**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**





(Mark
      One)


x QUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15(d)


OF


THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      quarterly period ended September 30, 2005





OR





o TRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(d)


OF


THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      transition period from ___________ to ____________




**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.)




**Continental
      Plaza**


**433
      Hackensack Avenue**


**Hackensack,
      New Jersey 07601**


(Address
      of principal executive office)




**(201) 968-0980**


(Registrant’s
      telephone number, including area code)







Indicate
      by check mark whether registrant (1) has filed all reports required to be filed
      by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
      preceding 12 months (or for such shorter period that registrant was required
      to
      file such reports), and (2) has been subject to such filing requirements for
      the
      past 90 days. Yes x No o





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





On
      November 1, 2005  there
      were outstanding 23,083,425 shares of the registrant’s common stock, par value
      $0.0001 per share.




1




**DOV
      PHARMACEUTICAL, INC.**





**Form
      10-Q**





**For
      the Quarter Ended September 30, 2005**





**Table
      of Contents**





**PAGE
                NUMBER****PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements (Unaudited)Condensed
                Consolidated Balance Sheets as of September 30, 2005 and December
                31,
                2004
            4Condensed
                Consolidated Statements of Operations for the three and nine months
                ended
                September 30, 2005 and 2004
            5Condensed
                Consolidated Statements of Cash Flows for the nine months ended September
                30, 2005 and 2004
            6Notes
                to Unaudited Condensed Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            14Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            20Item
                4.
            Controls
                and Procedures
            20**PART
                II**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            21Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            21Item
              4.
            Submission
                of Matters to a Vote of Security Holders
            21Item
                5.
            Other
                Information
            21Item
                6.
            Exhibits
            32Signatures
            33





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 :





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





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





·
            develop
                an acceptable development plan under and otherwise achieve the results
                contemplated by the recent amendment to the existing license agreement
                with Merck;





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





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





·
            obtain
                and maintain collaborations as required with pharmaceutical
                partners;





·
            obtain
                substantial additional funds;





·
            obtain
                and maintain all necessary patents, licenses and other intellectual
                property rights; 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 5. Other Information - Risk Factors and Factors Affecting
      Forward-Looking Statements” 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
      I.**  **Financial
      Statements**





**DOV
      PHARMACEUTICAL, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





**December
                31,**
              **2004**
            
            
            **September
                30,**
              **2005**(Unaudited)**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            28,934,473
            
            $
            14,639,246Marketable
                securities—short-term
            
            
            80,051,777
            
            
            94,180,115Prepaid
                expenses and other current assets
            
            
            1,771,681
            
            
            2,250,190Total
                current assets
            
            
            110,757,931
            
            
            111,069,551Marketable
                securities—long-term
            
            
            23,235,823
            
            
            2,011,800Property
                and equipment, net
            
            
            476,419
            
            
            762,227Deferred
                charges, net
            
            
            2,252,380
            
            
            2,099,526Total
                assets
            
            $
            136,722,553
            
            $
            115,943,104**Liabilities
                and Stockholders’ Equity/(Deficit)**Current
                liabilities:Accounts
                payable
            
            $
            3,273,357
            
            $
            5,455,723Accrued
                expenses
            
            
            3,911,550
            
            
            5,950,377Convertible
                line of credit promissory note
            
            
            4,003,275
            
            
            —Deferred
                revenue—current
            
            
            8,235,294
            
            
            5,511,811Total
                current liabilities
            
            
            19,423,476
            
            
            16,917,911Deferred
                revenue—non-current
            
            
            24,362,745
            
            
            21,817,585Convertible
                subordinated debentures
            
            
            65,000,000
            
            
            80,000,000Commitments
                and contingenciesStockholders'
                equity:Preferred
                stock—undesignated
                preferred stock,$1.00
                par value, 6,550,357 shares authorized, 0 shares issued and outstanding
                at
                December 31, 2004 and September 30, 2005
            
            
            —
            
            
            —Common
                stock, $.0001 par value, 60,000,000 shares authorized, 21,462,628
                issued
                and outstanding at December 31, 2004 and 23,067,925 issued and outstanding
                at September 30, 2005
            
            
            2,146
            
            
            2,307Additional
                paid-in capital
            
            
            128,500,216
            
            
            136,582,983Accumulated
                other comprehensive loss
            
            
            (247,553
            )
            
            (392,130
            )Accumulated
                deficit
            
            
            (100,317,086
            )
            
            (136,352,577
            )Unearned
                compensation
            
            
            (1,391
            )
            
            (2,632,975
            )Total
                stockholders' equity/(deficit)
            
            
            27,936,332
            
            
            (2,792,392
            )Total
                liabilities and stockholders' equity/(deficit)
            
            $
            136,722,553
            
            $
            115,943,104





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**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,****2004**
              
              **2005**
              
              **2004**
              
              **2005**(Unaudited)
              
              (Unaudited)Revenue
              
              $
              343,137
              
              $
              1,377,954
              
              $
              343,137
              
              $
              7,268,643Operating
                  expenses:License
                  expense
              
              
              2,500,000
              
              
              —
              
              
              2,500,000
              
              
              —Research
                  and development expense
              
              
              7,037,700
              
              
              15,582,779
              
              
              18,708,344
              
              
              37,630,548General
                  and administrative expense
              
              
              1,933,021
              
              
              1,853,517
              
              
              4,637,368
              
              
              6,582,001Loss
                  from operations
              
              
              (11,127,584
              )
              
              (16,058,342
              )
              
              (25,502,575
              )
              
              (36,943,906
              )Interest
                  income
              
              
              209,188
              
              
              949,894
              
              
              549,402
              
              
              2,816,437Interest
                  expense
              
              
              (413,877
              )
              
              (599,978
              )
              
              (2,404,022
              )
              
              (1,901,698
              )Other
                  income (expense), net
              
              
              2,938
              
              
              (1,569
              )
              
              (3,819
              )
              
              (6,324
              )Loss
                  before income taxes
              
              
              (11,329,335
              )
              
              (15,709,995
              )
              
              (27,361,014
              )
              
              (36,035,491
              )Income
                  taxes
              
              
              (679,000
              )
              
              —
              
              
              (679,000
              )
              
              —Net
                  loss
              
              $
              (12,008,335
              )
              $
              (15,709,995
              )
              $
              (28,040,014
              )
              $
              (36,035,491
              )Basic
                  and diluted net loss per share
              
              $
              (0.56
              )
              $
              (0.68
              )
              $
              (1.46
              )
              $
              (1.58
              )Weighted
                  average shares used in computing basic and diluted net loss per
                  share
              
              
              21,327,987
              
              
              23,019,939
              
              
              19,150,738
              
              
              22,753,989





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






5




**DOV
      PHARMACEUTICAL, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**




**Nine
                    Months EndedSeptember 30,****2004**
                
                
                **2005**(Unaudited)**Cash
                    flows from operating activities**Net
                    loss
                
                $
                (28,040,014
                )
                $
                (36,035,491
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Non-cash
                    amortization of premium paid on marketable securities
                
                
                727,861
                
                
                994,415Non-cash
                    interest expense
                
                
                2,404,022
                
                
                105,148Depreciation
                    and write off of assets
                
                
                163,535
                
                
                260,830Amortization
                    of deferred charges
                
                
                51,866
                
                
                301,089Non-cash
                    compensation charges
                
                
                28,991
                
                
                391,416Warrants,
                    options and common stock issued for services
                
                
                259,280
                
                
                (38,182
                )Net
                    tax benefit of non-qualified stock options exercised
                
                
                222,000
                
                
                —Changes
                    in operating assets and liabilities:Prepaid
                    expenses and other current assets
                
                
                (127,729
                )
                
                (198,459
                )Accounts
                    payable
                
                
                2,209,285
                
                
                2,182,366License
                    expense payable
                
                
                2,500,000
                
                
                —Accrued
                    expenses
                
                
                373,516
                
                
                2,038,827Deferred
                    revenue
                
                
                34,656,863
                
                
                (5,268,643
                )Net
                    cash provided by (used in) operating activities
                
                
                15,429,476
                
                
                (35,266,684
                )**Cash
                    flows from investing activities**Purchases
                    of marketable securities
                
                
                (40,789,476
                )
                
                (117,991,103
                )Sales
                    of marketable securities
                
                
                41,628,000
                
                
                123,947,796Purchases
                    of property and equipment
                
                
                (217,753
                )
                
                (546,638
                )Net
                    cash provided by investing activities
                
                
                620,771
                
                
                5,410,055**Cash
                    flows from financing activities**Borrowings
                    under convertible debenture, net of issuance costs
                
                
                —
                
                
                14,571,715Proceeds
                    from issuance of stock, net of costs
                
                
                9,965,005
                
                
                —Proceeds
                    from options exercised
                
                
                1,049,003
                
                
                989,687Net
                    cash provided by financing activities
                
                
                11,014,008
                
                
                15,561,402Net
                    increase (decrease) in cash and cash equivalents
                
                
                27,064,255
                
                
                (14,295,227
                )Cash
                    and cash equivalents, beginning of period
                
                
                9,290,999
                
                
                28,934,473Cash
                    and cash equivalents, end of period
                
                $
                36,355,254
                
                $
                14,639,246





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**





**Organization**





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,
      development and commercialization of novel drug candidates for central nervous
      system disorders. The Company has several product candidates in clinical trials,
      and one product candidate for which two new drug applications, or NDA's, were
      filed on April 14, 2005 and May 26, 2005, targeting insomnia, pain, depression
      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.
      Significant Accounting Policies**





**Basis
      of Presentation**





The
      condensed 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. The
      year-end condensed balance sheet data was derived from audited financial
      statements but does not include all disclosures required by accounting
      principles generally accepted in the United States. 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, 2004, included in our Annual Report
      on
      Form 10-K filed with the SEC.





Certain
      prior period amounts have been reclassified to conform to current period
      presentation.





**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
      the development period for the Company’s products. Actual results could differ
      from those estimates and the differences could be material.





**Deferred
      Charges**





Deferred
      charges are issuance costs for the convertible debentures, the convertible
      promissory note and the convertible line of credit promissory note and were
      and
      are being amortized over the term of the instruments in the case of the
      convertible promissory note and the convertible line of credit promissory note
      and over seven years, that is, to the first put date, for the convertible
      debentures.





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 other potential common shares issuable on conversion
      of
      the convertible subordinated debentures, convertible promissory note, the
      convertible line of credit promissory note, and outstanding options and warrants
      to purchase common stock from the calculation of diluted net loss per share,
      as
      such securities are antidilutive as indicated in the table below.




**Three
                  Months Ended**
                **September
                  30,**
              
              
              **Nine
                  Months Ended**
                **September
                  30,****2004**
              
              
              **2005**
              
              
              **2004**
              
              
              **2005**(Unaudited)
              
              
              (Unaudited)Net
                  loss
              
              $
              (12,008,335
              )
              $
              (15,709,995
              )
              $
              (28,040,014
              )
              $
              (36,035,491
              )Basic
                  and diluted:Weighted-average
                  shares used in computing basic and diluted net loss per
                  share
              
              
              21,327,987
              
              
              23,019,939
              
              
              19,150,738
              
              
              22,753,989Basic
                  and diluted net loss per share
              
              $
              (0.56
              )
              $
              (0.68
              )
              $
              (1.46
              )
              $
              (1.58
              )Other
                  potential common shares not included in basic and diluted net loss
                  per
                  share calculation:Convertible
                  subordinated debentures
              
              
              —
              
              
              3,516,484
              
              
              —
              
              
              3,516,484Convertible
                  line of credit promissory note
              
              
              1,145,240
              
              
              —
              
              
              1,145,240
              
              
              —Options
              
              
              2,668,431
              
              
              3,265,166
              
              
              2,668,431
              
              
              3,265,166Warrants
              
              
              896,311
              
              
              819,831
              
              
              896,311
              
              
              819,8314,709,982
              
              
              7,601,481
              
              
              4,709,982
              
              
              7,601,481




**Comprehensive
      Loss**


**Three
                  Months Ended**
                **September
                  30,**
              
              
              **Nine
                  Months Ended**
                **September
                  30,****2004**
              
              
              **2005**
              
              
              **2004**
              
              
              **2005**(Unaudited)
              
              
              (Unaudited)Net
                  loss
              
              $
              (12,008,335
              )
              $
              (15,709,995
              )
              $
              (28,040,014
              )
              $
              (36,035,491
              )Net
                  unrealized gains (losses) on marketable securities and
                  investments
              
              
              100,761
              
              
              (15,400
              )
              
              (69,667
              )
              
              (144,577
              )Comprehensive
                  loss
              
              $
              (11,907,574
              )
              $
              (15,725,395
              )
              $
              (28,109,681
              )
              $
              (36,180,068
              )




8




**Stock-Based
      Compensation**





The
      Company accounts for stock-based compensation expense for options granted to
      employees using the intrinsic value method prescribed in Accounting Principles
      Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
      has
      adopted the disclosure only alternative of Statement of Financial Accounting
      Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
      ("SFAS 123").





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
      alternative methodology prescribed by SFAS 123, the effect on the Company's
      net loss would be as follows:




**Three
                    Months Ended**
                  **September
                    30,**
                
                
                **Nine
                    Months Ended**
                  **September
                    30,****2004**
                
                
                **2005**
                
                
                **2004**
                
                
                **2005**(Unaudited)
                
                
                (Unaudited)Net
                  loss as reported
                
                $
                (12,008,335
                )
                $
                (15,709,995
                )
                $
                (28,040,014
                )
                $
                (36,035,491
                )Add:
                    total stock-based employee compensation expense determined under
                    APB No.
                    25
                
                
                2,095
                
                
                332,843
                
                
                28,991
                
                
                391,416Deduct:
                    total stock-based employee compensation expense determined under
                    fair
                    value based method for all awards
                
                
                (913,657
                )
                
                (1,874,748
                )
                
                (2,885,647
                )
                
                (4,185,879
                )Pro
                    forma net loss
                
                $
                (12,919,897
                )
                $
                (17,251,900
                )
                $
                (30,896,670
                )
                $
                (39,829,954
                )Basic
                    and diluted net loss per share:As
                    reported
                
                $
                (0.56
                )
                $
                (0.68
                )
                $
                (1.46
                )
                $
                (1.58
                )Pro
                    forma
                
                $
                (0.61
                )
                $
                (0.75
                )
                $
                (1.62
                )
                $
                (1.75
                )








**Options
                Outstanding as of**
              **September
                30, 2005**
            
            **Options
                Exercisable as of**
              **September
                30, 2005****Weighted
                Average Remaining Contractual Life**
            
            **Number
                Outstanding**
            
            **Weighted
                Average Exercise Price**
            
            **Number
                Exercisable**
            
            **Weighted
                Average Exercise Price**Price
                range $2.27-$10.16
            
            
            5.5
                years
            
            
            1,442,166
            
            $
            3.62
            
            
            1,375,248
            
            $
            3.50Price
                range $10.17-$18.05
            
            
            8.97
                years
            
            
            1,823,000
            
            $
            16.07
            
            
            365,387
            
            $
            14.763,265,166
            
            
            
            
            
            1,740,635





**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 $4.8 million
      of the Company's cash balance was uninsured at September 30, 2005.





**Recent
      Accounting Pronouncements**





The
      Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004)
      (“SFAS No. 123R”), “Share-Based Payment,” in December 2004.  SFAS No. 123R
      is a revision of FASB Statement 123, “Accounting for Stock-Based Compensation”
      and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”
      and its related implementation guidance. The Statement focuses primarily on
      accounting for transactions in which an entity obtains employee services in
      share-based payment transactions. SFAS No. 123R requires a public entity to
      measure the cost of employee services received in exchange for an award of
      equity instruments based on the grant-date fair value of the award (with limited
      exceptions). That cost will be recognized over the period during which an
      employee is required to provide service in exchange for the award. This
      statement is effective as of the beginning of the first annual reporting period
      that begins after June 15, 2005 and the Company will adopt the standard in
      the
      first quarter of 2006.


As
      permitted by SFAS 123, the Company currently accounts for share-based payments
      to employees using APB Opinion 25’s intrinsic value method and, as such, it
      generally recognizes no compensation cost for employee stock options. Management
      cannot predict the impact of the adoption of SFAS 123R at this time because
      it
      will depend on levels of share-based payments granted in the future. The
      adoption of SFAS 123R’s fair value method is expected to have a significant
      impact on the Company’s results of operations, although it will have no impact
      on the overall financial position. Management has not yet completed the analysis
      of the ultimate impact that this statement will have on the Company’s operating
      results or financial position, nor the method of adoption for this new
      standard.




9




In
      May
      2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,”
      which replaces APB Opinion No. 20, “Accounting Changes,” and supersedes FASB
      Statement No. 3, “Reporting Accounting Changes in Interim Financial
      Statements—an amendment of APB Opinion No. 28.” SFAS 154 requires retrospective
      application to prior periods financial statements of changes in accounting
      principle, unless it is impracticable to determine either the period-specific
      effects or the cumulative effect of the change. When it is impracticable to
      determine the period-specific effects of an accounting change on one or more
      individual prior period presented, SFAS 154 requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings for that period rather than being reported in an income
      statement. When it is impracticable to determine the cumulative effect of
      applying a change in accounting principle to all prior periods, SFAS 154
      requires that the new accounting principle be applied as if it were adopted
      prospectively from the earliest date practicable. SFAS 154 is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005.  Management does not expect the implementation
      of
      SFAS 154 to have a significant impact on the Company's results of
      operations.





**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 U.S. Food
      and Drug Administration, or FDA, regulations.





**3.
      Research and Development Expense**





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





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




**Three
                      Months Ended**
                    **September
                      30,**
                  
                  
                  **Nine
                      Months Ended**
                    **September
                      30,****2004**
                  
                  
                  **2005**
                  
                  
                  **2004**
                  
                  
                  **2005**(Unaudited)
                  
                  
                  (Unaudited)Payroll
                      related and associated overhead
                  
                  $
                  1,274,646
                  
                  $
                  3,041,628
                  
                  $
                  4,630,530
                  
                  $
                  8,246,313Clinical
                      and preclinical development costs and manufacturing
                      supplies
                  
                  
                  5,553,605
                  
                  
                  12,522,303
                  
                  
                  13,718,634
                  
                  
                  28,966,476Professional
                      fees
                  
                  
                  209,449
                  
                  
                  18,848
                  
                  
                  359,180
                  
                  
                  417,759Total
                      research and development expense
                  
                  $
                  7,037,700
                  
                  $
                  15,582,779
                  
                  $
                  18,708,344
                  
                  $
                  37,630,548




**4.
      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. The
      Company has evaluated its investment policies consistently 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 December 31, 2004 and
      September 30, 2005, short-term marketable securities included $61.6 million
      and
      $19.0 million of investments, respectively, primarily comprised of investment
      grade asset-backed, variable-rate debt obligations (auction rate securities),
      commercial paper and money market funds.




10




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. Auction rate
      securities were classified as cash and cash equivalents at September 30, 2004.
      The classification of these amounts in the Company’s Condensed Consolidated
      Statements of Cash Flows has been revised to conform to the current year
      classification. For the nine months ended September 30, 2004, net cash provided
      by investing activities related to these short-term marketable securities of
      $12.6 million was included in cash and cash equivalents in the Company’s
      Condensed Consolidated Statements of Cash Flows. This change in classification
      does not affect previously reported results of operations or cash flows from
      operations or financing activities in the Condensed Consolidated Statements
      of
      Cash Flows.





**5.
      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), in each case at
      a
      price equal to the principal amount of the debentures to be purchased, plus
      accrued and unpaid interest, if any, to the purchase date. The debentures are
      unsecured and subordinated in right of payment to all existing and future senior
      debt, as defined in the indenture governing the debentures. The Company will
      pay
      interest semi-annually of $1,000,000 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.





**6.
      Equity Transactions**





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.





On
      May
      25, 2004, the holder of the Company’s convertible promissory note converted the
      entire outstanding principal and accrued interest totaling $11.6 million into
      2,907,162 shares of the Company’s common stock. In connection with this, the
      Company charged to additional paid in capital the remaining associated deferred
      charges of $71,000.




11


On
      March
      31, 2004, the holder of all the Company’s outstanding series B preferred stock
      converted all 354,643 shares of series B preferred stock into 574,521 shares
      of
      the Company’s common stock .





On
      March
      29, 2004, the Company concluded a private placement of 666,667 shares of common
      stock to an institutional investor for gross proceeds of $10.0 million. Pursuant
      to the securities purchase agreement and registration rights agreement, the
      Company filed a registration statement for the registrable securities, which
      was
      declared effective on April 15, 2004.





**7.
      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 72 months.





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, after certain development work by DOV,
      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.





**8.
      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 and 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 shares
      of
      restricted common stock 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 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.




12


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
      receives a salary of $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 will
      also receive a bonus of $85,000 in January 2006, and the parties have agreed
      that his target bonus for fiscal year 2006 and each subsequent year of his
      employment agreement will be 40% of base compensation upon achievement of
      milestones established by the compensation committee of the board of directors.
      He is also eligible for other benefits, including relocation allowances. For
      qualified events of severance, Dr. Hudson will be entitled 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.




13


**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, development
      and commercialization of novel drug candidates for central nervous system,
      or
      CNS, and other disorders, including cardiovascular, that involve alterations
      in
      neuronal processing. In 1998, we licensed four of our product candidates from
      Wyeth: indiplon, for the treatment of insomnia, bicifadine, for the treatment
      of
      pain, ocinaplon, for the treatment among other indications of anxiety, and
      DOV
      216,303, for the treatment of depression and other indications. In October
      2005,
      we discontinued the development of ocinaplon for generalized anxiety
      disorder.





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. 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. 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
      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. 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 this agreement such that we have
      agreed to assume the financial responsibility of development of DOV 21,947
      for
      certain development work, subject to premium reimbursement in certain
      circumstances, and expanded the agreement to include an additional preclinical
      triple reuptake inhibitor product candidate that may be selected by Merck after
      certain development by DOV. In 2004, we received a $2.0 million milestone
      payment from Neurocrine for the new drug application, or NDA, filing for
      indiplon. However, because the original NDA filing was not accepted by the
      FDA
      and our agreement with Neurocrine indicates that the $2.0 million milestone
      is
      earned once an NDA has been submitted according to certain FDA regulations,
      we
      recorded this payment as revenue once the filing was accepted by the FDA on
      June
      14, 2005.





Since
      our
      inception, we have incurred significant operating losses and we expect to do
      so
      for the foreseeable future. As of September 30, 2005, we had an accumulated
      deficit of $136.4 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
      have a
      relatively limited history of operations and 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.





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 preclinical studies, and professional fees related to clinical
      trials. Research and development expense also includes our expenses related
      to
      development activities of Nascime Limited, our wholly-owned subsidiary. 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.




14


We
      are
      currently conducting four
      Phase III clinical trials for bicifadine .
      For the
      remainder of 2005, we intend to initiate for bicifadine two Phase II clinical
      trials (one with patients with osteoarthritis and one with patients with painful
      diabetic neuropathy) and three additional Phase I clinical trials. In 2006,
      we
      intend to initiate for bicifadine two additional Phase III clinical trials
      in
      acute pain models, continue the Phase I program and continue with other
      development activities in preparation for NDA and supplemental NDA, or sNDA,
      filings in 2007. With the change in development responsibilities for DOV 21,947
      from Merck to DOV, we intend to initiate a Phase Ib with DOV 21,947 in 2005
      and
      a Phase II clinical trial in 2006 as well as continue with other development
      activities. We intend to initiate for DOV 102,677 a Phase II clinical trial
      in
      alcohol and substance abuse. We intend to continue the development of DOV
      216,303 for the indications we have retained. We also expect to continue to
      fortify our patent portfolio for each of our lead product and discovery
      candidates. As
      we
      expand our development activities, we expect to increase our personnel and
      related expenses.





In
      January 1999, Elan
      loaned us $8.0 million in the form of a 7% convertible promissory note
      to
      fund our investment in DOV Bermuda. In May 2004, Elan converted the entire
      outstanding principal and accrued interest of this note totaling $11.6 million
      on that date into 2,907,162 shares of our common stock. Elan agreed, in January
      1999, to lend us up to $7.0 million to fund our pro rata share of research
      and development funding in DOV Bermuda, a joint venture we had entered into
      with
      Elan. For this purpose, we issued to Elan a convertible line of credit
      promissory note bearing interest at 10% per annum compounded semi-annually
      on
      the amount outstanding. This convertible line of credit promissory note was
      sold
      to an institutional holder during 2004 and upon maturity on January 20,
      2005, was converted into 1,180,246 shares of our common stock. Please
      refer to note 6 of our financial statements included
      under Part I, Item 1of this
      Form
      10-Q.





**Results
      of Operations**





*Three
      Months Ended September 30, 2005 and 2004*





*Revenue.*  Our
      revenue for the three months ended September 30, 2005 and 2004 was comprised
      of
      $1.4 million and $343,000, respectively, of amortization of the $35.0 million
      fee we received on the signing of the license, research and development
      agreement for our collaboration with Merck. 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 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.




*License
      Expense.* License
      expense for the third quarter of 2004 was comprised of the $2.5 million owed
      to
      Wyeth for the licensing of certain rights to DOV 216,303 to Merck in August
      2004. ** As
      this
      milestone payment was prior to FDA approval, the entire amount was expensed
      in
      the third quarter of 2004.





*Research
      and Development Expense.*  **** Research
      and development expense increased $8.5 million to $15.5 million for the third
      quarter 2005 from $7.0 million for the comparable period in 2004. The increase
      in research and development expense was primarily associated with increased
      external development costs of $6.9 million, compensation and related expenses
      of
      $1.4 million and associated overhead of $402,000 as we increased our personnel
      to support our expanded programs, offset by a decrease in non-cash
      stock compensation to outside consultants of
      $245,000. Included in the increase in external development costs is an increase
      of $5.5 million for bicifadine, $872,000 for ocinaplon, $616,000 for DOV
      dilitazem and $760,000 for our discovery and preclinical programs offset by
      a
      decrease in costs of $400,000 for DOV 21,947, $164,000 for DOV 51,892 and
      $146,000 for DOV 216,303.





*General
      and Administrative Expense.* General
      and administrative expense decreased $80,000 to $1.9 million for the third
      quarter 2005 from $1.9 million for the comparable period in 2004. The decrease
      was primarily attributable to a decrease of $473,000 in professional fees,
      offset by an increase of $412,000 in compensation expense. The
      decrease in professional fees was primarily related to decreases of $110,000
      in
      accounting and related feesand $210,000 in recruitment fees. The increase in
      compensation and related expenses was primarily related to an increase of
      $332,000 in non-cash compensation expense related to the amortization of the
      restricted stock granted to Dr. Hudson upon his appointment as Chief Executive
      Officer in July 2005 and Dr. Lippa, our former Chief Executive Officer, in
      May
      2005 (please refer to note 8 of our financial statements included
      under Part I, Item 1of this
      Form
      10-Q).





15


*Interest
      Income.* Interest
      income increased $741,000 to $950,000 in the third quarter 2005 from $209,000
      in
      the comparable period in 2004 primarily due to higher average cash balances
      and
      a higher effective interest rate yield.





*Interest
      Expense.* Interest
      expense increased $186,000 to $600,000 in the third quarter 2005 from $414,000
      in the comparable period in 2004. We recorded interest expense including
      beneficial interest of $318,000 on our convertible promissory note and
      convertible line of credit promissory note in the third quarter of 2004 and
      none
      in the comparable period in 2005. This decrease was due to the conversion of
      the
      notes in May 2004 and January 2005. This decrease was offset by an increase
      of
      $500,000 in interest expense on the convertible debentures placed in December
      2004 and January 2005 and $100,000 in amortization of deferred charges on debt. Please
      refer to note 5 of our financial statements included
      under Part I, Item 1of this
      Form
      10-Q.





*Other
      Income (Expense), net.* Other
      income (expense), net was virtually unchanged in the third quarter of 2005
      from
      the comparable period in 2004.





*Income
      Tax Expense.* In
      the
      third quarter of 2004, we revised our full year 2004 estimate of our taxable
      income. Taking into account the $35.0 million up-front fee we received on the
      closing of the license, research and development agreement for our collaboration
      with Merck, we expected to generate taxable income for the 2004 tax year. In
      addition, our evaluation of the Section 382 limitation concluded that sufficient
      losses are available to offset a substantial portion of the estimated taxable
      income for 2004. As a result, in accordance with SFAS No. 109, we reversed
      approximately $4.0 million of valuation allowance associated with its federal
      and state NOL's. This
      benefit will be offset by the federal and state income tax expense. New
      Jersey state tax law limits the use of NOLs to 50% of state taxable income.
      As a
      result, we recorded state tax expense of $679,000.





*Nine
      Months Ended September 30, 2005 and 2004*





*Revenue.* Our
      revenue for the nine months ended September 30, 2005 and 2004 was comprised
      of
      $5.3 million and $343,000, respectively, of amortization of the $35.0 million
      fee we received on the signing of the license, research and development
      agreement for our collaboration with Merck. In addition for the nine months
      ended September 30, 2005, we recorded $2.0 million for the achievement of a
      milestone under the Neurocrine agreement described above. The up-front payment
      received in our collaboration with 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
      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.





*License
      Expense.* License
      expense for the nine months ended September 30, 2004 was comprised of the $2.5
      million owed to Wyeth for the licensing of certain rights to DOV 216,303 to
      Merck in August 2004. ** As
      this
      milestone payment was prior to FDA approval, the entire amount was expensed
      in
      the third quarter of 2004.





*Research
      and Development Expense.*  **** Research
      and development expense increased $18.9 million to $37.6 million for the nine
      months ended September 30, 2005 from $18.7 million for the comparable period
      in
      2004. The
      increase in research and development expense was primarily associated with
      increased external development costs of $15.2 million and compensation and
      related expenses of $2.4 million and associated overhead of $1.2 million as
      we
      increased our personnel to support our expanded programs. Included in the
      increase in external development costs is an increase of $13.1 million for
      bicifadine, $2.2 million for ocinaplon, $1.6 million for our discovery and
      preclinical programs, $644,000 for DOV dilitazem and $558,000 for DOV 102,677
      offset by a decrease in costs of $1.7 million for DOV 21,947, $877,000 for
      DOV
      51,892 and $300,000 for DOV 216,303.





*General
      and Administrative Expense.* General
      and administrative expense increased $1.9 million to $6.6 million in the nine
      months ended September 30, 2005 from $4.6 million for the comparable period
      in
      2004. The increase was primarily attributable to an
      increase of $790,000 in severance expense related to the termination of
      employment of our co-founder Dr. Lippa, $367,000 in non-cash
      compensation expense related
      to the amortization of the restricted stock granted to Dr. Hudson upon his
      appointment as Chief Executive Officer in July 2005 and to Dr. Lippa, our former
      Chief Executive Officer, in May 2005 (please refer to note 8 of our
      financial statements included
      under Part I, Item 1of this
      Form
      10-Q) ,
      $128,000 in professional
      fees, $596,000 in compensation
      and related expenses as we expanded our operations and $125,000
      in travel and entertainment expenses.




16


*Interest
      Income.* Interest
      income increased $2.3 million to $2.8 million in the nine months ended September
      30, 2005 from $549,000 in the comparable period in 2004 primarily due to higher
      average cash balances and a higher effective interest rate yield.





*Interest
      Expense.* Interest
      expense decreased $502,000 to $1.9 million in the nine months ended September
      30, 2005 from $2.4 million in the comparable period in 2004. We recorded
      interest expense including beneficial interest of $105,000 on our convertible
      promissory note and convertible line of credit promissory note in the nine
      months ended September 30, 2005 and $2.4million in the comparable period in
      2004. This
      decrease was due to the conversion of the notes in May 2004 and January 2005.
      This decrease was offset by an increase of $1.5 million in interest expense
      on
      the convertible debentures placed in December 2004 and January 2005 and $301,000
      in amortization of deferred charges on debt. Please
      refer to note 5 of our financial statements included
      under Part I, Item 1of this
      Form
      10-Q.





*Other
      Income (Expense), net.*  Other
      income (expense), net was virtually unchanged in the nine months ended September
      30, 2005 from the comparable period in 2004.





*Income
      Tax Expense.* In
      the
      third quarter of 2004, we revised our full year 2004 estimate of our taxable
      income. Taking into account the $35.0 million up-front fee we received on the
      closing of the license, research and development agreement for our collaboration
      with Merck, we expected to generate taxable income for the 2004 tax year. In
      addition, our evaluation of the Section 382 limitation concluded that sufficient
      losses are available to offset a substantial portion of the estimated taxable
      income for 2004. As a result, in accordance with SFAS No. 109, we reversed
      approximately $4.0 million of valuation allowance associated with its federal
      and state NOL's. This
      benefit will be offset by the federal and state income tax expense.  New
      Jersey state tax law limits the use of NOL's to 50% of state taxable income.
      As
      a result, we recorded state tax expense of $679,000.





**Liquidity
      and Capital Resources**


At
      September 30, 2005, our cash and cash equivalents and marketable securities
      totaled $110.8 million compared with $132.2 million at December 31, 2004. The
      decrease in cash balances at September 30, 2005 resulted primarily from cash
      used in operations of $35.3 million offset by cash provided by financing
      activities of $15.6 million comprised of $14.6 million from the issuance of
      convertible subordinated debentures and the balance from exercise of options.
      At
      September 30, 2005, we had working capital of $94.2 million compared with $91.3
      million at December 31, 2004.





Net
      cash
      used in operations during the nine months ended September 30, 2005 amounted
      to
      $35.3 million, as compared to net cash provided by operations of $15.4 million
      in the same period of 2004. The
      increase in cash used in operations resulted primarily from the increase in
      clinical development activities and the addition of personnel. Net cash used
      in
      operations benefited from an increase in accounts payable and accrued
      liabilities of $4.2 million due to an increase in volume and timing of payments.





Net
      cash
      provided by/used in investing activities during the quarter ended September
      30,
      2005 and 2004 amounted to $5.4 million and $621,000 provided by investing
      activities, 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 nine months ended September 30,
      2005
      was $15.6 million as compared to $11.0 million in the comparable period in
      2004. Net
      cash
      provided by financing activities in the nine months ended September 30, 2005 was primarily related to net proceeds of $14.6 million from
      the issuance of $15.0 million of 2.5% subordinated convertible debentures in
      January 2005. Net
      cash
      provided by financing activities in the nine months ended September 30, 2004
      was
      primarily related to $10.0 million of net proceeds from the sale of common
      stock
      to an institutional investor .




17


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 December 31, 2006. Our future capital uses and requirements
      depend on numerous factors, including:





·
            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;





·
            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
      sublicensee and collaborative partners, Neurocrine, Pfizer and Merck, 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. Moreover,
      Merck has reserved the right to terminate its license with us upon four months’
      notice but no earlier than March 2006.





To
      meet
      future capital requirements, we may attempt to raise additional funds through
      equity or debt financings, collaborative agreements with corporate partners
      or
      from other sources. If adequate funds are not available, or 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 ope rations
      from period to period.





**Contractual
      Obligations**





Future
      minimum payments for all contractual obligations for years subsequent to
      September 30, 2005, are as follows:





**Years
                Ended December 31,****2005**
            
            
            **2006**
            
            
            **2007**
            
            
            **Thereafter**
            
            
            **Total****(in
                thousands)**Convertible
                subordinated debentures(1)
            
            $
            913
            
            $
            2,000
            
            $
            2,000
            
            $
            114,000
            
            $
            118,913Operating
                leases
            
            
            234
            
            
            1,072
            
            
            1,086
            
            
            569
            
            
            2,961Total
                (2)
            
            $
            1,147
            
            $
            3,072
            
            $
            3,086
            
            $
            114,569
            
            $
            121,874




18


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




(2)
            Excludes
                our obligations to Merck to fund, subject to premium reimbursement
                if the
                studies are successful as defined, 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.





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
      2005. 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. 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. 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 owe 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
      the
      earlier agreement . 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 face contingent
      payments by us 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.





**Recent
      Accounting Pronouncements**





In
      December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.”  SFAS
      No. 123R is a revision of FASB Statement 123, “Accounting for Stock-Based
      Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to
      Employees,” and its related implementation guidance. The Statement focuses
      primarily on accounting for transactions in which an entity obtains employee
      services in share-based payment transactions. SFAS No. 123R requires a public
      entity to measure the cost of employee services received in exchange for an
      award of equity instruments based on the grant-date fair value of the award
      (with limited exceptions). That cost will be recognized over the period during
      which an employee is required to provide service in exchange for the award.
      This
      statement is effective as of the beginning of the first annual reporting period
      that begins after June 15, 2005 and thus we will adopt the standard in the
      first
      quarter of 2006.





As
      permitted by SFAS 123, we currently account for share-based payments to
      employees using APB Opinion 25’s intrinsic value method and, as such, we
      generally recognize no compensation cost for employee stock options. The impact
      of the adoption of SFAS 123R cannot be predicted at this time because it will
      depend on levels of share-based payments granted in the future. The adoption
      of
      SFAS 123R’s fair value method is expected to have a significant impact on our
      results of operations, although it will have no impact on our overall financial
      position. Management has not yet completed the analysis of the ultimate impact
      that this statement will have on our operating results or financial position,
      nor the method of adoption for this new standard.





In
      May
      2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,”
      which replaces APB Opinion No. 20, “Accounting Changes,” and supersedes FASB
      Statement No. 3, “Reporting Accounting Changes in Interim Financial
      Statements—an amendment of APB Opinion No. 28.” SFAS 154 requires retrospective
      application to prior period financial statements of changes in accounting
      principle, unless it is impracticable to determine either the period-specific
      effects or the cumulative effect of the change. When it is impracticable to
      determine the period-specific effects of an accounting change on one or more
      individual prior periods presented, SFAS 154 requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings for that period rather than being reported in an income
      statement. When it is impracticable to determine the cumulative effect of
      applying a change in accounting principle to all prior periods, SFAS 154
      requires that the new accounting principle be applied as if it were adopted
      prospectively from the earliest date practicable. SFAS 154 is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005.  We do not expect the implementation of SFAS
      154
      to have a significant impact on our results of operations.




19


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





To
      date,
      we have invested our cash balances with substantial financial institutions.
      In
      the future, the primary objective of our investment activities will be to
      maximize the income we receive from our investments consistent with preservation
      of principal and minimum risk. Some of the securities that we invest in may
      have
      market risk. This means that a change in prevailing interest rates may cause
      the
      principal amount of the investment to fluctuate. To minimize this risk in the
      future, we intend to maintain our portfolio of cash equivalents and investments
      in a variety of securities, including commercial paper, money market funds,
      government and non-government debt securities and corporate obligations. Due
      to
      the short holding period of these types of investments, we have concluded that
      we do not have a material financial market risk exposure.





**Item
      4.**  **Controls
      and Procedures**


As
      required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation
      of the effectiveness of the design and operation of our disclosure controls
      and
      procedures as of the end of the period covered by this report. This evaluation
      was carried out by management as of September 30, 2005, under the supervision
      and with the participation of our president, chief executive officer and
      secretary, and our senior vice president of finance and chief financial officer
      (our principal executive officer and principal financial officer). Based upon
      that evaluation, these officers 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. Effective
      January 1, 2005, the Company implemented a new accounting application software.
      The implementation has involved changes in systems that included internal
      control over financial reporting, and accordingly, have required minor changes
      to our system of internal control over financial reporting. We have reviewed
      the
      internal controls over financial reporting affected by the implementation of
      the
      new system and determined that there has been no material change in the internal
      controls over financial reporting occasioned by the new accounting
      software.




20


**PART
      II — OTHER INFORMATION**





**Item
      1.**  **Legal
      Proceedings**





We
      are
      not a party to any material legal proceedings.





**Item
      2.**  **Unregistered
      Sale of Equity Securities and Use of Proceeds**





**Recent
      Sales of Unregistered Securities**





None
      during the three month - period ended September 30, 2005.




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




None.




**Item
      5.**  **Other
      Information**





**Risk
      Factors and Factors Affecting Forward-Looking Statements**





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. In
      addition, 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.***





Market
      prices for securities of biopharmaceutical companies have been particularly
      volatile. In
      particular, our stock price experienced a substantial decline following our
      initial public offering and has fluctuated between a high of $21.49 and a low
      of
      $11.60 since January 1, 2004. Some of the factors that may cause the market
      price of our common stock to fluctuate include:





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


·
            delays
                in initiating clinical trials;


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


·
            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;


·
            regulatory
                developments or enforcement in the United States and foreign
                countries;


·
            developments
                or disputes concerning patents or other proprietary
                rights;


·
            changes
                in estimates or recommendations by securities
                analysts;


·
            public
                concern over our drugs;


·
            litigation;


·
            future
                sales of our common stock;


·
            general
                market conditions;


·
            changes
                in the structure of health care payment
                systems;


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


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


·
            period-to-period
                fluctuations in our financial
                results.




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.




21


***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%
      subordinated convertible 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.





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





Since
      our
      inception in April 1995 through September 30, 2005, we have incurred significant
      operating losses and, as of September 30, 2005, we had an accumulated deficit
      of
      $136.4 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
      will increase substantially in the foreseeable future as we:





·
            conduct
                clinical trials;


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


·
            make
                milestone payments;


·
            seek
                regulatory approvals for our product
                candidates;


·
            commercialize
                our product candidates, if
                approved;


·
            hire
                additional clinical, scientific and management
                personnel;


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


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





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





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





None
      of
      our product candidates is currently approved for sale by the FDA or by any
      other
      regulatory agency in the world, and our product candidates may never be approved
      for sale or become commercially viable. Before obtaining regulatory approval
      for
      the sale of our product candidates, they must be subjected to extensive
      preclinical and clinical testing to demonstrate their safety and efficacy for
      humans. Our success will depend on the success of our currently ongoing clinical
      trials and subsequent clinical trials that have not yet begun.





22


There
      are
      a number of difficulties and risks associated with clinical trials. The
      possibility exists that:





·
            we
                may discover that a product candidate 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 that
                will 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;
                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 lead anti-anxiety product candidate, 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
      due to a recent occurrence of enzyme elevations in liver function tests, or
      LFT's, 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. Based
      upon
      the data, we have discontinued the development of ocinaplon for generalized
      anxiety disorder. Given
      the uncertainty surrounding the regulatory and clinical trial process, we may
      not be able to successfully advance the development of effective or 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.





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 not receive regulatory approvals for our product candidates or approvals
      may
      be delayed.***





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 NDA’s for indiplon for the treatment of insomnia in
      April and May 2005. 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. Additionally,
      even after receipt of FDA approval, the FDA may request additional clinical
      trials to evaluate any adverse reactions or long-term effects. The scope and
      expense of such post-approval trials could be extensive and costly to us. Any
      FDA or other regulatory approval of our product candidates, once obtained,
      may
      be withdrawn. If our product candidates are marketed abroad, they will also
      be
      subject to extensive regulation by foreign governments.





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




23


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 recent occurrence of enzyme elevations
      in LFT's 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. Based upon
      the
      data, we have discontinued the development of ocinaplon for generalized anxiety
      disorder.




On
      September 28, 2004, we announced that we had initiated a pivotal, Phase III,
      U.S. clinical trial in patients with moderate to severe chronic lower back
      pain.
      This clinical trial is being conducted in accordance with a protocol (revised
      as
      described below) that we originally submitted to the FDA in accordance with
      the
      FDA’s special protocol assessment, or SPA, guidelines in May 2004. Following
      submission of the protocol to the FDA, we had meetings with the agency to reach
      agreement on the study design. Following our meeting with the FDA in September
      2004, we revised the protocol in response to comments from the FDA, and
      initiated this clinical trial in accordance with the revised protocol. We have
      received oral confirmation from the FDA that the revised protocol is acceptable,
      and have sought to obtain formal documentation of the agreement from the FDA
      regarding this revised protocol as required by the FDA’s SPA guidelines. We have
      subsequently made changes to the protocol covered by the SPA prior to FDA
      approval in order to improve the clinical trial and have sought the agency’s
      approval to continue the SPA. According to FDA guidelines on SPA, protocol
      changes in any manner without prior FDA approval renders the SPA no longer
      effective and we cannot offer any assurance that our request will be granted.
      While FDA guidance on SPA’s states that documented SPA’s should be considered
      binding on the review division, the FDA has the latitude to change its
      assessment if certain exceptions apply. Exceptions include identification of
      a
      substantial scientific issue essential to safety or efficacy testing that later
      comes to light, a failure to follow the protocol agreed upon or the FDA’s
      reliance on data, assumptions or information determined to be wrong or that
      omit
      relevant facts. Accordingly, we can give no assurance that as clinical trials
      proceed or as part of an NDA review process, if any, the FDA will not determine
      that one or more exceptions apply to a previously documented special protocol
      assessment for the particular protocol. This could have a material adverse
      effect on the NDA approval process, if any.




***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 Pfizer and 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
      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.




24


We
      entered into an amendment of our license agreement with Merck on August 5,
      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, after certain development work by
      DOV,
      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 continues to have the right to terminate the license
      agreement or Merck may instead select one of our preclinical triple reuptake
      inhibitors for commercialization under the license agreement as a substitute
      for
      DOV 21,947.





***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, Pfizer and Wyeth. Neurocrine
      has entered into a development and commercialization agreement with Pfizer
      involving a further sublicense under our agreement with Neurocrine. 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 on August 5, 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. 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 21, 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.***





On
      August
      5, 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, after certain development work by us, one of our
      preclincial 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 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.





25


***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.





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





At
      September 30, 2005, we had cash and cash equivalents and marketable securities
      of $110.8 million. We currently have no commitments or arrangements for any
      financing. We believe that our existing cash, cash equivalents and marketable
      securities will be sufficient to fund our anticipated operating expenses, debt
      obligations and capital requirements until at least December 31, 2006. We
      believe that we may 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 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.





***Our
      indebtedness and debt service 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 we issue other
      debt
      securities prior to conversion of the debentures, our debt service obligations
      may increase further.




We
      intend
      to fulfill our debt service obligations 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 the debentures, prior to maturity
      in January 2025, may be exercised in January 2012, 2015 and 2020.




26


***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 members of our senior management team, in particular, our
      Chief
      Executive Officer and President, Dr. Leslie Hudson, our Senior Vice President
      and Chief Scientific Officer, Dr. Phil Skolnick, and our Senior Vice President,
      Drug Development, Dr. Warren Stern, for our business success. Moreover, because
      of the specialized scientific and technical nature of our business, we are
      also
      highly dependent upon our scientific staff, the members of our scientific
      advisory board and our continued ability to attract and retain qualified
      scientific, technical and business development personnel. 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. The loss of the services of Drs.
      Hudson, Skolnick or Stern, or other key personnel, could severely harm our
      business if a replacement possessing a similar level of expertise cannot be
      retained or if the key person’s responsibilities cannot be assumed by existing
      employees.





***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, the use of bicifadine for the treatment of pain and the use of
      ocinaplon for anxiety. 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
      intend to pursue a rapid growth strategy, which could give rise to difficulties
      in managing and successfully implementing such
      growth.***





We
      intend
      to pursue a strategy of growth, both with regard to infrastructure and
      personnel, and will seek to aggressively develop our current product candidates
      and to acquire new product candidates. In the event of rapid growth in our
      operations, we will need to hire additional personnel, some of whom, due to
      the
      specialized scientific and technical nature of our business, must possess
      advanced degrees, be highly skilled and have many years of experience. We may
      be
      unable to attract and retain the necessary qualified personnel, or such
      personnel may not be available when needed, to successfully meet our growth
      needs. We cannot assure you that we will be able to obtain the personnel needed
      to achieve such growth or that we will be able to obtain and maintain all
      regulatory approvals or employ the best personnel to ensure compliance with
      all
      applicable laws, regulations and licensing requirements that may be necessary
      as
      a result of such growth.





27


We
      may
      determine to acquire laboratory facilities, which we currently do not have.
      The
      absence of such facilities and technical staff requires us to rely on contract
      parties for all preclinical work. Such facilities, even if they lead to cost
      savings and improved control and turn-around time, may require substantial
      management time, personnel transition and relocation costs and result in a
      higher level of fixed overhead, the cost of which might not be offset or fully
      offset by reductions in external contract costs.





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





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





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





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





**Risks
      Related to our Industry**





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





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





28


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;





·
            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.





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.





29


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





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





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





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





·
            safe,
                effective and medically necessary;





·
            appropriate
                for the specific patient;





·
            cost-effective;
                and





·
            neither
                experimental nor investigational.





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





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***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 $10.0 million
      per occurrence and $10.0 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 carryforwards 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 classified as having been incurred by our
      subsidiary Nascime Limited.




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**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.




10.1
              Amendment
                  Agreement dated August 5, 2005, between MSD Warwick (Manufacturing)
                  Ltd.
                  and Registrant (redacted subject to confidential treatment
                  request).


31.1
            Certification
                of Chief Executive 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.





31.2
            Certification
                of 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.





32.1
            Certification
                of Chief Executive 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.





32.2
            Certification
                of 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.




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**SIGNATURES**





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: November
              9, 2005
            By:
            /s/ Leslie
              HudsonLeslie Hudson
              Chief Executive Officer and President


DOVPharmaceutical,
                Inc.Date: November
              9, 2005
            By:
            /s/ Barbara
              G. DuncanBarbara G. Duncan
              Senior Vice President of Finance and Chief Financial
                Officer




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