**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: June 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 xNo 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 oNo x





On
      July
      28, 2006,  there
      were outstanding 26,743,657 shares of the registrant’s common stock, par value
      $0.0001 per share.





-1-







**DOV
      PHARMACEUTICAL, INC.**





**Form
      10-Q**





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





**Table
      of Contents**





**PAGE
                NUMBER****PART
                I -**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                StatementsCondensed
                Consolidated Balance Sheets as of June 30, 2006 and December 31,
                2005
            4Condensed
                Consolidated Statements of Operations for the three and six months
                ended
                June 30, 2006 and 2005
            5Condensed
                Consolidated Statements of Cash Flows for the six months ended June
                30,
                2006 and 2005
            6Notes
                to Unaudited Condensed Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            17Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            25Item
                4.
            Controls
                and Procedures
            25**PART
                II -**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            26Item
                1A.
            Risk
                Factors
            26Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            38Item
                5.
            Other
                Information
            38Item
                6.
            Exhibits
            38Signature
            39





-2-




**Special
      Note Regarding Forward-Looking Statements**





This
      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 :





·
            meet
                the listing requirements of the Nasdaq stock market for our common
                stock;





·
            restructure
                our obligations under our 2.50% convertible subordinated
                debentures;





·
            raise
                substantial additional capital, including in the event our common
                stock is
                no longer listed for trading on a U.S. national securities exchange,
                in
                order to fund operations and, if applicable, to repurchase our convertible
                subordinated debentures;





·
            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;





·
            develop
                and execute clinical programs in Phase II (osteoarthritis) and Phase
                III
                (chronic low back pain, or CLBP) for bicifadine, our novel analgesic;
                the
                Phase III trial has been revised as necessary to take into account
                the
                drug’s recent failure to achieve statistically significant effects
                relative to placebo;





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





·
            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;





·
            successfully
                execute the development plan under and otherwise achieve the results
                contemplated by the 2005 amendment to our license agreement with
                Merck;





·
            obtain
                and maintain collaborations as required with pharmaceutical partners;
                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.




-3-


**PART
      I - FINANCIAL INFORMATION**





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





**DOV
      PHARMACEUTICAL, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**June
                30,****2006**
            
            
            **December
                31, 2005**(Unaudited)**Assets**Current
                assets:Cash
                and cash equivalents
            $
            22,233,843
            
            $
            8,425,552Marketable
                securities—short-term
            
            38,054,475
            
            
            89,126,835Prepaid
                expenses and other current assets
            
            3,293,820
            
            
            2,011,051Total
                current assets
            
            63,582,138
            
            
            99,563,438Restricted
                cash—long-term
            
            4,211,109
            
            
            —Property
                and equipment, net
            
            429,736
            
            
            623,520Deferred
                charges, net
            
            1,799,593
            
            
            1,999,548Total
                assets
            $
            70,022,576
            
            $
            102,186,506**Liabilities
                and Stockholders’ Deficit**Current
                liabilities:Accounts
                payable
            $
            8,144,296
            
            $
            8,643,356Accrued
                expenses
            
            9,001,643
            
            
            6,892,738Deferred
                revenue—current
            
            4,333,714
            
            
            5,511,810Total
                current liabilities
            
            21,479,653
            
            
            21,047,904Deferred
                revenue—non-current
            
            18,959,998
            
            
            20,439,633Convertible
                subordinated debentures
            
            80,000,000
            
            
            80,000,000Commitments
                and contingenciesStockholders'
                deficit:Preferred
                stock—undesignated
                preferred stock,$1.00
                par value, 6,550,357 shares authorized, 0 shares issued and outstanding
                at
                June 30, 2006 and December 31, 2005
            
            —
            
            
            —Common
                stock, $.0001 par value, 60,000,000 shares authorized, 23,298,657
                issued
                and outstanding at June 30, 2006 and 23,090,970 issued and outstanding
                at
                December 31, 2005
            
            2,330
            
            
            2,309Treasury
                stock, at cost; 31,450 common shares at June 30, 2006
            
            (66,985
            )
            
            —Additional
                paid-in capital
            
            143,872,427
            
            
            136,495,644Accumulated
                other comprehensive loss
            
            (56,171
            )
            
            (298,411
            )Accumulated
                deficit
            
            (194,168,676
            )
            
            (153,284,922
            )Unearned
                compensation
            
            —
            
            
            (2,215,651
            )Total
                stockholders' deficit
            
            (50,417,075
            )
            
            (19,301,031
            )Total
                liabilities and stockholders' deficit
            $
            70,022,576
            
            $
            102,186,506


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




-4-


**DOV
      PHARMACEUTICAL, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**




**Three
                Months Ended****June
                30,**
            
            
            **Six
                Months Ended****June
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**(Unaudited)
            
            
            (Unaudited)Revenue
            $
            1,279,778
            
            $
            3,831,866
            
            $
            2,657,731
            
            $
            5,890,689Operating
                expenses:Research
                and development expense
            
            11,519,715
            
            
            12,241,167
            
            
            29,398,651
            
            
            22,047,769General
                and administrative expense
            
            10,542,989
            
            
            3,132,560
            
            
            14,553,211
            
            
            4,728,484Loss
                from operations
            
            (20,782,926
            )
            
            (11,541,861
            )
            
            (41,294,131
            )
            
            (20,885,564
            )Interest
                income
            
            753,808
            
            
            987,729
            
            
            1,589,391
            
            
            1,866,543Interest
                expense
            
            (600,774
            )
            
            (664,926
            )
            
            (1,200,751
            )
            
            (1,301,720
            )Other
                income (expense), net
            
            15,105
            
            
            1,176
            
            
            21,737
            
            
            (4,755
            )Net
                loss
            $
            (20,614,787
            )
            $
            (11,217,882
            )
            $
            (40,883,754
            )
            $
            (20,325,496
            )Basic
                and diluted net loss per share
            $
            (0.88
            )
            $
            (0.49
            )
            $
            (1.76
            )
            $
            (0.90
            )Weighted
                average shares used in computing basic and diluted net loss per
                share
            
            23,310,626
            
            
            22,776,359
            
            
            23,255,425
            
            
            22,658,345





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




-5-


**DOV
      PHARMACEUTICAL, INC.** **CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**




**Six
                Months Ended June 30,****2006**
            
            
            **2005**(Unaudited)**Cash
                flows from operating activities**Net
                loss
            $
            (40,883,754
            )
            $
            (20,325,496
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Non-cash
                amortization of premium paid on marketable securities
            
            302,585
            
            
            651,357Non-cash
                interest expense
            
            —
            
            
            105,148Depreciation
            
            225,305
            
            
            161,601Amortization
                of deferred charges
            
            199,955
            
            
            201,112Non-cash
                compensation charges
            
            8,968,780
            
            
            58,573Warrants,
                options and common stock issued for services
            
            16,473
            
            
            58,345Changes
                in operating assets and liabilities:Prepaid
                expenses and other current assets
            
            (1,282,769
            )
            
            (1,109,018
            )Accounts
                payable
            
            (499,060
            )
            
            3,484,074Accrued
                expenses
            
            2,041,920
            
            
            72,442Deferred
                revenue
            
            (2,657,731
            )
            
            (3,890,689
            )Net
                cash used in operating activities
            
            (33,568,296
            )
            
            (20,532,551
            )**Cash
                flows from investing activities**Purchases
                of marketable securities
            
            (55,935,530
            )
            
            (97,918,673
            )Sales
                of marketable securities
            
            106,947,546
            
            
            80,672,796Establishment
                of restricted cash
            
            (4,211,109
            )
            
            —Purchases
                of property and equipment
            
            (31,521
            )
            
            (395,405
            )Net
                cash provided by (used in) investing activities
            
            46,769,386
            
            
            (17,641,282
            )**Cash
                flows from financing activities**Borrowings
                under convertible debenture, net of issuance costs
            
            —
            
            
            14,571,715Proceeds
                from options exercised
            
            607,201
            
            
            851,062Net
                cash provided by financing activities
            
            607,201
            
            
            15,422,777Net
                increase (decrease) in cash and cash equivalents
            
            13,808,291
            
            
            (22,751,056
            )Cash
                and cash equivalents, beginning of period
            
            8,425,552
            
            
            28,934,473Cash
                and cash equivalents, end of period
            $
            22,233,843
            
            $
            6,183,417





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





-6-


**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 insomnia, pain, depression, alcohol abuse, 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 June
      30, 2006, it had an accumulated deficit of $194.2 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. In
      the
      event the Company’s common stock is no longer listed on a U.S. national
      securities exchange, the Company will be obligated to offer to repurchase all
      $70 million in aggregate principal amount of its outstanding 2.50% convertible
      subordinated debentures. Any equity or equity-linked financing may result in
      substantial dilution to our existing equity holders. As the Company does not
      presently have the capital necessary to repurchase all $70 million of these
      notes, the Company will need to either raise additional capital or pursue a
      restructuring of its obligations under the debentures. The Company’s
      alternatives will be determined based upon how many of such debentures are
      tendered to us for repurchase. In the event the Company’s common stock remains
      listed on a U.S. national securities exchange, it will not be obligated to
      offer
      to repurchase its debentures, in which case m anagement
      believes that existing cash and cash equivalents and marketable securities will
      be
      sufficient to fund the Company’s anticipated operating expenses, interest
      payments on its debt obligations and capital requirements until at least June
      30, 2007 .
      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 flow.





**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.





-7-


**Deferred
      Charges**





Deferred
      charges are issuance costs for the convertible debentures that are being
      amortized over seven years, that is, to the first put date, or earlier
      settlement date. Please refer to Note 7.





**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****June
                30,**
            
            
            **Six
                Months Ended****June
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**(Unaudited)
            
            
            (Unaudited)Net
                loss
            $
            (20,614,787
            )
            $
            (11,217,882
            )
            $
            (40,883,754
            )
            $
            (20,325,496
            )Basic
                and diluted:Weighted-average
                shares used in computing basic and diluted net loss per
                share
            
            23,310,626
            
            
            22,776,359
            
            
            23,255,425
            
            
            22,658,345Basic
                and diluted net loss per share
            $
            (0.88
            )
            $
            (0.49
            )
            $
            (1.76
            )
            $
            (0.90
            )Antidilutive
                securities not included in basic and diluted net loss per share
                calculation:Convertible
                subordinated debentures
            
            3,516,484
            
            
            3,516,484
            
            
            3,516,484
            
            
            3,516,484Options
            
            4,435,704
            
            
            2,959,791
            
            
            4,435,704
            
            
            2,959,791Warrants
            
            803,431
            
            
            842,484
            
            
            803,431
            
            
            842,4848,755,618
            
            
            7,318,759
            
            
            8,755,618
            
            
            7,318,759**Comprehensive
              Loss****Three
                Months Ended****June
                30,**
            
            
            **Six
                Months Ended****June
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**(Unaudited)
            
            
            (Unaudited)Net
              loss
            $
            (20,614,787
            )
            $
            (11,217,882
            )
            $
            (40,883,754
            )
            $
            (20,325,496
            )Net
                unrealized gains (losses) on marketable securities and
                investments
            
            108,673
            
            
            87,363
            
            
            242,240
            
            
            (129,177
            )Comprehensive
                loss
            $
            (20,506,114
            )
            $
            (11,130,519
            )
            $
            (40,641,514
            )
            $
            (20,454,673




**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 $1.2 million
      of the Company’s cash balance was uninsured at June 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 .





-8-


**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.





**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.




**New
      Accounting Standards and Accounting Changes** **:** **** **Variable
      Interest Entities** ****




In
      January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable
      Interest Entities, an interpretation of ARB 51,” or FIN 46. The primary
      objectives of FIN 46 are to provide guidance on the identification of entities
      for which control is achieved through means other than through voting rights
      (“VIEs”) and how to determine when and which business enterprise should
      consolidate the VIE. This new model for consolidation applies to an entity
      which
      either (1) the equity investors (if any) do not have a controlling financial
      interest or (2) the equity investment at risk is insufficient to finance that
      entity's activities without receiving additional subordinated financial support
      from other parties.





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 serves as the Company’s corporate
      headquarters and principal place of business effective 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 June 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 June 30, 2006, totaled approximately $1.3
      million.





**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).





-9-


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 $5.4
      and
      $7.1 million of stock-based compensation expense, net of estimated forfeitures,
      during the three and six months ended June 30, 2006, respectively as a result
      of
      its adoption of SFAS 123(R). The Company recorded $1.5 million and $1.9 million
      during the three and six months ended June 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 six months
      ended June 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 six months ended June 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 June 30, **2006****
            
            **Six
                Months**
              **Ended
                June 30, **2006****(Unaudited)
            
            (Unaudited)Research
                and development
            $(614,985
            )
            $(1,493,269
            )General
                and administrative
            (4,774,000
            )
            (5,583,985
            )Net
                increase in net loss
            $(5,388,985
            )
            $(7,077,254
            )Basic
                and diluted net loss per share
            $(0.23
            )
            $(0.30
            )








-10-


For
      the
      three and six months ended June 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**
                **June
                  30,2005**
              
              **Six
                  Months Ended**
                **June
                  30, 2005**(Unaudited)
              
              (Unaudited)Net
                  loss as reported
              
              $
              (11,217,882
              )
              $
              (20,325,496
              )Add:
                  total stock-based employee compensation expense determined under
                  APB No.
                  25
              
              
              57,892
              
              
              58,573Deduct:
                  total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards
              
              
              (1,255,061
              )
              
              (2,311,131
              )Pro
                  forma
              
              $
              (12,415,051
              )
              $
              (22,578,054
              )Basic
                  and diluted net loss per share:As
                  reported
              
              $
              (0.49
              )
              $
              (0.90
              )Pro
                  forma
              
              $
              (0.55
              )
              $
              (1.00
              )








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 June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Risk-free
                interest rate
            4.92%-5.35%
            
            3.73%-4.22%
            
            4.28%-5.35%
            
            3.73%-4.41%Expected
                lives
            6.00 -
                6.25 years
            
            6
                years
            
            6.00 -
                6.25 years
            
            6
                yearsExpected
                dividends
            --
            
            --
            
            --
            
            --Expected
                volatility
            73.87%-74.47%
            
            66.28%-67.90%
            
            52.30%-74.47%
            
            65.89%-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 six months ended June 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 June 30, 2006 and 2005, respectively was $1.48 and $9.86 per
      option. The weighted average grant date fair value of options granted during
      the
      six months ended June 30, 2006 and 2005, respectively was $3.19 and $9.97 per
      option. The total intrinsic value, determined as of the date of exercise, of
      options exercised in the three months ended June 30, 2006 and 2005 was $66,000
      and $1.1 million, respectively. The total intrinsic value, determined as of
      the
      date of exercise, of options exercised in the six months ended June 30, 2006
      and
      2005 was $2.9 million and $2.0 million, respectively. The Company received
      $14,000 and $607,000 in cash for option exercises in the three and six months
      ended June 30, 2006, respectively.





At
      June
      30, 2006, there was $11.2 million, net of estimated forfeitures of $3.1 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 unrecoginized 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 2.6 years. The following is a summary of stock option activity
      for the six months ended June 30, 2006:








-11-


**Options**
            
            **Weighted
                Average Options Exercise Price**
            
            **Aggregate
                Intrinsic Value**Options
                Outstanding, December 31, 2005
            
            
            3,540,966
            
            $
            10.94Granted
            
            
            1,537,475
            
            $
            5.35Exercised
            
            
            (201,400
            )
            $
            3.01Forfeited
            
            
            (441,337
            )
            $
            18.55Options
                Outstanding, June 30, 2006
            
            
            4,435,704
            
            $
            8.60
            
            $
            17,439Options
                Exercisable, June 30, 2006
            
            
            2,011,531
            
            $
            8.54
            
            $
            0





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 June 30, 2006. As of June 30, 2006, the
      Company had 318,860 shares available for future grants. The following is a
      summary of outstanding stock options at June 30, 2006.




**Options
                Outstanding as of**
              **June
                30, 2006**
            
            **Options
                Exercisable as of**
              **June
                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 $2.08-$11.64
            
            
            7.30
                years
            
            
            2,429,891
            
            $
            2.92
            
            
            4.55
                years
            
            
            1,190,891
            
            $
            3.69Price
                range $11.65-$21.20
            
            
            8.43
                years
            
            
            2,005,813
            
            $
            15.48
            
            
            7.86years
            
            
            820,640
            
            $
            15.564,435,704
            
            
            
            
            
            
            
            
            2,011,531





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





**Number**
            
            **Weighted
                Average Fair Value(1)**
            
            **Weighted
                Average Remaining Term**


Nonvested,
                December 31, 2005
            
            
            160,000
            
            $
            18.89
            
            
            3.1
                yearsNonvested,
                June 30, 2006(2)
            
            
            68,333
            
            $
            11.16
            
            
            2.1
                years





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


(2)
            The
                net decrease in nonvested RSAs from December 31, 2005 to June 30,
                2006 is
                due to the vesting of 100,000 and 20,000 RSAs, respectively, for
                Dr.
                Hudson and Dr. Lippa pursuant to their respective severance rights as
                discussed in Note 10 offset by the issuance of 28,333 RSAs to certain
                of
                the Company’s board members as discussed in Note
                8.





As
      of
      June 30, 2006, the total remaining unrecognized compensation cost related to
      RSAs amounted to $407,000, which will be amortized over the weighted average
      requisite service period of 2.1 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****June
                30,**
            
            
            **Six
                Months Ended****June
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**(Unaudited)
            
            
            (Unaudited)Payroll
                related and associated overhead
            
            $
            $3,744,798
            
            $
            $2,958,982
            
            $
            $8,946,084
            
            $
            $5,204,685Clinical
                and preclinical development costs and manufacturing
                supplies
            
            
            7,598,408
            
            
            8,946,972
            
            
            19,620,152
            
            
            16,444,173Professional
                fees
            
            
            176,509
            
            
            335,213
            
            
            832,415
            
            
            398,911Total
                research and development expense
            
            $
            11,519,715
            
            $
            12,241,167
            
            $
            29,398,651
            
            $
            22,047,769




-12-




**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 June 30, 2006 the Company
      included $3.5 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 June 30, 2006 and
      December 31, 2005, short-term marketable securities included $9.4 million and
      $21.2 million of investments, respectively, primarily comprised of investment
      grade asset-backed, variable-rate debt obligations (auction rate securities),
      commercial paper and money market funds.  Auction
      rate securities are classified as short-term marketable securities and the
      related purchases and sales have been classified as investing activities in
      the
      Company’s Condensed Consolidated Statements of Cash Flows.





**7.
      Convertible Subordinated Debentures**




In
      December 2004 and January 2005, the Company completed a private placement of
      $80.0 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. Upon a fundamental change,
      as
      defined in the indenture including a delisting of the Company’s common stock
      from a national securities exchange, note holders may require the Company to
      repurchase all or a portion of their notes. 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 $1,000,000 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. 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.





-13-


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.





**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.





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 $35.0 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.





-14-


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 . ****








**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.





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.





-15-


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.




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.







-16-





**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.





**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.





Since
      our
      inception, we have incurred significant operating losses and we expect to do
      so
      for the foreseeable future. As of June 30, 2006, we had an accumulated deficit
      of $194.2 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 adding new employees 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 1998 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 formula and a
      non-approvable letter for the 15 mg MR formula in May 2006. Based on its public
      disclosures, 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. 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.





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 $35.0 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 addition, Merck is permitted to select an additional
      preclinical triple reuptake inhibitor product candidate for inclusion in the
      agreement with no further up-front fee **.**




In
      April
      2006, we received the results of our Phase III clinical trial of bicifadine
      for
      the treatment of chronic low back pain, or CLBP.  Bicifadine did not
      achieve a statistically significant effect relative to placebo on the primary
      endpoint of the study at any of the doses tested.  Although we are
      continuing forward with our Phase II trial of bicifadine in osteoarthritis
      and
      our two ongoing Phase III trials of bicifadine in CLBP, this
      unsuccessful study has significantly delayed the previously
      planned NDA filing in chronic pain.  We have 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. In May 2006, we took further actions to
      optimize expenditures in our clinical research programs and restructured our
      organization, including a reduction in headcount, to most efficiently utilize
      capital resources. These collective actions, including the bicifadine program
      updates, are expected to reduce DOV’s estimated expenses by approximately $9
      million for the second half of 2006.  In
      addition, we have delayed the initiation of the upcoming Phase II clinical
      trial
      for DOV 21,947 to early in 2007 to further optimize the utilization of our
      internal resources and capital.





-17-


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. General and
      administrative expense consists primarily of the costs of our senior management,
      finance and administrative staff, business insurance, professional fees and
      costs associated with being a public reporting entity.





On
      July
      28, 2006, we received a notification from the Nasdaq
      Listings Qualification Department that we have failed to comply with the
      continued listing requirements of The Nasdaq Global Market. Pursuant to Nasdaq
      Marketplace Rule 4450(e)(4), we were provided until August 28, 2006, to regain
      compliance.  In the event we do not regain compliance by August 28, 2006,
      we shall have the right to appeal a staff determination to delist our securities
      and our securities will remain listed until completion of the appeal process.
      In
      addition, in the event we cannot meet the requirements for continued listing
      on
      The Nasdaq Global Market, we may apply to transfer to The Nasdaq Capital Market. In
      the
      event our common stock is no longer listed on a U.S. national securities
      exchange, we will be obligated to offer to repurchase all $70 million in
      aggregate principal amount of our outstanding 2.50% convertible subordinated
      debentures. As we do not presently have the capital necessary to repurchase
      all
      $70 million of these notes, we will need to either raise additional capital
      or
      pursue a restructuring of our obligations under the debentures. Our alternatives
      will be determined based upon how many of such debentures are tendered to us
      for
      repurchase.





**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.




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 six months ended June 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).





-18-


**Results
      of Operations**





*Three
      Months Ended June 30, 2006 and 2005*





*Revenue.*  Our
      revenue decreased $2.5 million to $1.3 million for the quarter ended June 30,
      2006 from $3.8 million for the comparable period in 2005. We recorded $1.3
      million and $1.8 million in the quarters ended June 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. During the second quarter of 2005 we also recorded
      a
      $2.0 million milestone payment under the Neurocrine agreement. 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, 2005 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 $721,000 to $11.5 million for the second
        quarter 2006 from $12.2 million for the comparable period in 2005. The decrease
        in research and development expense was primarily associated with decreased
        external development costs of $1.3 million and professional fees of $373,000,
        offset by an increase in payroll and payroll related expenses of $1.0 million.
        The decrease in research and development expense was primarily related to
        a
        decrease in development costs of $1.7 million for ocinaplon, offset by an
        increase in external development costs of $334,000 for DOV 21,947 and $118,000
        for bicifadine. The increase in payroll and payroll related expenses is
        primarily the result of an increase in non-cash stock compensation of $615,000
        related to the adoption of SFAS 123(R) and an overall increase in headcount
        as
        we expanded our operations. The net decrease in professional fees primarily
        related to a decrease in non-cash stock compensation to outside consultants
        of
        $353,000.




*General
      and Administrative Expense.* General
      and administrative expense increased $7.4 million to $10.5 million for the
      second quarter 2006 from $3.1 million for the comparable period in 2005. The
      increase was primarily attributable to an increase of $6.8 million in payroll
      and payroll related expenses, $941,000 in rent expenses related to our new
      headquarters in Somerset, New Jersey and $111,000 in office and related
      expenses. These increases were offset by a decrease of $339,000 in professional
      fees and $117,000 in travel and travel related expenses. The increase in payroll
      and associated overhead is primarily the result of 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 and an increase in non-cash stock compensation of $4.8 million
      related to the adoption of SFAS 123(R) and in non-cash compensation for
      restricted stock awards of $1.4 million 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. Included in these non-cash compensation
      charges are charges of $4.3 million related to the acceleration of all
      outstanding 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 decrease in professional fees is due to lower
      recruitment fees of $286,000. The severance agreements with Dr. Hudson and
      Mr.
      Horton are described in Note 10 of our financial statements included under
      Part
      I, Item 1 of this Form 10-Q.





*Interest
      Income.* Interest
      income decreased $234,000 to $754,000 in the second quarter 2006 from $988,000
      in the comparable period in 2005 primarily due to lower average cash balances,
      offset by higher effective interest rate yields.





*Interest
      Expense.* Interest
      expense decreased $64,000 in the second quarter of 2006 from the comparable
      period in 2005. We incurred $500,000 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.





-19-


*Other
      Income (Expense), net.* Other
      income (expense), net increased $14,000 in the second quarter of 2006 from
      the
      comparable period in 2005.





*Six
      Months Ended June 30, 2006 and 2005*





*Revenue.* Our
      revenue for the six months ended June 30, 2006 and 2005 was $2.7 million and
      $5.9 million, respectively including amortization of $2.7 million and $3.9
      million in 2006 and 2005, respectively relating to the $35.0 million up-front
      fee we received on the signing of the license, research and development
      agreement for our collaboration with Merck. During the second quarter of 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 $7.4 million to $29.4 million for the six
      months ended June 30, 2006 from $22.0 million for the comparable period in
      2005. The
      increase in research and development expense was primarily associated with
      increased external development costs of $3.2 million, payroll and payroll
      related expenses of $3.6 million, $294,000 for rent expense, $241,000 in travel
      and related expenses and $220,000 in professional fees offset by lower office
      related expenses of $210,000. Included in the increase in external development
      costs is an increase of $6.2 million for bicifadine, $595,000 for DOV 21,947
      and
      $212,000 for our discovery and preclinical programs offset by decreases in
      external development of $2.1 million for our anti-anxiety compounds, $1.1
      million for DOV 102,677, $419,000 for DOV diltiazem and $153,000 for DOV
      216,303.  The
      increase in payroll and payroll related expenses is primarily the result of
      an
      increase in non-cash stock compensation of $1.5 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 related to an
      increase in patent related legal fees of $133,000 and general consulting of
      $144,000.





*General
      and Administrative Expense.* General
      and administrative expense increased $9.9 million to $14.6 million in the six
      months ended June 30, 2006 from $4.7 million for the comparable period in 2005. The
      increase is primarily related to an increase of $8.6
      million in payroll
      and payroll related expenses ,
      $1.2
      million in rent related to our Somerset facility and $418,000 in office and
      related expenses, offset by a decrease in professional fees of $334,000 and
      in
      travel and entertainment expenses of $101,000. The
      increase in payroll and associated overhead is primarily the result of an
      increase in non-cash stock compensation of $5.6 million related to the adoption
      of SFAS 123(R) and $1.8 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 and, 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 decrease in professional
      fees is due primarily to lower recruitment fees of $267,000.





*Interest
      Income.* Interest
      income decreased $277,000 to $1.6 million in the six months ended June 30,
      2006
      from $1.9 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 decreased $101,000 to $1.2 million in the six months ended June 30,
      2006
      from $1.3 million in the comparable period in 2005. In
      the
      six months ended June 30, 2006 and 2005 we incurred $1.0 million 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.





*Other
      Income (Expense), net.*  Other
      income (expense), net increased $26,000 in the six months ended June 30, 2006
      from the comparable period in 2005.





-20-


**Liquidity
      and Capital Resources**




At
      June
      30, 2006, our cash and cash equivalents and marketable securities totaled $60.3
      million compared with $97.6 million at December 31, 2005. The decrease in cash
      balances at June 30, 2006 resulted primarily from cash used in operations of
      $33.6 million and the establishment of a letter of credit related to our new
      facility of $4.2 million. At June 30, 2006, we had working capital of $42.3
      million compared with $78.5 million at December 31, 2005.





Net
      cash
      used in operations during the six months ended June 30, 2006 amounted to $33.6
      million, as compared to $20.5 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 and
      depreciation and amortization expenses were $8.7 million in the six months
      ended
      June 30, 2006 and $585,000 in the comparable period in 2005.





Net
      cash provided by/used in investing activities during the six months ended June
      30, 2006 and 2005 amounted to $46.8 million provided by and $17.6 million used
      in, 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.





Net
      cash provided by financing activities during the six months ended June 30,
      2006
      was $607,000 as compared to $15.4 million in the comparable period in 2005. Net
      cash
      provided by financing activities in the six months ended June 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.





On
      July
      28, 2006, we received a notification from the Nasdaq
      Listings Qualification Department that we have failed to comply with the
      continued listing requirements of The Nasdaq Global Market. In the event we
      cannot meet the requirements for continued listing on The Nasdaq Global Market,
      we may apply to transfer to The Nasdaq Capital Market. In
      the
      event our common stock is no longer listed on a U.S. national securities
      exchange, we will be obligated to offer to repurchase all $70 million in
      aggregate principal amount of our outstanding 2.50% convertible subordinated
      debentures. As we do not presently have the capital necessary to repurchase
      all
      $70 million of these notes, we will need to either raise additional capital
      or
      pursue a restructuring of our obligations under the debentures. Our alternatives
      will be determined based upon how many of such debentures are tendered to us
      for
      repurchase.





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





As
      described above, in the event our common stock is no longer listed for trading
      on a U.S. national securities exchange, we will be obligated to offer to
      repurchase our 2.50% convertible subordinated debentures. As we do not presently
      have the capital necessary to repurchase all $70 million of these notes, we
      will
      need to either raise additional capital or pursue a restructuring of our
      obligations under the debentures. Our alternatives will be determined based
      upon
      how many of such debentures are tendered to us for repurchase. In the event
      our
      common stock remains listed on a U.S. national securities exchange, we believe
      that our existing cash and cash equivalents will be sufficient to fund our
      anticipated operating expenses, debt obligations and capital requirements until
      at least June 30, 2007. Our ability to fund these expenditures through June
      30,
      2007 is dependent upon our
      future capital uses and requirements which depend on numerous factors,
      including:





-21-


·
            our
                ability to meet the listing requirements of The Nasdaq Stock Market
                for
                our common stock;


·
            the
                terms of any restructuring of our obligations under our 2.5%
                convertible subordinated debentures if we do such a
                restructuring;


·
            our
                progress with research and development;


·
            our
                ability to maintain and establish, and the scope of, collaborations
                that
                finance research and development of our clinical
                candidates;


·
            our
                ability to develop and execute Phase II and III clinical programs
                for
                bicifadine, revised as necessary to take into account the drug’s recent
                failure to achieve statistically significant effects relative to
                placebo;


·
            the
                progress and success of clinical trials and preclinical studies of
                our
                product candidates;


·
            the
                design, and Merck’s approval thereof, and progress of the clinical studies
                we have agreed to conduct on DOV 21,947 under the amendment of our
                license
                agreement with Merck;


·
            the
                costs and timing of obtaining, enforcing and defending our patent
                and
                intellectual rights; and


·
            the
                costs and timing of regulatory
                approvals.





In
      addition to the foregoing, our future capital uses and requirements are also
      dependent in part on the ability of our licensees and collaborative partners
      to
      meet their obligations to us, including the fulfillment of their development
      and
      commercialization responsibilities in respect of our product candidates. Our
      licensors, sublicensees and collaborative partners, Neurocrine, Merck and Wyeth,
      may encounter conflicts of interest, changes in business or clinical strategy,
      or they may acquire or develop rights to competing products, all of which could
      adversely affect their ability or willingness to fulfill their obligations
      to us
      and, consequently, require us to satisfy, through the commitment of additional
      funds or personnel or both, any shortfalls in their performance. In addition,
      our future capital uses and requirements have been impacted by our agreement
      to
      undertake certain development activities with respect to DOV 21,947 that Merck
      would have otherwise been responsible for under our original license agreement
      with Merck. We will be spending substantial funds in an amount to be determined
      as we conduct this development of DOV 21,947. If certain of these studies are
      successful when measured against criteria to be agreed upon with Merck, we
      will
      be reimbursed for our costs of conducting these development activities, receive
      a success premium on certain of these activities and be entitled to receive
      the
      first of the milestones under the license agreement. If the clinical studies
      are
      not successful, we may not be reimbursed for our costs and may never receive
      milestone payments under the license to Merck unless Merck elects to make such
      payments and continue the relationship under the license agreement. Each party
      has certain termination rights.





If
      our
      common stock is not listed on a U.S. national securities exchange, we will
      be
      obligated to offer to repurchase our 2.50% convertible subordinated debentures.
      As we do not presently have the capital necessary to repurchase all $70 million
      of these notes, we will need to either raise additional capital or pursue a
      restructuring of our obligations under the debentures. Our alternatives will
      be
      determined based upon how many of such debentures are tendered to us for
      repurchase.





To
      meet
      future capital requirements, including any requirement to repurchase our 2.50%
      convertible subordinated debentures, 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 may 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. If adequate funds are not available, or not available
      on an acceptable basis, we may be required to curtail or delay significantly
      one
      or more of our product development programs. In addition, future milestone
      payments under some of our collaborative or license agreements are contingent
      upon our meeting particular research or development goals. The amount and timing
      of future milestone payments are contingent upon the terms of each collaborative
      or license agreement. Milestone performance criteria are specific to each
      agreement and based upon future performance. Therefore, we are subject to
      significant variation in the timing and amount of our revenues, milestone
      expenses and results of operations from period to period.





-22-


**Contractual
      Obligations**





Future
      minimum payments for all contractual obligations for years subsequent to June
      30, 2006, are as follows:





**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)
            
            $
            2,000
            
            $
            4,000
            
            $
            4,000
            
            $
            107,000
            
            $
            117,000Operating
                leases
            
            
            3,060
            
            
            5,713
            
            
            5,815
            
            
            14,344
            
            
            28,932Total
            
            $
            5,060
            
            $
            9,713
            
            $
            9,815
            
            $
            121,344
            
            $
            145,932




(1)
            Included
                are interest payments of approximately $2.0 million annually through
                2025.




(2)
            Excludes
                expenses for clinical studies called for by the amendment to the
                license
                agreement with Merck inasmuch as we have reserved the right to terminate
                the amendment at any 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.





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
      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 we have licensed certain rights to DOV 216,303 to Merck
      the
      next milestone payable to Wyeth of $2.5 million was accelerated and paid in
      2004. In addition, should Merck achieve sales on this compound, we will be
      obligated to pay Wyeth a royalty of 4.0% on those sales. 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 may be obligated to make payments
      to Biovail of $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.  We
      file
      our employment agreements with our current and former executive officers with
      the SEC and these agreements are available at www.sec.gov.





The
      table
      above assumes that our common stock remains listed on a U.S. national securities
      exchange. I n
      the
      event our common stock is no longer listed for trading on a U.S. national
      securities exchange, we will be obligated to offer to repurchase our 2.50%
      convertible subordinated debentures. Holders of debentures will then have the
      right to tender their debentures for repayment at par value. As we do not
      presently have the capital necessary to repurchase all $70 million of these
      notes, we will need to either raise additional capital or pursue a restructuring
      of our obligations under the debentures. Our alternatives will be determined
      based upon how many of such debentures are tendered to us for
      repurchase.





-23-


**Off-Balance
      Sheet Arrangements**





The
      $80.0
      million of outstanding convertible subordinated  debentures
      we have outstanding at June 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.





**Recent
      Accounting Pronouncements**





Effective
      January 1, 2006, we 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 our 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 our 2000 Stock Option and Grant Plan, or 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. We have recorded $5.4 million
      and
      $7.1 million of stock-based compensation expense, net of estimated forfeitures,
      during the three and six months ended June 30, 2006, respectively, as a result
      of our adoption of SFAS 123(R) and $1.5 million and $1.9 million of compensation
      expense related to restricted stock awards for the respective periods. 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.





Prior
      to
      January 1, 2006, we 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 our common stock on
      the
      grant date. Additionally, in the pro forma information required for the periods
      prior to 2006, we 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 six months
      ended June 30, 2006, we did not record any excess tax benefit generated from
      option exercises.





See
      Note
      4 to our consolidated financial statements in this quarterly
      report.





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.





-24-





**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 June 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.




-25-


**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**





***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.





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





o
            continued
                volatility and decrease of our stock price to such an extent that
                we do
                not comply with The Nasdaq Stock Market listing requirements;o
            our
                ability to restructure our obligations under our 2.50% convertible
                subordinated debentures and, if so restructured, the terms
                thereof;o
            future
                issuances of our common stock or other forms of financings which
                may
                result in substantial dilution to our existing equity
                holders;o
            results
                of clinical trials conducted by us or on our behalf, or by our
                competitors, such as announcement of the results from the currently
                ongoing Phase III clinical trial with bicifadine in patients with
                chronic
                low back pain, or CLBP, (study 021);o
            delays
                in initiating clinical trials or changes in previously planned or
                initiated clinical trials;o
            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;o
            business
                or legal developments concerning our collaborators, licensors or
                licensees, including Merck, Neurocrine and Wyeth;o
            delays
                or disagreements with Merck in the development of DOV 21,947 to be
                conducted by us under the August 2005 amendment to the license agreement
                with Merck;o
            developments
                or disputes concerning patents or other proprietary
                rights;o
            changes
                in estimates or recommendations by securities analysts;o
            public
                concern over our drugs that treat CNS disorders, including any drugs
                that
                we may develop in the future;o
            litigation;o
            general
                market conditions;o
            changes
                in the structure of health care payment systems;o
            failure
                of any of our product candidates, if approved, to achieve commercial
                success;o
            economic
                and other external factors or other disasters or crises;o
            period-to-period
                fluctuations in our financial results and financial
                position;o
            changes
                in senior management; ando
            further
                restructuring of our corporate workforce to best address and achieve
                our
                short- and long-term goals.





-26-


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.





***In
      the event our common stock is no longer listed on a U.S. national securities
      exchange, we will be obligated to repurchase all of the remaining $70 million
      in
      original principal amount of our 2.50% convertible subordinated debentures
      and,
      as of the date hereof, we do not have sufficient capital to so
      repurchase.***




On
        July
        28, 2006, we received a notification from the Nasdaq Listings Qualification
        Department that we have failed to comply with the continued listing requirements
        of The Nasdaq Global Market because the market value of our listed securities
        has fallen below $50,000,000 for ten consecutive business days pursuant to
        Nasdaq Marketplace Rule 4450(b)(1)(A). Nasdaq also informed us that we failed
        to
        comply with Nasdaq Marketplace Rule 4450(b)(1)(B), which requires total assets
        and total revenue of $50,000,000 each for the most recently completed fiscal
        year or two of the last three most recently completed fiscal years. Under
        the
        Nasdaq Global Market Continued Inclusion Requirements, we may maintain our
        listing qualifications without complying with this requirement if we are
        in
        compliance with the requirements of Nasdaq Marketplace Rule 4450(b)(1)(A)
        with
        respect to the market value of our listed securities being at least $50,000,000.
        Pursuant to Nasdaq Marketplace Rule 4450(e)(4), we were provided a period
        of 30
        calendar days, or until August 28, 2006, to regain compliance. In the event
        we
        do not regain compliance by August 28, 2006, we shall have the right to appeal
        a
        staff determination to delist our securities and our securities will remain
        listed until completion of the appeal process. In addition, in the event
        we
        cannot meet the requirements for continued listing on The Nasdaq Global Market,
        we may apply to transfer to The Nasdaq Capital Market. In the event our common
        stock is no longer listed on a U.S. national securities exchange, we will
        be
        obligated to offer to repurchase all $70 million in aggregate principal amount
        of our outstanding 2.50% convertible subordinated debentures. As we do
        not **** presently
        have the capital necessary to repurchase all $70 million of these notes,
        in the
        event we are so obligated to so offer to repurchase, we will need to either
        raise additional capital or pursue a restructuring of our obligations under
        our
        debentures. Our alternatives will be determined based upon how many of such
        debentures are tendered to us for repurchase. In the event we are unable
        to
        fulfill our obligation to repurchase the debentures that are tendered to
        us,
        holders of our debentures may declare a default and will have the remedies
        available to them under the terms of the debentures and as creditors.
  ***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 $80.0 million aggregate principal amount
      of 2.5% subordinated convertible debentures due in January 2025. Our annual
      debt
      service obligation on these debentures is $2.0 million. 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. If our common stock
      is
      not listed on a U.S. national securities market, these debentures may become
      due
      earlier than these dates. If we issue other debt securities prior to conversion
      of the debentures, our debt service obligations will increase further.





-27-


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
      June
      30, 2006, we had cash and cash equivalents and marketable securities of $60.3
      million. We currently have no commitments or arrangements for any financing.
      In
      the event our common stock remains listed on a U.S. national securities
      exchange, we believe that our existing cash, cash equivalents and marketable
      securities will be sufficient to fund our anticipated operating expenses,
      interest payments on our debt obligations and capital requirements until at
      least June 30, 2007. 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.





***If
      our outstanding convertible debt is converted into shares of our common stock,
      existing common stockholders will experience immediate equity dilution and,
      as a
      result, our stock price may go down.***




The
      2.5% convertible subordinated debentures that we issued in December 2004
      and January 2005 are convertible, at the option of the holders, into shares
      of
      our common stock at initial conversion rates of 43.9560 shares of common stock
      per $1,000 principal amount of notes, or $22.75 per share, subject to adjustment
      in certain circumstances. If all the debentures were converted at their initial
      conversion rate, we would be required to issue approximately 3,516,484 shares
      of
      our common stock. We have reserved shares of our authorized common stock for
      issuance upon conversion of the debentures. If the debentures are converted
      into
      shares of our common stock, our existing stockholders will experience immediate
      equity dilution and our common stock price may be subject to significant
      downward pressure.





On
      July 26, 2006, we exchanged an aggregate of 3,445,000 newly issued shares of
      our
      common stock, par value $0.0001 per share, 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.





***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 June 30, 2006, we have incurred significant
      operating losses and, as of June 30, 2006, we had an accumulated deficit of
      $194.2 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:





o
            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.





-28-


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 intend to devote a significant portion of our
      resources in 2006 to the development of bicifadine. Our success will depend
      on
      the success of our currently ongoing clinical trials and 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.





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
      2006, we announced the preliminary 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 May 2006, we announced the results of an internal in-depth
      analysis of the trial data by our senior management and scientists. This
      analysis showed that an unusually high placebo response rate was the single
      major contributory factor to the failure of the trial.  We also identified
      disease severity, as defined by either the degree of functional disability
      or
      the concomitant presence of pain radiating down the leg (sciatica), as the
      major
      factor controlling the difference between patients’ response to placebo and
      their response to bicifadine.  Our analysis showed that as disease severity
      worsened, placebo response decreased and the relative effect of bicifadine
      increased. As a result of this analysis and to give our ongoing clinical trial
      the best likelihood for success, we have amended the inclusion criteria for
      our
      Phase III trial of bicifadine in CLBP, study 021, to target only those patients
      with severe disease for enrollment. We have also announced, in July 2006, that
      we have dropped the 400 mg b.i.d. dosing arm from study 021.




-29-


Although
      we are continuing with our ongoing Phase III trials of bicifadine in CLBP -
      studies 021and the long-term safety trial, study 022 - the unsuccessful 020
      study has significantly delayed the previously planned NDA filing in
      chronic pain.  We have 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.  While w e
      have invested a significant portion of our efforts and financial resources
      in
      the development of bicifadine
      in CLBP, we are also conducting a Phase II trial of bicifadine in osteoarthritis, another chronic
      pain model.





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.





The
      August 2005 amendment to our license agreement with Merck conditions Merck’s
      obligation to reimburse us, including to reimburse us at a premium, for certain
      clinical tests on DOV 21,947 and to pay us a development milestone upon the
      successful outcome of a certain test measured by criteria to be agreed upon
      by
      the parties. We may not be able to achieve agreement with Merck on such
      criteria.




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*** ***postponing
      certain Phase I clinical trials and other development activities which are
      now
      no longer on the critical path timeline for an NDA filing 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. The
      internal analysis of study 020 provided valuable insights regarding target
      patient populations and their response to both placebo and bicifadine. We have
      used these analyses to determine the path forward for study 021 and have amended
      that trial accordingly. The timing and cost of the ongoing studies 021 and
      022
      continue to be under review. Any additional changes to those trials may
      contribute to staffing needs less than current levels. Any reduction in
      workforce is accompanied by risk of litigation, which if initiated or
      successful, could harm our business and financial position.





***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 formula and a non-approvable letter for the 15 mg MR formula 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. In July 2006, Neurocrine announced during its quarterly earnings
      conference call that it will hold a meeting with the FDA in August 2006 to
      discuss the 5 mg and 10 mg IR formulations. 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.





-30-


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 and may ultimately rely on Merck for the
      development, design and implementation of clinical trials, regulatory approval
      and commercialization of indiplon and our product candidates DOV 216,303 and
      DOV
      21,947.***





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. In
      August
      2004, we sublicensed DOV 216,303 for certain indications and DOV 21,947 for
      all
      indications to Merck without retaining any material rights other than our
      participation in the ongoing clinical plan collaboration, the right to receive
      milestone payments and royalties on product sales, if any, and co-promotion.
      The
      clinical development, design and implementation of clinical trials, the
      preparation of filings for FDA approval and, if approved, the subsequent
      commercialization of these product candidates are within the control of our
      partners. We will lack control over the process and, as a result, our ability
      to
      receive any revenue from these product candidates is dependent on the success
      of
      their efforts. Our partners may fail or otherwise decide not, or otherwise
      not
      have the ability, to devote the resources necessary to successfully develop
      and
      commercialize the product candidates, which would impair our ability to receive
      milestone or royalty payments, if any, in respect of the product
      candidates.





We
      entered into an amendment of our license agreement with Merck in August 2005
      which provides for us to conduct certain development of DOV 21,947 that would
      otherwise have been the responsibility of Merck under the terms of the
      agreement. Merck has the right to choose one of our preclinical triple reuptake
      inhibitors for inclusion under the license agreement with no further up-front
      fee. In the event we are unable to produce successful results from these
      clinical trials under criteria to be agreed upon by the parties, Merck will
      not
      be obligated to reimburse our costs of such development. Merck is not presently
      performing any clinical studies with DOV 21,947 under this arrangement and
      continues to have the right to terminate the license agreement.





-31-


***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
      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. 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.





***Under
      the August 5, 2005, amendment to our license agreement with Merck, we are now
      responsible for designing, conducting and bearing the costs of certain clinical
      trials that Merck would have otherwise been obligated to perform under the
      terms
      of the license agreement. If the results of these clinical trials do not meet
      the criteria of success to be agreed upon with Merck, we may not be reimbursed
      for the costs of conducting such trials, unless Merck agrees. If Merck does
      not
      continue the license agreement, our business and results may be adversely
      affected.***





In
      August
      2005 we amended our license agreement with Merck such that we are now
      responsible for conducting certain development of DOV 21,947 that had been
      the
      responsibility of Merck under the agreement. Merck has the right to choose
      one
      of our preclinical triple reuptake inhibitors for inclusion under the agreement
      with no further up-front fee. In the event we are unable to produce successful
      results from these clinical trials under criteria of success to be agreed upon
      by the parties, Merck will not be obligated to reimburse our costs of such
      development. Merck is not presently performing any clinical studies with DOV
      21,947 by reason of this arrangement and continues to have the right to
      terminate the license agreement. If the trials are not successful, Merck may
      elect to reimburse us notwithstanding and retain DOV 21,947. If the Merck
      agreement is terminated, we will need to pursue alternative arrangements for
      the
      development and commercialization of DOV 21,947, and we may be unable to reach
      an agreement with another party on economic terms as favorable as those in
      the
      Merck agreement.





***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.





-32-


***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.





***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.





-33-


***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 study 020 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.





***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.***





-34-


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.





***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.





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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.





***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. **





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***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.





***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.




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**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders**





(a)
            Our
                annual meeting of stockholders was held on May 22, 2006.





(b)
            The
                following Class I directors were elected at the annual meeting:





**Name**
            
            **Position**
            
            **Term
                Expires**Mr.
                Dennis Podlesak
            
            Class
                I director
            
            2009Mr.
                Daniel S. Van Riper
            
            Class
                I director
            
            2009





The
      following Class II and III directors continue to serve their respective terms,
      which expire on our annual meeting of stockholders in the year
      noted:




**Name**
            
            **Position**
            
            **Term
                Expires**Arnold
                Lippa, Ph.D.
            
            Class
                III director
            
            2008Patrick
                Ashe
            
            Class
                III director
            
            2008Zola
                Horovitz, Ph.D.
            
            Class
                II director
            
            2007Theresa
                A. Bischoff
            
            Class
                II director
            
            2007





On
      June
      30, 2006, Ms. Barbara Duncan became a Class I director and is filling the
      vacancy created by the expiration of another Class I director’s
      term.





At
      the
      2006 annual meeting, stockholders voted on three propositions: (i) election
      of
      two Class I Directors for a term of three years expiring in 2009, (ii) amendment
      of the 2000
      Stock Option and Grant Plan to increase the total number of shares of common
      stock authorized under the plan to 4,692,090 from 3,692,090, and (iii)
      ratification of the selection of PricewaterhouseCoopers LLP as our independent
      registered public accounting firm for our fiscal year ending December 31, 2006.
      All matters were approved by our stockholders. The voting results
      were **:**





**Proposition
                1:****Election of Directors:**
            
            **For**
            
            **Withheld**Mr.
                Dennis Podlesak
            
            17,251,507
            
            1,735,388Mr.
                Daniel S. Van Riper
            
            18,499,730
            
            487,165





**Proposition
                2:**
            
            **For**
            
            **Against**
            
            **Abstain**
            
            **Not
                Voted**Amendment
                to 2000 Stock Option Plan
            
            8,196,436
            
            4,972,220
            
            1,661,886
            
            4,156,353





**Proposition
                3:**
            
            **For**
            
            **Against**
            
            **Abstain**Ratify
                Selection of Our Independent Registered Accounting Firm
            
            18,986,895
            
            107,186
            
            1,621,000







**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.





10.48
            FifthAmendment
                to 2000 Stock Option and Grant Plan.





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.







-38-





**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.





DOVPharmaceutical,
                Inc.Date: August
              9, 2006
            By:
            /s/ 
Barbara
              G. DuncanName:  
Barbara
              G. DuncanTitle:    
              President and Chief Financial
              Officer


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