##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K





|                                                                                         |  | 
|---------------------------------------------------------------------------------------- |  | 
|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|For the fiscal year ended December 31, 2005                                             
|Commission File Number 000-51768                                                        

VALERA PHARMACEUTICALS, INC.


(Exact Name of Registrant as Specified in Its Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 13-4119931                              
|(State or Other Jurisdiction
    of Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)

7 Clarke Drive


Cranbury, New Jersey 08512


(Address of Principal Executive Offices) (Zip Code)


Registrants Telephone Number, Including Area Code:
(609) 235-3000


Securities registered pursuant to Section 12(b) of the
Act: None


Securities registered pursuant to Section 12(g) of the
Act:  common stock $0.001 par value


(Title of
class)




o þ


o þ


o þ


S-K 10-K 10-K. þ


12b-2




|                             |                        |                           
|---------------------------- | ---------------------- | --------------------------
|Large accelerated filer    o | Accelerated filer    o | Non-accelerated filer    þ

12b-2). o þ



















---



##### 










Valera Pharmaceuticals


Annual Report on
Form 10-K


for the fiscal year ended December 31, 2005


Table of Contents


|                                              |  |                                                                                                                      |     |      |     | 
|--------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | --- | ---- | --- | 
|                                              |  |                                                                                                                      |     | Page |    
|                                              |  |                                                                                                                      |     |      |    
|Part I                                       
|Item 1.                                       |  | Business                                                                                                             |     |      | 2   | 
|                                              |  | Overview                                                                                                             |     |      | 2   | 
|                                              |  | Material Agreements                                                                                                  |     |      | 13  | 
|                                              |  | Competition                                                                                                          |     |      | 20  | 
|                                              |  | Regulatory Matters                                                                                                   |     |      | 21  | 
|                                              |  | Employees                                                                                                            |     |      | 25  | 
|                                              |  | Available Information                                                                                                |     |      | 25  | 
|Item 1A.                                      |  | Risk Factors                                                                                                         |     |      | 27  | 
|Item 1B.                                      |  | Unresolved Staff Comments                                                                                            |     |      | 41  | 
|Item 2.                                       |  | Properties                                                                                                           |     |      | 42  | 
|Item 3.                                       |  | Legal Proceedings                                                                                                    |     |      | 42  | 
|Item 4.                                       |  | Submission of Matters to a Vote of Security
    Holders                                                              |     |      | 42  | 
|Part II                                      
|Item 5.                                       |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |     |      | 42  | 
|Item 6.                                       |  | Selected Financial Data                                                                                              |     |      | 46  | 
|Item 7.                                       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |     |      | 47  | 
|Item 7A.                                      |  | Quantitative and Qualitative Disclosures about Market Risk                                                           |     |      | 58  | 
|Item 8.                                       |  | Financial Statements and Supplementary Data                                                                          |     |      | 59  | 
|Item 9.                                       |  | Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure                             |     |      | 85  | 
|Item 9A.                                      |  | Controls and Procedures                                                                                              |     |      | 85  | 
|Item 9B.                                      |  | Other Information                                                                                                    |     |      | 85  | 
|Part III                                     
|Item 10.                                      |  | Directors and Executive Officers of the
    Registrant                                                               |     |      | 85  | 
|Item 11.                                      |  | Executive Compensation                                                                                               |     |      | 91  | 
|Item 12.                                      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |     |      | 97  | 
|Item 13.                                      |  | Certain Relationships and Related
    Transactions                                                                   |     |      | 99  | 
|Item 14.                                      |  | Principal Accountant Fees and Services                                                                               |     |      | 100 | 
|Part IV                                      
|Item 15.                                      |  | Exhibits and Financial Statement
    Schedules                                                                       |     |      | 100 | 
|Signatures                                    |  |                                                                                                                      | 103 |     
|Corporate Code of Business Conduct and Ethics
|Certification of CEO                         
|Certification of CFO                         
|Certification of CEO and CFO                 



i



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Part I


Forward-Looking Statements








| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in reimbursement rates for Vantas and any future
    products;                                                                                                            
|
| |  | the actions and initiatives of current and potential competitors;                                                                                                                 
|
| |  | the impact of current, pending and future legislation,
    regulation and legal actions in the U.S. and worldwide affecting
    the pharmaceutical and healthcare industries;     
|
| |  | our ability to manufacture our Vantas product;                                                                                                                                    
|
| |  | our ability to develop products, receive regulatory approvals,
    and market our products; and                                                                                   
|
| |  | other risks and uncertainties detailed under Risk
    Factors in Part I, Item 1A,
    Competition and Regulation in
    Part I, Item 1 and elsewhere throughout this report.



1



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|        |         
|------- | --------
|Item 1. | Business




Overview


12-month


12-month




Our Competitive Strengths






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Technology. We believe that Hydron Technology offers
    significant advantages over existing drug delivery systems.
    Implants using Hydron Technology can be adapted to deliver many
    kinds of drugs over an extended period of time. Currently, we
    only have regulatory approvals for Vantas. We will have to
    obtain approval for each product we develop, including products
    using Hydron Technology. In addition, our implants are soft and
    flexible, enhancing patient comfort. Further, because we own the
    manufacturing know-how to develop products utilizing Hydron
    Technology, we are able to control and maximize the potential
    commercial uses of this technology.
|
| |  | Development Capability. As demonstrated by Vantas, we
    have succeeded in developing a product, successfully taking it
    through the regulatory process to market in the U.S. in less
    than a year from the submission of a new drug application
    without utilizing an accelerated approval process. However, we
    may not be able to obtain FDA approval for our product
    candidates as quickly as we did for Vantas. Over the past three
    years, we have advanced two other product candidates into
    late-stage clinical development. We expect to continue to
    utilize this capability to efficiently develop future products.                                                       
|
| |  | Manufacturing Ability. We manufacture Vantas and our
    product candidates utilizing Hydron Technology using a patented
    process. In addition, we have developed proprietary equipment
    and scalable manufacturing methods to achieve cost-effective
    commercial production. Further, because we control the
    manufacture of Vantas and our product candidates that use Hydron
    Technology, we can ensure high quality and fully realize any
    manufacturing cost efficiencies.                                                                                                                                                                                                               

2



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Sales and Marketing. We are currently calling on
    urologists that account for the majority of LHRH agonist product
    sales in the U.S. By adjusting our current sales force structure
    slightly, we will be able to call on physicians in additional
    specialty areas, such as endocrinology. These therapeutic areas
    are attractive because a small, focused sales force can
    effectively target them. We also believe that the direct
    physician distribution channel of Vantas may present a barrier
    to the future entry of competition from generic products because
    generic drug companies do not typically have field sales forces.
    Outside the U.S., we intend to partner with companies with a
    local presence and proven distribution channels in the urology
    market for distribution of Vantas.

Product Development




|                              |  |                                                     |                       |               |  |                        |  |                      |  |                                                       |  |                                                                            
|----------------------------- |  | --------------------------------------------------- | --------------------- | ------------- |  | ---------------------- |  | -------------------- |  | ----------------------------------------------------- |  | ---------------------------------------------------------------------------
|                             
|                              |  | Therapeutic                                         |                       | Delivery      |  |                        |  | Next Anticipated    
|                              |  | Indication                                          |                       | Area          |  | Method                 |  | Status               |  | Milestone                                            
|Product                       |  |                                                     |                       |               |  |                        |  |                      |  |                                                      
|                             
|Vantas                        |  |                                                     | Prostate Cancer       |               |  | Urology                |  | Implant              |  | U.S. Commercial Sales                                 |  | Commence Mutual Recognition Process in Europe in Second Quarter
    of 2006
|                             
|Supprelin®-LA                 |  | Central Precocious Puberty (early onset of puberty) |                       | Endocrinology |  | Implant                |  | Phase III            |  | New Drug Application Filing in Second Quarter of 2006
|                             
|VP003
    (Octreotide)        |  |                                                     | Acromegaly (giantism) |               |  | Endocrinology          |  | Implant              |  | Phase I/II                                            |  | Phase IIb Clinical Trial in First Half of 2006                             
|                             
|VP004
    (Naltrexone)        |  |                                                     | Addiction Disorders   |               |  | Central Nervous System |  | Implant              |  | Pre-clinical                                          |  | Phase I/II Clinical Trial in First Half of 2006                            
|                             
|VP005
    (Anti-inflammatory) |  | Interstitial Cystitis (bladder inflammation)        |                       | Urology       |  | Bladder Instillation   |  | Pre-clinical         |  | Phase I/II Clinical Trial in Second Half of 2006     
|                             
|VP006
    (Peptide)           |  | Nocturnal Enuresis (bed-wetting)                    |                       | Urology       |  | Oral Tablet            |  | Phase I              |  | Clinical Trials in First Half of 2006                
|                             
|Valrubicin                    |  |                                                     | Bladder Cancer        |               |  | Urology                |  | Bladder Instillation |  | Acquisition Pending                                   |  | Closing of Asset Purchase in First Quarter of 2006                         
|                             

Vantas


12-month




3



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12-month 52-week






Supprelin-LA


12-month




4



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12-month Supprelin-LA




12-month


VP003 (Octreotide)








5



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##### Table of Contents











VP004 (Naltrexone)








VP005
(Anti-inflammatory)




6



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VP006 (rapid dissolve
desmopressin)






0.1-0.2






| |           
| | ----------
| | Valrubicin



7



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| |                                      
| | -------------------------------------
| | Research and Development Expenditures



Our Drug Delivery System




12-month




8



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased Patient Compliance. Hydron Technology releases
    drugs for up to a
    12-month period. As a
    result, the need for multiple physician visits and the
    inconvenience associated with frequent injections are
    eliminated, reducing the risk that a patient will miss a
    treatment.                                                                                                                                
|
| |  | Adaptability. Hydron Technology can be adapted to deliver
    many types of drugs. In addition, it provides a controlled and
    even drug release over a period of time that can result in
    increased efficacy and safety. Currently, we only have FDA
    approval for Vantas. We will need to obtain approval for each
    additional product we develop including products using our
    Hydron Technology.                       
|
| |  | Decreased Cost. As a result of the reduced number of
    patient visits to doctors offices, the overall costs
    associated with such visits, including scheduling, office visit
    and reimbursement claim costs, are significantly lowered. In
    addition, use of Hydron Technology lessens the administrative
    burden on private insurance and Medicare by reducing the number
    of reimbursement claims processed per year.





Our Business Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continue to Focus on Urological and Endocrine Conditions,
    Diseases and Disorders. We intend to continue to focus on
    the development, acquisition and commercialization of products
    for the treatment of urological and endocrine conditions,
    diseases and disorders. Our aim is to build our urological and
    endocrine product portfolio and opportunistically acquire or
    in-license later-stage urological and endocrine products that
    are currently on the market or require minimal development
    expenditures, or have some patent protection or potential for
    market exclusivity or product differentiation. We intend to
    collaborate with major and specialty pharmaceutical companies to
    develop and commercialize products that are outside of our core
    urology and endocrinology focus.
|
| |  | Develop Proprietary Pharmaceutical Portfolio. We are
    building a product portfolio based on Hydron Technology. We have
    demonstrated the utility of Hydron Technology through Vantas,
    and we believe that we can utilize this technology to bring
    additional products to market. We intend to apply Hydron
    Technology to the delivery of drugs with established safety and
    efficacy profiles to reduce product development risk and speed
    time to market.                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Develop or Acquire New Drug Delivery Technologies. In
    addition to our Hydron Technology, we intend to continue to
    evaluate other drug delivery technologies as candidates for
    in-license, acquisition and development, including various
    implantable technologies and other drug delivery systems. We
    believe that, by devoting our resources to continued development
    of new drug delivery technologies, we can develop a broader base
    that will enable us to deliver a greater variety of drugs than
    would be possible using a single drug delivery technology.                                                                                                                                                                                                                                            

9



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leverage Sales and Marketing Expertise. We will continue
    to expand our commercialization efforts by leveraging our
    existing sales and marketing expertise to market new products as
    they are approved. We intend to expand our commercial
    organization, which consisted of approximately 41 employees
    as of January 1, 2006, incrementally in a cost-effective
    manner and expand or realign territories as products emerge from
    our development pipeline or are acquired.
|
| |  | Partner Outside the U.S. to Reach New Geographic Markets.
    To reach markets outside the U.S., we are pursuing primarily a
    licensing strategy, whereby we partner with companies with a
    local presence and proven distribution channels in the urology
    and endocrinology markets for distribution of our products. We
    may retain full or co-marketing rights, however, on a select
    territory-by-territory basis to further leverage our sales and
    marketing expertise.     

Sales, Marketing and Distribution










10



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Reimbursement


12-month










11



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Intellectual Property








|                                                           |  |                                                                                                                   |  |         |                |  |              |        |    |            |  |                     
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ------- | -------------- |  | ------------ | ------ | -- | ---------- |  | --------------------
|                                                          
|                                                           |  | Date of                                                                                                          
|                                                           |  | No. of                                                                                                            |  |         | No. of Pending |  |              | Grant/
|Technology Family                                          |  | Brief Description of Coverage                                                                                     |  | Patents |                |  | Applications |        |    | Expiration
|                                                          
|Water-Swellable Hydrophilic Articles                       |  | Method of preparing a hydrophilic plastic cartridge                                                               |  |         | 15             |  |              |        | 0  |            |  | 1994/2011           
|                                                          
|Homogenous Hydrogel Copolymers                             |  | Method of preparing homogeneous copolymers having a
    predetermined equilibrium water content value             |  |         | 10             |  |              |        | 0  |            |  | 1993/2010           
|                                                          
|Hydrogel Composition                                       |  | Method of preparing homogenous porous hydrogel                                                                    |  |         | 2              |  |              |        | 3  |            |  | 2002/2020           
|                                                          
|Implanting Device                                          |  | Device for inserting implantable objects under the skin                                                           |  |         | 0              |  |              |        | 16 |            |  | Not Applicable/ 2023
|                                                          
|Implanting Device Design                                   |  | Design for an implanting device                                                                                   |  |         | 4              |  |              |        | 1  |            |  | 2004/2017           
|                                                          
|Compositions and Treatments for Central Precocious Puberty |  | Controlled delivery of gonadotropin- release hormone agonists
    for the treatment of central precocious puberty |  |         | 0              |  |              |        | 2  |            |  | Not Applicable/ 2025
|                                                          
|Polyurethane Implant Formulations                          |  | Polyurethane implant formulations and methods of preparing                                                        |  |         | 0              |  |              |        | 3  |            |  | Not Applicable/ 2024
|                                                          
|Total                                                      |  |                                                                                                                   |  |         | 31             |  |              |        | 25 |            |  |                     
|                                                          





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Material Agreements






| |                          
| | -------------------------
| | GP Strategies Corporation







| |                          
| | -------------------------
| | Hydron Technologies, Inc.









13



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| |                       
| | ----------------------
| | The Population Council









| |                                
| | -------------------------------
| | Shire Pharmaceuticals Group plc





14



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| |                   
| | ------------------
| | Paladin Labs, Inc.





15



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##### Table of Contents











| |                          
| | -------------------------
| | Key Oncologics (Pty) Ltd.









16



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| |                              
| | -----------------------------
| | International Urology Network







| |              
| | -------------
| | Besse Medical





| |                            
| | ---------------------------
| | BioPro Pharmaceutical, Inc.



17



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| |                  
| | -----------------
| | Alpex Pharma S.A.







18



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| |           
| | ----------
| | Valrubicin









| |            
| | -----------
| | Teva-Tuteur



19



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Competition




12-month


20



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Regulatory Matters




| |        
| | -------
| | General





| |                                                   
| | --------------------------------------------------
| | Research, Development and Product Approval Process





| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pre-clinical laboratory and animal tests and analysis;                                                                                                                         
|
| |  | submission to the FDA of an application for an investigational
    new drug application, which must become effective before human
    clinical trials may commence;            
|
| |  | preliminary human clinical studies to evaluate the drug and its
    manner of use;                                                                                             
|
| |  | adequate and well-controlled human clinical trials to establish
    whether the drug is safe and effective for its intended uses;                                              
|
| |  | FDA review of whether the facility in which the drug is
    manufactured, processed, packed or held meets standards designed
    to assure the products continued quality; and
|
| |  | submission and approval of an appropriate product application to
    the FDA, and approval of the application by the FDA.                                                      







| |   |                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase I studies are typically conducted in small numbers of
    healthy volunteers or, on occasion, in patients afflicted with
    the target disease, to determine the metabolic and
    pharmacological action of the product candidate in humans, the
    side effects associated with increasing doses, and, if possible,
    to gain early evidence of effectiveness.

21



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| |   |                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase II studies are generally conducted in larger groups
    of patients having the target disease or condition in order to
    validate the clinical endpoint and to obtain preliminary data on
    both the effectiveness of the product candidate and optimal
    dosage. This phase also helps determine further the safety
    profile of the product candidate.
|
| |  | Phase III large-scale clinical trials are generally
    conducted in hundreds of patients having the target disease or
    condition to provide sufficient data for the statistical proof
    of effectiveness and safety of the product candidate.                                                                                                                   















22



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| |                                                
| | -----------------------------------------------
| | Drugs for Serious or Life-threatening Illnesses





| |                                   
| | ----------------------------------
| | Other U.S. Regulatory Requirements



23



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| |                                       
| | --------------------------------------
| | European Union Regulatory Requirements









24



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| |                                      
| | -------------------------------------
| | Other Foreign Regulatory Requirements



Employees







Available Information


www.sec.gov


www.valerapharma.com www.valerapharma.com www.valerapharma.com/investors.asp


25



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www.valerapharma.com, www.valerapharma.com/investors.asp




26



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|         |             
|-------- | ------------
|Item 1A. | Risk Factors

You should carefully consider the risk factors described
below and all other information contained in this
Form 10-K,
including our historical financial statements and related notes
and schedule, before you decide to invest in our common stock.
If any of the following risk factors actually occur, our
business, financial condition and results of operations could be
materially and adversely affected. In that case, the trading
price of our common stock could decline, and you may lose part
or all of your investment.


Risks Related to Our Business




| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are largely dependent on the success of Vantas, our
    first product to be approved for commercial sale by the FDA, and
    we cannot be certain that we will be able to successfully expand
    the commercialization of Vantas.





| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | We have a history of operating losses and may not achieve
    or sustain profitability.





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are dependent on single suppliers for certain services
    and raw materials, including histrelin, that are necessary for
    the manufacture of our Hydron implants. If any of these
    suppliers fail or are unable to perform in a timely and
    satisfactory manner, we may be unable to manufacture Vantas or
    some of our product candidates, which could delay sales of
    Vantas and hinder research and development of our product
    candidates that use Hydron Technology.



27



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have previously experienced disruptions in our
    manufacturing of Vantas due to issues caused by our supply of
    histrelin, the active ingredient in Vantas, including a
    manufacturing disruption during the second and third quarters of
    2005 that caused a material decrease in our sales for the third
    quarter of 2005 and may have an adverse impact on our sales of
    Vantas in the future. Further interruptions in our manufacturing
    process for Vantas or our product candidates may have an adverse
    impact on our sales of Vantas and the development of our product
    candidates in the future.







| |                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The successful commercialization of Vantas and any other
    products we develop will depend on obtaining reimbursement at
    adequate levels from private health insurers and
    Medicare/Medicaid for patient use of these products. We expect
    the reimbursement levels for Vantas to decline, which will have
    an adverse effect on our net product sales.







28



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| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a manufacturer of our products, we are subject to
    regulatory requirements. If we do not comply with such
    requirements, the development and sales of our products and our
    financial performance may be materially harmed.







| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | production yields;                                                                     
|
| |  | raw materials;                                                                         
|
| |  | shortages of qualified personnel;                                                      
|
| |  | compliance with FDA regulations, including the demonstration of
    purity and potency;
|
| |  | changes in FDA requirements;                                                           

29



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| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | controlling production costs; and                                         
|
| |  | development of advanced manufacturing techniques and process
    controls.





| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to complete our acquisition of the
    assets associated with the valrubicin product or realize a
    return on our investment in this product candidate.







| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | We have limited sales, marketing and distribution
    experience and may be unable to successfully commercialize our
    products.





| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to obtain additional capital that may
    be necessary for growth and market penetration or to continue
    our operations.



30



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| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | costs associated with conducting pre-clinical and clinical
    testing;                                                                                                                                                            
|
| |  | costs associated with commercializing Vantas and other products
    we may develop, including expanding sales and marketing
    functions; for example, in connection with Supprelin-LA, we
    expect to increase our sales force;
|
| |  | costs of establishing arrangements for manufacturing;                                                                                                                                                                              
|
| |  | costs of acquiring new pharmaceutical products and drug delivery
    systems;                                                                                                                                                      
|
| |  | payments required under our current and any future license
    agreements and collaborations; for example, we are required to
    make certain royalty payments, which are tied to sales of Vantas;                                
|
| |  | costs, timing and outcome of regulatory reviews;                                                                                                                                                                                   
|
| |  | costs of obtaining, maintaining and defending patents on
    proprietary technology; and                                                                                                                                           
|
| |  | costs of increased general and administrative expenses.                                                                                                                                                                            



If
products utilizing our technology fail to gain market
acceptance, we may be unable to generate significant
revenue.






| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | establishment and demonstration of clinical efficacy and safety;                     
|
| |  | cost-effectiveness;                                                                  
|
| |  | adequate reimbursement by third parties;                                             
|
| |  | relative convenience and ease of administration;                                     
|
| |  | timing of market introduction of competitive products;                               
|
| |  | alternative treatment methods, for example, injections and oral
    formulations; and
|
| |  | marketing and distribution support.                                                  



31



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| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Our failure to recruit, retain, and motivate qualified
    management and scientific personnel could adversely affect
    us.







| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face substantial competition and our competitors may
    discover, develop or commercialize products similar to ours
    before or more successfully than we do.









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| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Our sales of Vantas and any other products we may develop
    could suffer from competition by generic products.





| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | We may encounter difficulties managing our growth, which
    could adversely affect our results of operations.







| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | We face a risk of product liability claims and may not be
    able to obtain adequate insurance.





| |   |                                           
| | - | ------------------------------------------
| |  | significant awards against us;            
|
| |  | substantial litigation costs;             
|
| |  | recall of the product;                    
|
| |  | injury to our reputation; and             
|
| |  | withdrawal of clinical trial participants;



33



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The
approved drugs used in Vantas and our product candidates, as
well as the implant itself, may cause side effects and we may
not be able to achieve an acceptable level of side effect risks,
compared to the potential therapeutic benefits, for our product
candidates.








| |                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we operated as a private company prior to our
    initial public offering in February 2006, we have no experience
    attempting to comply with public company obligations, including
    recently enacted changes in securities laws and regulations;
    attempting to comply with these requirements will increase our
    costs and require additional management resources and we still
    may fail to comply.





10-K.


Risks Related to Clinical Trials and Other Regulatory
Matters




| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our clinical trials are unsuccessful or significantly
    delayed, or if we do not complete our clinical trials, we may
    not be able to commercialize our product candidates.



34



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##### Table of Contents









| |   |                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | interim results of pre-clinical or clinical studies do not
    necessarily predict their final results, and acceptable results
    in early studies might not be seen in later studies;                                                                                                                                
|
| |  | product candidates that appear promising at early stages of
    development may ultimately fail because the products may be
    ineffective, may be less effective than competitors
    products or may cause harmful side effects;                                                                                   
|
| |  | any pre-clinical or clinical test may fail to produce results
    satisfactory to the FDA or foreign regulatory authorities;                                                                                                                                                                                           
|
| |  | pre-clinical or clinical data can be interpreted in different
    ways, which could delay, limit or prevent regulatory approval;                                                                                                                                                                                       
|
| |  | negative or inconclusive results from a pre-clinical study or
    clinical trial or adverse medical events during a clinical trial
    could cause a pre-clinical study or clinical trial to be
    repeated or a program to be terminated, even if other studies or
    trials relating to the program are successful;
|
| |  | the FDA can place a clinical hold on a trial if, among other
    reasons, it finds that patients enrolled in the trial are or
    would be exposed to an unreasonable and significant risk of
    illness or injury;                                                                                                   
|
| |  | we may encounter delays or rejections based on changes in
    regulatory agency policies during the period in which we are
    developing a product candidate or the period required for review
    of any application for regulatory agency approval;                                                                 
|
| |  | our clinical trials may not demonstrate the safety and efficacy
    of any product candidates or result in marketable products;                                                                                                                                                                                        
|
| |  | the FDA may change its approval policies or adopt new
    regulations that may negatively affect or delay our ability to
    bring a product candidate to market; and                                                                                                                                                  
|
| |  | a product candidate may not be approved for all the indications
    which we request.                                                                                                                                                                                                                                  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The development and approval process may take many years,
    require substantial resources and may never lead to the approval
    of a product. With the exception of Vantas, we do not have, and
    may never obtain, the regulatory approvals we need to market our
    product candidates. Our failure to obtain, or delays in
    obtaining, regulatory approvals would have a material adverse
    effect on our business, financial condition and results of
    operations.





35



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##### Table of Contents







| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | adversely affect the commercialization of any products that we
    develop;
|
| |  | impose additional costs on us;                                             
|
| |  | diminish any competitive advantages that we may attain; and                
|
| |  | adversely affect our receipt of revenues or royalties.                     



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Even if we receive regulatory approval for our product
    candidates, our approval may be limited and, we will be subject
    to significant ongoing regulatory obligations and
    oversight.





| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | refusals or delays in the approval of applications or
    supplements to approved applications;                                                      
|
| |  | refusal of a regulatory authority, including the FDA, to review
    pending market approval applications or supplements to approved
    applications;
|
| |  | warning letters;                                                                                                                                     
|
| |  | fines;                                                                                                                                               
|
| |  | import or export restrictions;                                                                                                                       
|
| |  | product recalls or seizures;                                                                                                                         
|
| |  | injunctions;                                                                                                                                         
|
| |  | total or partial suspension of clinical trials or production;                                                                                        
|
| |  | civil penalties;                                                                                                                                     
|
| |  | withdrawals of previously approved marketing applications or
    licenses;                                                                           
|
| |  | recommendations by the FDA or other regulatory authorities
    against entering into governmental contracts with us; or                              
|
| |  | criminal prosecutions.                                                                                                                               



| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The regulatory approval process outside the
    U.S. varies depending on foreign regulatory requirements,
    and failure to obtain regulatory approval in foreign
    jurisdictions would prevent the marketing of our products in
    those jurisdictions.



36



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##### Table of Contents







| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on third parties to conduct certain of the
    clinical trials for our product candidates, and if they do not
    perform their obligations to us, we may not be able to obtain
    regulatory approvals for our product candidates.



Risks Related to Intellectual Property




| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our success depends on the protection of our intellectual
    property rights, and our failure to secure these rights would
    materially harm our business.





| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to protect the confidentiality of our
    proprietary information and know-how, our competitive position
    would be impaired and our business could be adversely
    affected.



37



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| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our commercial success depends significantly on our
    ability to operate without infringing the patents and other
    proprietary rights of third parties.





| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Protecting our intellectual property is expensive and time
    consuming and could harm our business.



Risks Related to Our Common Stock




| |                                                                                  
| | ---------------------------------------------------------------------------------
| | The trading price of the shares of our common stock could
    be highly volatile.





| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | developments concerning Vantas or any of our product candidates;                                       
|
| |  | announcements of technological innovations by us or our
    competitors;                               
|
| |  | new products introduced or announced by us or our competitors;                                         
|
| |  | changes in reimbursement levels;                                                                       
|
| |  | changes in financial estimates by securities analysts;                                                 
|
| |  | actual or anticipated variations in operating results;                                                 
|
| |  | expiration or termination of licenses, research contracts or
    other collaboration agreements;       
|
| |  | conditions or trends in the regulatory climate and the
    biotechnology and pharmaceutical industries;

38



---



##### Table of Contents





| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | intellectual property, product liability or other litigation
    against us;                                        
|
| |  | changes in the market valuations of similar companies; and                                                          
|
| |  | sales of shares of our common stock, particularly sales by our
    officers, directors and significant stockholders.





| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | The ownership interests of our officers, directors and
    largest stockholders could conflict with the interests of our
    other stockholders.





| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Our use of our initial public offering proceeds may not
    yield a favorable return on your investment.





| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | Our common stock has been publicly traded for a short time
    and an active trading market may not be sustained.





| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Delaware law and our amended and restated certificate of
    incorporation and amended and restated bylaws contain provisions
    that could delay and discourage takeover attempts that
    stockholders may consider favorable.



39



---



##### Table of Contents







| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the ability of our board of directors to issue preferred stock
    with voting or other rights or preferences;                                                                                                                                       
|
| |  | limitations on the ability of stockholders to amend our charter
    documents, including stockholder supermajority voting
    requirements;                                                                                                          
|
| |  | the inability of stockholders to act by written consent or to
    call special meetings;                                                                                                                                                             
|
| |  | a classified board of directors with staggered three-year terms;                                                                                                                                                                                     
|
| |  | requirements that special meetings of our stockholders may only
    be called by the chairman of our board of directors, our
    president, or upon a resolution adopted by, or an affirmative
    vote of, a majority of our board of directors; and
|
| |  | advance notice procedures our stockholders must comply with in
    order to nominate candidates for election to our board of
    directors or to place stockholders proposals on the agenda
    for consideration at meetings of stockholders.      







| |                                                                  
| | -----------------------------------------------------------------
| | Future sales of our common stock may depress our stock
    price.



180-day 180-day


40



---



##### Table of Contents





| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our quarterly financial results are likely to fluctuate
    significantly because our sales prospects are uncertain and, as
    a result, our stock price may decline.





| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | success of the commercialization of Vantas and any other product
    candidates that may be approved;            
|
| |  | changes in our ability to obtain FDA approval for our product
    candidates;                                    
|
| |  | results of our clinical trials;                                                                                  
|
| |  | timing of new product offerings, acquisitions, licenses or other
    significant events by us or our competitors;
|
| |  | regulatory approvals and legislative changes affecting the
    products we may offer or those of our competitors;
|
| |  | our ability to establish, grow and maintain a productive sales
    force;                                        
|
| |  | demand and pricing of Vantas and other products we may offer;                                                    
|
| |  | physician and patient acceptance of Vantas and other products we
    may offer;                                  
|
| |  | levels of third-party reimbursement for Vantas and other
    products we may offer;                              
|
| |  | interruption in the manufacturing or distribution of Vantas and
    other products we may offer; and             
|
| |  | the effect of competing technological and market developments.                                                   





|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments



41



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##### Table of Contents








|        |           
|------- | ----------
|Item 2. | Properties



|                                |  |             |        |  |          |                                              |                  |  |      | 
|------------------------------- |  | ----------- | ------ |  | -------- | -------------------------------------------- | ---------------- |  | ---- | 
|Address                         |  | Square Feet |        |  | Function |                                              | Lease Expiration | 
|                                |  |             |        |  |          |                                              |                  | 
|7 Clarke Drive
    Cranbury, NJ |  |             | 21,274 |  |          | Research and Development;
    Administration |                  |  | 2015 | 
|                               
|8 Clarke Drive
    Cranbury, NJ |  |             | 29,772 |  |          | Manufacturing                                |                  |  | 2015 | 










|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings








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






PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities







Recent Sales of Unregistered Securities




42



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Use of Proceeds from Sales of Registered Securities








43



---



##### Table of Contents



Equity Compensation Plan Information as of December 31,
2005




|                                                                  |  |                         |           |  |                         |                         |      |                   |  |  |         | 
|----------------------------------------------------------------- |  | ----------------------- | --------- |  | ----------------------- | ----------------------- | ---- | ----------------- |  |  | ------- | 
|                                                                  |  |                         |           |  |                         | Number of Shares        |     
|                                                                  |  |                         |           |  |                         | Remaining Available for |     
|                                                                  |  |                         |           |  |                         | Future Issuance under   |     
|                                                                  |  |                         |           |  |                         | Equity Compensation     |     
|                                                                  |  | Number of Shares to be  |           |  | Weighted-Average        |                         |      | Plans (Excluding  | 
|                                                                  |  | Issued Upon Exercise of |           |  | Exercise Price of       |                         |      | Securities in 1st | 
|Plan Category                                                     |  | Outstanding Options     |           |  | Outstanding Options ($) |                         |      | Column)           | 
|                                                                  |  |                         |           |  |                         |                         |      |                   | 
|Equity compensation plan approved by security holders(1)          |  |                         | 1,265,849 |  |                         | $                       | 4.25 |                   |  |  | 567,484 | 
|Equity compensation plans not
    approved by security holders(2) |  |                         |          |  |                         |                         |     |                   |  |  |        | 
|                                                                  |  |                         |           |  |                         |                         |      |                   | 
|Total                                                             |  |                         | 1,265,849 |  |                         | $                       | 4.25 |                   |  |  | 567,484 | 
|                                                                  |  |                         |           |  |                         |                         |      |                   | 






|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | 2003 Equity Incentive Plan.                                                                                     
|   
|(2) | The Company does not maintain any equity compensation plans that
    have not been approved by its stockholders.





| |   |                                       
| | - | --------------------------------------
| |  | restricted shares of our common stock;
|
| |  | incentive stock options;              
|
| |  | non-qualified stock options; or       
|
| |  | any combination of the foregoing.     



Number of shares of our
common stock available under our Equity Plan




Administration of our Equity
Plan




44



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##### Table of Contents







Transfer Agent and Registrar






| |                                      
| | -------------------------------------
| | Stockholder action by written consent





| |                     
| | --------------------
| | Stockholder meetings





| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Requirements for advance notification of stockholder
    nominations and proposals



45



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

10-K. 10-K.


|                                                                             |                            |                                          |        |        |      |   |         |       |  |   |        |       |  |      |        |       |  |   |        |       | 
|---------------------------------------------------------------------------- | -------------------------- | ---------------------------------------- | ------ | ------ | ---- | - | ------- | ----- |  | - | ------ | ----- |  | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                                                             |                            | Year Ended December 31,                  |       
|                                                                             |                            |                                          |       
|                                                                             |                            | 2005                                     |        |        | 2004 |   |         | 2003  |  |   | 2002   |       |  | 2001 |       
|                                                                             |                            |                                          |        |        |      |   |         |       |  |   |        |       |  |      |       
|                                                                             |                            | (in thousands, except per share amounts) |       
|Net product sales                                                            |                            | $                                        | 26,798 |        |      | $ | 5,511   |       |  | $ | 7      |       |  | $    | 15     |       |  | $ | 8      |      
|Licensing revenue                                                            |                            |                                          | 34     |        |      |   | 135     |       |  |   |       |       |  |      |       |       |  |   |       |      
|                                                                             |                            |                                          |        |        |      |   |         |       |  |   |        |       |  |      |       
|Total net revenue                                                            |                            |                                          | 26,832 |        |      |   | 5,646   |       |  |   | 7      |       |  |      | 15     |       |  |   | 8      |      
|Operating costs and expenses                                                 |                            |                                          |        |        |      |   |         |       |  |   |        |       |  |      |        |       |  |   |        |      
|                                                                             | Cost of product sales      |                                          |        | 5,966  |      |   |         | 608   |  |   |        |      |  |      |        |      |  |   |        |      | 
|                                                                             | Research and development   |                                          |        | 5,930  |      |   |         | 6,376 |  |   |        | 5,230 |  |      |        | 4,320 |  |   |        | 2,616 | 
|                                                                             | Selling and marketing      |                                          |        | 10,754 |      |   |         | 5,025 |  |   |        | 509   |  |      |        | 270   |  |   |        |      | 
|                                                                             | General and administrative |                                          |        | 5,500  |      |   |         | 5,897 |  |   |        | 1,838 |  |      |        | 1,324 |  |   |        | 1,522 | 
|                                                                             |                            |                                          |        |        |      |   |         |       |  |   |        |       |  |      |       
|Total operating expenses                                                     |                            |                                          | 28,150 |        |      |   | 17,906  |       |  |   | 7,577  |       |  |      | 5,914  |       |  |   | 4,138  |      
|                                                                             |                            |                                          |        |        |      |   |         |       |  |   |        |       |  |      |       
|Loss from operations                                                         |                            |                                          | (1,318 | )      |      |   | (12,260 | )     |  |   | (7,570 | )     |  |      | (5,899 | )     |  |   | (4,130 | )    
|Interest income (expense), net                                               |                            |                                          | 49     |        |      |   | (6      | )     |  |   | 13     |       |  |      | 16     |       |  |   | (30    | )    
|                                                                             |                            |                                          |        |        |      |   |         |       |  |   |        |       |  |      |       
|Loss before income taxes                                                     |                            |                                          | (1,269 | )      |      |   | (12,266 | )     |  |   | (7,557 | )     |  |      | (5,883 | )     |  |   | (4,160 | )    
|Provision for (benefit from) income taxes                                    |                            |                                          | 75     |        |      |   | (243    | )     |  |   |       |       |  |      |       |       |  |   |       |      
|                                                                             |                            |                                          |        |        |      |   |         |       |  |   |        |       |  |      |       
|Net loss                                                                     |                            |                                          | (1,344 | )      |      |   | (12,023 | )     |  |   | (7,557 | )     |  |      | (5,883 | )     |  |   | (4,160 | )    
|Deemed dividend                                                              |                            |                                          |       |        |      |   | (5,861  | )     |  |   | (1,139 | )     |  |      |       |       |  |   |       |      
|                                                                             |                            |                                          |        |        |      |   |         |       |  |   |        |       |  |      |       
|Net loss attributable to common stockholders                                 |                            | $                                        | (1,344 | )      |      | $ | (17,884 | )     |  | $ | (8,696 | )     |  | $    | (5,883 | )     |  | $ | (4,160 | )    
|                                                                             |                            |                                          |        |        |      |   |         |       |  |   |        |       |  |      |       
|Basic and diluted net loss attributable to common stockholders
    per share |                            | $                                        | (0.81  | )      |      | $ | (10.73  | )     |  | $ | (5.22  | )     |  | $    | (3.53  | )     |  | $ | (8.06  | )    
|                                                                             |                            |                                          |        |        |      |   |         |       |  |   |        |       |  |      |       
|Weighted average shares outstanding  basic and diluted                      |                            |                                          | 1,667  |        |      |   | 1,667   |       |  |   | 1,667  |       |  |      | 1,667  |       |  |   | 516    |      
|                                                                             |                            |                                          |        |        |      |   |         |       |  |   |        |       |  |      |       

|                            |  |                    |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |       |  
|--------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - |  | - | ----- | -
|                            |  | As of December 31, |        
|                            |  |                    |        
|                            |  | 2005               |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |       
|                            |  |                    |         |   |      |   |         |      |  |   |         |   |  |      |       
|                            |  | (in thousands)     |        
|Balance Sheet Data:         |  |                    |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |       |  
|Cash and cash equivalents   |  | $                  | 2,340   |   |      | $ | 5,053   |      |  | $ | 5,241   |   |  | $    | 641    |   |  | $ | 6,621 |  
|Working capital             |  |                    | 2,845   |   |      |   | 8,306   |      |  |   | 4,585   |   |  |      | (404   | ) |  |   | 5,658 |  
|Total assets                |  |                    | 16,532  |   |      |   | 13,667  |      |  |   | 6,665   |   |  |      | 1,296  |   |  |   | 7,172 |  
|Long-term liabilities       |  |                    | 300     |   |      |   | 17      |      |  |   | 33      |   |  |      | 67     |   |  |   | 124   |  
|Convertible preferred stock |  |                    | 39,925  |   |      |   | 39,925  |      |  |   | 20,469  |   |  |      | 6,604  |   |  |   | 6,604 |  
|Total stockholders deficit |  |                    | (31,593 | ) |      |   | (29,887 | )    |  |   | (15,158 | ) |  |      | (6,465 | ) |  |   | (582  | )

46



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

The following discussion and analysis should be read in
conjunction with our financial statements and the related notes
and schedule thereto appearing elsewhere in this
Form 10-K. This
discussion and analysis may contain forward-looking statements
based upon current expectations that involve risks and
uncertainties. Our actual results may differ materially as a
result of various factors, including those set forth under
Risk Factors or elsewhere in this
Form 10-K.


Overview


12-month


12-month








47



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##### Table of Contents









| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | the scope, rate of progress and expense of our clinical trials
    and other research and development activities;               
|
| |  | future clinical trial results;                                                                                                  
|
| |  | the expense of clinical trials for additional indications;                                                                      
|
| |  | the terms and timing of any collaborative, licensing and other
    arrangements that we may establish;                          
|
| |  | the expense and timing of regulatory approvals;                                                                                 
|
| |  | the expense of establishing clinical and commercial supplies of
    our product candidates and any products that we may develop;
|
| |  | the effect of competing technological and market
    developments; and                                                          
|
| |  | the expense of filing, prosecuting, defending and enforcing any
    patent claims and other intellectual property rights.       





Basis of Presentation




| |                        
| | -----------------------
| | Product Sales and Costs





48



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##### Table of Contents





10-K.








| |                                  
| | ---------------------------------
| | Research and Development Expenses





| |                               
| | ------------------------------
| | Selling and Marketing Expenses





| |                                    
| | -----------------------------------
| | General and Administrative Expenses



Critical Accounting Policies and Estimates




49



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##### Table of Contents









| |                    
| | -------------------
| | Revenue Recognition

Revenue Recognition
in Financial Statements






| |                                               
| | ----------------------------------------------
| | Pre-clinical Study and Clinical Trial Expenses



50



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| |                         
| | ------------------------
| | Stock-based Compensation

Accounting for Stock-Based
Compensation  Transition and Disclosure 
an Amendment of FASB Statement No. 123 Accounting for Stock Issued to Employees Accounting for Stock Based Compensation




96-18, Accounting for Equity Investments that are Issued to Other
than Employees for Acquiring or in Conjunction with Selling
Goods or Services


Share Based Payment


Results of Operations




| |                                                             
| | ------------------------------------------------------------
| | Comparison of the Years Ended December 31, 2005 and
    2004

Net Product Sales.






51



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Licensing Revenue.


Cost of Product Sales. single-source




Research and Development Expense.


Selling and Marketing Expense.


General and Administrative Expense.


52



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Stock-Based Compensation.






|                           |  |                |      |   |      |   |       | 
|-------------------------- |  | -------------- | ---- | - | ---- | - | ----- | 
|                           |  | Year Ended     |     
|                           |  | December 31,   |     
|                           |  |                |     
|                           |  | 2005           |      |   | 2004 |  
|                           |  |                |      |   |      |  
|                           |  | (In thousands) |     
|General and administrative |  | $              | (331 | ) |      | $ | 2,278 | 
|Sales and marketing        |  |                | 1    |   |      |   | 580   | 
|Research and development   |  |                | (37  | ) |      |   | 297   | 
|Cost of product sales      |  |                | 4    |   |      |   |      | 

Net Interest Income (Expense).


Income Taxes.






| |                                                         
| | --------------------------------------------------------
| | Comparison of Years Ended December 31, 2004 and
    2003

Net Product Sales.


53



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Licensing Revenue.


Cost of Product Sales.


Research and Development Expense.




Selling and Marketing Expense.


General and Administrative Expense.


Stock-Based Compensation.




|                           |  |   |       | 
|-------------------------- |  | - | ----- | 
|General and administration |  | $ | 2,278 | 
|Sales and marketing        |  |   | 580   | 
|Research and development   |  |   | 297   | 

Net Interest Income (Expense).


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Income Taxes.




Liquidity and Capital Resources












one-month




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Intrinsic Value of Stock Options in the Twelve Months Prior
to December 31, 2005










| |   |                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the quarter ended September 30, 2004, we raised
    $11.6 million through the issuance of our series C
    convertible preferred stock at $6.00 per share. Approximately
    43% of the funds were received from outside, unrelated investors
    and as such the prices of the series C convertible
    preferred stock issued was used to determine our fair market
    value.
|
| |  | During the quarter ended December 31, 2004, our new drug
    application for Vantas was approved by the FDA. In addition, we
    hired a sales force and commenced sales of Vantas in the
    U.S. Initial                                                                                                                                                                             

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| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | sales of the product in November and December 2004 exceeded
    $5.0 million, which were above our expectations.                                                                                                                                     
|
| |  | During the quarter ended March 31, 2005, we engaged
    investment bankers to commence our initial public offering
    process and we continued to experience strong sales performance.                                                              
|
| |  | During the quarter ended June 30, 2005, we continued to
    experience strong sales performance, however we experienced a
    product outage in mid-June (that lasted until early August),
    which resulted from issues with certain raw materials.
|
| |  | During the six months ended December 31, 2005, we recovered
    from the product outage and recorded total net revenue of
    $8.8 million, primarily from the sales of Vantas.                                                                      



Contractual Obligations and Commitments




|                          |  |                 |        |  |      |   |       |      |  |   |       |  |  |      |       |  |      |   |       |            |  |   |       |  |  |   |       | 
|------------------------- |  | --------------- | ------ |  | ---- | - | ----- | ---- |  | - | ----- |  |  | ---- | ----- |  | ---- | - | ----- | ---------- |  | - | ----- |  |  | - | ----- | 
|                          |  | Payments Due in |       
|                          |  |                 |       
|Contractual Obligations   |  | Total           |        |  | 2006 |   |       | 2007 |  |   | 2008  |  |  | 2009 |       |  | 2010 |   |       | After 2010 | 
|                          |  |                 |        |  |      |   |       |      |  |   |       |  |  |      |       |  |      |   |       |            | 
|Operating leases          |  | $               | 13,000 |  |      | $ | 1,342 |      |  | $ | 1,319 |  |  | $    | 1,319 |  |      | $ | 1,315 |            |  | $ | 1,399 |  |  | $ | 6,306 | 
|Capital lease obligations |  |                 | 19     |  |      |   | 19    |      |  |   |      |  |  |      |      |  |      |   |      |            |  |   |      |  |  |   |      | 
|Line of credit            |  |                 | 1,525  |  |      |   | 1,525 |      |  |   |      |  |  |      |      |  |      |   |      |            |  |   |      |  |  |   |      | 
|Accrued royalties(1)      |  |                 | 438    |  |      |   | 438   |      |  |   |      |  |  |      |      |  |      |   |      |            |  |   |      |  |  |   |      | 
|                          |  |                 |        |  |      |   |       |      |  |   |       |  |  |      |       |  |      |   |       |            | 
|                          |  | $               | 14,982 |  |      | $ | 3,324 |      |  | $ | 1,319 |  |  | $    | 1,319 |  |      | $ | 1,315 |            |  | $ | 1,399 |  |  | $ | 6,306 | 
|                          |  |                 |        |  |      |   |       |      |  |   |       |  |  |      |       |  |      |   |       |            | 






|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Royalty payments have only been determined for 2006 based upon
    2005 sales. Future royalties have not been estimated as they are
    based on future sales levels.



Off-balance Sheet Arrangements




Recent Accounting Pronouncements


Share-Based Payment Accounting for Stock-Based
Compensation Statement of Cash Flows


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non-public non-public


Accounting
Changes and Error Corrections Accounting Changes Reporting Accounting Changes in Interim Financial
Statements


Inventory Costs  an Amendment of ARB No. 43,
Chapter 4




|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk







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Item 8.     Financial Statements
and Supplementary Data





INDEX TO FINANCIAL STATEMENTS


|                                                                                             |  |  |    | 
|-------------------------------------------------------------------------------------------- |  |  | -- | 
|Report of Independent Registered Public
    Accounting Firm                                  |  |  | 60 | 
|Balance Sheets as of December 31, 2005
    and 2004                                          |  |  | 61 | 
|Statements of Operations for the years
    ended December 31, 2005, 2004 and 2003            |  |  | 62 | 
|Statements of Shareholders Deficit
    for the years ended December 31, 2005, 2004 and 2003 |  |  | 63 | 
|Statements of Cash Flows for the years
    ended December 31, 2005, 2004 and 2003            |  |  | 64 | 
|Notes to Financial Statements                                                                |  |  | 65 | 
|Financial Statement Schedule                                                                 |  |  | 84 | 

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VALERA PHARMACEUTICALS, INC.





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM













| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





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VALERA PHARMACEUTICALS, INC.





BALANCE SHEETS


(in thousands, except par value)


|                                                                                                                                                                                                                                             |                                                                                                                                     |              |         |         |      |   |         |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------- | ------- | ---- | - | ------- | ------- | -
|                                                                                                                                                                                                                                             |                                                                                                                                     | December 31, |        
|                                                                                                                                                                                                                                             |                                                                                                                                     |              |        
|                                                                                                                                                                                                                                             |                                                                                                                                     | 2005         |         |         | 2004 |  
|                                                                                                                                                                                                                                             |                                                                                                                                     |              |         |         |      |  
|ASSETS                                                                                                                                                                                                                                      
|Current assets:                                                                                                                                                                                                                              |                                                                                                                                     |              |         |         |      |   |         |        
|                                                                                                                                                                                                                                             | Cash and cash equivalents                                                                                                           |              | $       | 2,340   |      |   | $       | 5,053   |  
|                                                                                                                                                                                                                                             | Accounts receivable, net of allowances of $385 at
    December 31, 2005 and $91 at December 31, 2004                                |              |         | 4,488   |      |   |         | 5,258   |  
|                                                                                                                                                                                                                                             | Inventories, net                                                                                                                    |              |         | 3,191   |      |   |         | 1,365   |  
|                                                                                                                                                                                                                                             | Prepaid and other current assets                                                                                                    |              |         | 726     |      |   |         | 142     |  
|                                                                                                                                                                                                                                             | Restricted cash                                                                                                                     |              |         |        |      |   |         | 100     |  
|                                                                                                                                                                                                                                             |                                                                                                                                     |              |         |         |      |  
|Total current assets                                                                                                                                                                                                                         |                                                                                                                                     |              | 10,745  |         |      |   | 11,918  |        
|Fixed assets, net                                                                                                                                                                                                                            |                                                                                                                                     |              | 4,194   |         |      |   | 1,704   |        
|Deferred offering costs                                                                                                                                                                                                                      |                                                                                                                                     |              | 1,378   |         |      |   |        |        
|Deferred financing costs                                                                                                                                                                                                                     |                                                                                                                                     |              | 124     |         |      |   |        |        
|Security deposits                                                                                                                                                                                                                            |                                                                                                                                     |              | 91      |         |      |   | 45      |        
|                                                                                                                                                                                                                                             |                                                                                                                                     |              |         |         |      |  
|Total assets                                                                                                                                                                                                                                 |                                                                                                                                     | $            | 16,532  |         |      | $ | 13,667  |        
|                                                                                                                                                                                                                                             |                                                                                                                                     |              |         |         |      |  
|                                                                                                                                                                                                                                            
|LIABILITIES AND SHAREHOLDERS DEFICIT                                                                                                                                                                                                       
|Current liabilities:                                                                                                                                                                                                                         |                                                                                                                                     |              |         |         |      |   |         |        
|                                                                                                                                                                                                                                             | Accounts payable                                                                                                                    |              | $       | 1,421   |      |   | $       | 2,042   |  
|                                                                                                                                                                                                                                             | Accrued liabilities                                                                                                                 |              |         | 4,607   |      |   |         | 1,552   |  
|                                                                                                                                                                                                                                             | Note payable                                                                                                                        |              |         | 1,525   |      |   |         |        |  
|                                                                                                                                                                                                                                             | Deferred revenue  current                                                                                                          |              |         | 329     |      |   |         |        |  
|                                                                                                                                                                                                                                             | Capital lease obligations  current                                                                                                 |              |         | 18      |      |   |         | 18      |  
|                                                                                                                                                                                                                                             |                                                                                                                                     |              |         |         |      |  
|                                                                                                                                                                                                                                             |                                                                                                                                     |              | 7,900   |         |      |   | 3,612   |        
|Capital lease obligations  long term                                                                                                                                                                                                        |                                                                                                                                     |              |        |         |      |   | 17      |        
|Deferred revenue  long term                                                                                                                                                                                                                 |                                                                                                                                     |              | 300     |         |      |   |        |        
|Commitments and contingent liabilities                                                                                                                                                                                                       |                                                                                                                                     |              |         |         |      |   |         |        
|Series A 6% Cumulative Convertible Preferred Stock,
    $0.001 par value; 7,000 shares authorized,
    7,000 shares issued and outstanding; liquidation
    preference  $7,598 and $7,161 at December 31,
    2005 and 2004, respectively   |                                                                                                                                     |              | 13,604  |         |      |   | 13,604  |        
|Series B 10% Cumulative Convertible Preferred Stock,
    $0.001 par value; 24,500 shares authorized,
    22,069 shares issued and outstanding; liquidation
    preference  $20,221 and $18,363 at December 31,
    2005, 2004, respectively |                                                                                                                                     |              | 15,082  |         |      |   | 15,082  |        
|Series C 6% Cumulative Convertible Preferred Stock,
    $0.001 par value; 11,600 shares authorized, issued and
    outstanding; liquidation preference  $12,590 and
    $11,866 at December 31, 2005 and 2004, respectively                 |                                                                                                                                     |              | 11,239  |         |      |   | 11,239  |        
|Shareholders deficit:                                                                                                                                                                                                                       |                                                                                                                                     |              |         |         |      |   |         |        
|                                                                                                                                                                                                                                             | Common stock, $0.001 par value; 30,000 shares
    authorized, 1,667 shares issued and outstanding at
    December 31, 2005 and 2004 |              |         | 2       |      |   |         | 2       |  
|                                                                                                                                                                                                                                             | Additional paid-in capital                                                                                                          |              |         | 8,696   |      |   |         | 9,961   |  
|                                                                                                                                                                                                                                             | Deferred stock-based compensation                                                                                                   |              |         | (630    | )    |   |         | (1,533  | )
|                                                                                                                                                                                                                                             | Accumulated deficit                                                                                                                 |              |         | (39,661 | )    |   |         | (38,317 | )
|                                                                                                                                                                                                                                             |                                                                                                                                     |              |         |         |      |  
|Total shareholders deficit                                                                                                                                                                                                                  |                                                                                                                                     |              | (31,593 | )       |      |   | (29,887 | )      
|                                                                                                                                                                                                                                             |                                                                                                                                     |              |         |         |      |  
|Total liabilities and shareholders deficit                                                                                                                                                                                                  |                                                                                                                                     | $            | 16,532  |         |      | $ | 13,667  |        
|                                                                                                                                                                                                                                             |                                                                                                                                     |              |         |         |      |  



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VALERA PHARMACEUTICALS, INC.





STATEMENTS OF OPERATIONS


(in thousands, except per share amounts)


|                                                                             |                            |                         |        |        |      |   |         |       |  |   |        |       | 
|---------------------------------------------------------------------------- | -------------------------- | ----------------------- | ------ | ------ | ---- | - | ------- | ----- |  | - | ------ | ----- | 
|                                                                             |                            | Year Ended December 31, |       
|                                                                             |                            |                         |       
|                                                                             |                            | 2005                    |        |        | 2004 |   |         | 2003  | 
|                                                                             |                            |                         |        |        |      |   |         |       | 
|Net product sales                                                            |                            | $                       | 26,798 |        |      | $ | 5,511   |       |  | $ | 7      |      
|Licensing revenue                                                            |                            |                         | 34     |        |      |   | 135     |       |  |   |       |      
|                                                                             |                            |                         |        |        |      |   |         |       | 
|Total net revenue                                                            |                            |                         | 26,832 |        |      |   | 5,646   |       |  |   | 7      |      
|Operating costs and expenses:                                                |                            |                         |        |        |      |   |         |       |  |   |        |      
|                                                                             | Cost of product sales      |                         |        | 5,966  |      |   |         | 608   |  |   |        |      | 
|                                                                             | Research and development   |                         |        | 5,930  |      |   |         | 6,376 |  |   |        | 5,230 | 
|                                                                             | Selling and marketing      |                         |        | 10,754 |      |   |         | 5,025 |  |   |        | 509   | 
|                                                                             | General and administrative |                         |        | 5,500  |      |   |         | 5,897 |  |   |        | 1,838 | 
|                                                                             |                            |                         |        |        |      |   |         |       | 
|Total operating expenses                                                     |                            |                         | 28,150 |        |      |   | 17,906  |       |  |   | 7,577  |      
|                                                                             |                            |                         |        |        |      |   |         |       | 
|Loss from operations                                                         |                            |                         | (1,318 | )      |      |   | (12,260 | )     |  |   | (7,570 | )    
|Interest income                                                              |                            |                         | 70     |        |      |   | 65      |       |  |   | 27     |      
|Interest expense                                                             |                            |                         | (21    | )      |      |   | (71     | )     |  |   | (14    | )    
|                                                                             |                            |                         |        |        |      |   |         |       | 
|Loss before income taxes                                                     |                            |                         | (1,269 | )      |      |   | (12,266 | )     |  |   | (7,557 | )    
|Provision for (benefit from) income taxes                                    |                            |                         | 75     |        |      |   | (243    | )     |  |   |       |      
|                                                                             |                            |                         |        |        |      |   |         |       | 
|Net loss                                                                     |                            |                         | (1,344 | )      |      |   | (12,023 | )     |  |   | (7,557 | )    
|Deemed dividend                                                              |                            |                         |       |        |      |   | (5,861  | )     |  |   | (1,139 | )    
|                                                                             |                            |                         |        |        |      |   |         |       | 
|Net loss attributable to common shareholders                                 |                            | $                       | (1,344 | )      |      | $ | (17,884 | )     |  | $ | (8,696 | )    
|                                                                             |                            |                         |        |        |      |   |         |       | 
|Basic and diluted net loss attributable to common shareholders
    per share |                            | $                       | (0.81  | )      |      | $ | (10.73  | )     |  | $ | (5.22  | )    
|                                                                             |                            |                         |        |        |      |   |         |       | 
|Weighted average shares outstanding  basic and diluted                      |                            |                         | 1,667  |        |      |   | 1,667   |       |  |   | 1,667  |      
|                                                                             |                            |                         |        |        |      |   |         |       | 



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VALERA PHARMACEUTICALS, INC.





STATEMENTS OF SHAREHOLDERS DEFICIT


For the Years Ended December 31, 2003, 2004 and 2005


(in thousands)


|                             |                                                                          |              |       |     |            |   |         |         |  |          |              |        |             |         |        |               |         |   |         |         |   |   |         |         |  
|---------------------------- | ------------------------------------------------------------------------ | ------------ | ----- | --- | ---------- | - | ------- | ------- |  | -------- | ------------ | ------ | ----------- | ------- | ------ | ------------- | ------- | - | ------- | ------- | - | - | ------- | ------- | -
|                             |                                                                          | Common Stock |       |     |            |   |         |         |  |          |             
|                             |                                                                          |              |       |     | Additional |   |         |         |  |          |              | Total  |            
|                             |                                                                          |              |       | Par |            |   | Paid-in |         |  | Deferred |              |        | Accumulated |         |        | Shareholders |        
|                             |                                                                          | Shares       |       |     | Value      |   |         | Capital |  |          | Compensation |        |             | Deficit |        |               | Deficit |  
|                             |                                                                          |              |       |     |            |   |         |         |  |          |              |        |             |         |        |               |         |  
|Balance at December 31, 2002 |                                                                          |              | 1,667 |     |            | $ | 2       |         |  | $        | 5,270        |        |             |         |        |               |         | $ | (11,737 | )       |   | $ | (6,465  | )      
|                             | Expense related to options granted to non-employees                      |              |       |     |            |   |         |         |  |          |              | 3      |             |         |        |               |         |   |         |         |   |   |         | 3       |  
|                             | Deemed dividend                                                          |              |       |     |            |   |         |         |  |          |              |        |             |         |        |               |         |   |         | (1,139  | ) |   |         | (1,139  | )
|                             | Net loss                                                                 |              |       |     |            |   |         |         |  |          |              |        |             |         |        |               |         |   |         | (7,557  | ) |   |         | (7,557  | )
|                             |                                                                          |              |       |     |            |   |         |         |  |          |              |        |             |         |        |               |         |  
|Balance at December 31, 2003 |                                                                          |              | 1,667 |     |            |   | 2       |         |  |          | 5,273        |        |             |         |        |               |         |   | (20,433 | )       |   |   | (15,158 | )      
|                             | Deferred compensation related to stock options, net of
    cancellations |              |       |     |            |   |         |         |  |          |              | 4,637  |             |         | $      | (4,637        | )       |   |         |         |   |   |         |        |  
|                             | Amortization of deferred stock-based compensation                        |              |       |     |            |   |         |         |  |          |              |        |             |         |        | 3,104         |         |   |         |         |   |   |         | 3,104   |  
|                             | Expense related to options granted to non-employees                      |              |       |     |            |   |         |         |  |          |              | 51     |             |         |        |               |         |   |         |         |   |   |         | 51      |  
|                             | Deemed dividend                                                          |              |       |     |            |   |         |         |  |          |              |        |             |         |        |               |         |   |         | (5,861  | ) |   |         | (5,861  | )
|                             | Net loss                                                                 |              |       |     |            |   |         |         |  |          |              |        |             |         |        |               |         |   |         | (12,023 | ) |   |         | (12,023 | )
|                             |                                                                          |              |       |     |            |   |         |         |  |          |              |        |             |         |        |               |         |  
|Balance at December 31, 2004 |                                                                          |              | 1,667 |     |            |   | 2       |         |  |          | 9,961        |        |             |         | (1,533 | )             |         |   | (38,317 | )       |   |   | (29,887 | )      
|                             | Exercise of stock options                                                |              |       |     |            |   |         |         |  |          |              | 1      |             |         |        |               |         |   |         |         |   |   |         | 1       |  
|                             | Deferred compensation related to stock options, net of
    cancellations |              |       |     |            |   |         |         |  |          |              | (1,430 | )           |         |        | 1,430         |         |   |         |         |   |   |         |        |  
|                             | Amortization of deferred stock based compensation                        |              |       |     |            |   |         |         |  |          |              |        |             |         |        | (527          | )       |   |         |         |   |   |         | (527    | )
|                             | Expense related to options granted to non-employees                      |              |       |     |            |   |         |         |  |          |              | 164    |             |         |        |               |         |   |         |         |   |   |         | 164     |  
|                             | Net loss                                                                 |              |       |     |            |   |         |         |  |          |              |        |             |         |        |               |         |   |         | (1,344  | ) |   |         | (1,344  | )
|                             |                                                                          |              |       |     |            |   |         |         |  |          |              |        |             |         |        |               |         |  
|Balance December 31, 2005    |                                                                          |              | 1,667 |     |            | $ | 2       |         |  | $        | 8,696        |        |             | $       | (630   | )             |         | $ | (39,661 | )       |   | $ | (31,593 | )      
|                             |                                                                          |              |       |     |            |   |         |         |  |          |              |        |             |         |        |               |         |  



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VALERA PHARMACEUTICALS, INC.





STATEMENTS OF CASH FLOWS


(in thousands)


|                                                                                              |                                                     |                                  |        |      |        |   |         |       |        |   |        |       |      |  
|--------------------------------------------------------------------------------------------- | --------------------------------------------------- | -------------------------------- | ------ | ---- | ------ | - | ------- | ----- | ------ | - | ------ | ----- | ---- | -
|                                                                                              |                                                     | Year Ended December 31,          |       
|                                                                                              |                                                     |                                  |       
|                                                                                              |                                                     | 2005                             |        |      | 2004   |   |         | 2003  |       
|                                                                                              |                                                     |                                  |        |      |        |   |         |       |       
|Operating activities                                                                          |                                                     |                                  |        |      |        |   |         |       |        |   |        |      
|Net loss                                                                                      |                                                     | $                                | (1,344 | )    |        | $ | (12,023 | )     |        | $ | (7,557 | )    
|Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities: |                                                     |                                  |        |      |        |   |         |       |        |   |        |      
|                                                                                              | Depreciation and amortization                       |                                  |        | 502  |        |   |         | 257   |        |   |        | 153   |     
|                                                                                              | Amortization of deferred financing costs            |                                  |        | 11   |        |   |         |      |        |   |        |      |     
|                                                                                              | Allowances for accounts receivable                  |                                  |        | 294  |        |   |         | 91    |        |   |        |      |     
|                                                                                              | Expense related to options granted to non-employees |                                  |        | 164  |        |   |         | 51    |        |   |        | 3     |     
|                                                                                              | Stock-based compensation                            |                                  |        | (527 | )      |   |         | 3,104 |        |   |        |      |     
|                                                                                              | Change in assets and liabilities:                   |                                  |        |      |        |   |         |       |        |   |        |       |     
|                                                                                              |                                                     | Accounts receivable              |        |      | 476    |   |         |       | (5,006 | ) |        |       |     |  
|                                                                                              |                                                     | Other accounts receivable        |        |      |       |   |         |       | 574    |   |        |       | (573 | )
|                                                                                              |                                                     | Inventories                      |        |      | (1,826 | ) |         |       | (1,365 | ) |        |       |     |  
|                                                                                              |                                                     | Restricted cash                  |        |      | 100    |   |         |       | (100   | ) |        |       |     |  
|                                                                                              |                                                     | Prepaid and other current assets |        |      | (584   | ) |         |       | (50    | ) |        |       | (45  | )
|                                                                                              |                                                     | Security deposits                |        |      | (46    | ) |         |       | 362    |   |        |       | (155 | )
|                                                                                              |                                                     | Accounts payable                 |        |      | (621   | ) |         |       | 856    |   |        |       | 201  |  
|                                                                                              |                                                     | Accrued liabilities              |        |      | 3,055  |   |         |       | 1,107  |   |        |       | 66   |  
|                                                                                              |                                                     | Deferred revenue                 |        |      | 629    |   |         |       |       |   |        |       |     |  
|                                                                                              |                                                     |                                  |        |      |        |   |         |       |       
|Net cash provided by (used in) operating activities                                           |                                                     |                                  | 283    |      |        |   | (12,142 | )     |        |   | (7,907 | )    
|Investing activities                                                                          |                                                     |                                  |        |      |        |   |         |       |        |   |        |      
|Capital expenditures                                                                          |                                                     |                                  | (2,992 | )    |        |   | (1,610  | )     |        |   | (148   | )    
|                                                                                              |                                                     |                                  |        |      |        |   |         |       |       
|Net cash used in investing activities                                                         |                                                     |                                  | (2,992 | )    |        |   | (1,610  | )     |        |   | (148   | )    
|Financing activities                                                                          |                                                     |                                  |        |      |        |   |         |       |        |   |        |      
|Net proceeds from issuance of common stock                                                    |                                                     |                                  | 1      |      |        |   |        |       |        |   |       |      
|Payment of capital lease obligations                                                          |                                                     |                                  | (17    | )    |        |   | (31     | )     |        |   | (71    | )    
|Proceeds from note                                                                            |                                                     |                                  | 1,525  |      |        |   |        |       |        |   |       |      
|Deferred offering costs                                                                       |                                                     |                                  | (1,378 | )    |        |   |        |       |        |   |       |      
|Deferred financing costs                                                                      |                                                     |                                  | (135   | )    |        |   |        |       |        |   |       |      
|Proceeds from officer loan                                                                    |                                                     |                                  |       |      |        |   | 200     |       |        |   |       |      
|Repayment of officer loan                                                                     |                                                     |                                  |       |      |        |   | (200    | )     |        |   |       |      
|Net proceeds from issuance of convertible preferred stock                                     |                                                     |                                  |       |      |        |   | 13,595  |       |        |   | 12,726 |      
|                                                                                              |                                                     |                                  |        |      |        |   |         |       |       
|Net cash (used in) provided by financing activities                                           |                                                     |                                  | (4     | )    |        |   | 13,564  |       |        |   | 12,655 |      
|                                                                                              |                                                     |                                  |        |      |        |   |         |       |       
|Net (decrease) increase in cash and cash equivalents                                          |                                                     |                                  | (2,713 | )    |        |   | (188    | )     |        |   | 4,600  |      
|Cash and cash equivalents at beginning of period                                              |                                                     |                                  | 5,053  |      |        |   | 5,241   |       |        |   | 641    |      
|                                                                                              |                                                     |                                  |        |      |        |   |         |       |       
|Cash and cash equivalents at end of period                                                    |                                                     | $                                | 2,340  |      |        | $ | 5,053   |       |        | $ | 5,241  |      
|                                                                                              |                                                     |                                  |        |      |        |   |         |       |       
|Supplemental Disclosure of Cash Flow Information and Non-Cash
    Financing Activities        |                                                     |                                  |        |      |        |   |         |       |        |   |        |      
|                                                                                              | Deemed dividends on preferred stock                 |                                  |        |     |        |   | $       | 5,861 |        |   | $      | 1,139 |     
|                                                                                              | Cash paid for interest                              |                                  | $      | 20   |        |   | $       | 65    |        |   | $      | 13    |     
|                                                                                              | Cash paid for income taxes                          |                                  | $      | 11   |        |   |         |      |        |   |        |      |     



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VALERA PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS




|   |                                         
|-- | ----------------------------------------
|1. | Organization and Description of Business



| |                                               
| | ----------------------------------------------
| | Nature of Operations and Basis of Presentation











| |                    
| | -------------------
| | Reverse Stock Split





|   |                                                          
|-- | ---------------------------------------------------------
|2. | Basis of Presentation and Significant Accounting Policies



| |                 
| | ----------------
| | Use of estimates



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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                  
| | -----------------
| | Reclassifications





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                                   
| | ----------------------------------
| | Allowances for Accounts Receivable





| |          
| | ---------
| | Inventory





| |                
| | ---------------
| | Restricted Cash





| |                       
| | ----------------------
| | Property and Equipment







| |                                      
| | -------------------------------------
| | Deferred Offering and Financing Costs



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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                  
| | -----------------
| | Net Product Sales





| |          
| | ---------
| | Royalties





| |                         
| | ------------------------
| | Research and Development





| |                            
| | ---------------------------
| | Shipping and Handling Costs





| |                         
| | ------------------------
| | Stock-based Compensation





Black-Scholes


67



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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                                                                                                   |  |                         |        |   |      |   |         |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                                                   |  | Year Ended December 31, |       
|                                                                                                                   |  |                         |       
|                                                                                                                   |  | 2005                    |        |   | 2004 |   |         | 2003 | 
|                                                                                                                   |  |                         |        |   |      |   |         |      | 
|                                                                                                                   |  | (in thousands)          |       
|Net loss attributable to common shareholders as reported                                                           |  | $                       | (1,344 | ) |      | $ | (17,884 | )    |  | $ | (8,696 | )
|Add non-cash employee compensation as reported                                                                     |  |                         | (527   | ) |      |   | 3,104   |      |  |   |       |  
|Deduct total stock-based employee compensation expense
    determined under fair value based method for all awards |  |                         | (750   | ) |      |   | (302    | )    |  |   | (47    | )
|                                                                                                                   |  |                         |        |   |      |   |         |      | 
|SFAS 123 pro forma net loss attributable to common
    shareholders                                                |  | $                       | (2,621 | ) |      | $ | (15,082 | )    |  | $ | (8,743 | )
|                                                                                                                   |  |                         |        |   |      |   |         |      | 
|Basic and diluted net loss attributable to common shareholders
    per share, as reported                          |  | $                       | (0.81  | ) |      | $ | (10.73  | )    |  | $ | (5.22  | )
|                                                                                                                   |  |                         |        |   |      |   |         |      | 
|Basic and diluted net loss attributable to common shareholders
    per share, SFAS 123 pro forma                   |  | $                       | (1.57  | ) |      | $ | (9.05   | )    |  | $ | (5.25  | )
|                                                                                                                   |  |                         |        |   |      |   |         |      | 



|                          |  |                         |      |   |            |  |      |      |  |  |      |   |  |  |      |  
|------------------------- |  | ----------------------- | ---- | - | ---------- |  | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                          |  | Year Ended December 31, |     
|                          |  |                         |     
|                          |  | 2005                    |      |   |           
|                          |  |                         |      |   |           
|                          |  | Public                  |      |   | Non-Public |  |      | 2004 |  |  | 2003 |  
|                          |  |                         |      |   |            |  |      |      |  |  |      |  
|Risk-free interest rate   |  |                         | 4.27 | % |            |  | 3.90 | %    |  |  | 4.24 | % |  |  | 4.58 | %
|Dividend yield            |  |                         | 0    | % |            |  | 0    | %    |  |  | 0    | % |  |  | 0    | %
|Volatility                |  |                         | 61   | % |            |  | 0    | %    |  |  | 0    | % |  |  | 0    | %
|Expected lives (in years) |  |                         | 6.3  |   |            |  | 4.0  |      |  |  | 4.0  |   |  |  | 4.0  |  





| |                            
| | ---------------------------
| | Deferred Stock Compensation





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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






| |             
| | ------------
| | Income Taxes





| |                   
| | ------------------
| | Net Loss Per Share



|                                                                                                                       |  |                                          |        |   |      |   |         |      |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                                                       |  | Year Ended December 31,                  |       
|                                                                                                                       |  |                                          |       
|                                                                                                                       |  | 2005                                     |        |   | 2004 |   |         | 2003 | 
|                                                                                                                       |  |                                          |        |   |      |   |         |      | 
|                                                                                                                       |  | (In thousands, except per share amounts) |       
|Numerator:                                                                                                             |  |                                          |        |   |      |   |         |      |  |   |        |  
|Net loss                                                                                                               |  | $                                        | (1,344 | ) |      | $ | (12,023 | )    |  | $ | (7,557 | )
|Deemed dividend                                                                                                        |  |                                          |       |   |      |   | (5,861  | )    |  |   | (1,139 | )
|                                                                                                                       |  |                                          |        |   |      |   |         |      | 
|Numerator for basic and diluted net loss attributable to common
    shareholders per share                             |  | $                                        | (1,344 | ) |      | $ | (17,884 | )    |  | $ | (8,696 | )
|                                                                                                                       |  |                                          |        |   |      |   |         |      | 
|Denominator:                                                                                                           |  |                                          |        |   |      |   |         |      |  |   |        |  
|Denominator for basic and diluted net loss attributable to
    common shareholders per share  weighted-average shares |  |                                          | 1,667  |   |      |   | 1,667   |      |  |   | 1,667  |  
|                                                                                                                       |  |                                          |        |   |      |   |         |      | 
|Basic and diluted net loss attributable to common shareholders
    per share                                           |  | $                                        | (0.81  | ) |      | $ | (10.73  | )    |  | $ | (5.22  | )
|                                                                                                                       |  |                                          |        |   |      |   |         |      | 



| |                  
| | -----------------
| | Long-lived Assets



69



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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                    
| | -------------------
| | Concentration Risks









| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                    
| | -------------------
| | Revenue Recognition





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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


|                                                  |  |                |     |   |            |   |        |       |  |   |        |  
|------------------------------------------------- |  | -------------- | --- | - | ---------- | - | ------ | ----- |  | - | ------ | -
|                                                  |  | Distributors   |     |   | Physicians |   |        | Total | 
|                                                  |  |                |     |   |            |   |        |       | 
|                                                  |  | (In thousands) |    
|Balance at 12/31/2003                             |  |                |    |   |            |   |       |       |  |   |       |  
|Provision related to sales made in current period |  | $              | 28  |   |            | $ | 370    |       |  | $ | 398    |  
|Provision related to sales made in prior periods  |  |                |    |   |            |   |       |       |  |   |       |  
|Returns and adjustments                           |  |                |    |   |            |   | (54    | )     |  |   | (54    | )
|                                                  |  |                |     |   |            |   |        |       | 
|Balance at 12/31/2004                             |  |                | 28  |   |            |   | 316    |       |  |   | 344    |  
|Provision related to sales made in current period |  |                | 20  |   |            |   | 2,175  |       |  |   | 2,195  |  
|Provision related to sales made in prior periods  |  |                |    |   |            |   |       |       |  |   |       |  
|Returns and adjustments                           |  |                | (29 | ) |            |   | (2,171 | )     |  |   | (2,200 | )
|                                                  |  |                |     |   |            |   |        |       | 
|Balance at 12/31/2005                             |  | $              | 19  |   |            | $ | 320    |       |  | $ | 339    |  
|                                                  |  |                |     |   |            |   |        |       | 



| |                            
| | ---------------------------
| | Customer Sales  Urologists





| |                                   
| | ----------------------------------
| | Customer Sales  Distributor Sales





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##### Table of Contents



VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


Preferred Stock
Dividends


98-5 00-27.




| |                                          
| | -----------------------------------------
| | Recently Issued Accounting Pronouncements



non-public non-public


Accounting
Changes and Error Corrections Accounting Changes Reporting Accounting Changes in Interim Financial
Statements


Inventory Costs  an Amendment of ARB No. 43,
Chapter 4


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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|   |          
|-- | ---------
|3. | Inventory



|                |  |                |       |  |      |   |       | 
|--------------- |  | -------------- | ----- |  | ---- | - | ----- | 
|                |  | December 31,   |      
|                |  |                |      
|                |  | 2005           |       |  | 2004 |  
|                |  |                |       |  |      |  
|                |  | (In thousands) |      
|Raw Materials   |  | $              | 463   |  |      | $ | 708   | 
|Work in process |  |                | 2,426 |  |      |   | 597   | 
|Finished goods  |  |                | 302   |  |      |   | 60    | 
|                |  |                |       |  |      |  
|                |  | $              | 3,191 |  |      | $ | 1,365 | 
|                |  |                |       |  |      |  





|   |                       
|-- | ----------------------
|4. | Property and Equipment



|                                               |  |              |            |                |      |   |        |      |  |   |       |  
|---------------------------------------------- |  | ------------ | ---------- | -------------- | ---- | - | ------ | ---- |  | - | ----- | -
|                                               |  |              |            | December 31,   |     
|                                               |  |              |            |                |     
|                                               |  | Useful Lives |            |                | 2005 |   |        | 2004 | 
|                                               |  |              |            |                |      |   |        |      | 
|                                               |  |              |            | (In thousands) |     
|Laboratory equipment                           |  |              | 5 years    |                |      | $ | 1,531  |      |  | $ | 1,390 |  
|Furniture and fixtures                         |  |              | 7 years    |                |      |   | 161    |      |  |   | 60    |  
|Office equipment                               |  |              | 5 years    |                |      |   | 108    |      |  |   | 42    |  
|Computer equipment                             |  |              | 3 years    |                |      |   | 417    |      |  |   | 326   |  
|Computer software                              |  |              | 3 years    |                |      |   | 200    |      |  |   | 159   |  
|Construction in process                        |  |              |            |                |      |   | 2,526  |      |  |   |      |  
|Leasehold improvements                         |  |              | 1-10 years |                |      |   | 625    |      |  |   | 599   |  
|                                               |  |              |            |                |      |   |        |      | 
|                                               |  |              |            |                |      |   | 5,568  |      |  |   | 2,576 |  
|Less accumulated depreciation and amortization |  |              |            |                |      |   | (1,374 | )    |  |   | (872  | )
|                                               |  |              |            |                |      |   |        |      | 
|Fixed assets, net                              |  |              |            |                |      | $ | 4,194  |      |  | $ | 1,704 |  
|                                               |  |              |            |                |      |   |        |      | 



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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|   |                    
|-- | -------------------
|5. | Accrued Liabilities



|                                          |  |                |       |  |      |   |       | 
|----------------------------------------- |  | -------------- | ----- |  | ---- | - | ----- | 
|                                          |  | December 31,   |      
|                                          |  |                |      
|                                          |  | 2005           |       |  | 2004 |  
|                                          |  |                |       |  |      |  
|                                          |  | (In thousands) |      
|Accrued royalties                         |  | $              | 396   |  |      | $ | 307   | 
|Accrual for sales returns and adjustments |  |                | 339   |  |      |   | 344   | 
|Accrued auditing fees                     |  |                | 251   |  |      |   | 133   | 
|Accrued distributor chargebacks           |  |                | 621   |  |      |   |      | 
|Accrued legal fees                        |  |                | 769   |  |      |   | 20    | 
|Accrued marketing expenses                |  |                | 316   |  |      |   | 25    | 
|Accrued compensation, bonus and benefits  |  |                | 587   |  |      |   | 411   | 
|Accrued commissions                       |  |                | 451   |  |      |   | 246   | 
|Accrued printing fees                     |  |                | 254   |  |      |   |      | 
|Accrued income taxes                      |  |                | 75    |  |      |   |      | 
|Accrued clinical fees                     |  |                | 312   |  |      |   |      | 
|Accrued other                             |  |                | 236   |  |      |   | 66    | 
|                                          |  |                |       |  |      |  
|                                          |  | $              | 4,607 |  |      | $ | 1,552 | 
|                                          |  |                |       |  |      |  



|   |                          
|-- | -------------------------
|6. | Capital Lease Obligations



|                                           |      |   |    |    | 
|------------------------------------------ | ---- | - | -- | -- | 
|                                           | 2006 |   | $  | 19 | 
|                                           |      |   |   
|Total minimum lease payments               |      |   | 19 |   
|Less amount representing interest payments |      |   | 1  |   
|                                           |      |   |   
|Present value of minimum lease payments    |      | $ | 18 |   
|                                           |      |   |   

7.     Credit Line Agreement


one-month


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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|   |            
|-- | -----------
|8. | Commitments



|                         |            |  |   |       | 
|------------------------ | ---------- |  | - | ----- | 
|Year ending December 31: |            |  |   |      
|                         | 2006       |  | $ | 1,342 | 
|                         | 2007       |  |   | 1,319 | 
|                         | 2008       |  |   | 1,319 | 
|                         | 2009       |  |   | 1,315 | 
|                         | 2010       |  |   | 1,399 | 
|                         | Thereafter |  |   | 6,306 | 





9.     Capitalization




| |                    
| | -------------------
| | Reverse Stock Split





| |             
| | ------------
| | Common Stock





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##### Table of Contents



VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








| |                            
| | ---------------------------
| | Convertible Preferred Stock





| |       
| | ------
| | Voting





| |          
| | ---------
| | Dividends



360-day




| |            
| | -----------
| | Liquidation



76



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##### Table of Contents



VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






| |           
| | ----------
| | Conversion







|         |  |            |        |  |             |  |        |             |  |   |              |  |  |           |       |  |  |   |       | 
|-------- |  | ---------- | ------ |  | ----------- |  | ------ | ----------- |  | - | ------------ |  |  | --------- | ----- |  |  | - | ----- | 
|         |  |            |        |  |             |  |        | Shares      |  |   | Undeclared   | 
|         |  | Authorized |        |  | Issued and  |  |        | Liquidation |  |   | Reserved for |  |  | Accrued   |      
|         |  | Shares     |        |  | Outstanding |  |        | Preference  |  |   | Conversion   |  |  | Dividends |      
|         |  |            |        |  |             |  |        |             |  |   |              |  |  |           |      
|Series A |  |            | 7,000  |  |             |  | 7,000  |             |  | $ | 7,598        |  |  |           | 2,533 |  |  | $ | 598   | 
|Series B |  |            | 24,500 |  |             |  | 22,069 |             |  |   | 20,221       |  |  |           | 4,649 |  |  |   | 4,221 | 
|Series C |  |            | 11,600 |  |             |  | 11,600 |             |  |   | 12,590       |  |  |           | 2,098 |  |  |   | 990   | 
|         |  |            |        |  |             |  |        |             |  |   |              |  |  |           |      
|         |  |            | 43,100 |  |             |  | 40,669 |             |  | $ | 40,409       |  |  |           | 9,280 |  |  | $ | 5,809 | 
|         |  |            |        |  |             |  |        |             |  |   |              |  |  |           |      

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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






|    |              
|--- | -------------
|10. | Stock Options









|                                 |           |         |           |         |                |  |   |       | 
|-------------------------------- | --------- | ------- | --------- | ------- | -------------- |  | - | ----- | 
|                                 |           | Common  |           |         | Weighted-      | 
|                                 |           | Stock   |           |         | Average        | 
|                                 |           | Options |           |         | Exercise Price | 
|                                 |           |         |           |         |                | 
|Outstanding at December 31, 2002 |           |         | 286,750   |         |                |  |   |      
|                                 | Granted   |         |           | 489,276 |                |  | $ | 3.00  | 
|                                 | Exercised |         |           |        |                |  |   |       | 
|                                 | Forfeited |         |           | (3,833  | )              |  | $ | 3.00  | 
|                                 |           |         |           |         |                | 
|Outstanding at December 31, 2003 |           |         | 772,193   |         |                |  |   |      
|                                 | Granted   |         |           | 353,832 |                |  | $ | 3.00  | 
|                                 | Exercised |         |           |        |                |  |   |       | 
|                                 | Forfeited |         |           | (6,600  | )              |  | $ | 3.00  | 
|                                 |           |         |           |         |                | 
|Outstanding at December 31, 2004 |           |         | 1,119,425 |         |                |  |   |      
|                                 | Granted   |         |           | 193,594 |                |  | $ | 11.55 | 
|                                 | Exercised |         |           | (417    | )              |  | $ | 3.00  | 
|                                 | Forfeited |         |           | (46,753 | )              |  | $ | 4.45  | 
|                                 |           |         |           |         |                | 
|Outstanding at December 31, 2005 |           |         | 1,265,849 |         |                |  |   |      
|                                 |           |         |           |         |                | 

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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                |  |              |         |  |      |   |         |      |  |   |         | 
|------------------------------- |  | ------------ | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                                |  | December 31, |        
|                                |  |              |        
|                                |  | 2003         |         |  | 2004 |   |         | 2005 | 
|                                |  |              |         |  |      |   |         |      | 
|Vested Stock Options            |  |              | 141,464 |  |      |   | 334,164 |      |  |   | 605,032 | 
|Weighted average exercise price |  | $            | 3.00    |  |      | $ | 3.00    |      |  | $ | 3.11    | 



|         |       |  |             |  |           |           |         |  |                  |         |  |          |     |  |  |   |       | 
|-------- | ----- |  | ----------- |  | --------- | --------- | ------- |  | ---------------- | ------- |  | -------- | --- |  |  | - | ----- | 
|         |       |  |             |  |           | Weighted- |         |  | Weighted-        |        
|Range of |       |  |             |  |           |           | Average |  |                  | Average | 
|Exercise |       |  | Options     |  |           | Options   |         |  | Remaining        |         |  | Exercise |    
|Prices   |       |  | Outstanding |  |           | Vested    |         |  | Contractual Life |         |  | Price    |    
|         |       |  |             |  |           |           |         |  |                  |         |  |          |    
|$        | 3.00  |  |             |  | 1,081,007 |           |         |  | 597,532          |         |  |          | 7.9 |  |  | $ | 3.00  | 
|$        | 6.00  |  |             |  | 12,666    |           |         |  |                 |         |  |          | 9.1 |  |  | $ | 6.00  | 
|$        | 12.00 |  |             |  | 172,176   |           |         |  | 7,500            |         |  |          | 9.6 |  |  | $ | 12.00 | 





96-18




|                                 |  |         |         |  |                |   |          |            |  |          |                 |  |  |   |       | 
|-------------------------------- |  | ------- | ------- |  | -------------- | - | -------- | ---------- |  | -------- | --------------- |  |  | - | ----- | 
|                                 |  | Number  |         |  |                |   | Weighted |            |  | Weighted |                
|                                 |  | of      |         |  | Weighted       |   |          | Average    |  |          | Average         | 
|                                 |  | Options |         |  | Average        |   |          | Fair Value |  |          | Intrinsic Value | 
|Grants Made During Quarter Ended |  | Granted |         |  | Exercise Price |   |          | per Share  |  |          | per Share       | 
|                                 |  |         |         |  |                |   |          |            |  |          |                 | 
|March 31, 2005                   |  |         | 14,499  |  |                | $ | 6.00     |            |  | $        | 16.20           |  |  | $ | 10.20 | 
|June 30, 2005                    |  |         | 143,594 |  |                | $ | 12.00    |            |  | $        | 12.00           |  |  | $ |      | 
|September 30, 2005               |  |         | 4,334   |  |                | $ | 12.00    |            |  | $        | 12.00           |  |  | $ |      | 
|December 31, 2005                |  |         | 31,167  |  |                | $ | 12.00    |            |  | $        | 12.00           |  |  | $ |      | 



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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|    |             
|--- | ------------
|11. | Income Taxes



|                                            |                                          |                |         |       |      |   |         |       | 
|------------------------------------------- | ---------------------------------------- | -------------- | ------- | ----- | ---- | - | ------- | ----- | 
|                                            |                                          | December 31,   |        
|                                            |                                          |                |        
|                                            |                                          | 2005           |         |       | 2004 |  
|                                            |                                          |                |         |       |      |  
|                                            |                                          | (in thousands) |        
|Deferred tax assets:                        |                                          |                |         |       |      |   |         |      
|                                            | Net operating loss carryforwards         |                | $       | 7,770 |      |   | $       | 8,050 | 
|                                            | Research and development credits         |                |         | 1,423 |      |   |         | 1,131 | 
|                                            | Stock-based compensation                 |                |         | 904   |      |   |         | 1,085 | 
|                                            | Amortization of stock-based compensation |                |         | 126   |      |   |         | 156   | 
|                                            | Non-employee stock compensation          |                |         | 87    |      |   |         | 22    | 
|                                            | Other                                    |                |         | 1,049 |      |   |         | 353   | 
|                                            |                                          |                |         |       |      |  
|Total gross deferred tax assets             |                                          |                | 11,359  |       |      |   | 10,797  |      
|Deferred tax liabilities:                   |                                          |                |         |       |      |   |         |      
|                                            | Depreciation and amortization            |                |         | 134   |      |   |         | 151   | 
|                                            |                                          |                |         |       |      |  
|Total gross deferred tax liabilities        |                                          |                | 134     |       |      |   | 151     |      
|Valuation allowance for deferred tax assets |                                          |                | (11,225 | )     |      |   | (10,646 | )    
|                                            |                                          |                |         |       |      |  
|Net deferred tax assets                     |                                          | $              |        |       |      | $ |        |      
|                                            |                                          |                |         |       |      |  





|        |  |                |    |  |      |   |      |      |  |   |   | 
|------- |  | -------------- | -- |  | ---- | - | ---- | ---- |  | - | - | 
|        |  | For the Year  
|        |  | December 31,  
|        |  |               
|        |  | 2005           |    |  | 2004 |   |      | 2003
|        |  |                |    |  |      |   |      |     
|        |  | (in thousands)
|Federal |  | $              | 20 |  |      | $ |     |      |  | $ |  | 
|State   |  |                | 55 |  |      |   | (243 | )    |  |   |  | 
|        |  |                |    |  |      |   |      |      | 
|Total   |  | $              | 75 |  |      | $ | (243 | )    |  | $ |  | 
|        |  |                |    |  |      |   |      |      | 



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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






|                                                          |  |              |     |    |      |  |     |      |  |  |     |   
|--------------------------------------------------------- |  | ------------ | --- | -- | ---- |  | --- | ---- |  |  | --- | --
|                                                          |  | December 31, |    
|                                                          |  |              |    
|                                                          |  | 2005         |     |    | 2004 |  |     | 2003 | 
|                                                          |  |              |     |    |      |  |     |      | 
|Statutory rate                                            |  |              | (34 | )% |      |  | (34 | )%   |  |  | (34 | )%
|State and local income taxes (net of federal tax benefit) |  |              | (3  | )  |      |  | (6  | )    |  |  | (6  | ) 
|Research and development tax credits                      |  |              | (11 | )  |      |  | (2  | )    |  |  | (4  | ) 
|Alternative minimum tax                                   |  |              | 2   |    |      |  |    |      |  |  |    |   
|Other permanent items                                     |  |              | 6   |    |      |  |    |      |  |  |    |   
|Change in valuation allowance                             |  |              | 46  |    |      |  | 42  |      |  |  | 44  |   
|                                                          |  |              |     |    |      |  |     |      | 
|                                                          |  |              | 6   | %  |      |  | 0   | %    |  |  | 0   | % 
|                                                          |  |              |     |    |      |  |     |      | 



|    |                           
|--- | --------------------------
|12. | Related Party Transactions









|    |                          
|--- | -------------------------
|13. | Defined Contribution Plan





|    |                       
|--- | ----------------------
|14. | Acquisition of Product





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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








|    |                                              
|--- | ---------------------------------------------
|15. | Selected Quarterly Financial Data (Unaudited)

|                                                                                   |  |                                          |       |  |         |   |        |              |  |   |             |   |  |   |        |  
|---------------------------------------------------------------------------------- |  | ---------------------------------------- | ----- |  | ------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------ | -
|                                                                                   |  | Quarter Ended                            |      
|                                                                                   |  |                                          |      
|                                                                                   |  | March 31                                 |       |  | June 30 |   |        | September 30 |  |   | December 31 |  
|                                                                                   |  |                                          |       |  |         |   |        |              |  |   |             |  
|                                                                                   |  | (In thousands, except per share amounts) |      
|2005                                                                               |  |                                          |       |  |         |   |        |              |  |   |             |   |  |   |        |  
|Total net revenue                                                                  |  | $                                        | 7,695 |  |         | $ | 10,286 |              |  | $ | 3,678       |   |  | $ | 5,173  |  
|Cost of product sales                                                              |  |                                          | 1,023 |  |         |   | 2,951  |              |  |   | 809         |   |  |   | 1,183  |  
|Total operating expenses                                                           |  |                                          | 5,972 |  |         |   | 8,777  |              |  |   | 6,805       |   |  |   | 6,596  |  
|Income (loss) from operations                                                      |  |                                          | 1,723 |  |         |   | 1,509  |              |  |   | (3,127      | ) |  |   | (1,423 | )
|Provision for income taxes                                                         |  |                                          | 160   |  |         |   | 140    |              |  |   | (300        | ) |  |   | 75     |  
|Net income (loss) attributable to common shareholders                              |  |                                          | 1,577 |  |         |   | 1,382  |              |  |   | (2,808      | ) |  |   | (1,495 | )
|Basic net income (loss) attributable to common shareholders per
    common share   |  | $                                        | 0.95  |  |         | $ | 0.83   |              |  | $ | (1.68       | ) |  | $ | (0.90  | )
|Diluted net income (loss) attributable to common shareholders
    per common share |  | $                                        | 0.14  |  |         | $ | 0.12   |              |  | $ | (1.68       | ) |  | $ | (0.90  | )

|                                                                                    |  |                                       |        |   |         |   |        |              |  |   |             |   |  |   |        |  
|----------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------ | -
|                                                                                    |  | Quarter Ended                         |       
|                                                                                    |  |                                       |       
|                                                                                    |  | March 31                              |        |   | June 30 |   |        | September 30 |  |   | December 31 |  
|                                                                                    |  |                                       |        |   |         |   |        |              |  |   |             |  
|                                                                                    |  | (In thousands, except per share data) |       
|2004                                                                                |  |                                       |        |   |         |   |        |              |  |   |             |   |  |   |        |  
|Total net revenue                                                                   |  | $                                     |       |   |         |   |       |              |  | $ | 135         |   |  | $ | 5,511  |  
|Cost of product sales                                                               |  |                                       |       |   |         |   |       |              |  |   |            |   |  |   | 608    |  
|Total operating expenses                                                            |  |                                       | 2,018  |   |         |   | 3,540  |              |  |   | 3,704       |   |  |   | 8,644  |  
|Loss from operations                                                                |  |                                       | (2,018 | ) |         |   | (3,540 | )            |  |   | (3,569      | ) |  |   | (3,133 | )
|Benefit for income taxes                                                            |  |                                       |       |   |         |   |       |              |  |   |            |   |  |   | 243    |  
|Net loss                                                                            |  |                                       | (2,016 | ) |         |   | (3,545 | )            |  |   | (3,568      | ) |  |   | (2,894 | )
|Net loss attributable to common shareholders                                        |  |                                       | (2,016 | ) |         |   | (3,641 | )            |  |   | (9,333      | ) |  |   | (2,894 | )
|Basic and diluted net loss attributable to common shareholders
    per common share |  | $                                     | (1.21  | ) |         | $ | (2.18  | )            |  | $ | (5.60       | ) |  | $ | (1.74  | )



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VALERA PHARMACEUTICALS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|    |                  
|--- | -----------------
|16. | Subsequent Events



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VALERA PHARMACEUTICALS, INC.





VALUATION AND QUALIFYING ACCOUNTS SCHEDULE


(in thousands)


|                                      |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |        | 
|------------------------------------- | --------------------------------------------------- | ------------ | - | ------ | ---------- |  | - | ---------- |  |  | ---------- | --- | ---------- | ------ | - | ----- |  |  | - | ------ | 
|                                      |                                                     | Balance at   |   |        | Charged to |  |   | Charged to |  |  |            |     | Balance at |       
|                                      |                                                     | Beginning of |   |        | Cost and   |  |   | Other      |  |  |            |     | End of     |       
|                                      |                                                     | Period       |   |        | Expenses   |  |   | Accounts   |  |  | Deductions |     |            | Period |  
|                                      |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |  
|For the year ended December 31, 2005: |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |       
|                                      | Allowance for Sales Returns and Adjustments         |              | $ | 344    |            |  | $ | 2,195      |  |  |            |    |            |        | $ | 2,200 |  |  | $ | 339    | 
|For the year ended December 31, 2004: |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |       
|                                      | Allowance for Sales Returns and Adjustments         |              |   |        |            |  |   | 398        |  |  |            |    |            |        |   | 54    |  |  |   | 344    | 
|For the year ended December 31, 2003: |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |       
|                                      | Allowance for Sales Returns and Adjustments         |              |   |       |            |  |   |           |  |  |            |    |            |        |   |      |  |  |   |       | 
|For the year ended December 31, 2005: |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |       
|                                      | Allowance for Doubtful Accounts and Cash Discounts  |              | $ | 91     |            |  | $ | 557        |  |  |            |    |            |        | $ | 263   |  |  | $ | 385    | 
|For the year ended December 31, 2004: |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |       
|                                      | Allowance for Doubtful Accounts and Cash Discounts  |              |   |       |            |  |   | 91         |  |  |            |    |            |        |   |      |  |  |   | 91     | 
|For the year ended December 31, 2003: |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |       
|                                      | Allowanced for Doubtful Accounts and Cash Discounts |              |   |       |            |  |   |           |  |  |            |    |            |        |   |      |  |  |   |       | 
|For the year ended December 31, 2005: |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |       
|                                      | Tax Valuation Allowance                             |              | $ | 10,646 |            |  | $ | 579        |  |  |            |    |            |        |   |      |  |  | $ | 11,225 | 
|For the year ended December 31, 2004: |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |       
|                                      | Tax Valuation Allowance                             |              |   | 5,733  |            |  |   | 4,913      |  |  |            |    |            |        |   |      |  |  |   | 10,646 | 
|For the year ended December 31, 2003: |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |       
|                                      | Tax Valuation Allowance                             |              |   | 2,521  |            |  |   | 3,212      |  |  |            |    |            |        |   |      |  |  |   | 5,733  | 
|For the year ended December 31, 2005: |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |       
|                                      | Inventory Valuation Reserve                         |              | $ | 91     |            |  | $ | 1,083      |  |  | $          | 138 |            |        | $ | 114   |  |  | $ | 1,198  | 
|For the year ended December 31, 2004: |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |       
|                                      | Inventory Valuation Reserve                         |              |   |       |            |  |   | 91         |  |  |            |    |            |        |   |      |  |  |   | 91     | 
|For the year ended December 31, 2003: |                                                     |              |   |        |            |  |   |            |  |  |            |     |            |        |   |       |  |  |   |       
|                                      | Inventory Valuation Reserve                         |              |   |       |            |  |   |           |  |  |            |    |            |        |   |      |  |  |   |       | 

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosures





|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures







|         |                  
|-------- | -----------------
|Item 9B. | Other Information






Part III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



|                        |  |     |    |  |          |                                                       
|----------------------- |  | --- | -- |  | -------- | ------------------------------------------------------
|Name                    |  | Age |    |  | Position
|                        |  |     |    |  |         
|David S. Tierney, M.D.  |  |     | 42 |  |          | President, Chief Executive Officer and Director       
|Andrew T. Drechsler     |  |     | 34 |  |          | Chief Financial Officer and Secretary                 
|Petr F. Kužma           |  |     | 62 |  |          | Vice President of Research and Development            
|Pete J. Perron          |  |     | 39 |  |          | Vice President of Sales                               
|Matthew L. Rue, III     |  |     | 55 |  |          | Vice President of Marketing and Commercial Development
|James C. Gale           |  |     | 56 |  |          | Chairman of the Board of Directors                    
|David R. Dantzker, M.D. |  |     | 62 |  |          | Director                                              
|Jerome Feldman          |  |     | 77 |  |          | Director                                              
|Hubert Huckel, M.D.     |  |     | 74 |  |          | Director                                              
|Jeffrey M. Krauss       |  |     | 49 |  |          | Director                                              
|Ogden R. Reid           |  |     | 80 |  |          | Director                                              
|Howard Silverman        |  |     | 70 |  |          | Director                                              
|John T. Spitznagel      |  |     | 64 |  |          | Director                                              

David S. Tierney, M.D.


85



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Andrew T. Drechsler


Petr F. Kužma e-Learning


Pete J. Perron


Matthew L. Rue, III


James C. Gale


86



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David R. Dantzker, M.D. Q-RNA,


Jerome I. Feldman


Hubert E. Huckel, M.D.


Jeffrey M. Krauss


Ogden R. Reid


Howard Silverman


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John T. Spitznagel


Board Composition






| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | our Class I directors are Mr. Feldman, Dr. Huckel
    and Mr. Reid;         
|
| |  | our Class II directors are Dr. Dantzker, Mr. Gale and
    Mr. Silverman; and
|
| |  | our Class III directors are Mr. Krauss, Mr. Spitznagel
    and Dr. Tierney. 



Appointment of Directors




Board Committees




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Audit Committee






| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | selecting independent auditors;                                                                                                                                                                                                                                                                   
|
| |  | reviewing the scope of the audit to be conducted by them and the
    results of their audit;                                                                                                                                                                                                      
|
| |  | approving non-audit services provided to us by the independent
    auditor;                                                                                                                                                                                                                       
|
| |  | reviewing the integrity, adequacy and effectiveness of our
    financial reporting process and internal controls; assessing our
    financial reporting practices, including the disclosures in our
    annual and quarterly reports and the accounting standards and
    principles followed; and
|
| |  | conducting other reviews relating to compliance by our employees
    with our policies and applicable laws.                                                                                                                                                                                       



Compensation Committee






| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | developing guidelines and reviewing the compensation and
    performance of our executive officers;                                                                            
|
| |  | setting the compensation of the chief executive officer and
    evaluating his performance based on corporate goals and
    objectives;                                        
|
| |  | making recommendations to the board of directors with respect to
    incentive compensation plans, equity-based plans and deferred
    compensation plans; and                 
|
| |  | reviewing director compensation levels and practices, and
    recommending, from time to time, changes in such compensation
    levels and practices to the board of directors.



Nominating and Corporate Governance Committee






Compensation Committee Interlocks and Insider
Participation




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Compensation of Directors




Code of Conduct


10-K. S-K




(609-235-3000).


90



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|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

10-K


Summary Compensation Table


|                            |                                 |             |      |                     |            |              |         |              |       |   |         |        |  |                 |        |        |  |   |       |       | 
|--------------------------- | ------------------------------- | ----------- | ---- | ------------------- | ---------- | ------------ | ------- | ------------ | ----- | - | ------- | ------ |  | --------------- | ------ | ------ |  | - | ----- | ----- | 
|                            |                                 |             |      |                     |            |              |         | Long-term    |       |   |        
|                            |                                 |             |      |                     |            | Compensation |         |              |      
|                            |                                 |             |      | Annual Compensation |            |              | Awards  |              |       |  
|                            |                                 |             |      |                     |            |              |         |              |       |  
|                            |                                 |             |      |                     |            | Shares       |         |              |      
|                            |                                 |             |      |                     |            | Underlying   |         |              | Other |  
|Name and Principal Position |                                 | Fiscal Year |      |                     | Salary ($) |              |         | Bonus ($)(1) |       |   | Options |        |  | Compensation(2) |       
|                            |                                 |             |      |                     |            |              |         |              |       |   |         |        |  |                 |       
|David S. Tierney, M.D.      |                                 |             | 2005 |                     |            | $            | 312,500 |              |       | $ | 117,188 |        |  |                 |       |        |  | $ | 7,000 |      
|                            | President and Chief Executive   |             |      | 2004                |            |              | $       | 287,500      |       |   | $       | 75,000 |  |                 |        | 79,167 |  |   | $     | 6,500 | 
|                            | Officer                         |             |      |                     |            |              |         |              |       |   |         |        |  |                 |        |        |  |   |       |       | 
|Andrew T. Drechsler(3)      |                                 |             | 2005 |                     |            | $            | 142,500 |              |       | $ | 42,577  |        |  |                 | 79,166 |        |  | $ |      |      
|                            | Chief Financial Officer         |             |      |                     |            |              |         |              |       |   |         |        |  |                 |        |        |  |   |       |       | 
|Petr F. Kužma               |                                 |             | 2005 |                     |            | $            | 156,327 |              |       | $ | 28,125  |        |  |                 |       |        |  | $ | 7,438 |      
|                            | Vice President of Research and  |             |      | 2004                |            |              | $       | 135,000      |       |   | $       | 20,000 |  |                 |        | 25,000 |  |   | $     | 4,801 | 
|                            | Development                     |             |      |                     |            |              |         |              |       |   |         |        |  |                 |        |        |  |   |       |       | 
|Pete J. Perron(4)           |                                 |             | 2005 |                     |            | $            | 186,667 |              |       | $ | 54,875  |        |  |                 | 6,667  |        |  | $ | 7,000 |      
|                            | Vice President of Sales         |             |      | 2004                |            |              | $       | 119,109      |       |   | $       | 30,000 |  |                 |        | 83,333 |  |   | $     |      | 
|Matthew L. Rue, III         |                                 |             | 2005 |                     |            | $            | 186,333 |              |       | $ | 54,875  |        |  |                 |       |        |  | $ | 8,800 |      
|                            | Vice President of Marketing and |             |      | 2004                |            |              | $       | 168,000      |       |   | $       | 25,000 |  |                 |        | 33,333 |  |   | $     | 6,324 | 
|                            | Commercial Development          |             |      |                     |            |              |         |              |       |   |         |        |  |                 |        |        |  |   |       |       | 






|    |                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------
|(1) | Bonus amounts represent the bonus earned in the year stated. The
    actual bonus payment was made in the subsequent year.
|   
|(2) | Such amounts represent matching contributions made by Valera
    under our 401(k) plan.                                   
|   
|(3) | Mr. Drechsler joined Valera in April 2005 at an annual salary of
    $190,000.                                            
|   
|(4) | Mr. Perron joined Valera in April 2004.                                                                                   

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Option Grants




|                       |  |                                      |        |            |                      |  |      |             |                  |                       |          |  |  |            |                        |             |       |  |           |        |  |   |         |  |  |   |         | 
|---------------------- |  | ------------------------------------ | ------ | ---------- | -------------------- |  | ---- | ----------- | ---------------- | --------------------- | -------- |  |  | ---------- | ---------------------- | ----------- | ----- |  | --------- | ------ |  | - | ------- |  |  | - | ------- | 
|                       |  | Option Grants in Last Fiscal Year(1) |        |            |                     
|                       |  |                                      |        |            | Potential Realizable | 
|                       |  |                                      |        | Percent of |                      |  |      |             | Value at Assumed |                      
|                       |  | Number of                            |        |            | Total                |  |      |             |                  | Annual Rates of Stock |         
|                       |  | Securities                           |        |            | Options              |  |      |             |                  | Fair Market           |          |  |  |            | Price Appreciation for |            
|                       |  | Underlying                           |        |            | Granted to           |  |      | Exercise or |                  |                       | Value on |  |  |            |                        | Option Term |      
|                       |  | Options                              |        |            | Employees            |  |      | Base Price  |                  |                       | Date of  |  |  | Expiration |                        |             |       | 
|Name                   |  | Granted                              |        |            | in 2005              |  |      | ($/share)   |                  |                       | Grant(2) |  |  | Date       |                        |             | 5%(3) |  |           | 10%(3) | 
|                       |  |                                      |        |            |                      |  |      |             |                  |                       |          |  |  |            |                        |             |       |  |           |        | 
|David S. Tierney, M.D. |  |                                      |       |            |                      |  |     | %           |                  | $                     |         |  |  | $          |                       |             |       |  |          |        |  |   |         |  |  |   |         | 
|Andrew T. Drechsler    |  |                                      | 79,166 |            |                      |  | 40.9 | %           |                  | $                     | 12.00    |  |  | $          | 12.00                  |             |       |  | 6/27/2015 |        |  | $ | 210,588 |  |  | $ | 898,045 | 
|Petr F. Kužma          |  |                                      |       |            |                      |  |     | %           |                  | $                     |         |  |  | $          |                       |             |       |  |          |        |  |   |         |  |  |   |         | 
|Pete J. Perron         |  |                                      | 6,667  |            |                      |  | 3.4  | %           |                  | $                     | 12.00    |  |  | $          | 12.00                  |             |       |  | 6/27/2015 |        |  | $ | 17,735  |  |  | $ | 75,628  | 
|Matthew L. Rue, III    |  |                                      |       |            |                      |  |     | %           |                  | $                     |         |  |  | $          |                       |             |       |  |          |        |  |   |         |  |  |   |         | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These options vest at a rate of 25% on each yearly anniversary
    of the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(2) | There was no public trading market for our common stock during
    2005. Accordingly, these prices represent the fair market value,
    as established by our board of directors, of our common stock on
    the date of grant of the options.                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(3) | Potential realizable values are computed by multiplying the
    number of shares of common stock subject to a given option by
    the initial public offering price of $9.00 per share
    assuming that the aggregate stock value derived from that
    calculation compounds at an annual 5% or 10% rate shown in the
    table for the entire ten-year term of the option and subtracting
    from that result the aggregate option exercise price. The 5% and
    10% assumed annual rates of stock appreciation are mandated by
    the rules of the SEC and do not reflect our estimate or
    projection of future stock price growth.

Aggregated Options Values at December 31, 2005


In-the


|                       |  |                        |         |                      |                         |  |         |             |  |   |               |  |  |   |           | 
|---------------------- |  | ---------------------- | ------- | -------------------- | ----------------------- |  | ------- | ----------- |  | - | ------------- |  |  | - | --------- | 
|                       |  |                        |         | Value of Unexercised |                        
|                       |  | Number of              |         |                      | In-the-money Options at | 
|                       |  | Unexercised Options at |         |                      | December 31, 2005       | 
|                       |  | December 31, 2005      |         |                      | ($)(1)                  | 
|                       |  |                        |         |                      |                         | 
|Name                   |  | Exercisable            |         |                      | Unexercisable           |  |         | Exercisable |  |   | Unexercisable | 
|                       |  |                        |         |                      |                         |  |         |             |  |   |               | 
|David S. Tierney, M.D. |  |                        | 294,793 |                      |                         |  | 167,707 |             |  | $ | 1,768,758     |  |  | $ | 1,006,242 | 
|Andrew T. Drechsler    |  |                        |        |                      |                         |  | 79,166  |             |  |   |              |  |  |   |          | 
|Petr F. Kužma          |  |                        | 43,751  |                      |                         |  | 39,583  |             |  |   | 262,506       |  |  |   | 237,498   | 
|Pete J. Perron         |  |                        | 20,834  |                      |                         |  | 69,166  |             |  |   | 125,004       |  |  |   | 374,994   | 
|Matthew L. Rue, III    |  |                        | 75,001  |                      |                         |  | 41,665  |             |  |   | 450,006       |  |  |   | 249,990   | 






|    |                                                                 
|--- | ----------------------------------------------------------------
|(1) | Based upon the initial public offering price of $9.00 per share.

Employment Agreements




92



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12-month 18-month






Change in Control Agreements




93



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Valera Pharmaceuticals, Inc. Equity Incentive Plan






| |   |                                       
| | - | --------------------------------------
| |  | restricted shares of our common stock;
|
| |  | incentive stock options;              
|
| |  | non-qualified stock options; or       
|
| |  | any combination of the foregoing.     



Number of shares of our
common stock available under our Equity Plan




Administration of our Equity
Plan






Restricted shares under our
Equity Plan




94



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| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | cause restrictions on all outstanding shares of restricted stock
    to lapse;                       
|
| |  | cancel restricted stock in exchange for shares of restricted
    stock of a successor corporation; or
|
| |  | redeem restricted shares for cash or other substitute
    consideration.                             

Stock options under our
Equity Plan










| |   |                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | cause outstanding options to become immediately and fully vested
    and exercisable;                                                                                                                                                                       
|
| |  | require that the grantees surrender their outstanding options in
    exchange for a payment by us of an amount equal to the amount by
    which the fair market value of the shares of stock subject to
    the option exceeds the option exercise price; or
|
| |  | cancel any outstanding option in exchange for an option to
    purchase common stock of any successor corporation.                                                                                                                                          



95



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401(k) plan




96



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|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters





| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | each person or entity who we know beneficially owns more than 5%
    of our outstanding common stock;
|
| |  | each of the named executive officers;                                                                
|
| |  | each of our directors; and                                                                           
|
| |  | all directors and named executive officers as a group.                                               





|                                                      |  |                    |           |                     |                   |  |               |             |  |  |      |  
|----------------------------------------------------- |  | ------------------ | --------- | ------------------- | ----------------- |  | ------------- | ----------- |  |  | ---- | -
|                                                      |  |                    |           | Options Exercisable |                   |  | Percentage of |            
|                                                      |  | Number of Shares   |           |                     | within 60 Days of |  |               | Shares      | 
|Name                                                  |  | Beneficially Owned |           |                     | March 1, 2006     |  |               | Outstanding | 
|                                                      |  |                    |           |                     |                   |  |               |             | 
|Five Percent Stockholders:                            |  |                    |           |                     |                   |  |               |             |  |  |      |  
|Sanders Morris Harris, Inc.(1)                        |  |                    | 5,453,730 |                     |                   |  | 3,750         |             |  |  | 36.6 | %
|MXL Industries, Inc.(2)                               |  |                    | 2,070,670 |                     |                   |  |              |             |  |  | 13.9 | %
|Wheatley Partners(3)                                  |  |                    | 1,293,518 |                     |                   |  |              |             |  |  | 8.7  | %
|Wasatch Advisors Inc.                                 |  |                    | 1,000,000 |                     |                   |  |              |             |  |  | 6.7  | %
|Directors and Named Executive Officers:               |  |                    |           |                     |                   |  |               |             |  |  |      |  
|David S. Tierney, M.D.                                |  |                    | 300,293   |                     |                   |  | 294,793       |             |  |  | 2.0  | %
|Andrew T. Drechsler                                   |  |                    | 21,393    |                     |                   |  | 19,793        |             |  |  | *    |  
|Petr F. Kužma                                         |  |                    | 44,851    |                     |                   |  | 43,751        |             |  |  | *    |  
|Pete J. Perron                                        |  |                    | 21,334    |                     |                   |  | 20,834        |             |  |  | *    |  
|Matthew L. Rue, III                                   |  |                    | 75,001    |                     |                   |  | 75,001        |             |  |  | *    |  
|James C. Gale(4)                                      |  |                    | 5,456,439 |                     |                   |  | 6,459         |             |  |  | 36.6 | %
|David R. Dantzker, M.D.(5)                            |  |                    | 599,449   |                     |                   |  | 7,500         |             |  |  | 4.0  | %
|Jerome I. Feldman(6)                                  |  |                    | 2,074,420 |                     |                   |  | 3,750         |             |  |  | 13.9 | %
|Hubert Huckel, M.D.                                   |  |                    | 24,550    |                     |                   |  | 21,250        |             |  |  | *    |  
|Jeffrey M. Krauss(7)                                  |  |                    | 731,787   |                     |                   |  | 3,750         |             |  |  | 4.9  | %
|Ogden R. Reid                                         |  |                    | 25,703    |                     |                   |  | 25,703        |             |  |  | *    |  
|Howard Silverman                                      |  |                    | 7,500     |                     |                   |  | 7,500         |             |  |  | *    |  
|John T. Spitznagel                                    |  |                    | 21,250    |                     |                   |  | 21,250        |             |  |  | *    |  
|All Directors and Named Executive Officers as a group |  |                    | 9,403,970 |                     |                   |  | 551,334       |             |  |  | 60.9 | %






|    |                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Less than 1%.                                                                                                                                                                                
|   
|(1) | Represents shares held by SMH Hydro Med, LLC, SMH Hydro
    Med II, LLC, SMH Valera, LLC, Corporate Opportunities Fund,
    L.P., by Corporate Opportunities Fund (Institutional), L.P., Life

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Sciences Opportunities Fund, L.P., Life Sciences Opportunities
    Fund (Institutional), L.P., each an affiliate of Sanders Morris
    Harris, Inc., or SMH. Mr. Gale has sole voting and dispositive
    power over the shares held by Sanders Morris Harris Inc. The
    address for Sanders Morris Harris, Inc. is
    3100 JP Morgan Chase Tower, 600 Travis,
    Suite 3100, Houston, TX 77002.                                                                                                                                                                                                                                                                                                                                                                            
|   
|(2) | MXL Industries, Inc. is a wholly-owned subsidiary of National
    Patent Development Corporation, a publicly held corporation.
    Mr. Feldman is the chairman of the board of directors and
    chief executive officer of National Patent Development
    Corporation. The address for MXL Industries, Inc. is
    777 Westchester Avenue, Fourth Floor, White Plains, NY
    10604.                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(3) | Represents shares held by Wheatley MedTech Partners, L.P.,
    Wheatley Partners III, L.P., Wheatley Associates III, L.P.,
    Wheatley Foreign Partners III, L.P., each an affiliate of
    Wheatley Partners. Mr. David Dantzker shares voting and
    dispositive power as to 591,949 shares held by Wheatley MedTech
    Partners, L.P. with Barry Rubenstein, Irwin Lieber, Barry
    Fingerhut, Jonathan Lieber, Seth Lieber, Nancy Casey and Brian
    Rubenstein. Barry Rubenstein, Irwin Lieber, Barry Fingerhut,
    Jonathan Lieber, Seth Lieber and Nancy Casey share voting and
    dispositive power over the remaining 701,569 shares held by
    the other Wheatley entities. The address for Wheatley Partners
    is 80 Cuttermill Road, Great Neck, NY 11021.
|   
|(4) | Includes 5,453,730 shares held by Sanders Morris Harris
    Inc. described in footnote 1 above. The number of options
    exercisable within 60 days of March 1, 2006 includes 3,750
    options held by affiliates of SMH. Mr. Gale is an affiliate
    of SMH and manages the funds described in footnote 1 above.
    Mr. Gale disclaims beneficial ownership of the
    5,453,730 shares held by SMH except to the extent of his
    pecuniary interest in the funds described in footnote 1
    above.                                                                                                                                                                                                                                                                     
|   
|(5) | Includes 591,949 shares held by Wheatley MedTech Partners,
    L.P. described in footnote 3 above. Dr. Dantzker is a
    voting member of Wheatley MedTech Partners LLC, the general
    partner of Wheatley MedTech Partners, L.P. Dr. Dantzker
    disclaims beneficial ownership of the 591,949 shares held
    by Wheatley MedTech Partners, L.P. except to the extent of his
    pecuniary interest in that fund.                                                                                                                                                                                                                                                                                                                                                          
|   
|(6) | Includes 2,070,670 shares held by MXL Industries, Inc.
    Mr. Feldman is the chairman of the board of directors and
    chief executive officer of National Patent Development
    Corporation, the parent of MXL Industries, Inc. Mr. Feldman
    disclaims beneficial ownership of the 2,070,670 shares held
    by MXL Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(7) | Includes 728,037 shares held by Psilos Group.
    Mr. Krauss is a managing director of Psilos Group.
    Mr. Krauss disclaims beneficial ownership of the
    728,037 shares held by Psilos Group, except to the extent
    of his pecuniary interest in the fund.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

98



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|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions



Loan from Our President and Chief Executive Officer




Preferred Stock Issuances




Appointment of Directors






99



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|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



|                   |  |      |     |  |      |   |     | 
|------------------ |  | ---- | --- |  | ---- | - | --- | 
|                   |  | 2005 |     |  | 2004 |  
|                   |  |      |     |  |      |  
|Audit Fees         |  | $    | 566 |  |      | $ | 144 | 
|Audit-Related Fees |  |      |    |  |      |   |    | 
|Tax Fees           |  |      |    |  |      |   |    | 
|All Other Fees     |  |      | 2   |  |      |   |    | 
|Total              |  | $    | 568 |  |      | $ | 144 | 

Audit Fees


Audit-Related Fees


Tax Fees


All Other Fees


Pre-approval Policy.





Part IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules



|        |   |         |  |                                                                                   
|------- | - | ------- |  | ----------------------------------------------------------------------------------
|Exhibit |   |        
|Number  |   | Exhibit
|        |   |        
|        | 3 | .1      |  | Amended and Restated Certificate of Incorporation(2)                              
|       
|        | 3 | .2      |  | Amended and Restated Bylaws(2)                                                    
|       
|        | 4 | .1      |  | Specimen Common Stock Certificate(2)                                              
|       
|        | 4 | .2      |  | Second Amended and Restated Investor Rights Agreement dated
    August 16, 2004(6)
|       
|        | 4 | .3      |  | Form of Incentive Stock Award Agreement(6)                                        
|       
|        | 4 | .4      |  | Form of Non-Qualified Stock Option Agreement(6)                                   

100



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|        |    |         |  |                                                                                                                                                                                        
|------- | -- | ------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        
|Number  |    | Exhibit
|        |    |        
|       
|        | 10 | .1      |  | Executive Employment Agreement between Valera Pharmaceuticals,
    Inc. and David S. Tierney dated September 16, 2003(6)                                                               
|       
|        | 10 | .2      |  | License and Distribution Agreement between Hydro Med Sciences,
    Inc. and Paladin Labs, Inc. dated October 3, 2002(5)                                                                
|       
|        | 10 | .3      |  | Investment Agreement between Hydro Med Sciences, Inc. and
    Paladin Labs, Inc. dated October 3, 2002(5)                                                                              
|       
|        | 10 | .4      |  | License and Distribution Agreement between Valera
    Pharmaceuticals, Inc. and Key Oncologics dated
    September 17, 2003(5)                                                         
|       
|        | 10 | .5      |  | Termination Agreement, License Back and Option between Hydro Med
    Sciences, Inc. and Shire US Inc. dated December 21,
    2001(6)                                                   
|       
|        | 10 | .6      |  | Termination of Agreement dated September 12, 1990 between
    National Patent Development Corporation and The Population
    Council, Inc. dated October 1, 1997(6)                    
|       
|        | 10 | .7      |  | Amendment to the Termination of the Joint Development Agreement
    between GP Strategies Corporation and The Population Council,
    Inc. dated November 29, 2001(6)                  
|       
|        | 10 | .8      |  | Amendment No. 2 to Termination Agreement between Valera
    Pharmaceuticals, Inc. and The Population Council, Inc. dated
    August 31, 2004(6)                                        
|       
|        | 10 | .9      |  | Lease Agreement between National Patent Development Corporation
    and Cedar Brook Corporate Center, L.P. dated October 6,
    1997(6)                                                
|       
|        | 10 | .10     |  | Amendment to Lease between Valera Pharmaceuticals, Inc. and
    Cedar Brook Corporate Center, L.P. dated January 7, 2004(6)                                                            
|       
|        | 10 | .11     |  | Lease Agreement between Valera Pharmaceuticals, Inc. and Cedar
    Brook 7 Corporate Center, L.P. dated March 8, 2005(6)                                                               
|       
|        | 10 | .12     |  | Contribution Agreement between Hydro Med Sciences, Inc. and GP
    Strategies Corporation dated June 30, 2000(6)                                                                       
|       
|        | 10 | .13     |  | License and Distribution Agreement between Valera
    Pharmaceuticals, Inc. and BioPro Pharmaceutical, Inc. dated
    January 28, 2005(6)                                              
|       
|        | 10 | .14     |  | Valera Pharmaceuticals, Inc. 2002 Equity Incentive Plan(6)                                                                                                                             
|       
|        | 10 | .15     |  | Group Purchasing Agreement between Valera Pharmaceuticals, Inc.
    and International Physician Networks, LLC dated as of
    March 21, 2005**(5)                                      
|       
|        | 10 | .16     |  | Group Purchasing Agreement between Valera Pharmaceuticals, Inc.
    and International Physician Networks, LLC (on behalf of
    U.S. Urology Practices) dated as of March 21, 2005**(5)
|       
|        | 10 | .17     |  | Agreement between National Patent Development Corporation and
    Dento-Med Industries, Inc. dated November 30, 1989(6)                                                                
|       
|        | 10 | .18     |  | Fee for Services Agreement between Valera Pharmaceuticals, Inc.
    and Besse Medical Supply dated as of March 21, 2005**(5)                                                           
|       
|        | 10 | .19     |  | Collaboration and Development Agreement between Valera
    Pharmaceuticals, Inc. and Alpex Pharma S.A. dated April 6,
    2005**(5)                                                    
|       
|        | 10 | .20     |  | Form of Change in Control Agreement with Executive Officers(4)                                                                                                                         
|       
|        | 10 | .21     |  | Asset Purchase Agreement between Valera Pharmaceuticals, Inc.
    and Anthra Pharmaceuticals, Inc. dated as of September 28,
    2005**(1)                                             
|       
|        | 10 | .22     |  | Credit Agreement between Valera Pharmaceuticals, Inc. and
    Merrill Lynch Capital dated October 20, 2005(3)                                                                          
|       
|        | 10 | .23     |  | Distribution Agreement between Valera Pharmaceuticals, Inc. and
    Teva-Tuteur dated December 9, 2005(3)                                                                              
|       
|        | 14 | .1      |  | Corporate Code of Business Conduct and Ethics*                                                                                                                                         
|       
|        | 21 | .1      |  | List of Subsidiary(4)                                                                                                                                                                  
|       
|        | 31 | .1      |  | Certificate of the Chief Executive Officer of Valera
    Pharmaceuticals, Inc. pursuant to Rule 13a-14(a) under the
    Securities Exchange Act of 1934.*                              

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|        |    |         |  |                                                                                                                                                                                                                   
|------- | -- | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        
|Number  |    | Exhibit
|        |    |        
|       
|        | 31 | .2      |  | Certificate of the Chief Financial Officer of Valera
    Pharmaceuticals, Inc. pursuant to Rule 13a-14(a) under the
    Securities Exchange Act of 1934.*                                                         
|       
|        | 32 |         |  | Certificate of the Chief Executive Officer and the Chief
    Financial Officer of Valera Pharmaceuticals, Inc. pursuant
    to Rule 13a-14(b) under the Securities Exchange Act of 1934 and
    18 U.S.C. § 1350.*






| |   |               
| | - | --------------
| | * | Filed herewith



|   |                                                                                      
|-- | -------------------------------------------------------------------------------------
|** | Portions omitted pursuant to a request for confidential
    treatment under Rule 406.



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Filed as an Exhibit to Amendment No. 6 to Registration
    Statement on
    Form S-1 (File
    No. 333-123288) filed on January 30, 2006.  
|   
|(2) | Filed as an Exhibit to Amendment No. 5 to Registration
    Statement on
    Form S-1 (File
    No. 333-123288) filed on January 17, 2006.  
|   
|(3) | Filed as an Exhibit to Amendment No. 4 to Registration
    Statement on
    Form S-1 (File
    No. 333-123288) filed on December 9, 2005.  
|   
|(4) | Filed as an Exhibit to Amendment No. 3 to Registration
    Statement on
    Form S-1 (File
    No. 333-123288) filed on September 29, 2005.
|   
|(5) | Filed as an Exhibit to Amendment No. 2 to Registration
    Statement on
    Form S-1 (File
    No. 333-123288) filed on April 20, 2005.    
|   
|(6) | Filed as an Exhibit to Registration Statement on
    Form S-1 (File
    No. 333-123288) filed on March 14, 2005.                           



10-K


102



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SIGNATURES






| |                             
| | ----------------------------
| | VALERA PHARMACEUTICALS, INC.



| |     |                        
| | --- | -----------------------
| | By: | /s/ Andrew T. Drechsler

| |                                     
| | ------------------------------------
| |                                     
| | Name:        Andrew T.
    Drechsler

| |        |                        
| | ------ | -----------------------
| | Title: | Chief Financial Officer



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

|                                                     |  |                                                                                            |  |                |  | 
|---------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | -------------- |  | 
|Signature                                            |  | Title                                                                                      |  |               
|                                                     |  |                                                                                            |  |               
|                                                     |  |                                                                                            |  | Date          
|                                                     |  |                                                                                            |  |               
|                                                    
|/s/ David S.
    Tierney, M.D.David S. Tierney, M.D. |  | President, Chief Executive Officer and Director (Principal
    Executive Officer)          |  | March 20, 2006
|                                                    
|/s/ Andrew T. DrechslerAndrew T. Drechsler           |  | Chief Financial Officer (Principal Financial Officer and
    Principal Accounting Officer) |  | March 20, 2006
|                                                    
|/s/ James C. GaleJames C. Gale                       |  | Chairman of the Board of Directors                                                         |  | March 20, 2006
|                                                    
|/s/ David
    Dantzker, M.D.David Dantzker, M.D.     |  | Director                                                                                   |  | March 20, 2006
|                                                    
|/s/ Jerome FeldmanJerome Feldman                     |  | Director                                                                                   |  | March 20, 2006
|                                                    
|/s/ Hubert
    Huckel, M.D.Hubert Huckel, M.D.       |  | Director                                                                                   |  | March 20, 2006
|                                                    
|/s/ Jeffrey KraussJeffrey Krauss                     |  | Director                                                                                   |  | March 20, 2006
|                                                    
|/s/ Ogden R. ReidOgden R. Reid                       |  | Director                                                                                   |  | March 20, 2006
|                                                    
|/s/ Howard SilvermanHoward Silverman                 |  | Director                                                                                   |  | March 20, 2006
|                                                    
|/s/ John T. SpitznagelJohn T. Spitznagel             |  | Director                                                                                   |  | March 20, 2006

103