**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**FORM
      10-Q**





(Mark
      One)


x
            **Quarterly
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934****For
                the quarterly period ended: September 30, 2006**o
            **Transition
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934**








**Commission
      file number 000-49730**







**DOV
      PHARMACEUTICAL, INC.**


(Exact
      Name of Registrant as Specified in its Charter)


**Delaware**
              (State
                or Other Jurisdiction
              of
                Incorporation or Organization)
            
            **22-3374365**
              (I.R.S.
                Employer
              Identification
                No.)




**150
      Pierce Street**


**Somerset,
      NJ 08873**


(Address
      of principal executive office)





**(732) 907-3600**


(Registrant’s
      telephone number, including area code)







Indicate
      by check mark whether 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 registrant was required
      to
      file such reports), and (2) has been subject to such filing requirements for
      the
      past 90 days. Yes x No o





Indicate
      by check mark whether registrant is a large accelerated filer, an accelerated
      filer or a non-accelerated filer. See definitions of “accelerated filer and
      large accelerated filer” in Rule 12b-2 of the Act.


Large
      Accelerated Filer o   Accelerated
      Filer x   Non-accelerated
      Filer o





Indicate
      by check mark whether registrant is a shell company (as defined in Rule 12b-2
      of
      the Act). Yes o No x





On
      October 31, 2006, there were outstanding 26,743,657 shares of the
      registrant’s common stock, par value $0.0001 per share.












**DOV
      PHARMACEUTICAL, INC.**





**Form
      10-Q**





**For
      the Quarter Ended September 30, 2006**


**Table
      of Contents**





**PAGE**
              **NUMBER****PART
                I -**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements
            5Condensed
                Consolidated Balance Sheets as of September 30, 2006 and December
                31,
                2005
            5Condensed
                Consolidated Statements of Operations for the three and nine months
                ended
                September 30, 2006 and 2005
            6Condensed
                Consolidated Statements of Cash Flows for the nine months ended September
                30, 2006 and 2005
            7Notes
                to Unaudited Condensed Consolidated Financial Statements
            8Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            20Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            29Item
                4.
            Controls
                and Procedures
            29**PART
                II -**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            30Item
                1A.
            Risk
                Factors
            30Item
                5.
            Other
                Information
            42Item
                6.
            Exhibits
            42Signature
            42





2





**Special
      Note Regarding DOV Pharmaceutical, Inc.’s Common Stock**


**and
      2.50% Convertible Subordinated Debentures due 2025**





Effective
      at the opening of business on October 27, 2006, trading in our common stock
      on
      The NASDAQ Stock Market, Inc.’s Global Market, or the NASDAQ Global Market, was
      suspended and our common stock was delisted from the NASDAQ Global Market,
      because we did not meet the aggregate market value of listed securities
      requirement of Marketplace Rule 4450(b)(1)(A). We understand that our common
      stock is currently quoted
      on
      the Pink Sheets, an electronic quotation service for securities traded
      over-the-counter. Our common stock may, in the future, also be quoted on the
      Over-the-Counter Bulletin Board maintained by the National Association of
      Securities Dealers, or NASD, provided that a market maker in our common stock
      files the appropriate application with, and such application is cleared by,
      the
      NASD. We anticipate disclosing further trading venue information for our common
      stock, if any, once such information becomes available.





The
      delisting of our common stock from the NASDAQ Global Market constituted a
“fundamental change” under that certain Indenture dated as of December 22, 2004
      by and between DOV Pharmaceutical, Inc., as Issuer, and Wells Fargo Bank,
      National Association, as Trustee, which governs the terms of our 2.50%
      Convertible Subordinated Debentures due 2025. As a result, we are obligated
      to
      offer to repurchase the debentures. We must make this offer to repurchase the
      debentures on or prior to November 11, 2006. We are obligated to designate
      a
      repurchase date for the debentures that is not less than twenty, nor more than
      thirty-five, business days following the date of the Company's offer to
      repurchase. Holders of the debentures will have the option, but not the
      obligation, to require the Company to repurchase their debentures at 100% of
      the
      principal amount of the debentures, plus any accrued and unpaid interest. There
      are currently $70 million in aggregate principal amount of debentures
      outstanding. We cannot predict the number of holders of debentures that will
      exercise their option to require us to repurchase their debentures. We do
      not presently have the capital necessary to repurchase all or a significant
      portion of the $70 million of the debentures outstanding if holders of all
      or a
      significant portion of the debentures exercise their option to require us to
      repurchase the debentures. If we do not offer to repurchase the debentures
      as required by the indenture, or if we fail to pay for all debentures tendered
      to us for repurchase, an “event of default” will occur under the indenture
      governing the debentures. If we are unable to raise sufficient funds to
      repurchase the requisite amount of debentures or restructure our obligations
      under the debentures, we may be forced to seek protection under the United
      States bankruptcy laws. The
      above
      matters raise substantial doubt about our ability to continue as a going
      concern.





**Special
      Note Regarding Forward-Looking Statements**





This
      Quarterly Report on Form 10-Q includes forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities Exchange Act of 1934, each as amended, including statements regarding
      our expectations with respect to the progress of and level of expenses for
      our
      clinical trial programs.  You can also identify forward-looking statements
      by the following words:  may, will, should, expect, intend, plan,
      anticipate, believe, estimate, predict, potential, continue or the negative
      of
      these terms or other comparable terminology. We
      caution you that forward-looking statements are inherently uncertain and are
      simply point-in-time estimates based on a combination of facts and factors
      currently known by us about which we cannot be certain or even relatively
      confident. Actual results or events will surely differ and may differ materially
      from our forward-looking statements as a result of many factors, some of which
      we may not be able to predict or may not be within our control. Such factors
      may
      also materially adversely affect our ability to achieve our objectives and
      to
      successfully develop and commercialize our product candidates, including our
      ability to :





·
            negotiate
                with bondholders;


·
            raise
                substantial additional capital in order to repurchase debentures
                that a
                holder tenders to us for
                repurchase;


·
            raise
                substantial additional capital in order to fund
                operations;


·
            obtain
                and maintain all necessary patents, licenses and other intellectual
                property rights;


·
            demonstrate
                the safety and efficacy of product candidates at each stage of
                development;


·
            perform
                required regulatory close-out activities for ourclinical
                programs for bicifadine, our novel analgesic;


·
            meet
                our development schedule for our product candidates, including with
                respect to clinical trial initiation, enrollment and
                completion;




3




·
            meet
                applicable regulatory standards and receive required regulatory approvals
                on our anticipated time schedule or at
                all;


·
            meet
                or require our partners to meet obligations and achieve milestones
                under
                our license and other agreements;


·
            obtain
                and maintain collaborations as required with pharmaceutical
                partners;


·
            obtain
                substantial additional funds; and


·
            produce
                drug candidates in commercial quantities at reasonable costs and
                compete
                successfully against other products and companies.





You
      should refer to the “Part II—Other Information” section of this report under the
      subheading “Item 1A. Risk Factors” for a detailed discussion of some of the
      factors that may cause our actual results to differ materially from our
      forward-looking statements. We qualify all our forward-looking statements by
      these cautionary statements. There may also be other material factors that
      may
      materially affect our forward-looking statements and our future results. As
      a
      result of the foregoing, readers should not place undue reliance on our
      forward-looking statements. We do not undertake any obligation and do not intend
      to update any forward-looking statement.




4




**PART
      I - FINANCIAL INFORMATION**





**Item
      1.**  **Financial
      Statements**





**DOV
      PHARMACEUTICAL, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





**September
                30, 2006**
            
            **December
                31, 2005**(Unaudited)**Assets**Cash
                and cash equivalents
            
            $
            16,512,795
            
            $
            8,425,552Marketable
                securities—short-term
            
            
            30,825,954
            
            
            89,126,835Prepaid
                expenses and other current assets
            
            
            1,455,877
            
            
            2,011,051Total
                current assets
            
            
            48,794,626
            
            
            99,563,438Restricted
                cash—long-term
            
            
            4,211,109
            
            
            —Property
                and equipment, net
            
            
            1,522,659
            
            
            623,520Deferred
                charges, net
            
            
            —
            
            
            1,999,548Total
                assets
            
            $
            54,528,394
            
            $
            102,186,506**Liabilities
                and Stockholders’ Deficit**Current
                liabilities:Accounts
                payable
            
            $
            5,080,021
            
            $
            8,643,356Accrued
                expenses
            
            
            7,042,063
            
            
            6,892,738Deferred
                revenue - current
            
            
            4,333,713
            
            
            5,511,810Deferred
                credit - current
            
            
            124,580
            
            
            —Convertible
                subordinated debentures
            
            
            70,000,000
            
            
            —Total
                current liabilities
            
            
            86,580,377
            
            
            21,047,904Deferred
                revenue - non-current
            
            
            17,876,570
            
            
            20,439,633Deferred
                credits - non-current
            
            
            1,047,140
            
            
            —Convertible
                subordinated debentures
            
            
            —
            
            
            80,000,000Commitments
                and contingenciesStockholders’
                deficit:Preferred
                stock—undesignated
                preferred stock,$1.00
                par value, 6,550,357 shares authorized, 0shares
                issued and outstanding at September 30, 2006 and December 31,
                2005
            
            
            —
            
            
            —Common
                stock, $.0001 par value, 60,000,000 shares authorized, 26,743,657
                issued
                and outstanding at September 30, 2006 and 23,090,970 issued and
                outstanding at December 31, 2005
            
            
            2,674
            
            
            2,309Treasury
                stock, at cost; 31,450 common shares at September 30, 2006
            
            
            (66,985
            )
            
            —Additional
                paid-in capital
            
            
            160,754,923
            
            
            136,495,644Accumulated
                other comprehensive loss
            
            
            (1,195
            )
            
            (298,411
            )Accumulated
                deficit
            
            
            (211,665,110
            )
            
            (153,284,922
            )Unearned
                compensation
            
            
            —
            
            
            (2,215,651
            )Total
                stockholders’ deficit
            
            
            (50,975,693
            )
            
            (19,301,031
            )Total
                liabilities and stockholders’ deficit
            
            $
            54,528,394
            
            $
            102,186,506




The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.




5





**DOV
      PHARMACEUTICAL, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**





**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**(Unaudited)
            
            (Unaudited)Revenue
            
            $
            1,083,429
            
            $
            1,377,954
            
            $
            3,741,160
            
            $
            7,268,643Operating
                expenses:Research
                and development expense
            
            
            8,292,669
            
            
            15,582,779
            
            
            37,691,320
            
            
            37,630,548General
                and administrative expense
            
            
            2,969,524
            
            
            1,853,517
            
            
            17,522,735
            
            
            6,582,001Loss
                from operations
            
            
            (10,178,764
            )
            
            (16,058,342
            )
            
            (51,472,895
            )
            
            (36,943,906
            )Interest
                income
            
            
            698,395
            
            
            949,894
            
            
            2,287,786
            
            
            2,816,437Interest
                expense
            
            
            (2,369,704
            )
            
            (599,978
            )
            
            (3,570,455
            )
            
            (1,901,698
            )Debt
                conversion and other expenses, net
            
            
            (5,646,361
            )
            
            (1,569
            )
            
            (5,624,624
            )
            
            (6,324
            )Net
                loss
            
            $
            (17,496,434
            )
            $
            (15,709,995
            )
            $
            (58,380,188
            )
            $
            (36,035,491
            )Basic
                and diluted net loss per share
            
            $
            (0.68
            )
            $
            (0.68
            )
            $
            (2.42
            )
            $
            (1.58
            )Weighted
                average shares used in computing basic and diluted net loss per
                share
            
            
            25,770,070
            
            
            23,019,939
            
            
            24,102,851
            
            
            22,753,989




The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.




6





**DOV
      PHARMACEUTICAL, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**





**Nine
                Months Ended September 30,****2006**
            
            **2005**(Unaudited)**Cash
                flows from operating activities**Net
                loss
            
            $
            (58,380,188
            )
            $
            (36,035,491
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Non-cash
                amortization of premium paid on marketable securities
            
            
            279,115
            
            
            994,415Non-cash
                interest expense
            
            
            —
            
            
            105,148Depreciation
            
            
            351,608
            
            
            260,830Amortization
                of deferred charges
            
            
            2,050,435
            
            
            301,089Non-cash
                compensation charges
            
            
            10,468,693
            
            
            391,416Warrants,
                options and common stock issued for services
            
            
            16,473
            
            
            (38,182
            )Non-cash
                debt conversion expense
            
            
            5,657,865
            
            
            —Tenant
                allowance reimbursement and
                receivables
            
            
            1,245,805
            
            
            —Changes
                in operating assets and liabilities:Prepaid
                expenses and other current assets
            
            
            155,264
            
            
            (198,459
            )Accounts
                payable
            
            
            (3,563,335
            )
            
            2,182,366Accrued
                expenses
            
            
            149,325
            
            
            2,038,827Deferred
                revenue
            
            
            (3,741,160
            )
            
            (5,268,643
            )Net
                cash used in operating activities
            
            
            (45,310,100
            )
            
            (35,266,684
            )**Cash
                flows from investing activities**Purchases
                of marketable securities
            
            
            (99,143,508
            )
            
            (117,991,103
            )Sales
                of marketable securities
            
            
            157,462,490
            
            
            123,947,796Establishment
                of restricted cash
            
            
            (4,211,109
            )
            
            —Purchases
                of property and equipment
            
            
            (1,250,747
            )
            
            (546,638
            )Net
                cash provided by investing activities
            
            
            52,857,126
            
            
            5,410,055**Cash
                flows from financing activities**Borrowings
                under convertible debenture, net of issuance costs
            
            
            —
            
            
            14,571,715Treasury
                stock purchased
            
            
            (66,985
            )
            
            —Proceeds
                from options exercised
            
            
            607,202
            
            
            989,687Net
                cash provided by financing activities
            
            
            540,217
            
            
            15,561,402Net
                increase (decrease) in cash and cash equivalents
            
            
            8,087,243
            
            
            (14,295,227
            )Cash
                and cash equivalents, beginning of period
            
            
            8,425,552
            
            
            28,934,473Cash
                and cash equivalents, end of period
            
            $
            16,512,795
            
            $
            14,639,246




The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.




7








**DOV
      PHARMACEUTICAL, INC.**


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





**1.
      The Company**





DOV
      Pharmaceutical, Inc. (the “Company”) was incorporated in May 1995 in
      New Jersey and reincorporated in Delaware in November 2000.





The
      Company is a biopharmaceutical company focused on the discovery, in-licensing
      and development of novel drug candidates for central nervous system disorders.
      The Company has several product candidates in clinical development. These
      product candidates target depression, alcohol abuse, pain, insomnia and angina
      and hypertension. The Company has established strategic alliances with select
      partners to access their unique technologies and their commercialization
      capabilities. The Company operates principally in the United States but it
      also
      conducts clinical studies outside the United States.





**2.
      Liquidity**





Since
      the
      Company’s inception, it has incurred significant operating losses and management
      expects that it will continue to do so for the foreseeable future. As of
      September 30, 2006, it had an accumulated deficit of $211.7 million. The Company
      has depended upon equity and debt financings and license fee and milestone
      payments from its collaborative partners and licensees to fund its operations
      and research and product development programs and expects to do so for the
      foreseeable future. The Company currently has no commitments or arrangements
      for
      any financing.





On
      October 27, 2006, the Company’s securities were no longer listed for trading on
      a national securities exchange. The delisting of the Company’s common stock from
      the NASDAQ Global Market constituted a “fundamental change” under that certain
      Indenture dated as of December 22, 2004 by and between DOV Pharmaceutical,
      Inc.,
      as Issuer, and Wells Fargo Bank, National Association, as Trustee, which governs
      the terms of the Company’s 2.50% convertible subordinated debentures due 2025.
      As a result, the Company is obligated to offer to repurchase the debentures.
      The
      Company must make this offer to repurchase the debentures on or prior to
      November 11, 2006. The Company is obligated to designate a repurchase date
      for
      the debentures that is not less than twenty, nor more than thirty-five, business
      days following the date of the Company's offer to repurchase. Holders of the
      debentures will have the option, but not the obligation, to require the Company
      to repurchase their debentures at 100% of the principal amount of the
      debentures, plus any accrued and unpaid interest. There are currently $70
      million in aggregate principal amount of debentures outstanding. The Company
      cannot predict the number of holders of debentures that will exercise their
      option to require the Company to repurchase their debentures. The Company does
      not presently have the capital necessary to repurchase all or a significant
      portion of the $70 million of the debentures if all or a
      significant portion of the holders of debentures exercise their option to
      require the Company to repurchase the debentures. If the Company does not offer
      to repurchase the debentures as required by the indenture, or if the Company
      fails to pay for all debentures tendered to it for repurchase, an “event of
      default” will occur under the indenture governing the debentures. If the Company
      is unable to raise sufficient funds to repurchase the requisite amount of
      debentures or restructure its obligations under the debentures, the Company
      may
      be forced to seek protection under the United States bankruptcy laws. The
      above
      matters raise substantial doubt about the Company's ability to continue as
      a
      going concern.





Moreover,
      in the event the Company is able to address the debentures either through a
      restructuring or through the repurchase following the receipt of additional
      capital necessary to execute such a repurchase, the Company will continue to
      have capital needs. If at any time sufficient capital is not available, either
      through existing capital resources or through raising additional funds, the
      Company may be required to delay, reduce the scope of, eliminate or divest
      one
      or more of its product development programs or effect other reductions in cash
      usage.




8





**3.
      Significant Accounting Policies**





**Basis
      of Presentation**





The
      financial statements are presented on the basis of accounting principles
      generally accepted in the United States for interim financial information and
      in
      accordance with the instructions of the Securities and Exchange Commission
      (“SEC”) on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
      include all the information and footnotes required by accounting principles
      generally accepted in the United States for complete financial statements.
      In
      the opinion of management, these financial statements include all adjustments
      (consisting of normal recurring adjustments) necessary for a fair statement
      of
      the financial position, results of operations and cash flows for the periods
      presented.





The
      results of operations for the interim periods shown in this report are not
      necessarily indicative of results expected for the full year. The financial
      statements should be read in conjunction with the audited financial statements
      and notes for the year ended December 31, 2005, included in our Annual Report
      on
      Form 10-K filed with the SEC.




**Use
      of Estimates**





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make certain estimates and
      assumptions that affect the reported assets, liabilities, revenues, earnings,
      financial position and various disclosures. Significant estimates have included
      stock-based compensation expense, accrued litigation settlement costs, the
      value
      of investments, the valuation allowance recorded for deferred tax assets and
      the
      development period for the Company’s products. Actual results could differ from
      those estimates and the differences could be material.





**Deferred
      Charges**





Deferred
      charges are issuance costs for the convertible debentures that were being
      amortized over seven years, that is, to the first put date, or earlier
      settlement date. However, due to the reclassification of the Company’s
      debentures to current liabilities the balance of these deferred charges of
      $1.9
      million has been charged to interest expense as of September 30, 2006. Please
      refer to Note 7.




9





**Net
      Loss Per Share**





Basic
      and
      diluted net loss per share has been computed using the weighted-average number
      of shares of common stock outstanding during the period. For certain periods,
      the Company has excluded the shares issuable on conversion of the convertible
      subordinated debentures, outstanding options and warrants to purchase common
      stock from the calculation of diluted net loss per share, as such securities
      are
      antidilutive as indicated in the table below.





**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**(Unaudited)
            
            (Unaudited)Net
                loss
            
            $
            (17,496,434
            )
            $
            (15,709,995
            )
            $
            (58,380,188
            )
            $
            (36,035,491
            )Basic
                and diluted:Weighted-average
                shares used in computing basic and diluted net loss per
                share
            
            
            25,770,070
            
            
            23,019,939
            
            
            24,102,851
            
            
            22,753,989Basic
                and diluted net loss per share
            
            $
            (0.68
            )
            $
            (0.68
            )
            $
            (2.42
            )
            $
            (1.58
            )Antidilutive
                securities not included in basic and diluted net loss per share
                calculation:Convertible
                subordinated debentures
            
            
            3,076,923
            
            
            3,516,484
            
            
            3,076,923
            
            
            3,516,484Options
            
            
            4,284,441
            
            
            3,265,166
            
            
            4,284,441
            
            
            3,265,166Warrants
            
            
            378,276
            
            
            819,831
            
            
            378,276
            
            
            819,8317,739,640
            
            
            7,601,481
            
            
            7,739,640
            
            
            7,601,481**Comprehensive
                Loss**Net
                loss
            
            $
            (17,496,434
            )
            $
            (15,709,995
            )
            $
            (58,380,188
            )
            $
            (36,035,491
            )Net
                unrealized gains (losses) on marketable securities and
                investments
            
            
            54,976
            
            
            (15,400
            )
            
            297,216
            
            
            (144,577
            )Comprehensive
                loss
            
            $
            (17,441,458
            )
            $
            (15,725,395
            )
            $
            (58,082,972
            )
            $
            (36,180,068
            )








**Concentration
      of Credit Risk**





Cash
      and
      cash equivalents are invested in deposits with financial institutions. The
      Company has not experienced any losses on its deposits of cash and cash
      equivalents. Management believes that the financial institutions are financially
      sound and, accordingly, minimal credit risk exists. Approximately $1.3 million
      of the Company’s cash balance was uninsured at September 30, 2006.





**Restricted
      Cash**





Restricted
      cash within non-current assets consists primarily of cash collateral as required
      under the $4.2 million letter of credit for the lease on the Somerset facility.
      The Company does not expect this cash to be released before March 2016. The
      restricted cash is primarily invested in short-term money market accounts with
      financial institutions. The classification of restricted cash is determined
      based on the expected term of the collateral requirement and not the maturity
      date of the underlying securities. If the Company were to terminate the lease
      before March 2016, the restricted cash would be paid to the lessor.





**Risks
      and Uncertainties**





The
      Company is subject to risks common to companies in the biopharmaceutical
      industry, including but not limited to successful commercialization of product
      candidates, protection of proprietary technology and compliance with FDA
      regulations. Please refer to Note 2.




10





**Recent
      Accounting Pronouncements**





In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      123(R), which requires the Company to expense share-based payments, including
      employee stock options, based on their fair value. The Company adopted
      SFAS 123(R) on January 1, 2006. The adoption of SFAS 123(R) and the
      adoption’s effects are discussed in Note 4 below.





In
      July
      2006, the FASB issued FASB Interpretation No. 48 (FIN 48), "Accounting for
      Uncertainty in Income Taxes." FIN 48 prescribes detailed guidance for the
      financial statement recognition, measurement and disclosure of uncertain tax
      positions recognized in an enterprise’s financial statements in accordance with
      FASB Statement No. 109, "Accounting for Income Taxes." Tax positions must meet
      a
      more-likely-than-not recognition threshold at the effective date to be
      recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will
      be
      effective for fiscal years beginning after December 15, 2006 and the provisions
      of FIN 48 will be applied to all tax positions upon initial adoption of the
      Interpretation. The cumulative effect of applying the provisions of this
      Interpretation will be reported as an adjustment to the opening balance of
      retained earnings for that fiscal year. The Company is currently evaluating
      the
      potential impact of FIN 48 on its financial statements.




In
      September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108, which
      expresses the Staff’s views regarding the process of quantifying financial
      statement misstatements. The bulletin is effective at fiscal year end 2006.
      The
      Company believes the implementation of this bulletin will have no effect on
      its
      results of operations, cash flows or financial position.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No
      157, *Fair
      Value Measurements.* This
      statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles, and expands disclosures about
      fair
      value measurements. The statement is effective in the first fiscal quarter
      of
      2008 and the Company will adopt the statement at that time. The Company believes
      that the adoption of SFAS No 157 will not have a material effect on its results
      of operations, cash flows or financial position.





**Accounting
      Changes** **:
       Variable Interest Entities**




On
      February 28, 2006, the Company entered into a ten-year operating lease with
      a
      leasing entity for a 133,686 square-foot facility in Somerset, New Jersey which
      has served as the Company’s corporate headquarters and principal place of
      business since June 2006. The sole purpose of the leasing entity is to manage
      the Somerset facilities on behalf of its tenant(s) and is therefore considered
      a
      VIE as defined by FIN 46R. At September 30, 2006, the Company is the only tenant
      of the building and is therefore considered to hold a significant variable
      interest. With respect to the Company’s leasing arrangement, the Company has
      determined that it is not the primary beneficiary and accordingly is not
      required to consolidate the related assets and liabilities of the leasing
      entity. The Company’s maximum exposure to any potential losses, should they
      occur, associated with this VIE is limited to the Company’s standby letter of
      credit of $4.2 million and, where applicable, receivables for reimbursable
      expenses related to leasehold improvements due from this VIE, which, as of
      September 30, 2006, totaled approximately $210,000.





**4.
      Stock-Based Compensation**





The
      Company’s 2000 Stock Option and Grant Plan (the “2000 Plan”) was adopted by the
      Company’s board of directors on November 18, 2000, was amended and restated
      on March 28, 2002, and further amended on May 30, 2003, May 24, 2004, May 23,
      2005, May 22, 2006 and May 30, 2006. The 2000 Plan provides for the granting
      of
      stock, stock options, restricted stock and stock appreciation rights. Under
      the
      2000 Plan, the Company has granted options and restricted stock, or RSAs, to
      certain employees and non-employee advisors. The Company’s board of directors
      administers the 2000 Plan. Options granted under the 2000 Plan have a maximum
      term of ten years. Options issued generally vest either 25% on the first
      anniversary of grant and the balance ratably over the next three years or 50%
      18
      months after grant and the balance ratably quarterly over the next 18 months.
      The 2000 Plan also provides the Company’s board of directors with the discretion
      to accelerate exercisability of any award. In May 2006, the Company amended
      the
      2000 Plan providing for the full acceleration and vesting of all outstanding
      options and RSAs immediately prior to a change of control of the Company. This
      change did not impact the fair value of the options and did not impact the
      Company’s adoption of SFAS 123(R) or expense recognized under SFAS
      123(R).




11





Effective
      January 1, 2006, the Company adopted the provisions of Statement of Financial
      Accounting Standards No. 123(R) Share-Based payment, and related
      interpretations, or SFAS 123(R), to account for stock-based compensation using
      the modified prospective transition method and therefore will not restate its
      prior period results. SFAS 123(R) supersedes Accounting Principles Board Opinion
      No. 25, “Accounting for Stock Issued to Employees,” or APB No. 25, and
      revises guidance in SFAS 123, Accounting for Stock-Based Compensation. Among
      other things, SFAS 123(R) requires that compensation expense be recognized
      in
      the financial statements for share-based awards based on the grant date fair
      value of those awards. The modified prospective transition method applies to
      (a)
      unvested stock options under the Company’s 2000 Plan and non-plan awards based
      on the grant date fair value estimated in accordance with the pro forma
      provisions of SFAS 123, and (b) any new share-based awards granted subsequent
      to
      December 31, 2005, based on the grant-date fair value estimated in accordance
      with the provisions of SFAS 123(R). Additionally, stock-based compensation
      expense includes an estimate for forfeitures and is recognized over the
      requisite service periods of the awards on a straight-line basis, which is
      generally commensurate with the vesting term. The Company has recorded $1.4
      million and $8.5 million of stock-based compensation expense, net of estimated
      forfeitures, during the three and nine months ended September 30, 2006,
      respectively as a result of its adoption of SFAS 123(R). The Company recorded
      $81,000 and $2.0 million during the three and nine months ended September 30,
      2006, respectively, of compensation expense related to RSAs. SFAS 123(R)
      requires forfeitures to be estimated at the time of grant and revised, if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. Unearned compensation related to the RSAs of $2.2 million as of
      December 31, 2005 was eliminated to additional paid in capital as of January
      1,
      2006.





Prior
      to
      January 1, 2006, the Company accounted for stock-based compensation expense
      for
      options granted to employees using the intrinsic value method prescribed in
      APB
      No. 25 and had adopted the disclosure only alternative under SFAS
 123. Accordingly, compensation expense for a stock option grant was
      recognized only if the exercise price was less than the market value of the
      Company’s common stock on the grant date. Additionally, in the pro forma
      information required for the periods prior to 2006, the Company accounted for
      forfeitures as they occurred.





SFAS
      123(R) requires the benefits associated with tax deductions in excess of
      recognized compensation cost to be reported as a financing cash flow rather
      than
      as an operating cash flow as previously required. For the three and nine months
      ended September 30, 2006, the Company did not record any excess tax benefit
      generated from option exercises.




The
      table
      below summarizes the impact on the Company’s results of operations for the three
      and nine months ended September 30, 2006 of outstanding unvested stock options
      under the Company’s 2000 Plan and non-plan grants recognized under the
      provisions of SFAS 123(R).





**Three
                Months Ended**
              **September
                30, 2006**
            
            **Nine
                Months Ended**
              **September
                30, 2006**(Unaudited)
            
            (Unaudited)Research
                and development
            
            $
            (801,468
            )
            $
            (2,294,737
            )General
                and administrative
            
            
            (617,616
            )
            
            (6,201,601
            )Stock
                based compensation
            
            $
            (1,419,084
            )
            $
            (8,496,338
            )Basic
                and diluted net loss per share
            
            $
            (0.06
            )
            $
            (0.35
            )




12





For
      the
      three and nine months ended September 30, 2005, if the Company had elected
      to
      recognize compensation expense based upon the fair value at the date of grant
      for awards under these plans, consistent with the methodology prescribed by
      SFAS 123, the effect on the Company's net loss would be as
      follows:




**Three
                Months Ended**
              **September
                30, 2005**
            
            **Nine
                Months Ended**
              **September
                30, 2005**(Unaudited)
            
            (Unaudited)Net
                loss as reported
            
            $
            (15,709,995
            )
            $
            (36,035,491
            )Add:
                total stock-based employee compensation expense determined under
                APB No.
                25
            
            
            332,843
            
            
            391,416Deduct:
                total stock-based employee compensation expense determined under
                fair
                value based method for all awards
            
            
            (1,874,748
            )
            
            (4,185,879
            )Pro
                forma
            
            $
            (17,251,900
            )
            $
            (39,829,954
            )Basic
                and diluted net loss per share:As
                reported
            
            $
            (0.68
            )
            $
            (1.58
            )Pro
                forma
            
            $
            (0.75
            )
            $
            (1.75
            )





For
      purposes of the computation of the fair value of each option award on the grant
      date using the Black-Scholes option pricing model, the following assumptions
      were used for each respective period:





**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Risk-free
                interest rate
            
            4.91%
            
            3.93%
                - 4.21%
            
            4.28%
                - 5.35%
            
            3.73%
                - 4.41%Expected
                lives
            
            6.25
                years
            
            6
                years
            
            6.25
                years
            
            6
                yearsExpected
                dividends
            
            --
            
            --
            
            --
            
            --Expected
                volatility
            
            74.86%
            
            65.11%
                - 65.87%
            
            52.30%
                - 74.86%
            
            65.11%
                - 67.90%





The
      expected term and volatility are highly subjective assumptions. The Company
      has
      reviewed its historical pattern of option exercises and has determined that
      there were no meaningful differences in option exercise activity among employee
      functions. The Company estimates the expected life of the options granted
      through review of historical exercise patterns for those options granted prior
      to January 1, 2006 and has used the SAB 107’s simplified method of estimating
      the expected life of option grants for ‘plain vanilla’ options granted in the
      nine months ended September 30, 2006. The Company estimates the expected
      volatility of its common stock based on its historical volatility as it did
      not
      view a combination of historical and implied a more meaningful volatility
      measure. The Company believes that historical volatility may be representative
      of future stock price trends. The risk-free rate assumption is determined using
      the Federal Reserve nominal rates of U.S. Treasury zero-coupon bonds with
      maturities similar to those of the expected terms of the award being valued.
      The
      Company has never paid any cash dividends on its common stock and does not
      anticipate paying any cash dividends in the foreseeable future. Therefore,
      the
      Company assumed an expected dividend yield of zero.





The
      weighted average grant date fair value of options granted during the three
      months ended September 30, 2006 and 2005, respectively was $0.98 and $13.24
      per
      option. The weighted average grant date fair value of options granted during
      the
      nine months ended September 30, 2006 and 2005, respectively was $3.22 and $11.18
      per option. The total intrinsic value, determined as of the date of exercise,
      of
      options exercised in the three months ended September 30, 2006 and 2005 was
      none
      and $429,000, respectively. The total intrinsic value, determined as of the
      date
      of exercise, of options exercised in the nine months ended September 30, 2006
      and 2005 was $2.9 million and $2.4 million, respectively. The Company received
      none and $607,000 in cash for option exercises in the three and nine months
      ended September 30, 2006, respectively.




13





At
      September 30, 2006, there was $9.9 million, net of estimated forfeitures of
      $2.7
      million, of total unrecognized compensation cost related to non-vested
      share-based compensation arrangements granted under all its equity compensation
      plans, which include stock options and RSAs. Total unrecognized compensation
      cost will be adjusted for future changes in estimated forfeitures. The Company
      expects to recognize this stock-based compensation expense over a weighted
      average period of approximately 2.5 years. The following is a summary of stock
      option activity for the nine months ended September 30, 2006:





**Options**
            
            **Weighted**
              **Average**
              **Options**
              **Exercise
                Price**
            
            **Aggregate**
              **Intrinsic
                Value**Options
                outstanding, December 31, 2005
            
            
            3,540,966
            
            $
            10.94Granted
            
            
            1,538,175
            
            
            5.33Exercised
            
            
            (201,400
            )
            
            3.01Forfeited
            
            
            (593,300
            )
            
            16.74Options
                outstanding, September 30, 2006
            
            
            4,284,441
            
            
            8.50
            
            
            —Options
                exercisable, September 30, 2006
            
            
            2,086,375
            
            
            8.73
            
            
            —





The
      total
      intrinsic value is calculated as the difference between the exercise price
      of
      the underlying awards and the quoted price of the Company’s common stock for the
      options that were in-the-money as of September 30, 2006. As of September 30,
      2006, the Company had 470,123 shares available for future grants. The following
      is a summary of outstanding stock options at September 30, 2006.




14








**Options
                Outstanding as of**
              **September
                30, 2006**
            
            **Options
                Exercisable as of**
              **September
                30, 2006****Weighted
                Average Remaining Contractual Life**
            
            **Number
                Outstanding**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Life**
            
            **Number**
              **Exercisable**
            
            **Weighted
                Average Exercise Price**Price
                range $1.40-$11.30
            
            
            6.99
            
            
            2,384,841
            
            $
            2.94
            
            
            4.31
                years
            
            
            1,195,891
            
            $
            3.69Price
                range $11.31-$21.20
            
            
            8.15
            
            
            1,899,600
            
            $
            15.48
            
            
            7.56
                years
            
            
            890,484
            
            $
            15.504,284,441
            
            
            
            
            
            
            
            
            2,086,375




The
      following is a summary of outstanding RSAs at September 30, 2006:





**Number**
            
            **Weighted**
              **Average
                Fair**
              **Value
                (1)**
            
            **Weighted**
              **Average**
              **Remaining****Term**Nonvested,
                December 31, 2005
            
            
            160,000
            
            $
            18.89
            
            
            3.1
                yearsNonvested,
                September 30, 2006
            
            
            68,333
            
            $
            10.02
            
            
            2.0
                years





(1)
      Fair
      value is calculated at the date of the award and is not adjusted for current
      market values.





As
      of
      September 30, 2006, the total remaining unrecognized compensation cost related
      to RSAs amounted to $326,000, which will be amortized over the weighted average
      requisite service period of 2.0 years.





**5.
      Research and Development Expense**





Research
      and development costs are expensed when incurred and include allocations for
      payroll and related costs and other corporate overhead.





The
      following represents a detail of amounts included in research and development
      expense:




**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**(Unaudited)
            
            (Unaudited)Payroll
                related and associated overhead
            
            $
            3,318,908
            
            $
            3,041,628
            
            $
            12,264,992
            
            $
            8,246,313Clinical
                and preclinical development costs and manufacturing
                supplies
            
            
            4,803,629
            
            
            12,522,303
            
            
            24,423,781
            
            
            28,966,476Professional
                fees
            
            
            170,132
            
            
            18,848
            
            
            1,002,547
            
            
            417,759Research
                and development expense
            
            $
            8,292,669
            
            $
            15,582,779
            
            $
            37,691,320
            
            $
            37,630,548





**6.
      Marketable Securities and Investments**





The
      Company considers all highly liquid investments with a maturity of 90 days
      or less when purchased to be cash equivalents. As of September 30, 2006 the
      Company included $8.5 million of short term commercial paper in cash. The
      Company has evaluated its investment policies in accordance with SFAS No. 115,
      “Accounting for Certain Investments in Debt and Equity Securities,” and has
      determined that all its investment securities are to be classified as
      available-for-sale. Available-for-sale securities are carried at fair value,
      with the unrealized gains and losses reported in Stockholders’ Equity under the
      caption “Accumulated Other Comprehensive Income (Loss).” The amortized cost of
      debt securities is adjusted for amortization of premiums and accretion of
      discounts to maturity. Such amortization is included in interest income.
      Realized gains and losses and declines in value judged to be
      other-than-temporary on available-for-sale securities are included in other
      income and expense. The cost of securities sold is based on the specific
      identification method. Interest and dividends on securities classified as
      available-for-sale are included in interest income. At September 30, 2006 and
      December 31, 2005, short-term marketable securities included $24.8 million
      and
      $21.2 million, respectively, of variable-rate debt obligations (auction
      rate securities).




15





**7.
      Convertible Subordinated Debentures**




*Recent
      Event*


On
      October 27, 2006, the Company’s securities were no longer listed for trading on
      a national securities exchange. The delisting of the Company’s common stock from
      the NASDAQ Global Market constituted a “fundamental change” under that certain
      Indenture dated as of December 22, 2004 by and between DOV Pharmaceutical,
      Inc.,
      as Issuer, and Wells Fargo Bank, National Association, as Trustee, which governs
      the terms of the Company’s 2.50% Convertible Subordinated Debentures due 2025.
      Details of the original issuance terms of the debentures and subsequent
      retirements are described below. As a result, the Company is obligated to offer
      to repurchase the debentures. The Company must make this offer to repurchase
      the
      debentures on or prior to November 11, 2006. The Company is obligated to
      designate a repurchase date for the debentures that is not less than twenty,
      nor
      more than thirty-five, business days following the date of the Company's offer
      to repurchase. Holders of the debentures will have the option, but not the
      obligation, to require the Company to repurchase their debentures at 100% of
      the
      principal amount of the debentures, plus any accrued and unpaid interest. There
      are currently $70 million in aggregate principal amount of debentures
      outstanding. The Company cannot predict the number of holders of debentures
      that
      will exercise their option to require the Company to repurchase their
      debentures. The Company does not presently have the capital necessary to
      repurchase all or a significant portion of the $70 million of the
      debentures if all or a significant portion of the holders of
      debentures exercise their option to require the Company to repurchase the
      debentures. If the Company does not offer to repurchase the debentures as
      required by the indenture, or if the Company fails to pay for all debentures
      tendered to it for repurchase, an “event of default” will occur under the
      indenture governing the debentures. If the Company is unable to raise sufficient
      funds to repurchase the requisite amount of debentures or restructure its
      obligations under the debentures, the Company may be forced to seek protection
      under the United States bankruptcy laws. The
      above
      matters raise substantial doubt about the Company's ability to continue as
      a
      going concern.





In
      December 2004 and January 2005, the Company completed a private placement of
      $80
      million aggregate principal amount of 2.5% convertible subordinated debentures
      due January 15, 2025. The holders of the debentures may require us to purchase
      all or a portion of their debentures on January 15, 2012, January 15, 2015
      and
      January 15, 2020 (the investor repurchase dates) or upon the occurrence of
      a
      fundamental change, in each case at a price equal to the principal amount of
      the
      debentures to be purchased, plus accrued and unpaid interest, including
      liquidated damages, if any, to the purchase date. The debentures are unsecured
      and subordinated in right of payment to all existing and future senior debt,
      as
      defined in the indenture governing the debentures. The Company will pay interest
      semi-annually of $1 million on January 15 and July 15 of each year, commencing
      July 15, 2005.




The
      Company has reserved 3,516,484 shares of common stock for issuance upon
      conversion of the debentures. The Company incurred issuance costs related to
      this private placement of approximately $2.8 million, which have been recorded
      as other assets and are being amortized to interest expense through the first
      investor repurchase date of the debentures. However,
      due to the reclassification of the Company’s debentures to current liabilities
      the balance of these deferred charges of $1.9 million has been charged to
      interest expense as of September 30, 2006. The
      Company has
      filed
      a shelf registration statement with the SEC covering resales of the debentures
      and the common stock issuable upon conversion of the debentures, which was
      declared effective on May 9, 2005.




Holders
      may convert their debentures at
      any
      time at the conversion rate prior to the close of business on the business
      day
      prior to the maturity date or, if the debentures are called for redemption,
      on
      the business day prior to the redemption date. The initial conversion rate
      is
      43.9560 shares of the Company’s common stock for each $1,000 principal amount of
      debentures, or $22.75 per share. In addition, if certain corporate transactions
      that constitute a change of control occur on or prior to January 15, 2012,
      the
      conversion rate will increase in certain circumstances, unless such transactions
      constitute a public acquirer change of control and the Company elects to satisfy
      its conversion obligation with public acquirer common stock. The Company may
      redeem for cash the debentures in whole or in part at any time beginning on
      January 15, 2008 and prior to January 15, 2012, at a redemption price equal
      to
      100% of the principal amount of the debentures to be redeemed, plus accrued
      and
      unpaid interest, including liquidated damages, if any, to but excluding the
      redemption date, provided the last reported sale price of the Company’s common
      stock has exceeded 140% of the conversion price for at least 20 trading days
      in
      any consecutive 30-day trading period ending on the trading day prior to the
      date of mailing of the notice of redemption. On or after January 20, 2012,
      the
      Company may redeem for cash some of or all the debentures at any time at a
      redemption price equal to 100% of the principal amount of the debentures to
      be
      redeemed, plus any accrued and unpaid interest, including liquidated damages,
      if
      any, to but excluding the redemption date.




16





On
      July
      26, 2006, the Company exchanged an aggregate of 3,445,000 shares of its common
      stock for an aggregate of $10 million in original principal amount of these
      debentures. The debentures and the shares of common stock originally issuable
      upon conversion thereof are registered for resale under the Securities Act.
      The
      Company has canceled the debentures received in the exchange transactions which
      reduces the aggregate bonds outstanding from $80 million in original principal
      amount to $70 million in original principal amount. This exchange was not done
      in accordance with the original conversion terms of the debentures. With
      this reduction in principal amount, the shares reserved for issuance upon
      conversion of the debentures has been reduced to 3,076,923 and semi-annual
      interest is reduced to $875,000.





**8.
      Equity Transactions**





As
      noted
      above, on July 26, 2006 the Company issued 3,445,000 shares of common stock
      in
      exchange for $10 million in original principal amount of its convertible
      subordinated debentures. As a result of the exchange, the Company recorded
      a
      charge of $5.6 million for the fair value of the inducement offer as non-cash
      conversion expense, as required by SFAS 84 “Induced Conversions of Convertible
      Debt” .  Additionally,
      the Company included the unamortized issuance costs of $275,000 associated
      with
      the converted debt as a component of paid in capital. After
      giving effect to the exchange offer, $70 million of convertible subordinated
      debentures remains outstanding as of September 30, 2006.





On
      May
      22, 2006, the Company issued 28,333 RSAs to certain of the Company’s directors
      pursuant to the compensation program for independent directors of the Company.
      These awards will vest annually ratably over three years.





On
      January 20, 2005, the institutional investor holder of the line of credit
      promissory note converted the entire balance of the note and the accrued
      interest into 1,180,246 shares of the Company’s common stock. The holder had
      purchased the note from Elan in June 2004.





**9.
      Merck Agreement**





On
      August
      5, 2004, the Company entered into a license agreement with a subsidiary of
      Merck
& Co. Inc., or Merck, for the worldwide development and commercialization of
      DOV 21,947 for all therapeutic indications and of DOV 216,303 for the treatment
      of depression, anxiety and addiction. The agreement became effective in
      September 2004. Additionally, Merck obtained rights of first offer and refusal
      regarding a licensing agreement for DOV 102,677 under certain circumstances
      and
      for additional consideration. Under the original agreement, Merck assumed
      financial responsibility for development and commercialization of a product
      containing at least one of the licensed compounds; however this agreement was
      amended in August 2005 (as described below). The parties have agreed to work
      together to clinically develop licensed product and DOV has reserved the right
      to co-promote the sales of product in the United States to psychiatrists and
      other specialists who treat depression.





Under
      the
      agreement, DOV received a $35 million up-front licensing payment. In addition,
      the Company is entitled to receive milestone payments of up to $420.0 million,
      as well as royalties on worldwide net sales, if any. In accordance with the
      Emerging Issues Task Force (EITF) Issue No. 00-21, “Accounting for Revenue
      Arrangements with Multiple Deliverables” the Company has evaluated the
      arrangement to determine if the deliverables are separable into units of
      accounting and then applied applicable revenue recognition criteria.  The
      Company has determined that the license and the collaboration are a single
      element for accounting purposes. As a result, the $35 million up-front licensing
      payment and any future milestones received will be amortized and taken into
      revenue over the term of the collaboration.  As the Company has a
      continuing obligation with respect to collaboration on development of product
      candidates, until an NDA is filed, the up-front payment has been deferred and
      will be amortized and taken into revenue over the estimated research and
      development period of 86 months.
      The time period of the development period is a significant estimate used in
      the
      preparation of the Company’s financial statements and is subject to Merck or the
      Company developing the compound in accordance with the estimated development
      schedule. The Company originally estimated the development time period as 51
      months. However as of June 1, 2005, the Company revised this estimate to 72
      months from 51 months and as of May 31, 2006, the Company further revised the
      estimate to 86 months due to changes in the development timeline.




17





On
      August
      5, 2005, Merck and DOV amended their license agreement such that the Company
      will initially carry out at its expense certain development work involving
      DOV
      21,947. Merck is authorized to choose one of the Company’s preclinical triple
      reuptake inhibitors for inclusion in the agreement at no additional up-front
      fee. Merck may reassume the financial development and commercialization under
      the agreement for DOV 21,947 at any time and is required to do so upon
      successful completion of a pivotal Phase II clinical trial as defined by Merck.
      Upon this occurrence, Merck will reimburse DOV for its approved development
      expenditures for DOV 21,947 incurred and pay a success premium on certain of
      that work. In addition, the first development milestone in the original
      agreement will be payable to DOV. Merck and DOV have each retained certain
      termination rights under the amendment. If the test results are not successful
      as defined, Merck may elect to make such payments to DOV and retain DOV 21,947,
      but is not required to do so. ****





In
      October 2006, DOV notified Merck of its desire to terminate the companies’
license agreement with respect to DOV 21,947. In the event Merck decides not
      to
      re-internalize the compound, DOV 21,947 will no longer be covered by the license
      agreement effective as of December 8, 2006. Unless terminated by Merck, the
      license agreement will remain effective in respect to DOV 216,303.





**10.
      Employment Agreements**





On
      May
      23, 2005, the Company entered into a two-year employment agreement with Dr.
      Lippa, the Company’s then Chief Executive Officer, which continued his existing
      agreement, with certain changes, that was extended in January 2005. Such changes
      include severance protection in the event of a termination of employment without
      cause or good reason equal to payment of base compensation for the greater
      of
      one year or the balance of the term of the agreement, subject to consulting
      obligations. In addition, the agreement includes a change in control severance
      protection equal to two years’ base compensation, elimination of a 2% bonus
      based upon gross proceeds in the event of a sale of the Company and elimination
      of incentive compensation for licensing. He was also awarded 60,000 RSAs under
      the Company’s 2000 stock option and grant plan, subject to ratable annual
      vesting over three years provided he remains as a director of the Company.
      As of
      July 28, 2005, Dr. Lippa’s employment as Chief Executive Officer terminated thus
      requiring the Company to pay the contractual severance. As a result, the Company
      has recorded a severance obligation of $790,000 as of June 30, 2005. Dr. Lippa
      remains as chairman of the board of directors.





On
      June
      29, 2005, the Company entered into a three-year employment agreement with Dr.
      Hudson as Chief Executive Officer and President. Under the agreement, Dr. Hudson
      received a salary of at least $425,000 per annum and received, upon commencement
      of employment on July 28, 2005, 100,000 shares of restricted stock and 225,000
      stock options, each vesting ratably annually over four years. Dr. Hudson also
      received a bonus of $85,000 in January 2006. The agreement provided for other
      benefits, including relocation allowances. For qualified events of severance,
      Dr. Hudson was entitled under the agreement to base compensation for the balance
      of his agreement subject to a minimum of one-year base compensation and an
      additional severance payment equal to his prior incentive bonus in the case
      of a
      termination following a change of control. On June 29, 2006, Dr. Hudson resigned
      as President and Chief Executive Officer and as a member of the Board of
      Directors of the Company. DOV entered into a Separation and General Release
      Agreement with Dr. Hudson, dated as of June 29, 2006, pursuant to which the
      Company will make severance payments to Dr. Hudson in an aggregate amount equal
      to 24 months of basic compensation. Additionally, the 100,000 shares of RSAs
      granted to Dr. Hudson in connection with the commencement of his employment
      were
      vested and Dr. Hudson elected to have the tax withheld from the RSAs granted,
      thus DOV has agreed to remove any restrictions on 68,550 of such shares which
      are now fully-owned by Dr. Hudson and the remaining 31,450 shares were retired
      to treasury stock as the Company will pay in cash the tax withholding. As a
      result, the Company has recorded a severance obligation of $953,000 and recorded
      non-cash compensation expense charge of $1.4 million related to the acceleration
      of the RSAs. In addition, in accordance with the provisions of Dr. Hudson’s
      employment agreement, all stock options held at the date of termination were
      subject to accelerated vesting. Upon termination, the Company recognized an
      accelerated non-cash compensation charge of $2.9 million due to the acceleration
      of vesting of these options. Dr. Hudson elected to forfeit these options. Both
      of these charges are included in general and administrative expense. The
      non-cash compensation charges are based on the fair value of the options and
      RSAs at the date of grant.




18





In
      May
      2006, the employment of Robert Horton, the Company’s general counsel, was
      terminated. As part of his severance agreement, the Company agreed to pay base
      salary and benefits over the next 15 months and, pursuant to the provisions
      of
      his employment agreement, his unvested options have been vested and the exercise
      period for all outstanding options has been extended to at least December 31,
      2007. The Company has recorded a severance obligation of $456,000 as of June
      30,
      2006. The acceleration of Mr. Horton’s options resulted in a non-cash
      compensation charge of $1.1 million and is included in general and
      administrative expense. The non-cash compensation charge is based on the fair
      value of the options at the date of grant as opposed to current fair value.





On
      June
      30, 2006, Ms. Barbara Duncan was promoted to President, continues as Chief
      Financial Officer of the Company and will serve as a member of the board of
      directors. In connection with Ms. Duncan’s promotion, DOV has entered into
      Amendment No. 1 with Ms. Duncan, dated as of June 30, 2006, to Ms. Duncan’s
      employment agreement, which was originally dated as of August 3, 2004. The
      amendment provides for Ms. Duncan’s service to DOV as President and Chief
      Financial Officer until June 30, 2008. In connection with the execution of
      the
      amendment, Ms. Duncan was granted options to purchase 350,000 shares of DOV
      common stock at an exercise price of $2.12 per share (the closing price on
      the
      grant date of June 30, 2006) that will vest ratably annually over four years.
      Such options, to the extent not vested, shall vest immediately upon a
      termination of Ms. Duncan’s employment by DOV without cause or a termination of
      employment by Ms. Duncan for good reason or within six months of certain events
      constituting a change of control of the Company. Additionally, in the event
      of a
      termination of Ms. Duncan’s employment by DOV without cause or a termination of
      employment by Ms. Duncan for good reason or within six months of certain events
      constituting a change of control of DOV, Ms. Duncan will be entitled to
      severance payments equal to the greater of (i) basic compensation for the period
      commencing on the date of such termination and ending June 30, 2008 and (ii)
      basic compensation for the period commencing on the date of such termination
      and
      ending on the date that is 12 months thereafter. The amendment also provides
      that Ms. Duncan will resign as a member of the Company’s board of directors in
      the event Ms. Duncan’s employment with the Company is terminated for any reason.
      Ms. Duncan’s annual basic compensation was not altered by the amendment and will
      remain at $344,000 for 2006.




On
      June
      30, 2006, Dr. Phil Skolnick was promoted to Executive Vice President and will
      continue to serve as Chief Scientific Officer of the Company. In connection
      with
      Dr. Skolnick’s promotion, DOV has entered into Amendment No. 1 with Dr.
      Skolnick, dated as of June 30, 2006, to Dr. Skolnick’s restated employment
      agreement, which was originally dated as of January 9, 2004. The amendment
      provides for Dr. Skolnick’s service to DOV as Executive Vice President and Chief
      Scientific Officer until June 30, 2008. In connection with the execution of
      the
      amendment, Dr. Skolnick was granted options to purchase 350,000 shares of DOV
      common stock at an exercise price of $2.12 per share (the closing price on
      the
      grant date of June 30, 2006) that will vest ratably annually over four years.
      Such options, to the extent not vested, shall vest immediately upon a
      termination of Dr. Skolnick’s employment by DOV without cause or a termination
      of employment by Dr. Skolnick for good reason or within six months of certain
      events constituting a change of control of the Company. Additionally, in the
      event of a termination of Dr. Skolnick’s employment by DOV without cause or a
      termination of employment by Dr. Skolnick for good reason or within six months
      of certain events constituting a change of control of the Company, Dr. Skolnick
      will be entitled to severance payments equal to the greater of (i) basic
      compensation for the period commencing on the date of such termination and
      ending June 30, 2008 and (ii) basic compensation for the period commencing
      on
      the date of such termination and ending on the date that is 12 months
      thereafter. Dr. Skolnick’s annual basic compensation was not altered by the
      amendment and will remain at $344,000 for 2006.




19




The
      Company has executed Amendment No. 1 with Dr. Warren Stern, dated as of June
      30,
      2006, to Dr. Stern’s employment agreement, which was originally dated as of
      September 10, 2003. The amendment provides for an extension of the term of
      Dr.
      Stern’s service to DOV as Senior Vice President of Drug Development from
      September 10, 2006 until March 31, 2007; provided, however, that the hours
      of
      service provided by Dr. Stern to the Company and Dr. Stern’s basic compensation
      will be reduced by (i) 30% from October 1, 2006 until January 1, 2007 and (ii)
      50% from January 1, 2007 until March 31, 2007. In connection with the execution
      of the amendment, Dr. Stern was granted options to purchase 75,000 shares of
      DOV
      common stock at an exercise price of $2.12 per share (the closing price on
      the
      grant date of June 30, 2006) that will vest in full on March 31, 2007. Such
      options, to the extent not vested, shall vest immediately upon a termination
      of
      Dr. Stern’s employment by DOV without cause or a termination of employment by
      Dr. Stern for good reason or within six months of certain events constituting
      a
      change of control of the Company.





**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





You
      should read the following discussion of our results of operations and financial
      condition together with our unaudited financial statements and related notes
      contained elsewhere in this report.





**Special
      Note Regarding Our Common Stock and 2.50% Convertible Subordinated
      Debentures**





Effective
      at the opening of business on October 27, 2006, trading in our common stock
      on
      The NASDAQ Stock Market, Inc.’s Global Market, or the NASDAQ Global Market, was
      suspended and our common stock was delisted from the NASDAQ Global Market,
      because we did not meet the aggregate market value of listed securities
      requirement of Marketplace Rule 4450(b)(1)(A). We understand that our common
      stock is currently quoted
      on
      the Pink Sheets, an electronic quotation service for securities traded
      over-the-counter. Our common stock may, in the future, also be quoted on the
      Over-the-Counter Bulletin Board maintained by the National Association of
      Securities Dealers, or NASD, provided that a market maker in our common stock
      files the appropriate application with, and such application is cleared by,
      the
      NASD. We anticipate disclosing further trading venue information for our common
      stock, if any, once such information becomes available.





The
      delisting of our common stock from the NASDAQ Global Market constituted a
“fundamental change” under that certain Indenture dated as of December 22, 2004
      by and between DOV Pharmaceutical, Inc., as Issuer, and Wells Fargo Bank,
      National Association, as Trustee, which governs the terms of our 2.50%
      Convertible Subordinated Debentures due 2025. As a result, we are obligated
      to
      offer to repurchase the debentures. We must make this offer to repurchase the
      debentures on or prior to November 11, 2006. We are obligated to designate
      a
      repurchase date for the debentures that is not less than twenty, nor more than
      thirty-five, business days following the date of the Company's offer to
      repurchase. Holders of the debentures will have the option, but not the
      obligation, to require the Company to repurchase their debentures at 100% of
      the
      principal amount of the debentures, plus any accrued and unpaid interest. There
      are currently $70 million in aggregate principal amount of debentures
      outstanding. We cannot predict the number of holders of debentures that will
      exercise their option to require us to repurchase their debentures. We do
      not presently have the capital neccesary to repurchase all or a significant
      portion of the $70 million of the debentures outstanding if holders of all
      or a
      significant portion of the debentures exercise their option to require us to
      repurchase the debentures. If we do not offer to repurchase the debentures
      as required by the indenture, or if we fail to pay for all debentures tendered
      to us for repurchase, an “event of default” will occur under the indenture
      governing the debentures. If we are unable to raise sufficient funds to
      repurchase the requisite amount of debentures or restructure our obligations
      under the debentures, we may be forced to seek protection under the United
      States bankruptcy laws. The
      above
      matters raise substantial doubt about our ability to continue as a going
      concern.





**Overview**





We
      are a
      biopharmaceutical company focused on the discovery, in-licensing and development
      of novel drug candidates for central nervous system, or CNS, disorders. In
      1998,
      we licensed four of our product candidates for all indications from Wyeth:
      indiplon, for the treatment of insomnia, bicifadine, for the treatment of pain,
      ocinaplon, for the treatment of anxiety, and DOV 216,303, for the treatment
      of
      depression and other indications. In October 2005, we discontinued the
      development of ocinaplon for general anxiety disorder, or GAD. Our preclinical
      efforts remain focused on the discovery and development of novel amine uptake
      inhibitors (TRIs, SNRIs, NEDs and SADs) and GABA A receptor
      modulators. Uptake inhibitors can be used to treat a variety of neuropsychiatric
      disorders, including but not limited to depression, pain, attention deficit
      hyperactivity disorder, obesity, and substance abuse. The GABA A receptor
      modulator program is focused on the development of a follow-on molecule to
      ocinaplon, which demonstrates robust anti-anxiety actions without the limiting
      side effects produced by benzodiazepines such as Valium®.




20





Since
      our
      inception, we have incurred significant operating losses and we expect to do
      so
      for the foreseeable future. As of September 30, 2006, we had an accumulated
      deficit of $211.7 million. We have depended upon equity and debt financings
      and
      license fee and milestone payments from our collaborative partners and licensees
      to fund our research and product development programs and expect to do so for
      the foreseeable future.





We
      anticipate that our quarterly results of operations will fluctuate for several
      reasons, including the timing and extent of research and development efforts,
      the timing and extent of changes to our employee base and infrastructure, the
      timing of milestone, license fee and royalty payments and the timing and outcome
      of regulatory approvals.





In
      pursuing our strategy, we enter into collaboration and/or license agreements
      with strategic partners from time to time. We currently have relationships
      with
      Neurocrine, Merck and Wyeth. In 1998, we sublicensed the worldwide development
      and commercialization of indiplon to Neurocrine in exchange for the right to
      receive payments upon the achievement of certain clinical development milestones
      and royalties based on product sales, if any. Neurocrine subsequently entered
      into a worldwide development and commercialization agreement with Pfizer for
      indiplon. Neurocrine filed two NDAs for indiplon for the treatment of insomnia
      in April and May 2005. The FDA issued an approvable letter for the 5 mg and
      10
      mg IR formulation and a non-approvable letter for the 15 mg MR formulation
      in
      May 2006. In September 2006, Neurocrine announced that it held an end-of-review
      meeting with the Food and Drug Administration (FDA) for the indiplon capsules
      New Drug Application (NDA). Neurocrine summarized the results of the FDA meeting
      as follows: the FDA requested that Neurocrine supplement the
      pharmacokinetic/food effect profile of indiplon (IR) capsules to include several
      meal types. Neurocrine will initiate such a study shortly after further
      consultation with the FDA. No other clinical trials were requested for the
      re-submission. The re-submission will also include further analyses and
      modifications of analyses previously submitted which address questions raised
      by
      the agency in the initial review. Earlier this year, in June 2006, Neurocrine
      announced that Neurocrine and Pfizer had agreed to terminate the collaboration
      agreement to develop and co-promote indiplon and that Neurocrine would reacquire
      all worldwide rights for indiplon capsules and tablets and would independently
      develop indiplon for approval and commercialization. The termination of this
      partnership does not affect or alter DOV’s royalty percentage and milestone
      payment agreements with Neurocrine.





On
      August 5, 2004, we entered into an agreement with Merck for the worldwide
      development and commercialization of all indications for DOV 21,947 and certain
      indications for DOV 216,303 in exchange for a $35 million up-front payment
      and
      the right to receive further payments of up to $420.0 million upon the
      achievement of certain milestones and royalties based on product net sales,
      if
      any. As described below, this agreement was amended in 2005. The up-front
      payment has been deferred and is being amortized to revenue over the estimated
      research and development period. As of June 1, 2005, we revised this estimate
      to
      72 months from 51 months and, accordingly, the amortization of the remaining
      balance beginning June 1, 2005 reflected this revised time period. This
      adjustment to the estimate for the development period was made as a result
      of
      the need to collect and assess additional clinical data which has extended
      the
      total development timeline. As of May 31, 2006 we revised the estimate to 86
      months and accordingly, the amortization of the remaining balance beginning
      June
      1, 2006 reflects this revised time period. This most recent adjustment was
      made
      as a result of our decision to delay the initiation of the next clinical trial
      for DOV 21,947 as well as certain of the development and manufacturing
      activities which has extended the total development timeline. The time period
      of
      the development period is a significant estimate used in the preparation of
      our
      financial statements and is subject to Merck developing the compound in
      accordance with the estimated development schedule. This development period
      estimate may fluctuate from period to period and the fluctuation may be
      significant. On August 5, 2005, we amended our agreement with Merck such that
      we
      have agreed to assume responsibility for certain development work for DOV
      21,947, subject to reimbursement for certain of our development costs in certain
      circumstances. **** In
      October 2006, DOV notified Merck of its desire to terminate the companies’
license agreement with respect to DOV 21,947. In the event Merck decides
      not to re-internalize the compound, DOV 21,947 will no longer be covered by
      the
      license agreement effective as of December 8, 2006.  Unless terminated by
      Merck, the license agreement will remain effective in respect to DOV 216,303.
      If
      the license agreement is terminated by Merck the remaining deferred revenue
      of
      $22.2 million will be recognized immediately upon such termination. There are
      no
      payments due to Merck upon the termination of either the amendment or the
      original license agreement.




21




In
      April
      2006, we received the results of one of our two Phase III clinical trial of
      bicifadine for the treatment of chronic low back pain, or CLBP, study 020,
      and
      in October 2006 we received the interim results from the second CLBP study,
      study 021.  Bicifadine did not achieve a statistically significant effect
      relative to placebo on the primary endpoint of either of the studies. We are
      stopping patient dosing in study 021 and as the safety database is no longer
      the
      gating item to an NDA filing, we have also elected to stop dosing of all ongoing
      patients in our open-label safety study, study 022. We are also closing out
      the
      recently completed Phase II study of bicifadine in subjects with osteoarthritis
      of the hip or knee. However, it is an FDA requirement to complete the relevant
      safety assessments and to finalize study documentation in accordance with FDA
      mandated good clinical practices. We anticipate this process and related
      regulatory close-out obligations at the study sites will take several months
      and
      is expected to be completed by the end of the first quarter of 2007. These
      actions will reduce our expenditures in relation to bicifadine as we seek a
      development partner for the compound. We have delayed the initiation of the
      Phase II clinical trial for DOV 21,947 and Phase Ib clinical trial for DOV
      102,677 to focus our internal resources and capital in the near term but intend
      to begin the preparatory activities necessary for the initiation of these
      studies once the required close out activities for the bicifadine studies are
      completed. We intend to select an uptake inhibitor development candidate from
      our preclinical pipeline in early 2007, and file an IND with the FDA in early
      2008.





Our
      revenue has consisted primarily of license fees and milestone payments from
      our
      collaborative partners and licensees. We record revenue on an accrual basis
      when
      amounts are considered collectible. In accordance with EITF 00-21, we evaluate
      all new agreements to determine if they are a single unit of accounting or
      separable. Revenue received in advance of performance obligations, or in cases
      where we have a continuing obligation to perform services, is deferred and
      amortized over the performance period. Revenue from milestone payments that
      represent the culmination of a separate earnings process is recorded when the
      milestone is achieved. Contract revenues are recorded as the services are
      performed. License and milestone revenue are typically not consistent or
      recurring in nature. Our revenue has fluctuated from year-to-year and
      quarter-to-quarter and this will likely continue.





Our
      operating expenses consist primarily of license expense, costs associated with
      research and development and general and administrative costs associated with
      our operations. Research and development expense consists primarily of
      compensation and other related costs of our personnel dedicated to research
      and
      development activities, clinical and preclinical trial expenses, including
      toxicology studies, costs of manufacturing clinical and preclinical trial
      materials, and professional fees related to clinical trials and patent strategy
      and prosecution. General and administrative expense consists primarily of the
      costs of our senior management, finance and administrative staff, business
      insurance, professional fees, including fees associated with investment bankers
      and lawyers engaged to advise us in relation to our debentures, and costs
      associated with being a public reporting entity.





**Stock-based
      Compensation**





During
      the first quarter of 2006, we implemented the following new critical accounting
      policy related to our stock-based compensation. Beginning on January 1, 2006,
      we
      began accounting for stock options under the provisions of Financial Accounting
      Standards No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123(R), which
      requires the recognition of the fair value of stock-based compensation. Under
      the fair value recognition provisions for SFAS 123(R), stock-based compensation
      cost is estimated at the grant date based on the fair value of the awards
      expected to vest and recognized as expense ratably over the requisite service
      period of the award. We have used the Black-Scholes valuation model, or BSM,
      to
      estimate fair value of our stock-based awards, which requires various judgmental
      assumptions including estimating stock price volatility, forfeiture rates,
      and
      expected life. Our computation of expected volatility is based on our historical
      volatility. In addition, we consider many factors when estimating expected
      forfeitures and expected life, including types of awards, employee class and
      historical experience. If any of the assumptions used in the BSM model change
      significantly, stock-based compensation expense may differ materially in the
      future from that recorded in the current period.




22




We
      adopted SFAS 123(R) using the modified prospective method which requires the
      application of the accounting standard as of January 1, 2006. Our consolidated
      financial statements as of and for nine months ended September 30, 2006 reflect
      the impact of SFAS 123(R). In accordance with the modified prospective method,
      the consolidated financial statements for prior periods have not been restated
      to reflect, and do not include, the impact of SFAS 123(R).





**Results
      of Operations**





*Three
      Months Ended September 30, 2006 and 2005*





*Revenue.* Our
      revenue decreased $295,000 to $1.1 million for the quarter ended September
      30,
      2006 from $1.4 million for the comparable period in 2005. We recorded $1.1
      million and $1.4 million in the quarters ended September 30, 2006 and 2005,
      respectively of amortization of the $35.0 million up-front fee we received
      on
      the signing of the license, research and development agreement for our
      collaboration with Merck. The up-front payment received from Merck has been
      deferred and is being amortized to revenue over the estimated research and
      development period. As of June 1, 2005, we revised this estimate to 72 months
      from 51 months and, accordingly, the amortization of the remaining balance
      beginning June 1, 2005 reflected this revised time period. This adjustment
      to
      the estimate for the development period was made as a result of the need to
      collect and assess additional clinical data, which extended the total
      development timeline. As of May 31, 2006 we further revised this estimate to
      86
      months and, accordingly, the amortization of the remaining balance beginning
      June 1, 2006 reflects this revised time period. This most recent adjustment
      was
      made as a result of our decision to delay the initiation of the next clinical
      trial for DOV 21,947 as well as certain of the development and manufacturing
      activities which has extended the total development timeline.




*Research
      and Development Expense.*  **** Research
      and development expense decreased $7.3 million to $8.3 million for the third
      quarter 2006 from $15.6 million for the comparable period in 2005. The decrease
      in research and development expense is primarily associated with decreased
      external development costs of $7.7 million and office and office related
      expenses of $225,000 offset by an increase in payroll and payroll related
      expenses of $502,000 and professional fees of $151,000. The decrease in
      research and development expense is primarily related to a decrease in
      development costs of $4.4 million for bicifadine, $1.6 million for ocinaplon,
      $697,000 for DOV diltiazem and $308,000 for DOV 102,677, offset by an increase
      in external development costs of $86,000 for DOV 21,947. The increase in payroll
      and payroll related expenses is primarily the result of an increase in non-cash
      stock compensation of $801,000 related to the adoption of SFAS 123(R) offset
      by
      an overall decrease in headcount.




*General
      and Administrative Expense.* General
      and administrative expense increased $1.1 million to $3.0 million for the third
      quarter 2006 from $1.9 million for the comparable period in 2005. The increase
      was primarily attributable to an increase of $370,000 in rent expenses related
      to our new headquarters in Somerset, New Jersey, $301,000 in office and related
      expenses and $359,000 in professional fees. The increase in office and office
      related expenses is due to increased property and liability insurance and
      utilities related to our Somerset facility. The increase in professional fees
      is
      due to higher accounting, legal and consulting fees. Included in general and
      administrative expenses is $698,000 of non-cash stock compensation expense
      related to the adoption of SFAS 123(R).





*Interest
      Income.* Interest
      income decreased $251,000 to $698,000 in the third quarter 2006 from $950,000
      in
      the comparable period in 2005 primarily due to lower average cash balances,
      offset by higher effective interest rate yields.





*Interest
      Expense.* Interest
      expense increased $1.8 million in the third quarter of 2006 to $2.4 million
      from
      $600,000 in the comparable period in 2005. The increase is primarily related
      to
      the non-cash amortization of $2.1 million of deferred issuance costs on our
      convertible subordinated debt as it is probable that the obligations under
      the
      debenture will be substantially changed in the near term. We incurred $445,000
      in interest expense on the convertible debentures placed in December 2004 and
      January 2005. Please refer to Note 7 of our financial statements included
      under Part I, Item 1of this Form 10-Q.





*Debt
      Conversion Expense and Other Expenses, net.* On
      July
      26, 2006, we exchanged an aggregate of 3,445,000 shares of our common stock
      for
      an aggregate of $10 million in original principal amount of our outstanding
      convertible debentures. As a result of the exchange, and as required by SFAS
      84
“Induced Conversions of Convertible Debt, we recorded a $5.6 million non-cash
      charge related to the fair value of the additional shares issued to induce
      the
      exchange.




23





*Nine
      Months Ended September 30, 2006 and 2005*





*Revenue.* Our
      revenue for the nine months ended September 30, 2006 and 2005 was $3.7 million
      and $7.3 million, respectively including amortization of $3.7 million and $5.3
      million in 2006 and 2005, respectively relating to the $35 million up-front
      fee
      we received on the signing of the license, research and development agreement
      for our collaboration with Merck. During the nine months ended September 30,
      2005 we recorded a $2.0 million milestone payment under the Neurocrine
      agreement. As of June 1, 2005, we revised our estimate under the Merck agreement
      to 72 months from 51 months and, accordingly, the amortization of the remaining
      balance beginning June 1, 2005 reflects this revised time period. This
      adjustment to the estimate for the development period was made as a result
      of
      the need to collect and assess additional clinical data, which has extended
      the
      total development timeline. As of May 31, 2006 we revised this estimate to
      86
      months and beginning June 1, 2006 amortized the remaining balance over this
      time
      period. This most recent adjustment was made as a result of our decision to
      delay the initiation of the next clinical trial for DOV 21,947 as well as
      certain of the development and manufacturing activities which has extended
      the
      total development timeline.





*Research
      and Development Expense.*  **** Research
      and development expense increased $61,000 to $37.7 million for the nine months
      ended September 30, 2006 from $37.6 million for the comparable period in 2005.
      The increase in research and development expense is primarily associated with
      increased payroll and payroll related expenses of $4.1 million, $374,000 for
      rent expense, $149,000 in travel and related expenses and $585,000 in
      professional fees offset by decreased external development costs of $4.5 million
      and lower office related expenses and recruitment fees of $634,000. Included
      in
      the decrease in external development costs are decreases of $3.7 million for
      our
      anti-anxiety compounds, $1.4 million for DOV 102,677, $1.1 million for DOV
      diltiazem and $209,000 for DOV 216,303 offset by increases of $1.7 million
      for
      bicifadine, $681,000 for DOV 21,947 and $75,000 for our discovery and
      preclinical programs.  The increase in payroll and payroll related expenses
      is primarily the result of an increase in non-cash stock compensation of $2.3
      million related to the adoption of SFAS 123(R) and an overall increase in
      headcount as we expanded our operations. The net increase in professional fees
      primarily relates to an increase in patent related legal fees of $199,000 and
      general consulting of $201,000.





*General
      and Administrative Expense.* General
      and administrative expense increased $10.9 million to $17.5 million in the
      nine
      months ended September 30, 2006 from $6.6 million for the comparable period
      in
      2005. The increase is primarily related to an increase of $8.7 million in
      payroll and payroll related expenses, $1.6 million in rent related to our
      Somerset facility and $719,000 in office and related expenses, offset by a
      decrease in travel and entertainment expenses of $144,000. The increase in
      payroll and associated overhead is primarily the result of an increase in
      non-cash stock compensation of $6.2 million related to the adoption of SFAS
      123(R) and $2.0 million for restricted stock expense, an increase in severance
      obligations of $1.4 million for our then chief executive officer, Dr. Hudson,
      and our then general counsel, Mr. Horton, pursuant to their respective severance
      agreements offset partly by a decrease in severance obligation recorded in
      the
      comparable period in 2005 of $790,000 for our then chief executive officer,
      Dr.
      Lippa, and an increase in headcount as we expanded operations. Included in
      these
      non-cash compensation charges are charges of $4.3 million related to the
      acceleration of stock options and RSAs for Dr. Hudson and $1.1 million resulting
      from the acceleration of all outstanding stock options for Mr. Horton, pursuant
      to their respective severance agreements. The non-cash compensation charges
      are
      based on the fair value of the RSAs and options at the date of grant as opposed
      to current fair value. The increase in office and office related expenses is
      due
      primarily to increased insurance, supplies and utilities related to our Somerset
      facility.





*Interest
      Income.* Interest
      income decreased $529,000 to $2.3 million in the nine months ended September
      30,
      2006 from $2.8 million in the comparable period in 2005 primarily due to lower
      average cash balances offset by a higher effective interest rate
      yield.





*Interest
      Expense.* Interest
      expense increased $1.7 million to $3.6 million in the nine months ended
      September 30, 2006 from $1.9 million in the comparable period in 2005. In the
      nine months ended September 30, 2006 and 2005 we incurred $1.4 million and
      1.5
      million in interest expense on the convertible debentures placed in December
      2004 and January 2005. In addition, in the nine months ended September 30,
      2006,
      we amortized $2.1 million of deferred issuance costs on our convertible
      subordinated debt as it is probable that the obligations under the debenture
      will be substantially changed in the near term. Please refer to Note 7 of
      our financial statements included under Part I, Item 1of this Form
      10-Q.




24





*Debt
      Conversion Expense and Other Expenses, net.* On
      July
      26, 2006, we exchanged an aggregate of 3,445,000 shares of our common stock
      for
      an aggregate of $10 million in original principal amount of our outstanding
      convertible debentures. As a result of the exchange, and as required by SFAS
      84
“Induced Conversions of Convertible Debt” we recorded a $5.6 million non-cash
      charge related to the fair value of the additional shares issued to induce
      the
      exchange.





**Liquidity
      and Capital Resources**




At
      September 30, 2006, our cash and cash equivalents and marketable securities
      totaled $47.3 million compared with $97.6 million at December 31, 2005. The
      decrease in cash balances at September 30, 2006 resulted primarily from cash
      used in operations of $45.3 million and the establishment of a letter of credit
      related to our new facility of $4.2 million. At September 30, 2006, we had
      working capital deficit of $37.8 million compared with working capital of $78.5
      million at December 31, 2005. The working capital deficit includes the $70
      million of convertible debt that we have now classified as a current
      liability.





Net
      cash
      used in operations during the nine months ended September 30, 2006 amounted
      to
      $45.3 million, as compared to $35.3 million in the same period of 2005. The
      increase in cash used in operations resulted primarily from the increase in
      clinical development activities and the addition of personnel. Net non-cash
      expense (income) related to stock-based compensation, interest expense, debt
      conversion expense and depreciation and amortization expenses were $18.5 million
      in the nine months ended September 30, 2006 and $1.0 million in the comparable
      period in 2005.





Net
      cash
      provided by investing activities during the nine months ended September 30,
      2006
      and 2005 amounted to $52.9 million and $5.4 million, respectively. This
      fluctuation resulted primarily from the timing differences in investment
      purchases, sales and maturities and the fluctuations in our portfolio mix
      between cash equivalents and short-term investment holdings. We expect similar
      fluctuations to continue in future periods. In
      addition, cash provided by investing activities was decreased by the
      establishment of a letter of credit related to our new facility of $4.2
      million.





Net
      cash
      provided by financing activities during the nine months ended September 30,
      2006
      was $540,000 as compared to $15.6 million in the comparable period in 2005. Net
      cash
      provided by financing activities in the nine months ended September 30, 2005 was primarily related to net
      proceeds of $14.6 million from the issuance of $15.0 million of 2.5%
      subordinated convertible debentures in January 2005 .





In
      February 2006, we committed to a ten-year operating lease for a 133,686 square
      foot facility in Somerset, New Jersey which now serves as our corporate
      headquarters and principal place of business, effective June 2006. This lease
      will result in an increase to our annual occupancy costs as annual rent is
      $2.8
      million, not taking into account expected revenue from a sublease, if any,
      of
      space excess to our current needs. In connection with this lease we have entered
      into a stand-by letter of credit facility for $4.2 million to serve as
      collateral for our performance under the lease and as such this cash is not
      available to us through March 2016.





Effective
      at the opening of business on October 27, 2006, trading in our common stock
      on
      the NASDAQ Global Market was suspended, and our common stock was delisted from
      the NASDAQ Global Market, because we did not meet the aggregate market value
      of
      listed securities requirement of Marketplace Rule 4450(b)(1)(A). The
      delisting of our common stock from the NASDAQ Global Market constituted a
“fundamental change” under that certain Indenture dated as of December 22, 2004
      by and between DOV Pharmaceutical, Inc., as Issuer, and Wells Fargo Bank,
      National Association, as Trustee, which governs the terms of our 2.50%
      Convertible Subordinated Debentures due 2025. As a result, we are obligated
      to
      offer to repurchase the debentures. We must make this offer to repurchase the
      debentures on or prior to November 11, 2006. We are obligated to designate
      a
      repurchase date for the debentures that is not less than twenty, nor more than
      thirty-five, business days following the date of the Company's offer to
      repurchase. Holders of the debentures will have the option, but not the
      obligation, to require the Company to repurchase their debentures at 100% of
      the
      principal amount of the debentures, plus any accrued and unpaid interest. There
      are currently $70 million in aggregate principal amount of debentures
      outstanding. We cannot predict the number of holders of debentures that will
      exercise their option to require us to repurchase their debentures. We do not
      presently have the capital necessary to repurchase all or a significant
      portion of the $70 million of the debentures outstanding if holders of all
      or a
      significant portion of the debentures exercise their option to require us to
      repurchase the debentures. Accordingly, in order to satisfy the obligation
      to repurchase the debentures, we will need to either raise additional capital,
      which is difficult given our current situation, or pursue a restructuring of
      our
      obligations under the debentures. Any capital raise that may be effected would
      be highly dilutive to holders of our common stock. In addition, in the event
      we
      pursue a restructuring of our obligations under our debentures, we will incur
      substantial fees in connection with such restructuring, may be required to
      pay
      out a significant portion of our cash on hand, may be required to issue equity
      or equity equivalents, which would be highly dilutive to holders of our common
      stock and may be required to issue additional debt that would have a higher
      interest rate than the debentures. We cannot assure you that any such
      restructuring will be available to us on terms acceptable to us, if at all.
      Moreover, no holder of our debentures will be obligated to participate in any
      such restructuring and may instead require us to repurchase its debentures.
      If
      we do not offer to repurchase the debentures as required by the indenture,
      or if
      we fail to pay for all debentures tendered to us for repurchase, an “event of
      default” will occur under the indenture governing the debentures. If we are
      unable to raise sufficient funds to repurchase the requisite amount of
      debentures or restructure our obligations under the debentures, we may be forced
      to seek protection under the United States bankruptcy laws. The
      above
      matters raise substantial doubt about our ability to continue as a going
      concern.




25





**Factors
      That May Affect Future Financial Condition and Liquidity**





We
      are
      required to offer to repurchase $70 million in aggregate principal amount of
      our
      debentures because our common stock is no longer listed for trading on a United
      States national securities exchange. We are obligated to make this offer to
      repurchase on or prior to November 11, 2006. We do not presently have the
      capital necessary to repurchase all or a significant portion of the $70
      million of the debentures outstanding if holders of all or a significant portion
      of the debentures exercise their option to require us to repurchase the
      debentures. If we do not offer to repurchase the debentures as required by
      the
      indenture, or if we fail to pay for all debentures tendered to us for
      repurchase, an “event of default” will occur under the indenture governing the
      debentures.





Accordingly,
      in order to satisfy the obligation to repurchase the debentures, we will need
      to
      either raise additional capital, which is difficult given our current situation,
      or pursue a restructuring of our obligations under the debentures. Any capital
      raise that may be effected would be highly dilutive to holders of our common
      stock. In the event we pursue a restructuring of our obligations under our
      debentures, we will incur substantial fees in connection with such
      restructuring, may be required to pay out a significant portion of our cash
      on
      hand, may be required to issue equity or equity equivalents, which would be
      highly dilutive to holders of our common stock and may be required to issue
      additional debt that would have a higher interest rate than the debentures.
      We
      cannot assure you that any such restructuring will be available to us on terms
      acceptable to us, if at all. Moreover, no holder of our debentures will be
      obligated to participate in any such restructuring and may instead require
      us to
      repurchase its debentures.





Any
      payment to holders of debentures in connection with an offer to repurchase
      or a
      restructuring of our obligations under the debentures will impact our financial
      condition and liquidity, as will a failure to provide the offer to repurchase
      or
      to pay for all debentures tendered to us for repurchase in response to an offer
      to repurchase by us.




To
      meet
      future capital requirements, including of our obligation to repurchase any
      of
      our 2.50% convertible subordinated debentures tendered to us, we may attempt
      to
      raise additional funds including through equity or debt financings,
      collaborative agreements with corporate partners or from other sources. Any
      such
      equity or equity-linked financing will result in substantial dilution to our
      existing equity holders. In addition, we have exchanged shares of common stock
      for outstanding 2.50% convertible subordinated debentures and may do so in
      the
      future. Any such exchange may also result in dilution to our existing equity
      holders, although it would also result in the cancellation of the principal
      amount of any such debentures so exchanged. In addition we may agree to reset
      the conversion price on the outstanding 2.50% convertible subordinated
      debentures or to issue new debentures in exchange therefor, as part of a
      restructuring of our obligations under the debentures. Any such reset or
      issuance will result in substantial dilution to our existing equity holders.
      If
      adequate funds are not available, or not available on an acceptable basis,
      we
      may be unable to repurchase any debentures tendered to us for repurchase and
      may
      be forced to seek protection under the United States bankruptcy laws. Moreover,
      even if we are able to repurchase debentures so tendered to us or restructure
      our obligations thereunder, we still may be unable to raise additional funds
      on
      terms that are acceptable to us, or at all, and, as a result, we would be
      required to curtail or delay significantly one or more of our product
      development programs. In addition, given the uncertainty surrounding the
      company’s financial ability to make payments for work performed, we expect that
      vendors will begin to require up-front payments before initiating or completing
      work which will negatively impact our cash flow.




26





**Contractual
      Obligations**





Future
      minimum payments for all contractual obligations for years subsequent to
      September 30, 2006, are as set forth in the table that follows. This table
      does
      not display our obligation to offer to repurchase the $70 million in aggregate
      principal amount of our 2.50% convertible subordinated debentures that we are
      obligated to offer to repurchase as a result of our common stock no longer
      being
      listed on a US national securities exchange. In addition, the following table
      does not display any obligation that we may have to pay the entire principal
      amount outstanding under our debentures in the event we are required to do
      so as
      a result of an event of default, such as may occur in the event we fail to
      offer
      to repurchase the debentures as we are required to or we fail to pay for any
      debentures tendered in response to an offer to repurchase. Instead, the table
      below displays that our obligation to pay the principal amount under the
      debentures accrues more than five years after September 30, 2006, although
      our
      payment obligations will be accelerated to the extent we offer to repurchase
      our
      debentures and holders thereof tender their debentures to us for repurchase.
      Moreover, our payment obligations under the debentures will be due and payable
      within one year in their entirety in the event our obligations are accelerated
      following an event of default under the indenture governing the debentures.
      Our
      obligation to offer to repurchase and other matters surrounding the debentures
      are described elsewhere in this report.







**Payments
                Due by Period****Less
                Than**
              **1
                Year**
            
            **1-3
                Years**
            
            **3-5
                Years**
            
            **More
                Than**
              **5
                Years**
            
            **Total
                (2)(3)**(in
                thousands)Convertible
                subordinated debentures (1)
            
            $
            1,750,000
            
            $
            3,500,000
            
            $
            3,500,000
            
            $
            93,260,417
            
            $
            102,010,417Operating
                leases
            
            
            2,867,118
            
            
            5,708,955
            
            
            5,861,463
            
            
            13,822,352
            
            
            28,259,888Other
                contractual liabilities reflected on the Registrant’s balance sheet under
                GAAP
            
            
            1,296,750
            
            
            344,250
            
            
            —
            
            
            —
            
            
            1,641,000Total
            
            $
            5,913,868
            
            $
            9,553,205
            
            $
            9,361,463
            
            $
            107,082,769
            
            $
            131,911,305





(1)
            Included
                are interest payments of approximately $1,750,000 annually through
                2025.
                Does not give effect to our obligation to offer to repurchase our
                debentures as a result of our common stock no longer being traded
                on a US
                national securities exchange as more fully described elsewhere in
                this
                report. Moreover, does not give effect to any acceleration of our
                obligations under the debentures as may arise following an event
                of
                default under the indenture governing our
                debentures.


(2)
            We
                have entered into contracts with investment bankers and a real estate
                broker, one of which requires a monthly payment of $100,000, and
                all of
                which will require substantial fees upon the successful closing of
                certain
                transactions in relation to either a restructuring of our obligations
                under our debentures, an acquisition of our assets or equity or the
                sublease of all or part of our existing facility. Other than the
                minimum
                contractual fees required under the contracts, these amounts have
                been
                excluded from the table as the costs are not quantifiable or certain
                at
                this time.


(3)
            We
                have entered into additional contracts with vendors that do not create
                quantifiable contractual obligations, but that would require substantial
                wind-down costs and activities upon termination. These wind-down
                costs are
                not quantifiable at this time. In addition, we have entered into
                contracts
                with clinical sites participating in our clinical studies which detail
                specified amounts earned during the course of the study although
                a portion
                of those amounts are held back until the regulatory close out for
                the site
                has been completed. As there are still performance obligations due
                from
                the sites before those payments are made, the amount has been excluded
                from the table above. As of September 30, 2006, $2.3 million has
                been
                accrued under GAAP for the amounts owed under these contracts if
                all such
                performance obligations are met.





27




The
      table
      above excludes future milestones and royalties that may be owed to Wyeth, Elan
      and Biovail under terms of existing agreements as payments are contingent upon
      future events. We do not expect to pay any royalties under these agreements
      in
      2006. In May 1998, we licensed from Wyeth, on an exclusive, worldwide
      basis, indiplon, bicifadine, ocinaplon and DOV 216,303. We have the right to
      develop and commercialize these compounds, including the right to grant
      sublicenses to third parties, subject to Wyeth’s right of first refusal. If at
      any time we become insolvent or commit actions for bankruptcy, the license
      for
      our four compounds with Wyeth may be terminated and thus we may not have any
      remaining economic interest in the compounds. In
      addition, if at any time we become insolvent or commit actions for bankruptcy,
      the licenses for certain technology that we have with Elan, Neurocrine and
      Merck
      may be terminated. In
      February 2004, we entered into agreements to reorganize our exclusive license
      agreement with Wyeth in respect of these four compounds and our sublicense
      agreement with Neurocrine in respect of indiplon. Under the restated license
      agreements, if we sell the products ourselves, we are obligated to pay Wyeth
      royalties of 3.5% of net sales for ocinaplon and DOV 216,303 and 5.0% of net
      sales for bicifadine, and milestones of $2.5 million for ocinaplon and
      $5.0 million for bicifadine upon NDA filing and $4.5 million each for
      bicifadine, ocinaplon and DOV 216,303 upon a NDA approval. The royalty rate
      for
      bicifadine, ocinaplon and DOV 216,303 will increase by 0.5% should we partner
      or
      sublicense that compound, which we have done for DOV 216,303 for certain
      indications. In addition, should we partner or sublicense a compound, the next
      milestone payable to Wyeth for that compound will be accelerated to become
      due
      upon partnering. As part of the reorganization, Neurocrine acquired Wyeth’s
      interest under the license covering indiplon. Accordingly, the reorganization
      with Neurocrine allows Neurocrine to pay to us royalty and milestone payments
      net of those amounts that would be owed by us to Wyeth under our 1998 agreement
      with Wyeth. In connection with Elan’s license grant to us in October 2003, Elan
      is entitled to receive up to an aggregate of $3.0 million when bicifadine and
      ocinaplon are licensed or come to market. In connection with the Biovail
      separation agreement, we Biovail is entitled to receive $3.0 million upon
      issuance of marketing authorization for DOV diltiazem and up to
      $7.5 million based upon sales, if any.





The
      table
      also excludes any severance or termination payments that would be due to certain
      of our employees under their employment contracts should they be terminated
      without cause or terminate following a change of control prior to the expiration
      of their contract term as the amounts are not determinable at this time.
 If on September 30, 2006 the relevant employees were terminated without
      cause the amounts due pursuant to these contracts would have been $2.0 million.
      In addition, as there are still performance obligations for Dr. Lippa, we have
      excluded the $275,000 remaining severance obligation related to his contract
      from the table above; however the amounts are included in accrued expenses
      in
      accordance with GAAP. We file our employment agreements with our current and
      former executive officers with the SEC and these agreements are available at www.sec.gov.





**Off-Balance
      Sheet Arrangements**





The
      $70
      million of outstanding convertible subordinated debentures we have
      outstanding at September 30, 2006 are convertible into approximately 3.5
      million shares of our common stock.  If all these debentures were
      converted, our stockholders could experience significant dilution. We would
      not receive any additional cash proceeds upon the conversion of the
      debentures. In July 2006, we exchanged an aggregate of 3,445,000 of our common
      stock for an aggregate of $10 million in original principal amount of these
      debentures. We have canceled the debentures received in the exchange
      transactions which reduced the aggregate bonds outstanding from $80 million
      in
      original principal amount to $70 million in original principal amount. With
      this
      reduction in principal amount, the shares reserved for issuance upon conversion
      of the debentures has been reduced to 3,076,923.




28





**Recent
      Accounting Pronouncements**





In
      July
      2006, the FASB issued FASB Interpretation No. 48 (FIN 48), "Accounting for
      Uncertainty in Income Taxes." FIN 48 prescribes detailed guidance for the
      financial statement recognition, measurement and disclosure of uncertain tax
      positions recognized in an enterprise’s financial statements in accordance with
      FASB Statement No. 109, "Accounting for Income Taxes." Tax positions must meet
      a
      more-likely-than-not recognition threshold at the effective date to be
      recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will
      be
      effective for fiscal years beginning after December 15, 2006 and the provisions
      of FIN 48 will be applied to all tax positions upon initial adoption of the
      Interpretation. The cumulative effect of applying the provisions of this
      Interpretation will be reported as an adjustment to the opening balance of
      retained earnings for that fiscal year. We are currently evaluating the
      potential impact of FIN 48 on our financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108, which
      expresses the Staff’s views regarding the process of quantifying financial
      statement misstatements. The bulletin is effective at fiscal year end 2006.
      We
      believe the implementation of this bulletin will have no effect on our results
      of operations, cash flows or financial position.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No
      157, *Fair
      Value Measurements.* This
      statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles, and expands disclosures about
      fair
      value measurements. The statement is effective in the first fiscal quarter
      of
      2008 and we will adopt the statement at that time. We believe that the adoption
      of SFAS No 157 will not have a material effect on our results of operations,
      cash flows or financial position.





**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risks**





There
      have been no material changes with respect to the information on Quantitative
      and Qualitative Disclosures About Market Risk appearing in Part II, Item 7A
      to
      our Annual Report on Form 10-K for the year ended December 31,
      2005.





**Item
      4. Controls and Procedures**




As
      required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation
      of the effectiveness of the design and operation of our disclosure controls
      and
      procedures as of the end of the period covered by this report. This evaluation
      was carried out by management as of September 30, 2006, under the supervision
      and with the participation of our president and chief financial officer (our
      principal accounting officer). Based upon that evaluation, this officer
      concluded that our disclosure controls and procedures are effective **.**





There
      was
      no significant change in our internal control over financial reporting that
      occurred during our most recently completed fiscal quarter that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.




29




**PART
      II — OTHER INFORMATION**





**Item
      1. Legal Proceedings**





We
      are
      not a party to any material legal proceedings.





**Item
      1A. Risk Factors**





If
      any of
      the events covered by the following risks occur, our business, results of
      operations and financial condition could be harmed. In that case, the trading
      price of our common stock could decline. Moreover,
      our actual results may differ materially from our forward-looking statements
      as
      a result of the following factors.





**Risks
      Related to our Business**





***We
      do not have the funds available to us to repurchase our 2.50% convertible
      subordinated debentures due 2025 that we are obligated to offer to so repurchase
      as a result of the delisting of our common stock by the The NASDAQ Global
      Market.***





*In
      the event we either fail to offer to repurchase our debentures, we fail to
      repurchase any debentures that are tendered to us for repurchase or we are
      otherwise in default under the indenture governing our debentures, our
      obligations under the debentures will accelerate and we may be forced to seek
      the protection of the United States bankruptcy laws.*





We
      are
      obligated to offer to repurchase the $70 million in aggregate principal amount
      currently outstanding under our 2.50 % convertible subordinated debentures
      and
      we do not have sufficient funds available to pay for all or a significant
      portion of the $70 million of the debentures currently outstanding if all
      or a significant portion of such debentures are tendered for repurchase. In
      the event we fail to offer to repurchase or we are unable to pay for any
      debentures tendered to us for repurchase, our obligations under the debentures
      will accelerate because either of these failures constitute an event of default
      under the indenture governing our debentures. In the event our obligations
      accelerate as a result of such an event of default, or any other event of
      default under the indenture, we do not have sufficient funds available to pay
      for all of the debentures and we may be forced to seek the protection of the
      United States bankruptcy laws. In the event we seek the protection of the United
      States bankruptcy laws, our creditors may not receive payment in full for their
      claims and holders of our common stock may receive nothing for their common
      stock. If
      at any
      time we become insolvent or commit actions for bankruptcy, the license for
      our
      four compounds with Wyeth may be terminated and thus we may not have any
      remaining economic interest in the compounds.  In
      addition, if at any time we become insolvent or commit actions for bankruptcy,
      the licenses for certain technology that we have with Elan, Neurocrine and
      Merck
      may be terminated. The above matters raise substantial doubt about our ability
      to continue as a going concern.





*In
      order to fulfill our obligations to repurchase any debentures tendered to us
      for
      repurchase or to repay any debentures that we are otherwise obligated to repay,
      we may be required to secure financing or other capital on terms that are not
      advantageous, including equity issuances that are highly dilutive to holders
      of
      our common stock, debt with interest rates and repayment terms that are not
      desirable or other capital raising transactions that are substantially more
      expensive than we would otherwise be able to achieve.*





As
      a
      result of numerous factors including the delisting of our common stock, our
      near
      term obligations under our debentures, the clinical results of certain of our
      compounds and delays in the commercialization of products that utilize our
      compounds, we may be unable to, and at a minimum will have difficulty, raising
      additional capital to repurchase or otherwise repay our debentures or to fund
      substantial operations. As a result, any financing or capital raising
      transaction that we may be able to secure will likely be on disadvantageous
      terms. Any such financing will result in significant dilution to holders of
      our
      common stock, increased borrowing costs or other terms that will impact our
      future operations.




30





*We
      may be unable to restructure our obligations under our debentures outside of
      a
      bankruptcy proceeding and, any such restructuring that we may achieve outside
      of
      a bankruptcy proceeding will likely involve a new security which will carry
      a
      higher yield and a lower conversion price resulting in increased costs to us
      and
      significant dilution to holders of our common stock.*





Holders
      of our debentures are not obligated to engage in any restructuring discussions
      or to accept any restructuring of our debentures. In the event we are obligated
      to repurchase or otherwise repay a significant amount of our debentures, we
      will
      not have sufficient capital to do so. Holders of our debentures may agree with
      us to restructure our obligations under the debentures to provide for a new
      security or to amend the terms of the existing debentures. Any such new or
      amended security will likely carry a higher interest rate and a lower conversion
      price than our current debentures. As a result, our company may incur
      significant additional costs to finance such new or amended security and holders
      of our common stock would suffer significant dilution. In addition, the holders
      of the debentures may also require a payment of cash in connection with any
      such
      restructuring which will decrease the cash available to fund future operations,
      although we are limited in the amount of such cash that we may pay in connection
      with any such restructuring. Finally, any such restructuring, if one is pursued
      and completed, will result in significant costs to us as we pay investment
      banking and professional fees in connection with these efforts.





***The
      delisting of our common stock from the TheNASDAQ Global Market will result
      in
      more limited trading opportunities for holders of our common stock, increased
      volatility and additional difficulty in raising capital in the future if
      needed.***





Our
      common stock is no longer traded on The NASDAQ Global Market. Instead, it is
      currently traded on the Pink Sheets and may, in the future, be traded on the
      Over-the-Counter Bulletin Board operated by the National Association of
      Securities Dealers. Although these trading venues offer holders of our common
      stock the opportunity to trade, it is likely that our stock price will be highly
      volatile. Moreover, it is unlikely that any significant long-term institutional
      holdings will develop through these trading venues. Trading on the Pink Sheets
      and the OTC Bulletin Board will also likely present additional difficulties
      in
      the event we need to raise additional capital in the future as most institutions
      prefer to invest in a common stock that is traded on a national securities
      exchange.





***Our
      stock price is likely to be volatile and the market price of our common stock
      may decline.***





Our
      stock
      price has been particularly volatile. Following
      the release of results from our completed Phase III clinical trial of bicifadine
      in patients with chronic low back pain, or CLBP, our stock price experienced
      a
      substantial decline from the previous day’s close price of $14.69 to $7.92.
      Further, following our partner Neurocrine’s announcement regarding the FDA
      review and approval process for indiplon, our stock price experienced another
      decline from the previous day’s close price of $7.05 to $3.02 and has further
      declined upon the July 31, 2006 announcement of our notice of NASDAQ listing
      requirement deficiencies and the October 26, 2006 announcement that we would
      no
      longer be listed for trading on a national exchange.





Some
      of
      the factors that may cause the market price of our common stock to continue
      to
      fluctuate include:





·
            our
                ability to restructure our obligations under our 2.50% convertible
                subordinated debentures and, if so restructured, the terms
                thereof;


·
            future
                issuances of our common stock or other forms of financings which
                would
                result in substantial dilution to our existing equity
                holders;


·
            results
                of clinical trials conducted by us or on our behalf, or by our
                competitors;


·
            delays
                in initiating clinical trials or changes in previously planned or
                initiated clinical trials;


·
            regulatory
                developments or enforcement in the United States and foreign countries,
                such as the result of the May 2006 FDA issuance of an approvable
                letter
                (for the 5mg and 10mg IR doses) and a non-approvable letter (for
                the 15mg
                MR dose) by the FDA for the indiplon NDA
                filings;


·
            business
                or legal developments concerning our collaborators, licensors or
                licensees, including Merck, Neurocrine and
                Wyeth;


·
            developments
                or disputes concerning patents or other proprietary
                rights;


·
            changes
                in estimates or recommendations by securities
                analysts;




31




·
            public
                concern over our drugs that treat CNS disorders, including any drugs
                that
                we may develop in the future;


·
            litigation;


·
            general
                market conditions;


·
            changes
                in the structure of health care payment
                systems;


·
            failure
                of any of our product candidates, if approved, to achieve commercial
                success;


·
            economic
                and other external factors or other disasters or crises;


·
            period-to-period
                fluctuations in our financial results and financial
                position;


·
            changes
                in senior management; and


·
            further
                restructuring of our corporate workforce to best address and achieve
                our
                short- and long-term goals.





If
      any of
      the foregoing risks occur, our stock price could fall and in some cases expose
      us to class action lawsuits that, even if unsuccessful, could be costly to
      defend and a distraction to management. In this regard, following a decline
      in
      the aftermarket trading price of our common stock in connection with our initial
      public offering, beginning on April 30, 2002, a number of class action
      lawsuits were filed naming us as defendants, in addition to certain of our
      officers and directors and certain of our underwriters. On December 20,
      2002, we entered into a settlement agreement, which was approved by the court
      on
      April 16, 2003, to settle these lawsuits. Pursuant to the settlement
      agreement, we have paid the class members (inclusive of their attorneys' fees
      and costs) $250,000 in cash and issued them six-year warrants to purchase
      500,000 shares of our common stock with an exercise price of $10.00 per share.
      Upon issuance, we determined the value of the warrants to be $2.2
      million.




***Our
      indebtedness and interest payment obligations may adversely affect our cash
      flow, cash position and stock price.***





In
      December 2004 and January 2005, we sold $80 million aggregate principal amount
      of 2.5% subordinated convertible debentures due in January 2025. Our annual
      debt
      service obligation on these debentures prior to July 26, 2006 was $2.0
      million. We are required to offer to repurchase $70 million in aggregate
      principal amount of our debentures because our common stock is no longer listed
      for trading on a US national securities exchange. We are obligated to make
      this
      offer to repurchase on or prior to November 11, 2006. We do not presently have
      the capital necessary to repurchase all or a significant portion of the $70
      million of the debentures if all or a significant portion of the holders of
      debentures exercise their option to require us to repurchase the debentures.
      If
      we do not offer to repurchase the debentures as required by the indenture,
      or if
      we fail to pay for all debentures tendered to us for repurchase, an “event of
      default” will occur under the indenture governing the debentures. If we are
      unable to raise sufficient funds to repurchase the requisite amount of
      debentures or restructure our obligations under the debentures, we may be forced
      to seek protection under the United States bankruptcy laws.





We
      intend
      to fulfill our interest payment obligations for the convertible subordinated
      debentures from our existing cash, cash equivalents and marketable securities.
      In the future, if the holders require us to purchase all or a portion of their
      debentures and we are unable to generate cash or raise additional cash through
      financings sufficient to meet these obligations, we may have to delay or curtail
      research, development and commercialization programs. The holders’ right to
      require us to purchase all or a portion of the debentures, prior to maturity
      in
      January 2025, may be exercised in January 2012, 2015 and 2020 or earlier upon
      a
      fundamental change of the Company, including a delisting of our common stock
      from a national securities exchange.





***If
      we cannot raise additional funding, we may be unable to complete development
      of
      our product candidates.***





At
      September 30, 2006, we had cash and cash equivalents and marketable securities
      of $47.3 million. We currently have no commitments or arrangements for any
      financing. We will require additional funding to continue our research and
      development programs, including preclinical testing and clinical trials of
      our
      product candidates, for operating expenses and to pursue regulatory approvals
      for our product candidates. We may continue to seek additional capital including
      through public or private financing or collaborative agreements. If adequate
      funds are not available to us as we need them, we may be required to curtail
      significantly or eliminate at least temporarily one or more of our product
      development programs. In
      addition, given our current financial situation we
      expect
      that vendors will begin to require up-front payments before initiating or
      completing work which will negatively impact our cash flow .




32





***We
      have incurred losses since our inception and expect to incur significant losses
      for the foreseeable future, and we may never reach
      profitability.***





Since
      our
      inception in April 1995 through September 30, 2006, we have incurred significant
      operating losses and, as of September 30, 2006, we had an accumulated deficit
      of
      $211.7 million. We have not yet completed the development, including obtaining
      regulatory approvals, of any product candidate and, consequently, have not
      generated any revenues from the sale of products. Even if we succeed in
      developing and commercializing one or more of our product candidates, we may
      never achieve significant sales revenue and we expect to incur operating losses
      for the foreseeable future. We also expect to continue to incur significant
      operating expenses and capital expenditures and anticipate that our expenses
      may
      increase in the foreseeable future as we:





·
            conduct
                clinical trials;


·
            conduct
                research and development on existing and new product candidates;


·
            make
                milestone payments;


·
            seek
                regulatory approvals for our product
                candidates;


·
            commercialize
                our product candidates, if
                approved;


·
            hire
                additional clinical, scientific and management
                personnel;


·
            add
                operational, financial and management information systems and personnel;
                and


·
            identify
                additional compounds and acquire rights from third parties to those
                compounds through a license to us.





We
      must
      generate significant revenue to achieve and maintain profitability. We may
      not
      be able to generate sufficient revenue and we may never be able to achieve
      or
      maintain profitability.





***We
      are dependent on the successful outcome of clinical trials for our lead
      product candidates.***





None
      of
      our product candidates is currently approved for sale by the FDA, or by any
      other regulatory agency in the world, and our product candidates may never
      be
      approved for sale or become commercially viable. Before obtaining regulatory
      approval for the sale of our product candidates, they must be subjected to
      extensive preclinical and clinical testing to demonstrate their safety and
      efficacy for humans and we have devoted a significant portion of our resources
      in 2006 to the development of bicifadine. Our success will depend on the success
      of clinical trials that have not yet begun. There are a number of difficulties
      and risks associated with clinical trials including, but not limited to, the
      possibilities that:





·
            we
                may discover that a product candidate causes or may cause harmful
                side
                effects;


·
            we
                may discover that a product candidate, even if safe when taken alone,
                may
                interfere with the actions of other drugs taken at the same time
                such that
                its marketability is materially
                reduced;


·
            we
                may discover that a product candidate does not exhibit the expected
                therapeutic results in humans;


·
            a
                product candidate may lend itself to user abuse, in which case labeling
                may adversely affect its
                marketability;


·
            results
                may not be statistically significant or predictive of results to
                be
                obtained from large-scale, advanced clinical
                trials;


·
            we
                or the FDA may suspend or delay initiation of further clinical trials
                of
                our product candidates for any of a number of reasons, including
                safety or
                delay in obtaining clinical trial
                material;


·
            we
                may be delayed in the FDA protocol review process;


·
            patient
                recruitment may be slower than expected;


·
            patient
                compliance may fall short of trial requirements;
                and


·
            patients
                may drop out of our clinical
                trials.




33





In
      October 2003, the FDA placed the start of our Phase III clinical trial of
      ocinaplon, our anti-anxiety product candidate, on hold and requested that we
      produce additional safety information. We supplied this information to the
      FDA
      and with FDA concurrence initiated a Phase III clinical trial in the fourth
      quarter of 2004. In August 2005, we announced that we had suspended the trial
      due to a recent occurrence of enzyme elevations in liver function tests, or
      LFTs, for one subject in the trial and, following our trial report to the FDA,
      the agency joined in the clinical hold. We have since evaluated the safety
      findings from all subjects in ocinaplon clinical trials. During this study
      the
      overall incidence of an elevation in liver enzymes greater than three times
      normal was eight percent. Based upon these data, we have discontinued the
      development of ocinaplon for GAD.




In
      April
      and May 2006, we announced the results of our Phase III clinical trial of
      bicifadine for the treatment of chronic lower back pain, CLBP, study 020. 
Bicifadine did not achieve a statistically significant effect relative to
      placebo on the primary endpoint of the study at any of the three doses
      tested.  In October 2006, we announced the interim results of our second
      Phase III clinical trial of bicifadine for CLBP, study 021. Bicifadine did
      not
      achieve a statistically significant effect relative to placebo on the primary
      endpoint of the study and we are therefore stopping the dosing in this
      study.  In
      addition in October 2006, we announced that we are stopping dosing in the
      long-term safety trial, study 022.  We are also closing out the recently
      completed Phase II study of bicifadine in subjects with osteoarthritis of the
      hip or knee. However, it is an FDA requirement to complete the relevant safety
      assessments and to finalize study documentation in accordance with FDA mandated
      good clinical practices. We anticipate this process and related regulatory
      close-out obligations at the study sites will take several months and is
      expected to be completed by the end of the first quarter of 2007. We had
      previously postponed certain Phase I clinical trials and other development
      activities which are now no longer on the critical path timeline for an NDA
      filing to enable us to have more flexibility with expenditures in the near
      term.





Given
      the
      uncertainty surrounding the outcome of the regulatory and clinical trial
      process, we may not be able to successfully advance the development of effective
      and safe, commercially viable products. If we are unable to successfully develop
      and commercialize any one or more of our product candidates, this could severely
      harm our business, impair our ability to generate revenues and adversely impact
      our stock price.





***We
      may determine to continue to reduce staffing further as a result of stopping
      certain clinical trials and other development activities for bicifadine, in
      which case we could face lawsuits.***





On
      May
      18, 2006, we reduced our workforce to 74 employees from 111 employees in order
      to lower our cost structure as part of a reorganization of operations and to
      appropriately align our operations with its current stage of drug development
      and research. This reduction in force was made as a result of the postponement
      by us of certain clinical trials and other development activities for
      bicifadine. In
      October 2006, we announced the interim results of our second Phase III clinical
      trial of bicifadine for CLBP, study 021. Bicifadine did not achieve a
      statistically significant effect relative to placebo on the primary endpoint
      of
      the study and we are therefore stopping the dosing in this study.  In
      addition in October 2006, we announced that we are stopping dosing in the
      long-term safety trial, study 022. Any reduction in workforce is accompanied
      by
      risk of litigation, which if initiated or successful, could harm our business
      and financial position.





***We
      have experienced a substantial decline in our workforce and we may continue
      to
      experience such declines given the uncertainty of our current business
      situation. Further reductions could hinder our ability to efficiently complete
      requlatory closeouts of our clinical studies or transact discussions with
      potential partners.***





****** Since
      June 2006, our workforce has declined to 55 employees from 74 employees through
      voluntary departures. With the uncertainty of our business situation we expect
      to have more such voluntary departures. With the employee base that we currently
      have, we believe we will complete the required FDA regulatory closeouts of
      our
      recently halted or completed clinical studies of bicifadine by the first quarter
      of 2007. However, this reduction has hindered us from initiating any additional
      clinical studies with our reuptake inhibitors. Any further reductions in
      workforce will not only result in further delays in initiating clinical studies
      but could also result in increased costs associated with hiring of outside
      consultants to complete ongoing work. In addition as certain of our employees
      are needed to facilitate discussions with potential partners, either for
      licensing, financing or acquisitions transactions, the loss of these employees
      will severely impact the success of any such discussions.




34





***We
      may not receive regulatory approvals for our product candidates, approvals
      may
      be delayed or the approvals we receive may not be sufficient to fulfill our
      current goals for our product candidates.***





Regulation
      by government authorities in the United States and foreign countries is a
      significant factor in the development, manufacture and commercialization of
      our
      product candidates and in our ongoing research and development activities.
      Our
      partner Neurocrine filed two NDAs for indiplon for the treatment of insomnia
      in
      April and May 2005. The FDA issued an approvable letter for the 5 mg and 10
      mg
      IR formulation and a non-approvable letter for the 15 mg MR formulation in
      May
      2006. Neurocrine is continuing to review the FDA letters and is pursuing
      discussions with the FDA to gain greater clarity regarding next steps for
      indiplon’s development. All our other product candidates are in various stages
      of research and development and we have not yet requested or received regulatory
      approval to commercialize any product candidate from the FDA or any other
      regulatory body.





In
      particular, human therapeutic products are subject to rigorous preclinical
      testing, clinical trials and other approval procedures of the FDA and similar
      regulatory authorities in foreign countries. The FDA regulates, among other
      things, the development, testing, manufacture, safety, efficacy, record keeping,
      labeling, storage, approval, advertising, promotion, sale and distribution
      of
      biopharmaceutical products. Securing FDA approval requires the submission of
      extensive preclinical and clinical data and supporting information to the FDA
      for each therapeutic indication to establish the product candidate’s safety and
      efficacy. The approval process may take many years to complete and the approvals
      we receive may not allow us to pursue all the desired indications or uses for
      each of our product candidates. Additionally, even after receipt of FDA
      approval, the FDA may request additional clinical trials to evaluate any adverse
      reactions or long-term effects. The scope and expense of such post-approval
      trials could be extensive and costly to us. Any FDA or other regulatory approval
      of our product candidates, once obtained, may be withdrawn. If our product
      candidates are marketed abroad, they will also be subject to extensive
      regulation by foreign governments.





Any
      failure to receive regulatory approvals necessary to commercialize our product
      candidates would have a material adverse effect on our business. The process
      of
      obtaining these approvals and the subsequent compliance with appropriate federal
      and state statutes and regulations require spending substantial time and
      financial resources. If we, or our collaborators or licensees, fail to obtain
      or
      maintain or encounter delays in obtaining or maintaining regulatory approvals,
      it could adversely affect the marketing of any product candidates we develop,
      our ability to receive product or royalty revenues and our liquidity and capital
      resources.





As
      noted
      above, in October 2003, the FDA placed the start of our Phase III clinical
      trial of ocinaplon, on hold and requested that we produce additional safety
      information. We supplied this information to the FDA and with FDA approval
      initiated a Phase III clinical trial in the fourth quarter of 2004. In August
      2005, we announced that we had suspended the trial following a recent occurrence
      of enzyme elevations in LFTs for one subject in the trial and, following our
      trial report to the FDA, the agency joined in the clinical hold. We have since
      evaluated the safety findings from all subjects in ocinaplon clinical trials.
      During this study the overall incidence of an elevation in liver enzymes greater
      than three times normal was eight percent. Based upon these data, we have
      discontinued the development of ocinaplon for GAD.




***Our
      operating results are subject to fluctuations that may cause our stock price
      to
      decline.***





Our
      revenue is unpredictable and has fluctuated significantly from year-to-year
      and
      quarter-to-quarter and will likely continue to be highly volatile. We believe
      that period-to-period comparisons of our past operating results are not good
      indicators of our future performance and should not be relied on to predict
      our
      future results. In the future, our operating results in a particular period
      may
      not meet the expectations of any securities analysts whose attention we may
      attract, or those of our investors, which may result in a decline in the market
      price of our common stock.




***We
      rely on the efforts of Neurocrine for the development, design and implementation
      of clinical trials, regulatory approval and commercialization of
      indiplon.***





In
      1998,
      we sublicensed indiplon to Neurocrine without retaining any material rights
      other than the right to receive milestone payments and royalties on product
      sales, if any. In December 2002, Neurocrine entered into a development and
      commercialization agreement with Pfizer for indiplon. In June 2006, Neurocrine
      announced that Neurocrine and Pfizer had agreed to terminate the collaboration
      agreement to develop and co-promote indiplon and that Neurocrine would reacquire
      all worldwide rights for indiplon capsules and tablets and would independently
      develop indiplon for approval and commercialization. The termination of this
      partnership does not affect or alter DOV’s royalty and milestone agreements with
      Neurocrine.




35




***Our
      success in developing our product candidates depends upon the performance of
      our
      licensees and collaborative partners.***





Our
      efforts to develop, obtain regulatory approval for and commercialize our
      existing and any future product candidates depend in part upon the performance
      of our licensees and collaborative partners. Currently, we have license and
      collaborative agreements with Merck, Neurocrine and Wyeth. If DOV at any time
      becomes insolvent or commits actions for bankruptcy, the license for our four
      compounds with Wyeth may be terminated and thus we may not have any remaining
      economic interest in the compounds. In
      addition, if at any time we become insolvent or commit actions for bankruptcy,
      the licenses for certain technology that we have with Elan, Neurocrine and
      Merck
      may be terminated.In connection with certain of these agreements, we
      have granted certain rights, including development and marketing rights and
      rights to defend and enforce our intellectual property. We do not have
      day-to-day control over the activities of our licensees or collaborative
      partners and cannot assure you that they will fulfill their obligations to
      us,
      including their development and commercialization responsibilities in respect
      of
      our product candidates. Our license agreement with Merck was amended in August
      2005 to provide that we would assume responsibility for certain development
      of
      DOV 21,947 that Merck would have otherwise been responsible for under the
      agreement. Merck is not presently performing any clinical studies under this
      arrangement and continues to have the right to terminate the license agreement.
      In October 2006, DOV notified Merck of its desire to terminate the companies’
license agreement with respect to DOV 21,947.  In the event Merck decides
      not to re-internalize the compound, DOV 21,947 will no longer be covered by
      the
      license agreement effective as of December 8, 2006.  Unless terminated by
      Merck, the license agreement will remain effective in respect to DOV
      216,303.





We
      also
      cannot assure you that our licensees or collaborators will properly maintain
      or
      defend our intellectual property rights or that they will not utilize our
      proprietary information in such a way as to invite litigation that could
      jeopardize or potentially invalidate our proprietary information or expose
      us to
      potential liability. Further, we cannot assure you that our licensees or
      collaborators will not encounter conflicts of interest, or changes in business
      strategy, or that they will not acquire or develop rights to competing products,
      all of which could adversely affect their willingness or ability to fulfill
      their obligations to us.




From
      January 1999 until October 2003, Elan and we were engaged in developing
      controlled release formulations of bicifadine and ocinaplon pursuant to our
      joint venture. In October 2003, we acquired from Elan 100% ownership of
      Nascime, the joint venture's operating subsidiary, and the product candidates
      bicifadine and ocinaplon. This acquisition ended our involvement with Elan
      in
      the nearly five-year joint venture. In March 2003, we and Biovail
      terminated our collaboration for DOV diltiazem.




Any
      failure on the part of our licensees or collaborators to perform or satisfy
      their obligations to us could lead to delays in the development or
      commercialization of our product candidates and affect our ability to realize
      product revenues. Disagreements with our licensees or collaborators could
      require or result in litigation or arbitration, which could be time-consuming
      and expensive. If we or our licensees or collaborators fail to maintain our
      existing agreements or establish new agreements as necessary, we could be
      required to undertake development, manufacturing and commercialization
      activities solely at our own expense. This would significantly increase our
      capital requirements and may also delay the commercialization of our product
      candidates.





***The
      independent clinical investigators and contract research organizations that
      we
      rely upon to assist in the conduct of our clinical trials may not be diligent,
      careful or timely, and may make mistakes, in the conduct of our
      trials.***





We
      depend
      on independent clinical investigators and contract research organizations,
      or
      CROs, to assist in the conduct of our clinical trials under their agreements
      with us. The investigators are not our employees, and we cannot control the
      amount or timing of resources that they devote to our programs. If independent
      investigators fail to devote sufficient time and resources to our drug
      development programs, or if their performance is substandard, it will delay
      the
      approval of our FDA applications and our introduction of new drugs. The CROs
      we
      contract with to assist with the execution of our clinical trials play a
      significant role in the conduct of the trials and the subsequent collection
      and
      analysis of data. Failure of the CROs to meet their obligations could adversely
      affect clinical development of our products. Moreover, these independent
      investigators and CROs may also have relationships with other commercial
      entities, some of which may compete with us. If independent investigators and
      CROs assist our competitors at our expense, it could harm our competitive
      position.




36





***Our
      existing collaborative and licensing agreements contain, and any such agreements
      that we may enter into in the future may contain, covenants that restrict our
      product development and commercialization activities.***




Our
      existing license and collaborative agreements contain covenants that restrict
      our product development and our ability to compete in collaborative agreements.
      In addition, certain of our agreements no longer effective have involved, among
      other things, restrictions on the issuance of debt and equity securities and
      limitations on our ability to license our product candidates to third parties.
      Because of existing restrictive covenants, if our licensees or collaborators
      fail to fulfill their obligations to us or we are otherwise not able to maintain
      these relationships, we cannot assure you that we will be able to enter into
      alternative arrangements or assume the development of these product candidates
      ourselves. This would significantly affect our ability to commercialize our
      product candidates. Further, we cannot assure you, even if alternative
      arrangements are available to us, that they will be any less restrictive on
      our
      business activities.





***If
      we are unable to create sales, marketing and distribution capabilities, or
      enter
      into agreements with third parties to perform these functions, we will not
      be
      able to commercialize our product candidates.***





We
      do not
      have any sales, marketing or distribution capabilities. In order to
      commercialize our product candidates, if any are approved, we must either
      acquire or internally develop sales, marketing and distribution capabilities
      or
      make arrangements with third parties to perform these services for us. If we
      obtain FDA approval for our existing product candidates, we intend to rely
      on
      relationships with one or more pharmaceutical companies or other third parties
      with established distribution systems and direct sales forces to market our
      product candidates. If we decide to market any of our product candidates
      directly, we must either acquire or internally develop a marketing and sales
      force with technical expertise and supporting distribution capabilities. The
      acquisition or development of a sales and distribution infrastructure would
      require substantial resources, which may divert the attention of our management
      and key personnel, and negatively impact our product development efforts.
      Moreover, we may not be able to establish in-house sales and distribution
      capabilities or relationships with third parties. To the extent we enter into
      co-promotion or other licensing agreements, our product revenues are likely
      to
      be lower than if we directly marketed and sold our product candidates, and
      any
      revenue we receive will depend upon the efforts of third parties, which may
      not
      be successful.





***The
      success of our business depends upon the members of our senior management team,
      our scientific staff and our ability to continue to attract and retain qualified
      scientific, technical and business personnel.***





We
      are
      dependent on the principal members of our management team and scientific staff
      for our business success. The loss of any of these people could impede the
      achievement of our development and business objectives. We do not carry key
      man
      life insurance on the lives of any of our key personnel. There is intense
      competition for human resources, including management, in the scientific fields
      in which we operate and there can be no assurance that we will be able to
      attract and retain qualified personnel necessary for the successful development
      of our product candidates, and any expansion into areas and activities requiring
      additional expertise. In addition, there can be no assurance that such personnel
      or resources will be available when needed. In addition, we rely on a
      significant number of consultants to assist us in formulating our research
      and
      development strategy and other business activities. All our consultants may
      have
      commitments to, or advisory or consulting agreements with, other entities that
      may limit their availability to us.




37





***We
      may be subject to claims that we or our employees have wrongfully used or
      disclosed alleged trade secrets of their former
      employers.***





As
      is
      commonplace in the biotechnology industry, we employ individuals who were
      previously employed at other biotechnology or pharmaceutical companies,
      including our competitors or potential competitors. Although no claims against
      us are currently pending, we may be subject to claims that these employees
      or we
      have inadvertently or otherwise used or disclosed trade secrets or other
      proprietary information of their former employers. Litigation may be necessary
      to defend against these claims. Even if we are successful in defending against
      these claims, litigation could result in substantial costs and be a distraction
      to management.





***Because
      some of our patents with respect to some of our product candidates have expired
      or will expire in the near term, we may be required to rely solely on the
      Hatch-Waxman Act for market exclusivity.***





A
      number
      of patents that we licensed from Wyeth have expired, including certain patents
      that provide protection for the use of DOV 216,303 for the treatment of
      depression, and the use of bicifadine for the treatment of pain. Patents
      protecting intermediates useful in the manufacture of ocinaplon are due to
      expire in 2007. The numerous patent applications pending and others in
      preparation covering our compounds, even if filed and approved, may not afford
      us adequate protection against generic versions of our product candidates or
      other competitive products. In the event we achieve regulatory approval to
      market any of our product candidates, including bicifadine, DOV 216,303 or
      ocinaplon, and we are unable to obtain adequate patent protection for the
      ultimate marketed product, we will be required to rely to a greater extent
      on
      the Hatch-Waxman Act, and applicable foreign legislation, to achieve market
      exclusivity. The Hatch-Waxman Act generally provides for marketing exclusivity
      to the first applicant to gain approval for a particular drug by prohibiting
      filing of an abbreviated NDA, or ANDA, by a generic competitor for up to five
      years after the drug is first approved. The Hatch-Waxman Act, however, also
      accelerates the approval process for generic competitors using the same active
      ingredients once the period of statutory exclusivity has expired. It may also
      in
      practice encourage more aggressive legal challenges to the patents protecting
      approved drugs. In addition, because some of our patents have expired, third
      parties may develop competing product candidates using our product compounds
      and
      if they obtain regulatory approval for those products prior to us, we would
      be
      barred from seeking an ANDA for those products under the Hatch-Waxman Act for
      the applicable statutory exclusivity period.





***Our
      business activities require compliance with environmental laws, which if
      violated could result in significant fines and work
      stoppage.***





Our
      research and development programs, and the manufacturing operations and disposal
      procedures of our contractors and collaborators, are affected by federal, state,
      local and foreign environmental laws. Although we intend to use reasonable
      efforts to comply with applicable environmental laws, our contractors and
      collaborators may not comply with these laws. Failure to comply with
      environmental laws could result in significant fines and work stoppage, and
      may
      harm our business.




***We
      may not be able to fully utilize our new corporate headquarters, and as a
      result, our overhead expenses will increase.***




In
      February 2006 we committed to a ten-year operating lease for a 133,686 square
      foot facility in Somerset, New Jersey. This facility serves as our corporate
      headquarters and principal place of business, effective June 2006. This new
      facility has office and laboratory space and results in a higher level of fixed
      overhead. The use of such facilities, even if they lead to cost savings and
      improved control and turn-around time, is expected to require substantial
      management time, personnel transition and relocation costs. In addition, as
      a
      result of the failure of the Phase III bicifadine clinical studies 020 and
      021
      and the stoppage of 022, for
      the
      foreseeable future we will not utilize the full capacity of the facility and
      there can be no assurance that we will ever operate the facility efficiently.
      The annual lease payments on this facility are $2.8 million.




38





***Our
      bylaws require us to indemnify our officers and directors to the fullest extent
      permitted by law, which may obligate us to make substantial payments and in
      some
      instances payments in advance of judicial resolution of
      entitlement.***





Our
      bylaws require that we indemnify our directors, officers and scientific advisory
      board members, and permit us to indemnify our other employees and agents, to
      the
      fullest extent permitted by the Delaware corporate law. This could require
      us,
      with some legally prescribed exceptions, to indemnify our directors, officers
      and scientific advisory board members against any and all expenses, judgments,
      penalties, fines and amounts reasonably paid in defense or settlement in
      connection with an action, suit or proceeding relating to their association
      with
      us. For directors, our bylaws require us to pay in advance of final disposition
      all expenses including attorneys’ fees incurred by them in connection with any
      action, suit or proceeding relating to their status or actions as directors.
      Advance payment of legal expenses is discretionary for officers, scientific
      advisory board members and other employees or agents. We may make these advance
      payments provided that they are preceded or accompanied by an undertaking on
      behalf of the indemnified party to repay all advances if it is ultimately
      determined that he or she is not entitled to be indemnified by us. Accordingly,
      we may incur expenses to meet these indemnification obligations, including
      expenses that in hindsight are not qualified for reimbursement and possibly
      not
      subject to recovery as a practical matter.





***Provisions
      of Delaware law, our charter and by-laws and our stockholders rights plan may
      make a takeover more difficult.***





Provisions
      of our certificate of incorporation and by-laws and in the Delaware corporate
      law may make it difficult and expensive for a third party to pursue a tender
      offer, change in control or takeover attempt that is opposed by our management
      and board of directors. Moreover, our stockholders rights plan, adopted in
      October 2002, commonly called a poison pill, empowers our board of directors
      to
      delay or negotiate, and thereby possibly to thwart, any tender or takeover
      attempt the board of directors opposes. Public stockholders who might desire
      to
      participate in such a transaction may not have an opportunity to do so. We
      also
      have a staggered board of directors that makes it difficult for stockholders
      to
      change the composition of our board of directors in any one year. These
      anti-takeover provisions could substantially impede the ability of public
      stockholders to change our management and board of directors.




***Risks
      Related to our Industry***





***We
      face intense competition and if we are unable to compete effectively, the demand
      for our products, if any, may be reduced.***





The
      pharmaceutical industry is highly competitive and marked by a number of
      established, large pharmaceutical companies, as well as smaller emerging
      companies, whose activities are directly focused on our target markets and
      areas
      of expertise. We face and will continue to face competition in the discovery,
      in-licensing, development and commercialization of our product candidates,
      which
      could severely impact our ability to generate revenue or achieve significant
      market acceptance of our product candidates. Furthermore, new developments,
      including the development of other drug technologies and methods of preventing
      the incidence of disease, occur in the pharmaceutical industry at a rapid pace.
      These developments may render our product candidates or technologies obsolete
      or
      noncompetitive.





We
      are
      focused on developing product candidates for the treatment of central nervous
      system and other disorders that involve alterations in neuronal processing.
      We
      have a number of competitors. If one or more of their products or programs
      are
      successful, the market for our product candidates may be reduced or eliminated.
      Compared to us, many of our competitors and potential competitors have
      substantially greater:





·
            capital
                resources and access to capital;


·
            research
                and development resources, including personnel and
                technology;


·
            regulatory
                experience;


·
            preclinical
                study and clinical testing experience;
                and


·
            manufacturing,
                distribution and marketing
                experience.





As
      a
      result of these factors, our competitors may obtain regulatory approval of
      their
      products more rapidly than we. Our competitors may obtain patent protection
      or
      other intellectual property rights that limit our ability to develop or
      commercialize our product candidates or technologies. Our competitors may also
      develop drugs that are more effective or useful and less costly than ours and
      may also be more successful than we and our collaborators or licensees in
      manufacturing and marketing their products.




39





***If
      we are unable to protect our intellectual property, our competitors could
      develop and market products based on our discoveries, which may reduce demand
      for our product candidates.***





To
      a
      substantial degree, our success will depend on the following intellectual
      property achievements:





·
            our
                ability to obtain patent protection for our proprietary technologies
                and
                product candidates, as well as our ability to preserve our trade
                secrets;


·
            the
                ability of our collaborators and licensees to obtain patent protection
                for
                their proprietary technologies and product candidates covered by
                our
                agreements, as well as their ability to preserve related trade secrets;
                and


·
            our
                ability to prevent third parties from infringing upon our proprietary
                rights, as well as the ability of our collaborators and licensees
                to
                accomplish the same.





Because
      of the substantial length of time and expense associated with bringing new
      products through the development and regulatory approval processes in order
      to
      reach the marketplace, the pharmaceutical industry places considerable
      importance on obtaining patent and trade secret protection for new technologies,
      products and processes. Accordingly, we, either alone or together with our
      collaborators or licensees, intend to seek and enhance patent protection for
      our
      proprietary technologies and product candidates. The risk exists, however,
      that
      these patents may be unobtainable and that the breadth of the claims in a
      patent, if obtained, may not provide adequate protection of our, or our
      collaborators’ or licensees’ proprietary technologies or product candidates.




We
      also
      rely upon unpatented trade secrets and improvements, unpatented know-how and
      continuing technological innovation to develop and maintain our competitive
      position, which we seek to protect, in part, by confidentiality agreements
      with
      our collaborators, licensees, employees and consultants. We also have invention
      or patent assignment agreements with our employees and some of, but not all,
      our
      collaborators and consultants. If our employees, collaborators or consultants
      breach these agreements or common law principles, we may not have adequate
      remedies for any such breach, and our trade secrets may otherwise become known
      to or independently discovered by our competitors.





In
      addition, although we own or otherwise have certain rights to a number of
      patents and patent applications, the issuance of a patent is not conclusive
      as
      to its validity or enforceability, and third parties may challenge the validity
      or enforceability of our patents or the patents of our collaborators or
      licensees. We cannot assure you how much protection, if any, will be given
      to
      our patents if we attempt to enforce them or if they are challenged in court
      or
      in other proceedings. It is possible that a competitor may successfully
      challenge our patents, or the patents of our collaborators or licensees, or
      that
      challenges will result in elimination of patent claims and therefore limitations
      of coverage. Moreover, competitors may infringe our patents, the patents of
      our
      collaborators or licensees, or successfully avoid them through design
      innovation. To prevent infringement or unauthorized use, we may need to file
      infringement claims, which are expensive and time-consuming. In addition, in
      an
      infringement proceeding, a court may decide that a patent of ours is not valid
      or is unenforceable, or may refuse to stop the other party from using the
      technology at issue on the ground that our patents do not cover its technology.
      In addition, interference proceedings brought by the U.S. Patent and Trademark
      Office may be necessary to determine the priority of inventions with respect
      to
      our patent applications or those of our collaborators or licensees. Litigation
      or interference proceedings may fail and, even if successful, may result in
      substantial costs and be a distraction to management. We cannot assure you
      that
      we, or our collaborators or licensees, will be able to prevent misappropriation
      of our respective proprietary rights, particularly in countries where the laws
      may not protect such rights as fully as in the United States.




40





***The
      intellectual property of our competitors or other third parties may prevent
      us
      from developing or commercializing our product
      candidates.***





Our
      product candidates and the technologies we use in our research may inadvertently
      infringe the patents or violate the proprietary rights of third parties. In
      addition, other parties conduct their research and development efforts in
      segments where we, or our collaborators or licensees, focus research and
      development activities. We
      are
      aware of a patent application controlled by another company, which if granted
      in
      its broadest scope and held to be valid, could impact the partnering or
      commercialization of bicifadine in the United States, and potentially other
      territories, unless we obtain a license, which may not be available to
      us. We
      cannot assure you that third parties will not assert patent or other
      intellectual property infringement claims against us, or our collaborators
      or
      licensees, with respect to technologies used in potential product candidates.
      Any claims that might be brought against us relating to infringement of patents
      may cause us to incur significant expenses and, if successfully asserted against
      us, may cause us to pay substantial damages. Even if we were to prevail, any
      litigation could be costly and time-consuming and could divert the attention
      of
      our management and key personnel from our business operations. In addition,
      any
      patent claims brought against our collaborators or licensees could affect their
      ability to carry out their obligations to us. Furthermore, as a result of a
      patent infringement suit brought against us, or our collaborators or licensees,
      the development, manufacture or potential sale of product candidates claimed
      to
      infringe a third party’s intellectual property may have to stop or be delayed,
      unless that party is willing to grant certain rights to use its intellectual
      property. In such cases, we may be required to obtain licenses to patents or
      proprietary rights of others in order to continue to commercialize our product
      candidates. We may not, however, be able to obtain any licenses required under
      any patents or proprietary rights of third parties on acceptable terms, or
      at
      all. Even if we, or our collaborators or licensees were able to obtain rights
      to
      a third party’s intellectual property, these rights may be non-exclusive,
      thereby giving our competitors potential access to the same intellectual
      property. Ultimately, we may be unable to commercialize some of our potential
      products or may have to cease some of our business operations as a result of
      patent infringement claims, which could severely harm our business. **





***Our
      ability to receive royalties and profits from product sales depends in part
      upon
      the availability of approved reimbursement for the use of our products from
      third-party payors, for which we may or may not
      qualify.***




Our
      royalties or profits will be heavily dependent upon the availability of
      reimbursement for the use of our products from third-party health care payors,
      both in the United States and in foreign markets. The health care industry
      and
      these third-party payors are experiencing a trend toward containing or reducing
      the costs of health care through various means, including lowering reimbursement
      rates and negotiating reduced payment schedules with service providers for
      drug
      products. These cost-containment efforts could adversely affect the market
      acceptance of our product candidates and may also harm our business. There
      can
      be no assurance that we will be able to offset any of the payment reductions
      that may occur.





Reimbursement
      by a third-party payor may depend upon a number of factors, including the
      third-party payor’s determination that use of a product is:


·
            safe,
                effective and medically necessary;


·
            appropriate
                for the specific patient;


·
            cost-effective;
                and


·
            neither
                experimental nor investigational.





Reimbursement
      approval is required from each third-party payor individually, and seeking
      this
      approval is a time-consuming and costly process. Third-party payors may require
      cost-benefit analysis data from us in order to demonstrate the
      cost-effectiveness of any product we might bring to market. We cannot assure
      you
      that we will be able to provide data sufficient to gain acceptance with respect
      to reimbursement. There also exists substantial uncertainty concerning
      third-party reimbursement for the use of any drug product incorporating new
      technology. We cannot assure you that third-party reimbursement will be
      available for our product candidates utilizing new technology, or that any
      reimbursement authorization, if obtained, will be adequate. If such
      reimbursement approval is denied or delayed, the marketability of our product
      candidates could be materially impaired.





***We
      face potential product liability exposure, and if successful claims are brought
      against us, we may incur substantial liability for a product and may have to
      limit its commercialization.***





The
      use
      of our product candidates in clinical trials and the sale of any approved
      products may expose us to a substantial risk of product liability claims and
      the
      adverse publicity resulting from such claims. These claims might be brought
      against us by study participants or once a drug has received regulatory approval
      and is marketed, by consumers, health care providers, pharmaceutical companies
      or others selling our products. If we cannot successfully defend ourselves
      against these claims, we may incur substantial losses or expenses, or be
      required to limit the commercialization of our product candidates. We have
      obtained limited product liability insurance coverage for our clinical trials
      in
      the amount of $10 million per occurrence and $10 million in the aggregate.
      Our
      insurance coverage, however, may not reimburse us or may not be sufficient
      to
      reimburse us for any expenses or losses we may suffer. Moreover, insurance
      coverage is becoming increasingly expensive, and we may not be able to maintain
      insurance coverage at a reasonable cost or in sufficient amounts to protect
      us
      against losses due to liability. We intend to expand our insurance coverage
      to
      include the sale of commercial products if we obtain marketing approval for
      our
      product candidates in development, but we may be unable to obtain commercially
      reasonable product liability insurance for any products approved for marketing.
      On occasion, large judgments have been awarded in class action lawsuits based
      on
      drugs that had unanticipated side effects. A successful product liability claim
      or series of claims brought against us would decrease our cash and could cause
      our stock price to fall.




41





***We
      may not be able to utilize any of or all our net operating losses to offset
      future taxable income.***





As
      a
      company experiencing growth through the sale of equity, we may be limited under
      the tax code in the tax deductions we can take against income for net operating
      loss carry forwards if during the three years preceding such income shareholder
      control of our company changed to a significant degree or if our research and
      development expenditures were incurred by our previous subsidiary Nascime
      Limited outside the United States.




**Item
      5. Other Information**





None.





**Item
      6. Exhibits**


(a)
            Exhibits.


The
      following is a complete list of exhibits filed or incorporated by reference
      as
      part of this report.





Exhibit
      No.




10.49  Form
      of
      Stock Option Agreement for stock options granted under the 2000 Stock
      Option and Grant Plan (as amended).





31.1  Certification
      of President and Chief Financial Officer of DOV Pharmaceutical, Inc. pursuant
      to
      Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.





32  Certification
      of President and Chief Financial Officer of DOV Pharmaceutical, Inc., pursuant
      to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.





**SIGNATURE**





Pursuant
      to the requirements 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.





DOV
                Pharmaceutical, Inc.Date: November
                9, 2006
            By:
            /s/ 
                Barbara G. DuncanName:  
                Barbara G. DuncanTitle:    
                President and Chief Financial
                Officer








42