**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





(Mark
      One)


xANNUAL
      REPORT PURSUANT
      TO SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      fiscal year ended December 31, 2006





OR





oTRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      transition period from ___________ to ____________





**Commission
      file number 000-49730**








**DOV
      PHARMACEUTICAL, INC.**


(Exact
      Name of Registrant as Specified in its Charter)




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




**150
      Pierce Street**


**Somerset,
      New Jersey 08873**


(Address
      of principal executive office)





**(732) 907-3600**


(Registrant’s
      telephone number, including area code)











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





Securities
      registered pursuant to Section 12 (g) of the Act:


Common
      Stock, $0.0001 par value





Indicate
      by check mark whether registrant (1) has filed all reports required to be filed
      by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
      preceding 12 months (or for such shorter period that registrant was required
      to
      file such reports), and (2) has been subject to such filing requirements for
      the
      past 90 days. Yes xNo o





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





Indicate
      by check mark whether registrant is an accelerated filer (as defined in Rule
      12b-2 of the Act). Yes oNo x





Indicate
      by check mark whether registrant is a “well-known seasoned issuer” (as defined
      in Rule 12b-2 of the Act). Yes oNo
x





Indicate
      by check mark whether registrant is filing SEC reports voluntarily. Yes oNo x





Indicate
      by check mark whether registrant is a “shell company” (as defined in Rule 12b-2
      of the Act). Yes oNo x





The
      aggregate market value of the voting stock held by non-affiliates of registrant
      as of June 30, 2006 totaled approximately $49.4 million based on the
      then-closing stock price as reported by The NASDAQ Global Market.





On
      March
      15, 2007,  there
      were 26,743,657 outstanding shares of registrant’s common stock, par value
      $0.0001 per share.










**DOV
      PHARMACEUTICAL, INC.**





**Form
      10-K**





**For
      the Year Ended December 31, 2006**





**Table
      of Contents**





**Page
                Number****PART
                1**Special
                Note Regarding Forward-Looking Statements
            
            3Special
                Note Regarding DOV Pharmaceutical, Inc.’s Common Stockand
                2.50% Convertible Subordinated Debentures due 2025
            
            3ITEM
                1.
            Business
            
            5ITEM
                1A.
            Risk
                Factors
            
            25ITEM
                1B.
            Unresolved
                Staff Comments
            
            37ITEM
                2.
            Properties
            
            37ITEM
                3.
            Legal
                Proceedings
            
            37ITEM
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            37**PART
                II**ITEM
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities
            
            37ITEM
                6.
            Selected
                Financial Data
            
            38ITEM
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            40ITEM
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            50ITEM
                8.
            Financial
                Statements and Supplementary Data
            
            50ITEM
                9.
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure
            
            50ITEM
                9A.
            Controls
                and Procedures
            
            50ITEM
                9B.
            Other
                Information
            
            51**PART
                III**ITEM
                10.
            Directors
                and Executive Officers and Corporate Governance
            
            51ITEM
                11.
            Executive
                Compensation
            
            56ITEM
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            70ITEM
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            74ITEM
                14.
            Principal
                Accountant Fees and Services
            
            75**PART
                IV**ITEM
                15.
            Exhibits
                and Financial Statement Schedules
            
            76Signatures
            
            82





2


**PART
      I**





**Special
      Note Regarding Forward-Looking Statements**





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





·
            raise
                substantial additional capital in order to fund
                operations;





·
            pursue
                and receive stockholder approval of the increase in authorized common
                stock;





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





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





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





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





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





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





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





You
      should refer to the “Item
      1A.
      Risk Factors” for
      a
      detailed discussion of some of the factors that may cause our actual results
      to
      differ materially from our forward-looking statements. We qualify all our
      forward-looking statements by these cautionary statements. There may also be
      other factors that may materially affect our forward-looking statements and
      our
      future results. As a result of the foregoing, readers should not place undue
      reliance on our forward-looking statements. We undertake no obligation and
      do
      not intend to update any forward-looking statement.




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


**and
      2.50% Convertible Subordinated Debentures due 2025 (the
“Debentures”)**





Effective
      at the opening of business on October 27, 2006, trading in our common stock
      on
      The NASDAQ Stock Market, Inc.’s Global Market, or The NASDAQ Global Market, was
      suspended and our common stock was delisted from The NASDAQ Global Market
      because we did not meet the aggregate market value of listed securities
      requirement of Marketplace Rule 4450(b)(1)(A). The
      delisting of our common stock from The NASDAQ Global Market constituted a
“fundamental change” under that certain Indenture, dated as of December 22,
      2004, by and between DOV Pharmaceutical, Inc., as Issuer, and Wells Fargo Bank,
      National Association, as Trustee, which governs the terms of our 2.50%
      Convertible Subordinated Debentures due 2025. As a result, we were obligated
      to
      make an Offer to Repurchase to all holders of the Debentures under the Indenture
      at a price of $1,012.50 per $1,000 principal amount, representing such principal
      amount plus $12.50 of accrued but unpaid interest thereon.


3


The
      Offer
      to Repurchase expired at 5:00 p.m., New York City time, on January 2, 2007.
      Through the expiration of the Offer to Repurchase, we received tenders of
      Debentures in the aggregate principal amount of $67.8 million, representing
      approximately 96.9% of the $70.0 million in aggregate principal amount of
      outstanding Debentures. Upon the expiration of the Offer to Repurchase, we
      did
      not have the funds necessary to pay the aggregate purchase price of
      approximately $68.7 million for the Debentures that were tendered. As a result,
      no Debentures were accepted for payment by us in connection with the Offer
      to
      Repurchase. Our failure to pay for the Debentures tendered to us for repurchase
      in the Offer to Repurchase constituted an “event of default” under the
      Indenture.





We
      retained Houlihan Lokey Howard & Zukin Capital, Inc. to serve as our
      financial advisor to assist with our evaluation of strategic alternatives and
      restructuring efforts with respect to the Debentures. In January 2007, we
      entered into a Restructuring Support Agreement **** with
      certain members of an ad hoc committee of holders of our Debentures regarding
      a
      consensual restructuring of our obligations under the Debentures. Holders of
      the
      Debentures who beneficially owned approximately 88% in principal amount of
      the
      outstanding Debentures agreed to tender their Debentures in the Exchange Offer
      described below and agreed not to take any actions or exercise any remedies
      relating to our failure to repurchase the Debentures pursuant to the Offer
      to
      Repurchase, unless we commenced any bankruptcy or similar proceeding or such
      a
      proceeding was commenced against us or the Restructuring Support Agreement
      was
      terminated for any other reason under the terms of the Restructuring Support
      Agreement.





On
      January 29, 2007, we offered (the “Exchange Offer”) to exchange 8 shares of a
      new series of convertible preferred stock, par value $1.00 per share and
      liquidation preference $100 per share (the “new series C convertible preferred
      stock”), plus a cash payment of $212.50 for each $1,000 in principal amount of
      our outstanding Debentures. We also offered as an alternative to the 8 shares
      of
      new series C convertible preferred stock to exchange 8 shares of an alternative
      new series of convertible preferred stock, par value $1.00 per share with no
      fixed liquidation preference (the “alternative series D convertible preferred
      stock”). The cash payment and shares of the new series C convertible preferred
      stock or, if chosen, the alternative series D convertible preferred stock,
      was
      offered in full satisfaction of the principal amount of, and any accrued but
      unpaid interest through the consummation of the Exchange Offer on, the
      Debentures so tendered and accepted.





The
      Exchange Offer was consummated on March 15, 2007. Pursuant to the Exchange
      Offer, we made a cash payment of $14.3 million and issued 439,784 shares of
      our
      new series C convertible preferred stock and 100,000 shares of our alternative
      series D convertible preferred stock in exchange for $67.5 million in principal
      amount of Debentures. Additionally, the $2.5 million in principal amount of
      Debentures that remained outstanding after the consummation of the Exchange
      Offer was recently accelerated by the majority holder of such Debentures in
      accordance with the Indenture governing the Debentures and, on March 29, 2007,
      we repaid such Debentures at par plus accrued interest. In addition, we will
      distribute to holders of our common stock as of a date to be determined by
      our
      board of directors, and in any event prior to July 1, 2007, in one or more
      distributions or other transactions, warrants to purchase 30 million shares
      of
      our common stock. The exercise price will be approximately $0.523 per share.
      The
      warrants will be exercisable on and after July 1, 2007 until December 31,
      2009.


4


**ITEM
      I. BUSINESS**





**OVERVIEW**





We
      are a
      biopharmaceutical company focused on the discovery, acquisition and development
      of novel drug candidates for central nervous system, or CNS, disorders. We
      have
      active drug development programs that are at the preclinical, Phase I and Phase
      II clinical stages, including DOV 21,947 (entering Phase II for depression),
      DOV
      102,677 (Phase I for alcohol abuse) and an active preclinical discovery program
      in reuptake inhibitors and GABA modulators. We have entered into a sublicensing
      agreement with Neurocrine Biosciences, Inc., or Neurocrine, for indiplon for
      the
      treatment of insomnia and with XTL
      Development, Inc., or XTL, for
      bicifadine for the treatment of pain. We are seeking a partner for DOV diltiazem
      for the treatment of angina and hypertension.





DOV
      21,947, our lead product candidate for depression, is a triple reuptake
      inhibitor (serotonin, norepinephrine and dopamine inhibitor), or TRI. We intend
      to initiate a 300-patient Phase II clinical trial in July of 2007. DOV
      21,947 is related to DOV 216,303, another of our TRIs. In 2005, we announced statistically
      significant efficacy results from a Phase II clinical trial with DOV 216,303
      for
      the treatment of depression. DOV 102,677 is another of our TRIs, for which
      the
      next study will be a Phase I clinical trial in normal volunteers and may be
      initiated in late 2007 if appropriate funding is available.




Our
      reuptake inhibitor platforms, including TRIs, NEDs (norepinephrine and dopamine
      reuptake inhibitors), SADs (serotonin and dopamine reuptake inhibitors), and
      SNRIs (serotonin and norepinephrine reuptake inhibitors) can be tailored to
      create compounds that are able to treat a wide variety of neuropsychiatric
      disorders ranging from depression and attention deficit hyperactivity disorder
      to pain and obesity.  We have molecules belonging to each of these classes
      in various stages of preclinical development. We
      intend to select a triple reuptake inhibitor development candidate from our
      preclinical pipeline in 2007 and file an IND for the selected compound with
      the
      FDA in early 2008.




The
      primary objective of our GABA modulator program is the development of a molecule
      producing a robust anti-anxiety action without the side effects associated
      with
      benzodiazepines such as diazepam (Valium®).  Molecules fitting this profile
      are in various stages of preclinical development.  Further, GABA modulators
      also have proven utility as sedative-hypnotics, anticonvulsants, and muscle
      relaxants, and we have discovered several unique structural platforms that
      may
      be developed for these indications.




Indiplon
      has consistently demonstrated decreased time to sleep onset, improved measures
      of sleep maintenance and duration and improved sleep quality with no next day
      impairment in over 70 clinical trials involving nearly 8,000 patients.
      Neurocrine has announced that it plans to resubmit its New Drug Application
      (NDA) for indiplon capsules by the end of the second quarter of 2007.





Bicifadine has
      been
      shown to be effective in treating pain in three placebo-controlled efficacy
      trials in more than 1,600 patients with acute post-surgical pain.  We have
      also conducted three Phase III clinical trials of bicifadine in chronic low
      back
      pain (CLBP) and one Phase II trial of bicifadine in osteoarthritis. 
Bicifadine has demonstrated an attractive safety profile in short- and long-term
      safety studies involving more than 3,000 patients.  Also, we have completed
      lifetime carcinogenicity studies in rats and mice with no meaningful signals
      of
      carcinogenicity detected after approximately two years of dosing, an outcome
      that we expect to be acceptable to the FDA. XTL has indicated that it intends
      to
      pursue the treatment of chronic neuropathic pain for bicifadine’s further
      development and plans to initiate a Phase II clinical trial in
      2007.


5
  **OUR
      BUSINESS STRATEGY**





Our
      goal
      is to become a leading biopharmaceutical company focused primarily on products
      for the treatment of CNS disorders. In October 2006, we announced a new
      strategic direction and strategy for the Company, the key elements of which
      are
      to:





***Pursue
      development of our lead product candidates.*** We have
      four product candidates undergoing clinical development either by us or a
      sub-licensee. These product candidates address four separate and substantial
      pharmaceutical markets: insomnia, pain, depression and alcohol abuse. We have
      designed the clinical programs for the product candidates we are developing
      in
      an effort to provide clear and defined paths to attain regulatory approval.
      We
      intend to continue to devote substantial amount of our resources to earlier
      stage clinical testing.





***Selectively
      establish corporate collaborations to assist in the development and
      commercialization of our products and mitigate financial
      risk.***  We
      intend
      to pursue corporate collaborations with partners to leverage their resources
      and
      their development, regulatory and commercialization expertise to advance the
      clinical development of our product candidates. We currently have collaborations
      with Neurocrine for indiplon and
      with
      XTL for bicifadine.





***Expand
      our product candidate portfolio with novel drug candidates that address unmet
      needs in large, established markets.*** **** We seek
      to identify and develop, either internally or through collaborative agreements,
      novel drug candidates that address unmet needs in large, established markets.
      We
      intend to continue expanding our existing product candidate portfolio by
      discovering and developing novel drug compounds both internally and through
      focused outsourced research and development. We also hope to expand our
      portfolio by identifying, in-licensing and developing additional compounds
      that
      are potentially superior to currently marketed products and by developing
      additional applications and formulations for our existing discovery and licensed
      compounds.





***Reduce*** ** ***clinical
      development and commercialization risk by building a diversified product
      portfolio*** *.* We have
      built and intend to continue to build a portfolio of diverse product candidates
      to address CNS disorders to reduce the risks associated with the clinical
      development of any one drug. We have focused our in-licensing and development
      resources on compounds in all stages of research and clinical development for
      which there exists a significant amount of informative preclinical or clinical
      data. We believe this reduces the risk that these compounds will have safety
      concerns and enhances our chances of demonstrating efficacy in clinical trials.
      We focus on developing compounds with diverse mechanisms of action to limit
      the
      risk of difficulties associated with a particular mechanism of action. Finally,
      a single mechanism of action may have multiple therapeutic uses. We intend
      to
      investigate the efficacy of our compounds for these diverse uses in order to
      enhance the commercial potential of our product candidates. We believe that
      our
      portfolio approach reduces undue dependence on any single compound or
      therapeutic application to achieve commercial success and creates multiple
      potential sources of revenue.





**OUR
      PRODUCT PIPELINE**





The
      following table summarizes certain of our product candidates currently in
      development either by us or through our sub-licensees:





**Product**
            
            **Indication(s)**
            
            **Status**
            
            **Marketing
                Rights**Indiplon
            
            Insomnia
            
            Registration(1)
            
            NeurocrineBicifadine
            
            Pain
            
            Phase
                II/Phase III(2)
            
            XTLDOV
                21,947
            
            Depression
            
            Phase
                II planned for 2007
            
            DOVObesity
            
            Preclinical
            
            DOVDOV
                102,677
            
            Alcohol
                Abuse / Alcoholism
            
            Phase
                Ib contemplated(3)
            
            DOVTriple
                reuptake inhibitor
            
            Depression
            
            Pre-IND(4)
            
            DOV





(1) Neurocrine
      has stated that it plans to resubmit its NDA for indiplon capsules by the end
      of
      the second quarter of 2007.


6




(2)
      Our
      partner, XTL, has stated that it intends to initiate a Phase IIb clinical trial
      in neuropathic pain in 2007 with bicifadine. Bicifadine has been studied in
      five
      Phase III clinical trials.





(3) We
      may
      initiate a Phase I clinical trial in normal volunteers for DOV 102,677 to
      support subsequent studies in the alcohol abuse indication in late
      2007 if
      appropriate funding is available.





(4)
      We
      intend to select a triple reuptake inhibitor development candidate from our
      preclinical pipeline in 2007 and file an IND for the selected compound with
      the
      FDA in early 2008.





For
      an
      explanation of the terms Preclinical, Phase I, Phase II, Phase III and
      Registration, please refer to the text in subheading “Government Regulation” in
      this “Business” section.





**OUR
      PRODUCTS UNDER DEVELOPMENT**





**Clinical
      Development Programs**





***Indiplon:
      Our Product Candidate for Insomnia***




Insomnia
      is a neurological disorder with approximately 86 million adults in the
      United States reporting trouble sleeping a few nights per week or more,
      according to a 2006 report from Mattson Jack (an epidemiological database used
      to determine the prevalence of a disease or disorder). Mattson Jack also reports
      that approximately 26 million adults in the United States experience
      chronic insomnia, having trouble sleeping every night or almost every night.
      In
      addition, according to the National Sleep Foundation (2003), frequent sleep
      problems in individuals that are 55 to 84 years old, if ignored,
      can complicate the treatment of other medical conditions, including arthritis,
      diabetes, heart and lung disease and depression. According to IMS Health, the
      United States insomnia pharmaceutical market was $2.8 billion in 2005 and
      was expected to exceed $3.1 billion in 2006.





Researchers
      have found that insomnia can be treated by drugs that interact with the site
      of
      action of a natural brain chemical involved in promoting and maintaining sleep.
      This chemical is called gamma amino-butyric acid, or GABA, and the site of
      action is called the GABA A receptor.
      Beginning in the 1960’s, drugs that non-selectively target the GABA A receptor,
      known as benzodiazepines or BDZs, were used as sedatives to treat insomnia.
      This
      class of drugs produces several undesirable side effects, including negative
      interactions with other central nervous system depressants, such as alcohol,
      the
      development of tolerance upon repeat dosing, and rebound insomnia, or the
      worsening of insomnia following discontinuation of dosing. Additional side
      effects, due to the long half-life, or the duration of action of a compound,
      associated with this class of drugs include next-day residual sedation effects
      and impairment of coordination and memory.








During
      the late 1980s, a class of drugs known as non-BDZs was developed to target
      a
      specific population of GABA A receptors.
      The non-BDZs have been reported to produce a reduced incidence of side effects.
      This is believed to be attributable to the non-BDZs binding more selectively
      than the BDZs to a specific GABA A receptor
      subtype. The most commonly prescribed of the non-BDZs in the United States
      are
      Ambien ® ,
      Ambien
      CR ® ,
      Sonata ® and
      Lunesta ® .
      According to IMS Health, Ambien ® is
      the
      current market leader in the United States, with sales of $2.1 billion in
      2005.





***Indiplon*** ,
      our
      insomnia product candidate, is a non-BDZ. In 1998, we licensed indiplon from
      Wyeth Holdings Corporation, or Wyeth, and sublicensed it to Neurocrine. We
      are
      entitled to a 3.5 percent royalty on worldwide net sales of indiplon, if
      any.





Indiplon
      is a non-BDZ GABA A receptor
      agonist which acts via the same mechanism as the currently marketed non-BDZ
      therapeutics. However, preclinical studies suggest that indiplon has fewer
      side
      effects than currently marketed non- BDZs, including Ambien ® and
      Sonata ® .
      In
      Phase II and III clinical studies, indiplon demonstrated efficacy with no
      significant next-day residual sedation effects at clinically relevant doses.





7


Neurocrine
      has developed indiplon in both a short acting capsule formulation and a longer
      acting tablet formulation. To develop these two different formulations,
      Neurocrine has capitalized on important features of indiplon, its rapid
      absorption and its short half-life in the body. Based on its clinical studies,
      Neurocrine determined that the concentration of indiplon in the bloodstream
      reaches levels high enough to induce sedation approximately 15 minutes after
      the
      patient takes the pill. Indiplon is then rapidly metabolized and eliminated.
      The
      result for the patient is rapid sleep onset followed by rapid elimination of
      the
      drug from the body, reducing the risk of next-day residual sedation effects.








Indiplon
      has been developed to address the most prevalent forms of insomnia —
difficulty falling asleep; difficulty staying asleep; and difficulty getting
      back to sleep after middle of the night awakenings. Both forms of indiplon
      are
      intended to improve sleep quality without creating drug induced impairment
      upon
      awakening.








Based
      on
      the results of preclinical studies and Phase I, Phase II and
      Phase III clinical trials of indiplon, as well as a non-clinical data
      package related to indiplon manufacturing, formulation and commercial product
      development, Neurocrine assembled and filed NDAs with the FDA for both indiplon
      capsules and indiplon tablets. On May 15, 2006, Neurocrine received two
      complete responses from the FDA regarding indiplon capsule and tablet NDAs.
      These responses indicated that indiplon 5 mg and 10 mg capsules were
      approvable (“FDA Approvable Letter”) and that the 15 mg tablets were not
      approvable (“FDA Not Approvable Letter”).







The
      FDA
      Approvable Letter requested that Neurocrine reanalyze data from certain
      preclinical and clinical studies to support approval of indiplon 5 mg and
      10 mg capsules for sleep initiation and middle of the night dosing. The FDA
      Approvable Letter also requested reexamination of the safety analyses.
      Neurocrine held an end-of-review meeting with the FDA related to the FDA
      Approvable Letter in August 2006. This meeting was specifically focused on
      determining the actions needed to bring indiplon capsules from Approvable to
      Approval in the resubmission of the NDA for indiplon capsules. At the meeting
      the FDA requested that the resubmission include further analyses and
      modifications of analyses previously submitted to address questions raised
      by
      the FDA in the initial review. This reanalysis has been substantially completed.
      The FDA also requested, and Neurocrine has completed, a supplemental
      pharmacokinetic/food effect profile of indiplon capsules including several
      meal
      types. The NDA for indiplon capsules
      is currently being updated to include responses to the FDA requests and is
      targeted to be resubmitted to the FDA by the end of the second quarter of 2007.








The
      FDA
      Not Approvable Letter requested that Neurocrine reanalyze certain safety and
      efficacy data and questioned the sufficiency of the objective sleep maintenance
      clinical data with the 15 mg tablet in view of the fact that the majority
      of the indiplon tablet studies were conducted with doses higher than 15 mg.
      Neurocrine held an end-of-review meeting with the FDA related to the FDA Not
      Approvable Letter in October 2006. This meeting was specifically focused on
      determining the actions needed to bring indiplon tablets from Not Approvable
      to
      Approval in the resubmission of the NDA for indiplon tablets. The FDA has
      requested additional long-term safety and efficacy data with the 15 mg dose
      for the adult population and the development of a separate dose for the elderly
      population. In discussions, Neurocrine and the FDA noted positive efficacy
      data
      for sleep maintenance with both indiplon capsules and tablets. On the basis
      of
      these discussions, Neurocrine is formulating a strategy to pursue a sleep
      maintenance claim for indiplon. The evaluation of indiplon for sleep maintenance
      is ongoing and includes both indiplon capsules and tablets.





The
      preceding descriptions of Neurocrine’s clinical development and clinical trial
      results for indiplon are based solely on Neurocrine’s public disclosures through
      March 3, 2007.





***Bicifadine:
      Our Novel Analgesic***





Drugs
      for
      the treatment of pain, or analgesics, have historically been placed into the
      following general categories:


8


·
            narcotics
                or opioids, e.g., morphine, codeine, Demerol®and Percodan®;





·
            anticonvulsants,
                antidepressants and other agents used to treat neuropathic pain;
                and





·
            non-narcotic
                prostaglandin inhibitors, e.g., aspirin, acetaminophen, ibuprofen
                and
                COX-2 inhibitors.





While
      drugs in these categories are regularly used in the treatment of pain, their
      use
      has been limited because of various side effect profiles and, in many cases,
      incomplete efficacy. In addition, administering these drugs for extended time
      periods has been problematic. Although prostaglandin inhibitors have been used
      for the treatment of pain, particularly pain associated with inflammation,
      their
      efficacy is limited to milder types of pain and they often display undesirable
      side effects relating to the gastrointestinal tract and liver. Narcotics are
      also used to treat pain, but tolerance develops rapidly and higher doses often
      lead to physical dependence and additional side effects, including respiratory
      depression. Ultram ® ,
      marketed by Ortho-McNeil, Inc., was originally thought to be a non-narcotic
      but
      its metabolites have been reported to act at certain opiate receptors and have
      the potential to cause morphine-like psychic and physical dependence. Despite
      these drawbacks, U.S. sales in 2006 of narcotic and non-narcotic analgesics
      reached nearly $7.5 billion according to IMS. Furthermore, in September 2004, Merck &
      Co., or Merck, withdrew
      Vioxx ® ,
      a COX-2
      inhibitor, from the market, citing increased risk of stroke and heart attack
      in
      extended use. In April 2005, Pfizer withdrew Bextra ® ,
      another
      COX-2 inhibitor, citing increased risk of rare but serious skin reactions.
      The
      withdrawal of these drugs has had a significant impact on the treatment of
      pain
      and the pain market and, we believe, opened up greater opportunities for
      bicifadine.





The
      FDA
      has granted approval for two other classes of compounds for the management
      of
      specific types of chronic pain. In the first class, Neurontin ® ,
      marketed by Pfizer, is an anticonvulsant whose actions on ion channels in
      neuronal tissue are likely responsible for its therapeutic effects in a certain
      type of neuropathic pain (postherpetic neuralgia). Sharing a similar structure
      with Neurontin is Lyrica ® ,
      also
      marketed by Pfizer, which was approved in December 2004 for the management
      of
      neuropathic pain associated with diabetic peripheral neuropathy and postherpetic
      neuralgia. In the second class, Cymbalta ® ,
      marketed by Eli Lilly and Co., was granted approval in September 2004 for the
      management of diabetic peripheral neuropathic pain. Cymbalta’s mechanism of
      action is believed to result from the inhibition of the uptake of serotonin
      and
      norepinephrine (SNRI) in nerve cells, properties also possessed by bicifadine.





***Bicifadine,*** our
      product candidate for the treatment of pain, was licensed by us from Wyeth
      in
      1998 and sublicensed to XTL in 2007. We are entitled to up to $126.5 million
      in
      milestones and a low double-digit ascending royalty on worldwide net sales,
      if
      any.





Bicifadine
      possesses a unique profile of pharmacological activity. Its primary
      pharmacological action is to enhance and prolong the actions of norepinephrine
      and serotonin by inhibiting the transport proteins that terminate the
      physiological actions of the two biogenic amines. Preclinical studies with
      bicifadine indicate this molecule possesses additional neurochemical properties
      that may contribute to its analgesic effects. Preclinical studies and clinical
      trials indicate that either one or a combination of these individual actions
      may
      account for the analgesic properties of bicifadine.





Bicifadine
      is not a narcotic and, in preclinical studies, has been shown not to act at
      any
      opiate receptor. In preclinical studies to date, bicifadine has not demonstrated
      abuse, addiction or dependence potential, although, in a Phase I clinical trial,
      the immediate release, or IR, formulation did cause mild and transient euphoric
      mood in some subjects. However, in a Phase I study in experienced drug users,
      there was no statistically significant difference between bicifadine and
      placebo. Four Phase I clinical trials and 14 Phase II clinical trials involving
      more than 1,000 patients were conducted by Wyeth or DOV with an IR formulation
      of bicifadine. In five exploratory double-blind, placebo-controlled Phase II
      clinical trials of the IR formulation conducted by Wyeth, bicifadine
      demonstrated a statistically significant reduction in pain versus placebo,
      in
      some cases with an outcome suggesting it might be comparable to or better than
      positive controls such as codeine.


9


In
      addition to these trials with the IR formulation, we have conducted numerous
      studies using the sustained release, or SR, formulation, a formulation that
      permits less frequent daily dosing and improves tolerability. We have completed three
      placebo-controlled efficacy trials in more than 1,600 patients with acute
      post-surgical pain and have conducted three Phase III clinical trials of
      bicifadine in CLBP and one Phase II trial of bicifadine in osteoarthritis,
      all
      of which have provided us with a significant amount of data about the efficacy
      and safety of the drug.





*Phase
      III Chronic Pain Trials of Bicifadine in CLBP*




Study
      020




In
      April
      2006, we completed a Phase III, U.S. clinical trial of bicifadine in
      approximately 600 patients with moderate to severe CLBP, study 020. The clinical
      trial was a randomized, double-blind, placebo-controlled, outpatient,
      multi-center study assessing the efficacy and tolerability of three dose levels
      of bicifadine - 200 mg, 300 mg and 400 mg b.i.d. - over a three-month period.
      The primary efficacy endpoint was the change in pain severity rating as measured
      by the 100 mm Visual Analog Scale, or VAS, score between baseline and the end
      of
      dosing. In this trial, bicifadine did not achieve a statistically significant
      effect relative to placebo on the primary endpoint of the study (reduction
      in
      pain at the end of treatment) at any of the doses tested.  Bicifadine was
      well-tolerated; transient nausea and dizziness were the most common adverse
      events which occurred in 5% to 18% of patients.




Study
      021




Our
      second Phase III trial - study 021 - of bicifadine in CLBP analyzed only
      patients with more severe CLBP, accompanied by sciatica and/or substantial
      functional disability, and compared only two dosing arms, 200 mg b.i.d. of
      bicifadine versus placebo.  In October 2006, once study 021 had enrolled
      more than one half of the intended patients, we unblinded the results of an
      interim analysis.  In this trial, similar to study 020, bicifadine did not
      achieve a statistically significant effect relative to placebo on the primary
      endpoint of the study and we therefore stopped patient dosing in this trial
      before completing the intended enrollment.




Study
      022





In
      May
      2006 we completed enrollment
      in our Phase III open-label, long-term safety trial of bicifadine - study 022
      -
      and in October 2006 discontinued dosing of patients. The
      primary objective of this clinical trial was to evaluate the safety of
      bicifadine for up to one year in patients with CLBP. Over 500 patients were
      dosed with at least 200 mg b.i.d. of bicifadine for at least six months and
      over
      100 patients for at least one year. There
      were no deaths in the more than 3,000 patients who have received bicifadine
      in
      the clinical trial program.  Further, there are no apparent safety risks in
      respect to cardiovascular safety and liver function, organ systems that are
      most
      commonly the cause of drug related safety concerns.




*Phase
      II Trial in Osteoarthritis*




In
      November 2006, we completed a Phase II trial of bicifadine in patients with
      osteoarthritis.  This study was a multi-center, double-blind,
      placebo-controlled, four-way crossover trial designed to assess the efficacy,
      tolerability and pharmacokinetics of bicifadine alone and in combination with
      ibuprofen.    Of the 33 patients who completed the trial, each patient
      received one week of dosing for each of the following four treatment regimens:
      bicifadine, ibuprofen, bicifadine plus ibuprofen and placebo. The mean
      improvement scores on the primary efficacy endpoint (WOMAC total score) for
      the
      patients taking a combination of bicifadine plus ibuprofen were clinically
      and
      statistically superior to the improvement scores seen in the placebo
      (p<0.0005), and bicifadine (p<0.002) groups.  The improvement seen
      after only one week of dosing with bicifadine plus ibuprofen relative to placebo
      is appreciably larger than in many previously-reported placebo-controlled trials
      for COX-2 inhibitors or other NSAIDs in which dosing lasted for up to three
      months.  This significant and substantial improvement in pain reduction
      after only one week represents an unexpected finding using bicifadine and an
      NSAID, in this case ibuprofen.  The marked benefits seen with concurrent
      dosing of bicifadine plus ibuprofen were not due to a pharmacokinetic
      interaction between the two drugs since neither bicifadine nor ibuprofen
      appreciably altered the blood levels of the other drug.


10


*Completed
      Acute Pain Trials of Bicifadine*




In
      August
      2002, we completed a Phase II clinical trial in the U.S. involving 750 patients
      in the treatment of moderate to severe post-surgical dental pain. This Phase
      II
      trial was a single-dose, double-blind, placebo-controlled, study that evaluated
      three controlled release doses of bicifadine and one dose of codeine compared
      to
      placebo. Bicifadine produced a highly statistically significant, dose-related
      reduction in pain compared to placebo at each of the two higher doses. The
      efficacy of bicifadine was at least equivalent to codeine at all three doses.
      The trial demonstrated bicifadine to be safe and relatively well-tolerated
      without producing any serious adverse events. Both codeine and the two higher
      doses of bicifadine produced significantly more adverse events than placebo,
      with the bicifadine 400 mg and 600 mg doses producing 22 percent and 37 percent,
      respectively, versus 11 percent for placebo. The most frequently reported
      adverse events were nausea and vomiting.





In
      September 2003, we completed a 540-patient, double-blind, placebo-controlled
      Phase III clinical trial to compare three doses of bicifadine and one dose
      of
      tramadol to placebo in a moderate to severe post-surgical dental pain model.
      Bicifadine, in a dose-dependent fashion, produced a highly statistically
      significant reduction in pain compared to placebo, as did the single-dose level
      of tramadol. Statistically significant increases in analgesia were measured
      as
      early as one hour after administration and analgesia was sustained for the
      balance of the six-hour measurement period. The maximal efficacy of bicifadine
      was statistically indistinguishable from tramadol. Both bicifadine and tramadol
      were safe and relatively well-tolerated without producing any serious adverse
      events.





In
      September 2005, we completed a Phase III randomized, double-blind,
      placebo-controlled, outpatient, multi-center clinical trial to assess the
      efficacy and safety of three dose levels of bicifadine in patients with moderate
      to severe acute pain following bunionectomy surgery for a five-day period
      incorporating tramadol as an active control. The bunionectomy Phase III trial
      enrolled 325 patients at five sites in the U.S. The design and analysis of
      the
      study compared 200 mg and 400 mg t.i.d. of bicifadine to placebo with 100 mg
      t.i.d. of tramadol as an active control. Statistically significant increases
      in
      analgesia were measured as early as 30 minutes after administration and these
      effects were sustained for the balance of the eight-hour measurement period.
      The
      maximal efficacy of bicifadine was statistically indistinguishable from
      tramadol. While both bicifadine and tramadol were safe and relatively
      well-tolerated without producing any serious adverse events, the high level
      of
“rescue” analgesic medication used in both the placebo and active drug groups
      confounded an assessment of the analgesic actions of bicifadine or tramadol
      under repeat dosing conditions, which are an FDA requirement.




*XTL
      Development Plan*





XTL
      has
      stated that it intends to develop bicifadine for the treatment of neuropathic
      pain - a chronic condition resulting from damage to peripheral nerves. Due
      to
      the highly competitive nature of the market for acute pain drugs, and the FDA
      requirement to complete two repeat-dosing clinical trials in two different
      acute
      pain indications, no further studies in acute pain are planned. XTL intends
      to
      initiate a Phase IIb clinical trial with bicifadine in 2007.





***DOV
      21,947: Our Triple Reuptake Inhibitor for Depression***





Depression
      is a disorder in which the affected person experiences a mental state of
      sadness, despair, discouragement and hopelessness. Other symptoms may include
      apathy, withdrawal from social contact, an inability to experience pleasure,
      changes in appetite and sleep patterns, low energy levels, difficulty
      concentrating and thoughts of suicide. Neurotransmitters regulate numerous
      functions in the CNS, and imbalances in them have been linked to a number of
      psychiatric disorders, including depression. The actions of these
      neurotransmitters are terminated by specific transport proteins that remove
      them
      from synapses in the brain. Antidepressants are thought to produce their
      therapeutic effects by inhibiting the uptake activity of one or more of these
      transport proteins, effectively increasing the concentration and duration of
      action of these neurotransmitters at their receptors.


11


The
      emergence of selective serotonin reuptake inhibitors, or SSRIs, starting with
      Prozac ® in
      January 1988, followed by Zoloft ® in
      February 1992 and Paxil ® in
      January 1993, has had a dramatic impact on the antidepressant market. According
      to Mattson Jack (2006), the lifetime prevalence of major depressive disorder
      exceeds 22 million in the United States and 12 million suffer from
      less severe forms of depression. The National Institute of Mental Health also
      indicated that in 2006 over 19 million Americans suffered from a
      debilitating anxiety disorder. In 2005, the branded worldwide market for
      depression therapeutics was in excess of $12 billion (EvaluatePharma.com). Despite
      this widespread commercial success, SSRIs suffer from the following
      limitations:





·
            30-40
                percent of patients do not experience an adequate therapeutic response
                to
                a given drug;


·
            three
                or more weeks of therapy are often required before meaningful improvement
                is observed; and


·
            side
                effects such as nervousness, agitation, insomnia and sexual
                dysfunction.





Dual
      uptake inhibitors, referred to as SNRIs, like Effexor ® ,
      launched in 1994, and Cymbalta ® ,
      launched in August 2004, block the uptake of both serotonin and norepinephrine. In
      vitro
      studies have demonstrated that both drugs are appreciably more potent in
      blocking serotonin compared to norepinephrine uptake. While
      these drugs may be more effective than SSRIs in some patients, SNRIs still
      take
      three or more weeks of therapy before a meaningful improvement is observed.
      In
      addition, SNRIs have their own unique set of side effects, including nausea,
      headache, sleepiness, dry mouth, sexual dysfunction and dizziness.





Both
      preclinical studies and clinical trials indicate that a drug inhibiting uptake
      of all three, serotonin, norepinephrine and dopamine, may produce a faster
      onset
      of action or provide greater efficacy than traditional antidepressants. We
      believe that such a ‘broad spectrum’ antidepressant could represent a
      breakthrough in the treatment of depression.





***DOV
      21,947 and DOV 216,303*** are
      TRIs
      affecting the neurotransmitters serotonin, norepinephrine and dopamine. In
      preclinical studies, DOV 21,947 and DOV 216,303 were shown to inhibit the uptake
      of all three neurotransmitters. In animal models highly predictive of
      antidepressant action, DOV 21,947 and DOV 216,303 were more potent than
      Tofranil ® ,
      an
      SNRI, and the SSRIs Prozac and Celexa. Because of their ability to inhibit
      the
      uptake of all three neurotransmitters implicated in depression, we believe
      DOV
      21,947 and DOV 216,303 may be more effective and have a more rapid onset than
      other antidepressants. In
      addition, at doses similar to those active in models predictive of
      antidepressant action, DOV 21,947 produced a significant weight loss in two
      animal models of diet-induced obesity. Rodent models of diet-induced obesity
      are
      often used to predict the effectiveness of drugs to produce weight loss in
      obese
      individuals.





We
      have
      completed several Phase I studies in normal volunteers and a Phase II efficacy
      trial of DOV 216,303 in patients with major depressive disorder. The clinical
      trial was a randomized, multi-center, double-blind, safety, efficacy and
      tolerability study with 67 patients and compared 50 mg b.i.d. of DOV 216,303
      to
      20 mg b.i.d. of citalopram, an SSRI. Patients who completed two weeks of
      treatment in both the DOV 216,303 and citalopram groups demonstrated reductions
      from baseline (p<0.0001) in the primary outcome measure, the total Hamilton
      Depression , or HAM-D, scores. This study also showed that DOV 216,303 was
      generally well-tolerated, with no serious adverse events occurring. There are
      no
      ongoing clinical studies of DOV 216,303 and none are planned for
      2007.




Seven
      phase I studies of DOV 21,947 have been completed and we intend to initiate
      a
      Phase II double-blind clinical trial of DOV 21,947 versus placebo in depressed
      outpatients in July of 2007. DOV 21,947 is the (+)-enantiomer of DOV 216,303.
      In
      December 2005 we dosed the initial set of subjects in a second Phase Ib clinical
      trial of DOV 21,947.  At the highest dose levels explored - substantially
      above what is projected to be the therapeutic range - rashes were noted in
      some
      subjects.


12


***DOV
      102,677: Our TRI for Alcohol Abuse & Alcoholism***





Alcoholism,
      also known as alcohol dependence, is a disease with symptoms
      including:





·
            craving:
                a strong need or compulsion to
                drink;


·
            loss
                of control: the inability to limit one’s drinking on any given
                occasion;


·
            physical
                dependence: withdrawal symptoms, such as nausea, sweating, shakiness
                and
                anxiety, occur when alcohol use is stopped after a period of heavy
                drinking; and


·
            tolerance:
                the need to drink greater amounts of alcohol in order to ‘get
                high.’





The
      most
      recent alcohol use and abuse study conducted by the U.S. Department of Health
      and Human Services, “The 2001 National Household Survey on Drug Abuse”,
      estimates that approximately 14 million Americans meet the diagnostic criteria
      for alcohol abuse or alcoholism. Yet, this level of incidence is met by a
      general lack of substantially effective treatments for alcohol abuse.





***D*** ***OV
      102,677*** is a TRI
      with preferential action on the dopamine transporter protein and is related
      to
      DOV 21,947 and DOV 216,303. In a Phase Ia clinical trial, DOV 102,677 was shown
      to be safe and well-tolerated at single doses that are less than or equal to
      150
      mg. At higher doses, abnormal color vision, which was both transient and
      reversible, was observed in the majority of subjects. **** Results
      of this Phase Ia trial and compelling data from animal models of alcohol abuse
      have led us to identify DOV 102,677 as a development candidate to treat alcohol
      abuse and alcoholism rather than depression. We may initiate a Phase Ib
      repeat-dose clinical trial in normal volunteers for DOV 102,677 in late
      2007 if
      appropriate funding is available .





**Preclinical
      Discovery and Development Programs**





Our
      discovery program remains focused on GABA A receptor
      modulators and reuptake inhibitors for the treatment of CNS disorders.





***Reuptake
      Inhibitor Platform***





Our
      reuptake inhibitor platforms, including TRIs (triple reuptake inhibitors),
      NEDs
      (norepinephrine and dopamine reuptake inhibitors), SADs (serotonin and dopamine
      reuptake inhibitors), and SNRIs (serotonin and norepinephrine reuptake
      inhibitiors) can be tailored to create compounds that are able to treat a wide
      variety of neuropsychiatric disorders ranging from depression and attention
      deficit disorder to pain and obesity. This tailoring process produces new
      chemical entities with varying potencies at two (in the case of NEDs, SADs,
      and
      SNRIs) or three (in the case of TRIs) transport proteins. For example, we
      believe NEDs (with relative potencies to inhibit norepinephrine and dopamine
      uptake ranging from about 1:1 to 1:10) may offer certain advantages over
      currently prescribed medications for the treatment of attention deficit
      disorder. We have reuptake inhibitors from each of these classes in various
      stages of preclinical development. In addition, our reuptake inhibitor discovery
      program includes
      work to identify second generation bicifadine-like compounds. We intend to
      file
      an IND for one of our preclinical uptake inhibitors in early 2008 if we obtain
      satisfactory results from ongoing preclinical toxicology testing.





***GABA
      Modulator Platform***




GABA A receptors are classified into biochemically, pharmacologically and functionally
      distinct receptor subtypes that
      influence different behaviors such as anxiety, sedation and amnesia.





We
      believe that compounds that selectively act on specific GABA A receptor
      subtypes produce the desired therapeutic effects in the absence of the
      undesirable effects associated with traditional GABA modulators such as BDZs.
      For example, compounds acting at one GABA A receptor
      subtype may reduce anxiety without sedation, while compounds acting at another
      GABA A receptor
      subtype may produce sedation without memory impairment, or other effects
      associated with acting at other subtypes.


13


Our
      internal discovery effort with GABA A receptor
      modulators has yielded a series of compounds we are currently evaluating. These
      new chemical entities, currently in the lead optimization phase, are
      significantly more potent than ocinaplon, our previous anti-anxiety product
      candidate, and we have prioritized our preclinical pipeline and 2007 activities
      accordingly. These compounds appear to function as partial positive allosteric
      modulators at specific GABA A receptor
      subtypes that may be involved in the treatment of various anxiety disorders,
      including generalized anxiety disorder, or GAD, and panic disorder.




In
      August
      2005, we suspended further dosing in the ongoing Phase III clinical trial of
      ocinaplon following the occurrence of enzyme elevations in liver function tests,
      or LFTs, for one subject. We have since evaluated the safety findings from
      all
      subjects in the Phase III trial. During this study the overall incidence of
      an
      elevation in liver enzymes greater than three times normal was approximately
      eight percent in the ocinaplon-treated subjects and zero percent in the
      placebo-controlled subjects. Based upon the data, in October 2005 we
      discontinued the development of ocinaplon for GAD.





**Cardiovascular
      Disorders**





Chronic
      stable angina, or angina pectoris, refers to recurring severe constricting
      pain
      in the chest due to inadequate blood supply to the heart caused by heart
      disease. Angina attacks are more likely to occur during the morning and
      afternoon hours. Likewise, hypertension is greater in the morning hours.
      According to the 2002 practice guidelines update for the management of patients
      with chronic stable angina, published by the American College of
      Cardiology/American Heart Association/American College of Physicians-American
      Society of Internal Medicine, the number of patients in the U.S. with stable
      angina was estimated at 16.5 million. According
      to Decision Resources, high blood pressure or hypertension was estimated to
      affect more than 50 million people in the U.S.




Diltiazem
      belongs to a well-known class of drugs called calcium channel blockers. Calcium
      channel blockers remain a standard of care in the treatment of chronic stable
      angina and hypertension and continue to be highly endorsed by the medical
      community. Although comparative studies have demonstrated equivalent anti-angina
      effects for many marketed calcium channel blockers, a lower incidence of side
      effects with diltiazem was often reported in these studies. According to IMS
      figures for 2004, sales of diltiazem products in the U.S. totaled
      $799 million.





In
      an
      effort to provide both therapeutic blood levels of diltiazem for longer periods
      of time and improved patient compliance, several slow or extended release
      preparations of diltiazem have been developed for the treatment of hypertension
      and chronic stable angina. However, these commercially available, once-daily,
      extended release formulations produce only a partial reduction of chronic stable
      angina. According to published studies, currently marketed diltiazem products
      such as Tiazac ® ,
      Cardizem ® and
      Dilacor XR ® only
      reduce the number of angina attacks by approximately 50-60 percent when given
      at
      FDA-approved therapeutic doses. We believe incomplete reduction in angina
      demonstrated by current treatments may be the result of inadequate blood levels
      of the drug in the morning hours, when approximately half of all angina attacks
      occur. Experts in chronic stable angina have confirmed their dissatisfaction
      with the ability of current extended release products to adequately treat many
      of their patients on a once-a-day basis.





***DOV
      Diltiazem*** *,* ****** our
      proprietary formulation of diltiazem, is our product candidate for the treatment
      of angina and hypertension. DOV diltiazem combines an immediate release
      component with a controlled release component in order to provide prompt and
      improved blood levels throughout the day compared to currently marketed
      diltiazem products.





We
      believe that DOV diltiazem will reduce morning angina attacks to a significantly
      greater extent than commercially available products because of its combination
      of immediate and extended release components. Data from three Phase I trials
      indicate that our patented formulation produces clinically relevant blood levels
      within 30 minutes of administration and results in higher blood levels in the
      morning than Tiazac. In 2004 and 2006, we reached agreement with the FDA’s
      Cardio-Renal Division on the scope and design of the clinical trials required
      for submission of an NDA for DOV diltiazem. The FDA agreed that no additional
      preclinical or toxicology studies would be required for the NDA submission.
      We
      are currently seeking a strategic relationship to advance DOV diltiazem into
      Phase III clinical development and commercialization and thus intend that
      further clinical development of DOV diltiazem be conducted by a licensee of
      this
      product, assuming we are able to secure attractive license terms.


14


**Collaborations
      and Licensing Agreements**





***Neurocrine
      Biosciences, Inc.***





In
      June 1998, we sublicensed indiplon to Neurocrine on an exclusive, worldwide
      basis for ten years or, if later, the expiration of any patent covering
      either the compound or the marketed product, currently 2023. At the end of
      the
      term, Neurocrine will be deemed to have a fully-paid, royalty-free license
      to
      the compound and the marketed product. During the term of the agreement, we
      are
      entitled to receive a royalty equal to 3.5 percent of net sales for the
      later
      of the expiration of the Wyeth patents covering indiplon in such country and
      a
      period of the
      first ten years post launch in a given market, if any, and additional net
      milestone payments of $1.5 million upon FDA approval. As noted below, the
      royalty term has been expanded to include Neurocrine patents covering indiplon.
      During 2004, we received $2.0 million from Neurocrine for the milestone due
      upon
      NDA filing.





Neurocrine
      is responsible for the research, development and commercialization of indiplon.
      We have the right to terminate our agreement with Neurocrine, with regard to
      the
      entire territory, if Neurocrine terminates the research and development program
      or halts the research and development program for six months or longer within
      the U.S., other than for reasons relating to regulatory constraints. Likewise,
      if Neurocrine halts, for six months or longer, or terminates the research and
      development program in any other country, we have the right to terminate the
      agreement with respect to that country. If we terminate the agreement due to
      an
      uncured breach by Neurocrine, it must transfer to us all information and
      know-how related to indiplon or the marketed product, and all governmental
      filings and approvals.





In
      February 2004, we reorganized our sublicense agreement with Neurocrine in
      respect to indiplon. As part of the reorganization, Neurocrine acquired Wyeth’s
      interest under the license covering indiplon entered into between Wyeth and
      DOV
      in 1998. The restated sublicense agreement with Neurocrine expands the royalty
      term to include the life of Neurocrine patents as well as Wyeth patents covering
      indiplon. The revised agreement allows Neurocrine to pay to us royalty payments
      that are 3.5 percent of net sales, and milestone payments net of those amounts
      that would be owed by DOV to Wyeth. In addition, the first milestone payment
      to
      Wyeth of $2.5 million upon an NDA was changed to $1.0 million upon an NDA filing
      and $1.5 million upon an NDA approval. Thus, the net milestones payable to
      DOV
      is $2.0 million upon an NDA filing (which was paid in December 2004) and $1.5
      million upon an NDA approval.





***XTL
      Development, Inc.***





On
      January 15, 2007, we entered into an agreement with XTL in which we granted
      XTL
      the exclusive right to develop products incorporating bicifadine for the
      treatment of human diseases, disorders and conditions, except for treatment
      of
      symptoms in certain areas of women’s health. We received an up-front payment of
      $6.5 million, of which $5.0 million was paid to Wyeth as a result of the
      acceleration of a milestone payable pursuant to our agreement with Wyeth. We
      also paid to Elan $500,000 pursuant to our agreement with them. 
Additionally, XTL was required to make a $1.0 million payment to DOV within
      30
      days if we successfully transferred to XTL an existing investigational new
      drug
      application and certain program documentation relating to bicifadine. Such
      transfers were recently completed and XTL made such payment to us in February
      2007.  Total up-front and milestone payments by XTL under the agreement
      could exceed $130.0 million if all milestones are achieved, with escalating
      low
      double-digit royalties on annual net sales of bicifadine.  At its election,
      XTL may make certain non-royalty payments, including milestone payments, to
      us
      in shares of freely tradeable stock of XTL’s parent company, XTL
      Biopharmaceuticals Ltd. XTL will fund future research, development,
      manufacturing and commercialization costs of bicifadine.


15


***Merck &
      Co*** .





On
      August
      5, 2004, we entered into an agreement with Merck for the worldwide development
      and commercialization of DOV 21,947 for all therapeutic indications and of
      DOV
      216,303 for the treatment of depression, anxiety and addiction. Additionally,
      Merck obtained rights of first offer and refusal regarding a licensing agreement
      for DOV 102,677 under certain circumstances and for additional consideration.
      Merck assumed financial responsibility for development and commercialization
      of
      a product containing at least one of the licensed compounds. The parties agreed
      to work together to clinically develop licensed product and we have reserved
      the
      right to co-promote the sales of product in the U.S. to psychiatrists and other
      specialists who treat depression. The
      license agreement was terminated by the parties effective December 6,
      2006.   As a result of this termination, we regained all rights to the
      compounds, including the use of results of studies performed by
      Merck. There were no payments due to or from Merck upon this
      termination.





Under
      the
      agreement, we received a $35.0 million up-front licensing payment. In
      addition, we could have received as much as $300.0 million for achieving certain
      clinical development and regulatory milestones for multiple territories and
      approval of two indications, and up to $120.0 million upon achievement of
      certain sales thresholds. Merck assumed responsibility for the development,
      manufacturing and commercialization of DOV 21,947 and agreed to pay us royalties
      on worldwide sales, if any, which increased based upon certain sales thresholds.





In
      August
      2005, we announced that our license agreement with Merck for DOV 21,947 and
      DOV
      216,303 had been amended. The milestones, royalties and business terms
      originally established in the August 2004 license agreement were retained in
      full along with DOV’s co-promote rights. The amendment transferred to us from
      Merck certain development contemplated by the license agreement. It also
      permitted expansion of the parties’ relationship to include an additional TRI
      from the DOV preclinical pipeline for inclusion in the original license
      agreement with no additional up-front payment. If the DOV studies for DOV 21,947
      were successful, we may have been reimbursed by Merck for pre-agreed expenses
      and may have received a success premium. Subsequently, we may have received
      payment for achievement of certain clinical development and regulatory
      milestones pursuant to the existing agreement. Both parties retained certain
      termination rights.





***Elan
      Corporation, plc and Elan International Services, Ltd.***





In
      January 1999, Elan and we established a joint venture and formed DOV
      (Bermuda), Ltd., or DOV Bermuda, a holding company, and Nascime Limited, or
      Nascime, an operating company, to develop controlled release formulations of
      bicifadine for the treatment of pain and ocinaplon for the treatment of anxiety
      disorders and epilepsy. Pursuant to the original agreements, through
      December 31, 2002, Elan and we funded the joint venture in proportion to
      our equity interests in the venture, 19.9 percent and 80.1 percent,
      respectively. Effective January 1, 2003, Elan no longer funded its pro rata
      portion of the joint venture's expenses and, after funding ours and Elan’s
      portion of the joint venture's expenses for the first and second quarters of
      2003, our equity ownership in the joint venture increased to 83.0 percent from
      80.1 percent.





On
      October 21, 2003, we entered into an agreement with Elan and certain of
      Elan’s affiliates to terminate the joint venture and acquire 100 percent
      ownership of Nascime, the joint venture’s operating company. In connection with
      this agreement, among other things, Elan and we agreed to eliminate all material
      consent rights found in the 1999 stock purchase and license agreements. The
      termination agreement ended Elan’s involvement in the nearly five-year joint
      venture established to develop controlled release formulations of bicifadine
      and
      ocinaplon.




Pursuant
      to the termination agreement, we paid $5.0 million to a subsidiary of Elan
      in respect of its 17 percent equity stake in the joint venture. We agreed to
      indemnify Elan and its affiliates, subject to certain limitations, for claims
      arising from the past, present and any future activities of the joint venture
      companies, including activities related to the conduct of the joint venture's
      clinical trials. Each party waived any rights and released
      the other parties from any claims arising under certain of the principal joint
      venture agreements. Elan granted to Nascime, now wholly owned by us, a new
      non-exclusive, royalty-free, perpetual, worldwide license to make and sell
      the
      two product candidates in controlled release formulations using the Elan
      intellectual property licensed to the joint venture, including that developed
      during the venture. In connection with the license grant, Elan will be entitled
      to receive up to an aggregate of $3.0 million when the products are
      licensed or come to market, of which $500,000 was paid in January 2007 as a
      result of the sublicense agreement with XTL. In 2006, we transferred the
      intellectual property held by Nascime to us and dissolved Nascime.


16


***Biovail
      Laboratories Incorporated and Biovail***





In
      January 2001, we entered into a license, research and development agreement
      with Biovail to develop, manufacture and market DOV diltiazem. Biovail’s license
      to use DOV diltiazem was exclusive and worldwide in scope. In March 2003,
      following Biovail’s receipt of marketing authorization for Cardizem LA, we and
      Biovail agreed to terminate the license agreement. The separation agreement
      provided for the return to us of the patent license covering DOV diltiazem,
      a
      $1.0 million payment by us to Biovail and contingent payments by us to
      Biovail of $3.0 million upon issuance of marketing authorization for the
      drug and up to $7.5 million based upon sales, if any. We and Biovail have
      delivered mutual releases relating to the license agreement.





**Market
      Exclusivity, Patent Protection and Intellectual Property**





We
      believe that establishing and maintaining market exclusivity for our product
      candidates is critical to our long-term success. We utilize a number of methods
      to establish and maintain market exclusivity, including taking advantage of
      statutory market exclusivity provisions, seeking patent protection for our
      product candidates and otherwise protecting our intellectual property.





***The
      Hatch-Waxman Act***





Under
      the
      U.S. Drug Price Competition and Patent Term Restoration Act of 1984, or
      Hatch-Waxman Act, newly approved drugs and indications benefit from a statutory
      period of marketing exclusivity. Under the Hatch-Waxman Act, the FDA provides
      marketing exclusivity to the first applicant to gain approval for a particular
      new drug by prohibiting the filing of an abbreviated NDA, or ANDA, by a generic
      competitor for up to five years after the drug is first approved. The
      Hatch-Waxman Act also provides three years of marketing exclusivity for a new
      indication for an existing drug. This market exclusivity is provided even in
      the
      absence of patent protection for the approved drug. If the drug is also claimed
      in a patent, a third party may file an ANDA four years after the drug is first
      approved, provided that the third party certifies that the applicable patent
      is
      invalid or not infringed.





Because
      they appear to be compounds with new active ingredients, we believe ocinaplon,
      bicifadine and DOV 216,303 will each be eligible for the five-year exclusivity
      provisions of the Hatch-Waxman Act if they are the first approved drugs
      containing their active compounds. Since certain patents relating to bicifadine
      and ocinaplon have expired, in the absence of new patent protection based on
      patent applications currently being pursued by DOV, these market exclusivity
      provisions may be of particular importance to the success of these compounds
      if
      they are approved by the FDA.





The
      Hatch-Waxman Act also permits an extension of up to five years of the term
      of a
      patent for new approved products to compensate for patent term lost during
      the
      drug development and FDA regulatory review process if the applicant can show
      that research and development has been sufficiently continuous during the FDA
      review process. Only one patent applicable to any approved drug is eligible
      for
      extension under these provisions. In addition, this extension must be applied
      for after NDA approval of the new drug covered by the patent and before
      expiration of the patent. We will review at the time patent term extensions
      for
      some of our current patents under the Hatch-Waxman Act to add patent life beyond
      the expiration date. Since patent term extensions for patent term lost require
      prior NDA approval of the product, our prospective eligibility for extensions
      is
      subject to the expected length of clinical trials, patent life and factors
      involved in the filing and approval of an NDA.





17




***Patents
      and Intellectual Property Protection***





We
      seek
      to protect our rights in the compounds, formulations, processes, therapeutic
      uses, technologies and other valuable intellectual property invented, developed,
      licensed or used by us through a number of methods, including the use of
      patents, patent extensions, license agreements and confidentiality agreements.
      We have or have licensed from others 12 issued U.S. patents that are in
      force.





In
      2006,
      a U.S. patent was awarded to DOV covering a novel polymorphic form of
      bicifadine. Additional U.S. patent applications were filed in 2006 which claim
      compositions and methods for treating pain using this novel polymorphic form
      of
      bicifadine.





In
      2002,
      2003 and 2005, we filed U.S. patent applications claiming novel sustained
      release formulations of bicifadine, methods for sustained release delivery
      of
      bicifadine to treat pain, and therapeutic methods employing bicifadine to treat
      chronic pain (including chronic low back pain and other specific, chronic pain
      disorders).





In
      2005,
      we filed a U.S. provisional application directed to therapeutic uses,
      compositions and methods employing bicifadine to treat neuropathic disorders,
      including neuropathic pain. This application was perfected in 2006 as regular
      U.S. utility and PCT patent applications.





Also
      in
      2005, we filed two U.S. provisional applications directed to novel synthetic
      methods and intermediates for the production of bicifadine and related
      compounds, and these applications were consolidated and perfected in 2006 as
      U.S. regular utility and PCT patent applications.





In
      2004,
      we filed a U.S. provisional patent application directed to the use of bicifadine
      for controlling fever and menopausal symptoms, including hot flashes. This
      application was perfected in 2005 as regular U.S. utility and PCT patent
      applications.





In
      2005,
      we filed a U.S. provisional patent application directed to therapeutic uses,
      compositions and methods employing bicifadine to treat urological disorders,
      including urinary incontinence. This application was perfected in 2006 as U.S.
      regular utility and PCT patent applications.





DOV
      also
      retains U.S. patent rights protecting the use of bicifadine and DOV 216,303
      for
      the treatment of addictive disorders through December 2018.





Effective
      January 15, 2007, XTL has undertaken all patent and intellectual property
      prosecution relating to bicifadine at XTL’s expense.





A
      composition of matter patent for indiplon, patent no. 6,399,621, which falls
      under our license agreement and our sublicense to Neurocrine, was issued to
      a
      former Wyeth subsidiary, American Cyanamid, in June 2002 and is due to expire
      in
      August 2020. A further composition of matter patent covering indiplon, patent
      no. 6,544,999, was issued to Neurocrine in April 2003 and is due to expire
      in
      October 2020. A further composition of matter patent covering a novel
      polymorphic form (different crystal structure) of indiplon, patent no. 6,903,106
      was issued in June 2005 and is due to expire in 2023.





In
      2006,
      we filed a U.S. provisional patent application directed to novel salts and
      co-crystals of pyrazolopyrimidines, including indiplon and ocinaplon, which
      patent application also presents claims to methods and compositions for
      producing salts and co-crystals of pyrazolopyrimidines.





In
      December 2000, a patent issued covering the compound formulation of DOV
      diltiazem. This patent is due to expire in April 2018.





In
      April
      2002, a U.S. patent was issued claiming the composition of matter, use and
      methods of treatment and manufacture for DOV 21,947, a triple uptake
      inhibitor under development for the treatment of depression. This patent is
      due
      to expire in January 2021. In 2006 a US continuation patent issued to DOV
      covering methods for treating anxiety, eating disorders including excessive
      appetite and obesity, and other conditions using DOV 21,947. We currently have
      pending US utility and PCT patent applications claiming novel polymorphic forms
      of DOV 21,947, as well as related compositions and treatment methods employing
      these novel polymorphic forms of DOV 21,947.





18


Between
      2003 and 2006, five patents have issued covering the composition of matter,
      uses
      and methods of manufacture of DOV 102,677, our candidate for the treatment
      of
      indications including alcohol abuse, alcoholism, Parkinson’s disease, restless
      leg syndrome, and attention deficit disorder. This patent will expire in 2023.
      In 2006, we received a Notice of Allowance on a U.S. patent directed to methods
      for production of DOV 102,677, which patent is scheduled to issue in the near
      future.





In
      addition to protecting our compounds described above, we intend to supplement
      our current patents with additional patent applications covering new
      compositions of matter, uses, methods of manufacture and formulations, as
      appropriate. Once a basic product patent expires, we may be able to derive
      additional commercial exclusivity and benefits, including from :





·
            later-granted
                patents on processes or intermediates related to the most economical
                method of manufacture of the active ingredient of the product;





·
            patents
                directed to additional therapeutic uses; and





·
            patents
                directed to related compositions and improved clinical formulations.





***In-Licenses***





***Wyeth*** *.* In
      May 1998, we licensed from Wyeth, on an exclusive, worldwide basis,
      indiplon, bicifadine, ocinaplon and DOV 216,303 for any indication, including
      insomnia, pain, anxiety and depression. We have the right to develop and
      commercialize these compounds, including the right to grant sublicenses to
      third
      parties, subject to Wyeth's right of first refusal.





In
      February, 2004, we reorganized our exclusive license agreement with Wyeth and,
      in December 2006, we
      entered into three separate and distinct license agreements with Wyeth that
      together modified the terms of the existing licenses. Under the amended
      licensing arrangements, we gained an exclusive license to certain additional
      Wyeth intellectual property to allow us to develop products incorporating the
      three compounds for the treatment of human diseases, disorders and conditions
      except for the treatment of vasomotor symptoms in certain areas of women’s
      health. We granted to Wyeth an exclusive license to certain DOV intellectual
      property to allow Wyeth to develop products incorporating the three compounds
      for the treatment of vasomotor symptoms in those areas of women’s health,
      provided that the parties agreed to negotiate to jointly develop and
      commercialize any such products. Pursuant to the agreements, we
      are
      obligated to pay Wyeth royalties of 3.5 percent of net sales for ocinaplon
      and
      DOV 216,303 and 5.0 percent of net sales for bicifadine, and milestones of
      $2.5
      million each for ocinaplon and DOV 216,303 and $5.0 million for bicifadine
      upon NDA filing, and $4.5 million each for bicifadine, ocinaplon and DOV 216,303
      upon a NDA approval. The royalty rate for bicifadine, ocinaplon and DOV 216,303
      will increase by 0.5 percent should we partner or sublicense that compound.
      In
      addition, should we partner or sublicense a compound, the next milestone payable
      to Wyeth for that compound will be accelerated to become due upon partnering.
      Upon sublicensing bicifadine to XTL in January 2007 and DOV 216,303 to Merck
      in
      August 2004, we have paid the $5.0 million and $2.5 million due upon the
      acceleration of the milestones due upon a NDA filing for bicifadine and DOV
      216,303, respectively .
      In
      addition, we are obligated to pay milestones of $2.25 million upon NDA (or
      equivalent) approval in the United States, Europe or Japan for any product
      containing DOV 21,947 or DOV 102,677, but only if such milestone becomes payable
      prior to payment of the $4.5 million milestone payable on an NDA (or equivalent)
      approval for DOV 216,303. Any milestone payments made with respect to DOV 21,947
      or DOV 102,677 reduce, dollar-for-dollar, DOV's $4.5 million milestone
      obligation for DOV 216,303.





19


As
      part
      of the February 2004 reorganization, Neurocrine acquired Wyeth’s interest under
      the license covering indiplon, with the result that the 2.5 percent royalty
      payable by us to Wyeth and the $2.5 million in milestones was eliminated.
      Accordingly, the reorganization with Neurocrine allows Neurocrine to pay to
      us
      royalty and milestone payments net of those that would be owed by us to Wyeth,
      or 3.5 percent on worldwide net sales, if any, and a $1.5 million milestone
      upon
      NDA approval.





If
      Wyeth
      terminates a license upon an uncured breach by us, and by Neurocrine under
      the
      standby license, we must transfer to Wyeth all information, data and know-how
      relating to the products and any government authorizations, in addition to
      our
      rights derived from our sublicensees with regard to the products. The agreements
      expire as to each compound for the later of the expiration of the Wyeth patents
      in such country and a period of ten years following the launch of each compound
      in each country. Upon such expiration, with respect to each country we will
      have
      a fully paid, royalty-free license with the right to make, use or sell the
      compounds without any further monetary obligation to Wyeth.





***Elan*** *.* On
      October 21, 2003, in connection with termination of the joint venture with
      Elan, Elan granted to Nascime Limited, our former joint venture operating
      company, now wholly owned by us, a non-exclusive, royalty-free, perpetual,
      worldwide license to make and sell controlled release formulations of ocinaplon
      and bicifadine using the Elan intellectual property licensed to the joint
      venture, including that developed during the venture. We are required to pay
      Elan milestones, amounting to $1.0 million for ocinaplon and
      $0.5 million for bicifadine upon license of the products to a third party
      for development or commercialization, and additional equal amounts upon
      commercial launch, or an aggregate of $3.0 million upon commercial launch
      of both products if we do not license the products to a third party. The Elan
      intellectual property under license includes certain Elan know-how and all
      Elan
      patents owned, licensed or controlled by Elan subsequent to the license
      agreement. In 2006, we transferred the intellectual property held by Nascime
      to
      us and dissolved Nascime.





**Manufacturing**





We
      have
      and will continue to rely on third-party contract manufacturers to produce
      sufficient quantities of our product candidates for use in our preclinical
      studies and clinical trials. We also intend to rely on third-party contract
      manufacturers to produce sufficient quantities for large-scale
      commercialization. In this regard, we have and will continue to engage those
      contract manufacturers who have the capability to manufacture drug products
      in
      amounts required for commercialization.





**Marketing
      and Sales**





We
      have
      no marketing, sales or distribution capabilities. We will need to either acquire
      or internally develop sales and distribution capabilities, or make arrangements
      with third parties to perform these services for us, in order to commercialize
      any of our product candidates.





**Government
      Regulation**





Regulation
      by government authorities in the U.S. and foreign countries is a significant
      factor in the development, manufacture and marketing of our proposed products
      and in our ongoing research and product development activities. All our products
      will require regulatory approval by government agencies prior to
      commercialization. In particular, human therapeutic products are subject to
      rigorous preclinical studies and clinical trials and other approval procedures
      of the FDA and corresponding regulatory authorities in foreign countries.
      Various federal and state statutes and regulations also govern or influence
      testing, manufacturing, safety, labeling, storage and record-keeping related
      to
      such products and their marketing. The process of obtaining these approvals
      and
      the subsequent substantial compliance with appropriate federal and state
      statutes and regulations require the expenditure of substantial time and
      financial resources.





Preclinical
      studies generally are conducted in laboratory animals to evaluate the potential
      safety and the efficacy of a drug product. In the U.S., drug developers submit
      the results of preclinical studies to the FDA as a part of an investigational
      new drug application, or IND, which must become effective before they can begin
      clinical trials in the U.S. An IND becomes effective 30 days after receipt
      by the FDA unless the FDA objects to it. Typically, clinical evaluation involves
      a time-consuming and costly three-phase process.





20


Phase
                I
            Refers
                typically to closely-monitored clinical trials and includes the initial
                introduction of an investigational new drug into human patients or
                normal
                volunteer subjects. Phase I clinical trials are designed to determine
                the
                metabolism and pharmacologic actions of a drug in humans, the side
                effects
                associated with increasing drug doses and, if possible, to gain early
                evidence on effectiveness. Phase I trials also include the study
                of
                structure-activity relationships and mechanism of action in humans,
                as
                well as studies in which investigational drugs are used as research
                tools
                to explore biological phenomena or disease processes. During Phase
                I
                clinical trials, sufficient information about a drug’s pharmacokinetics
                and pharmacological effects should be obtained to permit the design
                of
                well-controlled, scientifically valid, Phase II studies. The total
                number
                of subjects and patients included in Phase I clinical trials varies,
                but
                is generally in the range of 20 to 80.Phase
                II
            Refers
                to controlled clinical trials conducted to evaluate the effectiveness
                of a
                drug for a particular indication or indications in patients with
                the
                disease or condition under study and to determine the common short-term
                side effects and risks associated with the drug. These clinical trials
                are
                typically well controlled, closely monitored and conducted in a relatively
                small number of patients, usually involving no more than several
                hundred
                patients.Phase
                III
            Refers
                to expanded controlled and uncontrolled clinical trials, also involving
                patients with the disease or condition under study. These clinical
                trials
                are performed after preliminary evidence suggesting effectiveness
                of a
                drug has been obtained. They are intended to gather additional information
                about the effectiveness and safety that is needed to evaluate the
                overall
                benefit-risk relationship of the drug and to provide an adequate
                basis for
                physician labeling. Phase III trials usually include from several
                hundred
                to several thousand patients.





The
      FDA
      closely monitors the progress of each of the three phases of clinical trials
      that are conducted in the U.S. and may, at its discretion, re-evaluate, alter,
      suspend or terminate the testing based upon the data accumulated to that point
      and the FDA’s assessment of the risk/benefit ratio to the patient. To date we
      have conducted certain of our clinical trials outside the U.S., where they
      are
      monitored by the cognizant national regulatory agencies. All clinical trial
      test
      design and results, whether the trial is conducted in the U.S. or abroad, are
      subject to review by the FDA following IND or NDA filings.





Once
      Phase III trials are completed, drug developers submit the results of
      preclinical studies and clinical trials to the FDA, in the form of a NDA, for
      approval to commence commercial sales. In response, the FDA may grant marketing
      approval, request additional information or deny the application if the FDA
      determines that the application does not meet regulatory approval criteria.
      This
      is the registration process. FDA approval may not be granted on a timely basis,
      or at all. Furthermore, the FDA may prevent a drug developer from marketing
      a
      product under a label for its desired indications, which may impair
      commercialization of the product. Similar regulatory procedures must also be
      complied with in countries outside the U.S.





If
      the
      FDA approves the NDA, the drug becomes available for physicians to prescribe
      in
      the U.S. After approval, the drug developer must submit periodic reports to
      the
      FDA, including descriptions of any adverse reactions reported. The FDA may
      request or require additional trials to evaluate any adverse reactions or
      long-term effects.





In
      addition to studies requested by the FDA after approval, a drug developer may
      conduct other trials and studies to explore use of the approved compound for
      treatment of new indications. The purpose of these trials and studies and
      related publications is to broaden the application and use of the drug and
      its
      acceptance in the medical community.





21


We
      will
      have to complete an approval process, similar to the U.S. approval process,
      in
      virtually every foreign target market for our products in order to commercialize
      our product candidates in those countries. The approval procedure and the time
      required for approval vary from country to country and may involve additional
      testing. Foreign approvals may not be granted on a timely basis, or at all.
      In
      addition, regulatory approval of prices is required in most countries other
      than
      the U.S. We face the risk that the resulting prices would be insufficient to
      generate an acceptable return to us or our collaborators.





**Competition**





The
      pharmaceutical industry is highly competitive and marked by a number of
      established, large pharmaceutical companies, as well as smaller emerging
      companies, whose activities are directly focused on our target markets and
      areas
      of expertise. Many of our competitors possess greater financial, managerial
      and
      technical resources and have established reputations for successfully developing
      and marketing drugs, all of which put us at a competitive disadvantage. We
      face
      and will continue to face competition in the discovery, in-licensing and
      development of our product candidates, which could severely impact our ability
      to generate revenue or achieve significant market acceptance of our drug
      candidates. Furthermore, new developments occur in the pharmaceutical industry
      at a rapid pace. These developments may render our product candidates or
      technologies obsolete or noncompetitive.





We
      have
      four product candidates undergoing DOV-driven or collaborative clinical
      development addressing four different and substantial pharmaceutical markets.
      Competition in these markets includes the following drugs and pharmaceutical
      companies:





***Insomnia
      Market***





Indiplon
      would compete in the sedative and hypnotic market. Ambien ® ,
      Sonata ® ,
      Lunesta ® ,
      and
      Rozerem ® are
      already marketed for the treatment of insomnia by Sanofi-Aventis, King
      Pharmaceuticals, Inc., Sepracor, Inc., and Takeda Pharmaceutical Company,
      respectively. Recently, in anticipation of the near-term generic entrant of
      Ambien ® or
      zoplidem, Sanofi-Aventis launched a controlled-release formulation of Ambien ® called
      Ambien CR ® .
      H.
      Lundbeck A/S and Merck are developing gaboxadol, a GABA agonist, for sleep
      disorders, which is currently in Phase III clinical trials. Somaxon
      Pharmaceuticals is developing doxepine, a H1 antagonist, for the treatment
      of
      insomnia, which is currently in Phase III clinical trials.





***Pain
      Market***





Bicifadine
      would compete in the analgesic market. The two principal classes of pain
      treatments, as defined by IMS, are the antiarthritic class and the analgesic
      class. Due to the incidence and prevalence of pain, both classes have a very
      large volume in sales and in total prescriptions.





Sales
      of
      antiarthritics in 2005 were $7.9 billion which represents a one year growth
      decrease of 19.1 percent in value due to the withdrawal of additional COX-2
      inhibitors (for example, Celebrex and Bextra, both marketed by Pfizer). This
      has
      led other antiarthritics, such as Mobic ® ,
      marketed by Boehringer Ingelheim, to capture a significant share of this class.
      In 2005, Mobic sales more than doubled with total sales of $1 billion.





Sales
      of
      the analgesic class, as defined by IMS, reached $10.5 billion in 2005 which
      represented a flat annual growth rate and an increase of approximately five
      percent in total prescriptions. This class is dominated by narcotics. Sales
      of
      longer acting non-injectable narcotics that are actively marketed such as
      Actiq ® by
      Cephalon, Inc., Avinza ® by
      Ligand Pharmaceuticals, Inc., and Kadian ® by
      Alpharma, Inc., continue to show strong growth in sales and prescriptions.
      Non-narcotics, such as the synthetic non-narcotic subclass as defined by IMS,
      demonstrated positive growth in total prescriptions, but negative growth in
      2005
      sales because of generic erosion in price. Branded synthetic non-narcotic
      products such as Ultram ® and
      Ultracet ® ,
      both
      marketed by Johnson & Johnson, enjoyed very strong sales when heavily
      promoted, but are now off-patent and are demonstrating significant sales
      declines.





22


***Depression
      Market***





DOV
      21,947 and 216,303 would compete in the antidepressant market, which is
      dominated by SSRIs and SNRIs that comprise nearly 80 percent of the
      antidepressant market. Significant SSRI market positions are held by Zoloft,
      marketed by Pfizer, Celexa and Lexapro ® ,
      marketed by Forest Laboratories, Inc., and Paxil, marketed by GlaxoSmithKline.
      SNRI market leaders include Effexor, marketed by Wyeth, and Cymbalta, marketed
      by Eli Lilly and Co., which is also co-promoted for neuropathic pain. In 2005
      IMS estimated that the SSRI and SNRI markets combined totaled $10.2
      billion.





***Alcohol
      Abuse***





DOV
      102,677 would compete in the alcohol abuse market. Both
      Vivitrol, approved in April 2006 and marketed by Cephalon and Alkermes and
      Campral ® ,
      marketed by Forest, compete in the alcohol abuse market. Alcohol
      abuse is an underserved space, met by a general lack of effective treatments.
      The most recent alcohol use and abuse study conducted by the U.S. Department
      of
      Health and Human Services, “The 2001 National Household Survey on Drug Abuse”,
      estimates that approximately 14 million Americans meet the diagnostic criteria
      for alcohol abuse or alcoholism.





**Employees**





As
      of
      March 19, 2007, we had 41 full-time employees, 15 of which hold Ph.D., M.D.
      or
      equivalent degrees. None of our employees are represented by a collective
      bargaining arrangement, and we believe the relationship with our employees
      is
      good.





**Our
      Scientific Advisory Board**





Our
      scientific advisory board, or SAB, advises us with respect to our product
      development strategy as well as the scientific and business merits of licensing
      opportunities and acquisition of compounds and the availability of opportunities
      for collaborations with other pharmaceutical companies. The SAB consists of
      a
      group of highly regarded and experienced scientists and clinicians. We have,
      in
      the past, compensated certain SAB members with stock options pursuant to our
      2000 stock option and grant plan, and expenses for attendance at the annual
      meeting. Certain of the SAB members receive compensation for consulting
      services. The current SAB members are:





**Robert
      Cancro, M.D.** is
      the
      chairman of our Scientific Advisory Board and one of our co-founders. From
      1976
      until his retirement in 2006, Dr. Cancro served as professor and chairman of
      the
      Department of Psychiatry at New York University School of Medicine, Director
      of
      Psychiatry at New York University Hospital and director of the Nathan S. Kline
      Institute for Psychiatric Research.  Today, he continues to serve as a
      professor in the Department of Psychiatry at New York University School of
      Medicine and as director of the Mental Illness Prevention Center.  Prior to
      1976, Dr. Cancro was a professor in the Department of Psychiatry at the
      University of Connecticut Health Center.  Dr. Cancro is a widely
      published, internationally recognized psychiatrist and educator, having received
      numerous honors and awards.  He is on the editorial board of several
      scientific journals and is an examiner for the American Board of Psychiatry
      and
      Neurology Inc. Dr. Cancro is a Fellow of the American Psychiatric
      Association, the American College of Psychiatrists and the American College
      of
      Physicians.  Dr. Cancro is president and a director of the
      International Committee Against Mental Illness and Chairman of the Section
      on
      Psychiatric Rehabilitation of the World Psychiatric Association.





**Arvid
      Carlsson, M.D., Ph.D.** is a
      world-renowned neuropharmacologist and the recipient of numerous prizes and
      awards, including the Nobel Prize and the Legion of Honour. Dr. Carlsson
      has been Professor Emeritus at the University of Gothenburg, Sweden since 1989.
      Prior to that, he was Professor, Pharmacology Department, University of
      Gothenburg since 1959 and served as chairman from 1959 to 1976. He has conducted
      groundbreaking research in the areas of depression, schizophrenia and
      Parkinson’s disease.





23


**John
      W. Daly, Ph.D.** is
      an
      internationally known chemist/pharmacologist. Now a scientist emeritus in the
      National Institute of Diabetes and Digestive and Kidney Diseases, Dr. Daly
      was
      chief of NIDDK’s Laboratory of Bioorganic Chemistry, a laboratory he founded and
      headed from 1981 to 1997. Natural products discovered through the research
      of
      Dr. Daly’s lab, primarily alkaloids derived from amphibian skin, have had a
      major impact on knowledge of how the nervous system functions and how drugs
      interact with the nervous system. During Dr. Daly’s 40-year tenure at NIH, his
      numerous accomplishments have included the discovery of the “NIH Shift” — an
      unexpected molecular process involved in the conversion of the amino acids
      phenylalanine and tryptophan to the important neurotransmitters dopamine,
      norepinephrine and serotonin. Author of more than 500 research papers, a book
      ( *Cyclic
      Nucleotides in the Nervous System* )
      and
      many book chapters, Dr. Daly was elected to the National Academy of Sciences
      in
      1997. Among his many other honors are the Hillebrand Award from the American
      Chemical Society in 1978, the Research Achievement Award from the American
      Society of Pharmacognosy in 1997, the Karl Wilhelm Scheele Award from the
      Swedish Academy of Pharmaceutical Sciences in 1999 and in 2002, the American
      Chemical Society’s Ernest Guenther Award in the Chemistry of Natural Products.
      That same year, he was also named among the most-cited pharmacologists in the
      world.





**David
      H. Farb, Ph.D.** is
      a
      Professor and has served since 1990 as Chairman of the Department of
      Pharmacology and Experimental Therapeutics at the Boston University School
      of
      Medicine, where he also serves as Director of the Program in Biomedical
      Neuroscience.  Additionally, he is Director of the university-wide
      interdisciplinary NIGMS-funded Biomolecular Pharmacology Training Program,
      the
      interdepartmental Program in Biomedical Neuroscience and heads the Laboratory
      of
      Molecular Neurobiology.  Dr. Farb chairs the Executive Committee for the
      Medical Sciences Training Program and is a member of the Bioinformatics Program.
       He is currently President of New England Pharmacologists Chapter of
      ASPET.  Prior to joining BU, Dr. Farb was a full professor with tenure and
      Head of the Molecular Pharmacology Research Program at the SUNY Downstate
      Medical Center.  He also was elected Presiding Officer of the Graduate
      School at SUNY. While in New York, Dr. Farb was elected Chair of the Section
      of
      Biological Sciences at the New York Academy of Sciences, where he subsequently
      founded the Section of Neuroscience.  He received his B.A. in Chemistry
      from Long Island University and the Ph.D. in Biochemistry at Brandeis
      University.  Dr. Farb’s current research is directed toward understanding
      the mechanisms of action of abused substances and steroid hormones and their
      interactions with excitatory and inhibitory amino acid receptors in the central
      nervous system. The research also focuses on the mechanism of action and
      discovery of neuromodulators as therapeutic agents and on the structure,
      function, and cellular dynamics of ion channels and receptors in the brain
      and
      spinal cord.




**Arnold
      S. Lippa, Ph.D.** is a
      co-founder of DOV and served as our chief executive officer from April 1995
      through June 2005. Since our inception in April 1995, Dr. Lippa has served
      as
      our chairman of our board of directors and since July 2005, serves as our
      executive chairman of our board of directors. Dr. Lippa also currently
      serves as chairman of Xintria Pharmaceutical Corporation, as senior managing
      director of Aurora Capital LLC and as manager of Atypical BioCapital Management
      LLC, Atypical BioVentures LLC and T Morgen Capital LLC. Prior to 1985, he served
      as Director of Molecular Neurobiology and held other positions at American
      Cyanamid. In addition, Dr. Lippa has consulted for various pharmaceutical and
      biotechnology companies and has been a graduate faculty professor at the New
      York University School of Medicine and the City University of New York.





**Website
      Availability of Reports**





Our
      Internet website address is http://www.dovpharm.com. Our annual report on Form
      10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
      to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
      Securities Exchange Act of 1934 are available free of charge through our website
      as soon as reasonably practicable after we electronically file such material
      with, or furnish it to, the SEC. Our website and the information contained
      therein or connected thereto are not intended to be incorporated into this
      Annual Report on Form 10-K.





**Our
      Corporate Information**





We
      were
      incorporated in May 1995 in New Jersey and reincorporated in Delaware in
      November 2000. Our principal executive office is located at 150 Pierce Street,
      Somerset, NJ 08873. The telephone number of our principal executive office
      is
      (732) 907-3600.





24




**ITEM
      1A. RISK FACTORS**





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





**Risks
      Related to our Business**





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





At
      December 31, 2006, we had cash and cash equivalents and marketable securities
      of
      $42.3 million. Pursuant to the recent consummation of the Exchange Offer, we
      have paid out $14.3 million and incurred substantial fees and expenses. We
      have
      also paid out an additional $2.5 million to repay the remaining outstanding
      debentures. We believe that our existing cash, cash equivalents and marketable
      securities will be sufficient to fund our anticipated operating expenses,
      interest payments on our debt obligations and capital requirements until
      December 31, 2007. We will require additional funding to continue our research
      and development programs, including preclinical testing and clinical trials
      of
      our product candidates, for operating expenses and to pursue regulatory
      approvals for our product candidates. We intend to raise additional capital
      in
      2007 through public or private financing or collaborative agreements; however,
      if adequate funds are not available to us as we need them, we will be required
      to curtail significantly or eliminate at least temporarily one or more product
      development programs. These matters raise substantial doubt over our ability
      to
      continue as a going concern.





***Failure
      to obtain approval by our shareholders of an increase in our authorized shares
      of common stock will result in dilution to shareholders as well as a retained
      liquidation preference to our series c convertible preferred
      stockholders.***





In
      connection with the consummation of the Exchange Offer described under Part
      I of
      this Form 10-K, we made an aggregate cash payment of $14.3 million and issued
      539,784 shares of convertible preferred stock, representing 79.4% of the
      Company’s outstanding common stock on an as-converted basis, in exchange for
      $67.5 million of our Debentures.  In
      the
      event our common stockholders fail to approve an amendment to our Certificate
      of
      Incorporation to increase the number of authorized shares of common stock,
      existing stockholders will begin to experience additional dilution beginning
      on
      the date
      that
      is 45 days following the date that the SEC informs us that it has no further
      comments on the proxy statement filed by us in connection with the proposed
      increase of the number of authorized shares of our common stock. This additional
      dilution will be caused by an increase in the conversion ratio of 1% per week
      subject to a maximum increase of 50% which will increase the number of shares
      of
      common stock issuable upon conversion of each share of convertible preferred
      stock, thus increasing the percentage of the Company owned by the holders of
      convertible preferred stock on an as converted basis. In the event the Company’s
      common stockholders never approve the amendment and the conversion ratio
      increased until it reached the maximum limit, current holders of common stock’s
      ownership interest in the Company would decrease from 20% to approximately
      14.7%, without giving effect to outstanding options and warrants.




*Senior
      Status of Series C Convertible Preferred Stock in Liquidation Will
      Remain:* In the
      event the amendment to the Company’s Certificate of Incorporation to increase
      the authorized common stock is not approved, the series C convertible preferred
      stock will remain outstanding and such shares will remain senior to the common
      stock and the series D convertible preferred stock in a liquidation of the
      Company. Accordingly, a holder of common stock or series D convertible preferred
      stock will not receive any proceeds in connection with a liquidation of the
      Company unless and until the holders of series C convertible preferred stock
      receive their full liquidation preference of $44 million. Accordingly, holders
      of common stock and series D convertible preferred stock would only receive
      proceeds in a liquidation in the event the full amount of such liquidation
      preference is paid to the holders of series C convertible preferred
      stock.




25


*New
      Class of Common Stock:* Holders
      of a majority of each series of the convertible preferred stock will also have
      the right to request that the Board approve and submit to stockholders for
      approval, an amendment to the Company’s Certificate of Incorporation to provide
      for a new class of common stock into which the new series of convertible
      preferred stock would then be convertible based upon the conversion ratio for
      the existing common stock described above. The new class of common stock will
      have certain rights that are superior to the existing common stock.




***Mandatory
      conversion of our series C convertible preferred stock will result in dilution
      to our common stockholders and may cause our common stock’s price to
      decline.***




In
      the
      event the amendment to increase the authorized common stock is approved, the
      shares of series C convertible preferred stock will automatically convert into
      common stock on the
      earlier to occur of (i) the date that is thirty (30) days following the filing
      of the amendment to our Certificate of Incorporation with the Secretary of
      the
      State of Delaware to increase our authorized common stock, and (ii) the date
      that we consummate a financing through the issuance of our equity or long term
      debt securities in which the gross proceeds to the Company are at least $5
      million, provided that the foregoing amendment to our Certificate of
      Incorporation has been filed. In the event the amendment to increase authorized
      common stock is approved, the number of shares of common stock outstanding
      will
      increase by 84.0 million shares shortly following the approval. Sales of these
      additional shares of common stock, which generally will have no restriction
      on
      trading, may cause our common stock’s price to decline. In addition, future
      growth and increases in the value of the Company as a whole will be shared
      by a
      significantly larger number of shares of common stock.




In
      the
      event the amendment to the Company’s Certificate of Incorporation to increase
      the authorized common stock is approved, the mandatory conversion of the series
      C convertible preferred stock will also have the effect of removing the
      liquidation preference that holders thereof are entitled to. Accordingly, in
      the
      event the Company is liquidated, holders of common stock (including common
      stock
      issued upon the mandatory conversion of the series C convertible preferred
      stock) and holders of the series D convertible preferred stock will share on
      a
      pari passu basis in any liquidation proceeds.




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





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





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





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





26





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





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


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


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


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


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


·
              developments
                  or disputes concerning patents or other proprietary
                  rights;


·
              changes
                  in estimates or recommendations by securities
                  analysts;


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


·
              litigation;


·
              general
                  market conditions;


·
              changes
                  in the structure of health care payment
                  systems;


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


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


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


·
              changes
                  in senior management.





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




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





Since
      our
      inception in April 1995 through December 31, 2006, we have incurred significant
      operating losses and, as of December 31, 2006, we had an accumulated deficit
      of
      $191.7 million. We have not yet completed the development, including obtaining
      regulatory approvals, of any product candidate and, consequently, have not
      generated any revenues from the sale of products. Even if we succeed in
      developing and commercializing one or more of our product candidates, we may
      never achieve significant sales revenue and we expect to incur operating losses
      for the foreseeable future. We also expect to continue to incur significant
      operating expenses and capital expenditures and anticipate that our expenses
      may
      increase in the foreseeable future as we:





·
            conduct
                clinical trials;


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


·
            make
                milestone payments;  ·
            seek
                regulatory approvals for our product
                candidates;


·
              commercialize
                  our product candidates, if
                  approved;


·
              hire
                  additional clinical, scientific and management personnel;
                  and




27




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




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





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





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





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


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


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


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


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


·
              we
                  or the FDA may suspend or delay initiation of further clinical
                  trials of
                  our product candidates for any of a number of
                  reasons;


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


·
              patient
                  recruitment may be slower than expected;


·
              patient
                  compliance may fall short of trial requirements;
                  and


·
              patients
                  may drop out of our clinical
                  trials.





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




In
      April
      and May 2006, we announced the results of our Phase III clinical trial of
      bicifadine for the treatment of chronic lower back pain, CLBP, study 020. 
Bicifadine did not achieve a statistically significant effect relative to
      placebo on the primary endpoint of the study at any of the three doses
      tested.  In October 2006, we announced the interim results of our second
      Phase III clinical trial of bicifadine for CLBP, study 021. Bicifadine did
      not
      achieve a statistically significant effect relative to placebo on the primary
      endpoint of the study and we therefore stopped the dosing in this study. We
      also
      recently stopped the dosing in the long-term safety trial, study 022. Following
      the execution of our sublicense agreement with XTL for bicifadine, we are
      required to perform certain transition activities relating to bicifadine. We
      anticipate this process will take several months and is expected to be completed
      in the second quarter of 2007.




28





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





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





On
      May
      18, 2006, we reduced our workforce to 74 employees from 111 employees in order
      to lower our cost structure as part of a reorganization of operations and to
      appropriately align our operations with its current stage of drug development
      and research. This reduction in force was made as a result of the postponement
      by us of certain clinical trials and other development activities for
      bicifadine. In
      October 2006, we announced the interim results of our second Phase III clinical
      trial of bicifadine for CLBP, study 021. Bicifadine did not achieve a
      statistically significant effect relative to placebo on the primary endpoint
      of
      the study and we therefore stopped the dosing in this study. We also recently
      stopped the dosing in the long-term safety trial, study 022. In addition, our
      sublicense of bicifadine to XTL in January 2007 resulted in the further
      reduction of the time and resources necessary for the development of bicifadine.
      Once the transition activities required under our sublicense agreement for
      bicifadine are complete, we may determine to further reduce our
      workforce. **** Any
      reduction in workforce is accompanied by risk of litigation, which if initiated
      or successful, could harm our business and financial position.





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





From
      June
      2006 through March 19, 2007, our workforce has declined to 41 employees from
      74
      employees. With the uncertainty of our business situation we expect to have
      further declines. With the employee base that we currently have, we believe
      we
      will complete the transition activities required under our sublicense agreement
      with XTL for bicifadine in the second quarter of 2007. The decline in our
      workforce has hindered us from initiating any additional clinical studies with
      our reuptake inhibitors and any further reductions in workforce will not only
      result in further delays in initiating clinical studies but could also result
      in
      increased costs associated with hiring outside consultants to complete ongoing
      work.





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





Regulation
      by government authorities in the United States and foreign countries is a
      significant factor in the development, manufacture and commercialization of
      our
      product candidates and in our ongoing research and development activities.
      Our
      partner Neurocrine filed two NDAs for indiplon for the treatment of insomnia
      in
      April and May 2005. The FDA issued an approvable letter for the 5 mg and 10
      mg
      IR formulation and a non-approvable letter for the 15 mg MR formulation in
      May
      2006. Neurocrine announced in January 2007 that it plans to resubmit its NDA
      for
      indiplon capsules by the end of the second quarter of 2007. All our other
      product candidates are in various stages of research and development and we
      have
      not yet requested or received regulatory approval to commercialize any product
      candidate from the FDA or any other regulatory body.





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




29





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





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




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





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




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





Our
      efforts to develop, obtain regulatory approval for and commercialize our
      existing and any future product candidates depend in part upon the performance
      of our licensees and collaborative partners. Currently, we have license and
      collaborative agreements with XTL, Neurocrine and Wyeth. If DOV at any time
      becomes insolvent or commits actions for bankruptcy, the license for our
      compounds with Wyeth may be terminated and thus we may not have any remaining
      economic interest in the compounds. In addition, if at any time we become
      insolvent or commit actions for bankruptcy, the licenses for certain technology
      that we have with certain of our partners may be terminated. In connection
      with
      certain of these agreements, we have granted certain rights, including
      development and marketing rights and rights to defend and enforce our
      intellectual property. We do not have day-to-day control over the activities
      of
      our licensees or collaborative partners and cannot assure you that they will
      fulfill their obligations to us, including their development and
      commercialization responsibilities in respect of our product candidates.





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




30




From
      January 1999 until October 2003, Elan Corporation plc (“Elan”) and we were
      engaged in developing controlled release formulations of bicifadine and
      ocinaplon pursuant to our joint venture. In October 2003, we acquired from
      Elan 100% ownership of Nascime, the joint venture's operating subsidiary, and
      the product candidates bicifadine and ocinaplon. This acquisition ended our
      involvement with Elan in the nearly five-year joint venture. In March 2003,
      we and Biovail Laboratories, Inc. terminated our collaboration for DOV diltiazem
      and in December 2006, we and Merck, Inc. terminated our collaboration for DOV
      21,947 and DOV 216,303.




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





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





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





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




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





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





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




31





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





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





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





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





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





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




32





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





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




***We
      have not been able to fully utilize our new corporate headquarters, and as
      a
      result, our overhead expenses have increased.***




In
      February 2006, we committed to a ten-year operating lease for a 133,686 square
      foot facility in Somerset, New Jersey. This facility has served as our corporate
      headquarters and principal place of business since June 2006. This new facility
      has office and laboratory space and results in a higher level of fixed overhead.
      As a result of the failure of the Phase III bicifadine clinical studies 020
      and
      021, the stoppage of 022 and the sublicensing of bicifadine to XTL, for
      the
      foreseeable future we will not utilize the full capacity of the facility and
      there can be no assurance that we will ever operate the facility efficiently.
      The annual lease payments on this facility are $2.8 million.





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





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





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





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




33





**Risks
      Related to our Industry**





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





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





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





·
            capital
                resources and access to capital;


·
              research
                  and development resources, including personnel and
                  technology;


·
              regulatory
                  experience;


·
              preclinical
                  study and clinical testing experience;
                  and


·
              manufacturing,
                  distribution and marketing
                  experience.





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





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





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





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


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


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





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




34





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





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





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





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




35





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





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





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




·
            safe,
                effective and medically necessary;


·
              appropriate
                  for the specific patient;


·
              cost-effective;
                  and


·
            neither
                experimental nor investigational.





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





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





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




36





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None.





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





We
      currently lease and occupy an approximately 133,686
      square foot facility in Somerset, New Jersey which serves as our corporate
      headquarters and principal place of business. This facility has
      laboratory and office space.





**ITEM
      3. LEGAL PROCEEDINGS**





We
      are
      not a party to any material legal proceedings.





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





No
      matters were submitted to a vote of security holders, through the solicitation
      of proxies or otherwise, during the fourth quarter of the fiscal year covered
      by
      this Form 10-K.




**PART
      II**





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




Our
      common stock is currently quoted on the Pink Sheets under the symbol
      DOVP.PK.




**Year
                2005**First
                Quarter
            
            $
            18.40
            
            $
            12.79Second
                Quarter
            
            
            19.37
            
            
            13.57Third
                Quarter
            
            
            21.49
            
            
            14.66Fourth
                Quarter
            
            
            17.02
            
            
            13.63




**Year
                2006**First
                Quarter
            
            $
            19.93
            
            $
            14.07Second
                Quarter
            
            
            16.80
            
            
            1.85Third
                Quarter
            
            
            2.54
            
            
            0.75Fourth
                Quarter
            
            
            0.94
            
            
            0.22




**Year
                2007**First
                Quarter (through March 15, 2007)
            
            $
            0.57
            
            $
            0.21





37


**STOCK
        PERFORMANCE GRAPH**
 
 The
        following graph compares the cumulative total shareholder return data for
        our
        common stock since April 24, 2002 (the date on which our common stock was
        first
        registered under section 12 of the Exchange Act) to the cumulative return
        over
        such period of the (i) NASDAQ Stock Market (U.S.) Index, and (ii) NASDAQ
        Biotechnology Index.
 
 The
        graph
        assumes that $100 was invested on April 24, 2002, the date on which our stock
        was first sold to the underwriters on the date of our initial public offering
        at
        a per share price of $13.00.


**COMPARISON
      OF CUMULATIVE TOTAL RETURN**


**FROM
      APRIL 24, 2002, TO DECEMBER 29, 2006**


**4/2002**
                
                **12/2002**
                
                **12/2003**
                
                **12/2004**
                
                **12/2005**
                
                **12/2006**DOV
                    Pharmaceutical, Inc.
                
                
                100.0
                
                
                52.3
                
                
                102.8
                
                
                138.8
                
                
                129.0
                
                
                2.1NASDAQ
                    Stock Market (U.S.)
                
                
                100.0
                
                
                75.6
                
                
                112.7
                
                
                122.4
                
                
                126.3
                
                
                134.9NASDAQ
                    Biotechnology Index
                
                
                100.0
                
                
                71.4
                
                
                104.2
                
                
                110.5
                
                
                113.7
                
                
                113.7


As
      of
      March 15, 2007, there were approximately 11 stockholders of record of our common
      stock. We cannot estimate with any confidence or accuracy how many beneficial
      owners are represented by the stockholders of record.





We
      have
      not paid any cash dividends on our common stock since inception and do not
      anticipate paying cash dividends in the foreseeable future.





See
      Part
      III, Item 12 of this Form 10-K for information regarding securities authorized
      for issuance under equity compensation plans.




**ITEM
      6. SELECTED FINANCIAL DATA**





The
      following selected financial data should be read in conjunction with
      "Management's Discussion and Analysis of Financial Condition and Results of
      Operations" and with our financial statements and related notes and other
      financial data included in Part II, Items 7 and 8 in this Form 10-K.





The
      following tables present selected financial data at and for the years ended
      December 31, 2002, 2003, 2004, 2005 and 2006. The statement of operations
      data for the years ended December 31, 2004, 2005 and 2006, and the balance
      sheet data at December 31, 2005 and 2006, have been derived from our
      audited financial statements included in Part II, Item 8 in this Form 10-K.
      The
      balance sheet data as of December 31, 2002, 2003 and 2004 and the statements
      of
      operations data for the year ended December 31, 2002 and 2003, have been derived
      from our audited financial statements not included in this Form 10-K.




38




**Years
                Ended December 31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****Statement
                of Operations Data:**
            
            **(in
                thousands, except per share data)**Revenue
            
            $
            2,390
            
            $
            2,969
            
            $
            2,542
            
            $
            8,647
            
            $
            25,951Operating
                expenses:License
                expense
            
            
            —
            
            
            1,000
            
            
            2,500
            
            
            —
            
            
            —Research
                and development expense
            
            
            10,311
            
            
            22,684
            
            
            24,764
            
            
            53,983
            
            
            42,800General
                and administrative expense
            
            
            3,903
            
            
            5,173
            
            
            6,360
            
            
            9,110
            
            
            20,541Loss
                from operations
            
            
            (11,824
            )
            
            (25,888
            )
            
            (31,082
            )
            
            (54,446
            )
            
            (37,389
            )Loss
                in investment in DOV Bermuda
            
            
            (1,017
            )
            
            —
            
            
            —
            
            
            —
            
            
            —Interest
                income
            
            
            1,067
            
            
            851
            
            
            934
            
            
            3,712
            
            
            2,894Interest
                expense
            
            
            (2,017
            )
            
            (2,947
            )
            
            (2,954
            )
            
            (2,502
            )
            
            (4,008
            )Debt
                conversion and other income (expense), net
            
            
            (3,029
            )
            
            1,104
            
            
            (8
            )
            
            (5
            )
            
            (5,612
            )Net
                loss before tax
            
            
            (16,820
            )
            
            (26,880
            )
            
            (33,110
            )
            
            (53,241
            )
            
            (44,115
            )Income
                tax benefit
            
            
            —
            
            
            149
            
            
            189
            
            
            273
            
            
            5,747Net
                loss
            
            $
            (16,820
            )
            $
            (26,731
            )
            $
            (32,921
            )
            $
            (52,968
            )
            $
            (38,368
            )Basic
                and diluted net loss per share
            
            $
            (1.47
            )
            $
            (1.73
            )
            $
            (1.67
            )
            $
            (2.32
            )
            $
            (1.55
            )Weighted
                average shares used in computing basic and diluted net loss per
                share
            
            
            11,440,731
            
            
            15,489,426
            
            
            19,729,765
            
            
            22,837,265
            
            
            24,703,333





**As
                of December 31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****Balance
                Sheet Data:**
            
            **(in
                thousands)**Cash
                and cash equivalents and marketable securities
            
            $
            60,346
            
            $
            52,162
            
            $
            132,222
            
            $
            97,552
            
            $
            42,292Working
                capital (1)
            
            
            54,114
            
            
            46,516
            
            
            91,334
            
            
            78,516
            
            
            21,137Total
                assets
            
            
            66,150
            
            
            53,852
            
            
            136,723
            
            
            102,187
            
            
            50,361Short-term
                debt
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            16,022Long-term
                debt
            
            
            13,800
            
            
            14,886
            
            
            65,000
            
            
            80,000
            
            
            53,978Accumulated
                deficit
            
            
            (40,665
            )
            
            (67,396
            )
            
            (100,317
            )
            
            (153,285
            )
            
            (191,653
            )Total
                stockholders' (deficit) equity
            
            
            40,759
            
            
            35,905
            
            
            27,936
            
            
            (19,301
            )
            
            (29,634
            )




(1)
      Represents current assets less current liabilities .


39


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





**Liquidity/Going
      Concern**





In
      2004
      and 2005, we issued a total of $80.0 million of debentures of which $70.0
      million in aggregate principal amount remained outstanding as of December 31,
      2006. Effective at the opening of business on October 27, 2006, our common
      stock
      was delisted from The NASDAQ Global Market because we did not meet the aggregate
      market value of listed securities requirement of Marketplace Rule 4450(b)(1)(A).
      The delisting of our common stock from The NASDAQ Global Market constituted
      a
“fundamental change” under the Indenture. As a result, we were obligated to make
      an offer to repurchase to all holders of the debentures under the Indenture
      at a
      price of $1,012.50 per $1,000 principal amount, representing such principal
      amount plus $12.50 of accrued but unpaid interest thereon (the “Offer to
      Repurchase”).





The
      Offer
      to Repurchase expired in January 2007. Through the expiration of the Offer
      to
      Repurchase, we received tenders of debentures in the aggregate principal amount
      of $67.8 million, representing approximately 96.9% of the $70.0 million in
      aggregate principal amount of outstanding debentures. Upon the expiration of
      the
      Offer to Repurchase, we did not have the capital necessary to pay the aggregate
      purchase price of approximately $68.7 million for the Debentures that were
      tendered. As a result, no debentures were accepted for payment in connection
      with the Offer to Repurchase, and all of the debentures were returned to the
      holders and remained outstanding. Our failure to pay for the debentures tendered
      for repurchase in the Offer to Repurchase constitutes an “event of default”
under the Indenture, which could have resulted in the exercise of available
      remedies by the Trustee or the bondholders under the Indenture and/or applicable
      law. In particular, the Trustee or holders of at least 25% in aggregate
      principal amount of the debentures could have declared due and payable 100%
      of
      the principal amount of the debentures, plus any accrued and unpaid interest
      thereon, and each holder of a Debenture who tendered had the right under the
      terms of the Indenture to payment of the purchase price for such Debenture
      in
      connection with the Offer to Repurchase.





*Recent
      Event.* In
      March
      2007, we consummated an Exchange Offer pursuant to which $67.5 million of the
      debentures were exchanged for 439,784 shares of series C and 100,000 shares
      of
      series D convertible preferred stock and $14.3 million in cash. Additionally,
      the $2.5 million in principal amount of Debentures that remained outstanding
      after the consummation of the Exchange Offer was recently accelerated by the
      majority holder of such Debentures in accordance with the Indenture governing
      the Debentures and, on March 29, 2007 we repaid such Debentures at par plus
      accrued interest. ** Although
      we estimate that we have remaining capital to fund operations through December
      31, 2007, we
      will
      continue to have capital needs. We intend to raise additional capital in 2007
      through public or private financing or collaborative agreements; however, if
      adequate funds are not available to us as we need them, we will be required
      to
      curtail significantly or eliminate at least temporarily one or more product
      development programs. These matters raise substantial doubt over our ability
      to
      continue as a going concern.





**Overview**





We
      are a
      biopharmaceutical company focused on the discovery, in-licensing and development
      of novel drug candidates for central nervous system, or CNS, disorders. Since
      our inception, we have incurred significant operating losses and we expect
      to do
      so for the foreseeable future. As of December 31, 2006, we had an accumulated
      deficit of $191.7 million. We have depended upon equity and debt financings
      and
      license fee and milestone payments from our collaborative partners and licensees
      to fund our research and product development programs and expect to do so for
      the foreseeable future.





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




40





In
      pursuing our strategy, we enter into collaboration and/or license agreements
      with strategic partners from time to time. We currently have relationships
      with
      Neurocrine, XTL and Wyeth. In 1998, we sublicensed the worldwide development
      and
      commercialization of indiplon to Neurocrine in exchange for the right to receive
      payments upon the achievement of certain clinical development milestones and
      royalties based on product sales, if any. Neurocrine filed two NDAs for indiplon
      for the treatment of insomnia in April and May 2005. The FDA issued an
      approvable letter for the 5 mg and 10 mg IR formulation and a non-approvable
      letter for the 15 mg MR formulation in May 2006. Neurocrine plans to resubmit
      its NDA for indiplon capsules by the end of the second quarter of 2007. All
      descriptions of Neurocrine’s clinical development and clinical trial results for
      indiplon are based solely on Neurocrine’s public disclosures through March 19,
      2007.





On
      August
      5, 2004, we entered into an agreement with Merck for the worldwide development
      and commercialization of all indications for DOV 21,947 and certain indications
      for DOV 216,303 in exchange for a $35 million up-front payment and the right
      to
      receive further payments of up to $420.0 million upon the achievement of certain
      milestones and royalties based on product net sales, if any. As described below,
      this agreement was amended in 2005. The up-front payment was deferred and
      amortized to revenue over the estimated research and development period. On
      August 5, 2005, we amended our agreement with Merck such that we agreed to
      assume responsibility for certain development work for DOV 21,947, subject
      to
      reimbursement for certain of our development costs in certain
      circumstances. **** In
      December 2006, the amendment and original license agreement were
      terminated. Thus the remaining deferred revenue of $22.2 million was
      recognized in the fourth quarter of 2006 upon such termination. There were
      no
      payments due to Merck upon the termination of either the amendment or the
      original license agreement.




On
      January 15, 2007, we entered into an agreement with XTL relating to bicifadine.
      Under the agreement we granted XTL the exclusive right to develop products
      incorporating bicifadine for the treatment of human diseases, disorders and
      conditions, except for treatment of symptoms in certain areas of women’s health.
      We received an up-front payment of $6.5 million, of which $5.0 million was
      paid
      to Wyeth as a result of the acceleration of a milestone payable pursuant to
      our
      agreement with Wyeth.  In addition, we paid to Elan $500,000 pursuant to
      our agreement with them. Additionally, XTL was required to make a $1.0 million
      payment to DOV within 30 days if we successfully transferred to XTL an existing
      IND and certain program documentation relating to bicifadine. Such transfers
      were recently completed and XTL made such payment to us in February 2007. 
Total up-front and milestone payments by XTL under the agreement could exceed
      $130.0 million if all milestones are achieved, with escalating low double-digit
      royalties on annual net sales of bicifadine.  XTL will fund future
      research, development, manufacturing and commercialization costs of bicifadine. As
      the
      up-front payment was not associated with continuing
      obligations from us, the payment will be recorded as revenue in the first
      quarter of 2007.





Our
      revenue has consisted primarily of license fees and milestone payments from
      our
      collaborative partners and licensees. We record revenue on an accrual basis
      when
      amounts are considered collectible. In accordance with EITF 00-21, we evaluate
      all new agreements to determine if they are a single unit of accounting or
      separable. Revenue received in advance of performance obligations, or in cases
      where we have a continuing obligation to perform services, is deferred and
      amortized over the performance period. Revenue from milestone payments that
      represent the culmination of a separate earnings process is recorded when the
      milestone is achieved. Contract revenues are recorded as the services are
      performed. License and milestone revenue are typically not consistent or
      recurring in nature. Our revenue has fluctuated from year-to-year and
      quarter-to-quarter and this will likely continue. In 2007, our revenue is
      expected to reflect the up-front payment received from XTL on the licensing
      of
      bicifadine and the reimbursement for certain work and expenditures that we
      are
      incurring on their behalf.





Our
      operating expenses consist primarily of license expense, costs associated with
      research and development and general and administrative costs associated with
      our operations. Research and development expense consists primarily of
      compensation and other related costs of our personnel dedicated to research
      and
      development activities, clinical and preclinical trial expenses, including
      toxicology studies, costs of manufacturing clinical and preclinical trial
      materials, and professional fees related to clinical trials and patent strategy
      and prosecution. General and administrative expense consists primarily of the
      costs of our senior management, finance and administrative staff, business
      insurance, professional fees, including fees associated with investment bankers
      and lawyers engaged to advise us in relation to our debentures, and costs
      associated with being a public reporting entity. The recently consummated
      Exchange Offer effected a technical change of control and pursuant to the 2000
      Plan, all outstanding options issued prior to January 2007 and restricted stock
      awards will be immediately accelerated. Thus the Company will recognize a
      non-cash compensation charge in the first quarter of 2007 of approximately
      $6.1
      million.




41





It
      is not
      unusual for the clinical development of our types of products to each take
      five
      to ten years or more, and for total development costs for each to exceed
      $100 million. We are no longer responsible financially for the clinical
      programs for indiplon or for bicifadine, and we are unable to estimate the
      amount of expenditures necessary to complete any of such product candidates’
development. As of December 31, 2006, we had spent approximately $75.6 million
      on the development of bicifadine in connection with its clinical development
      programs. Additionally, we incurred $8.0 million in technology license fees
      for the two products and the Elan technology and $5.3 million on the acquisition
      of the remaining rights to these products from Elan as described below. As
      of
      December 31, 2006, we have incurred approximately $3.2 million, $3.7 million
      and
      $4.0 million in development expenses for DOV 21,947, DOV 216,303 and DOV
      102,677, respectively. In 2007 our research and development expenses are
      expected to be reduced from 2006 and will be funded with our existing cash.
      For
      DOV 21,947, we intend to initiate a Phase I clinical trial in April 2007 and
      a
      Phase II clinical trial in July 2007. We intend to select an uptake inhibitor
      development candidate from our preclinical pipeline in early 2007, file an
      IND
      for the selected compound with the FDA in early 2008 and undertake the necessary
      expenditures to enable initiation of a Phase I clinical study in the first
      half
      of 2008.





We
      expect
      that the development of our product candidates in clinical development will
      require substantial additional time and expense. The time and cost of completing
      the clinical development of our product candidates will depend on a number
      of
      factors, including the disease or medical condition to be treated, clinical
      trial design and endpoints, availability of patients to participate in trials,
      the results of clinical trials, the number of clinical trials required to be
      conducted, unanticipated trials, the length of time of the regulatory review
      process, the relative efficacy of the product versus treatments already approved
      and our ability to enter into new development collaborations. In light of these
      many uncertainties, we are unable to estimate the length of time or costs
      required to complete the development of these product candidates.




**Stock-based
      Compensation**





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




We
      adopted SFAS 123(R) using the modified prospective method which requires the
      application of the accounting standard as of January 1, 2006. Our consolidated
      financial statements as of and for the year ended December 31, 2006 reflect
      the
      impact of SFAS 123(R). In accordance with the modified prospective method,
      the
      consolidated financial statements for prior periods have not been restated
      to
      reflect, and do not include, the impact of SFAS 123(R).




42





**Results
      of Operations**





*Years
      Ended December 31, 2006 and 2005*





*Revenue.* Our
      revenue for the year ended December 31, 2006 and 2005 was $26.0 million and
      $8.6
      million, respectively including amortization of $26.0 million and $6.6 million
      in 2006 and 2005, respectively relating to the $35 million up-front fee we
      received on the signing of the license, research and development agreement
      for
      our collaboration with Merck. The up-front payment was deferred and amortized
      to
      revenue over the estimated research and development period. In December 2006,
      the amendment and original license agreement were terminated. Thus the
      remaining deferred revenue of $22.2 million was recognized during the fourth
      quarter of 2006 upon such termination. During the year ended December 31, 2005
      we recorded a $2.0 million milestone payment under the Neurocrine
      agreement.





*Research
      and Development Expense.*  **** Research
      and development expense decreased $11.2 million to $42.8 million for the year
      ended December 31, 2006 from $54.0 million for the comparable period in 2005.
      The decrease in research and development expense is primarily associated with
      lower external development costs of $14.8 million and lower net office related
      expenses of $476,000 offset by increased payroll and payroll related expenses
      of
      $3.5 million, $409,000 in rent expense and $154,000 in professional fees.
      Included in the decrease in external development costs are decreases of $6.3
      million for bicifadine, $4.7 million for our anti-anxiety compounds, $1.7
      million for DOV 102,677, $1.2 million for DOV diltiazem, $243,000 for DOV
      216,303 and $600,000 for our discovery and preclinical programs.  The
      increase in payroll and payroll related expenses is primarily the result of
      an
      increase in non-cash stock compensation of $2.9 million and an overall net
      increase in headcount as we expanded our operations in the first quarter of
      2006. The net increase in rent is primarily related to our Somerset facility.





*General
      and Administrative Expense.* General
      and administrative expense increased $11.4 million to $20.5 million in the
      year
      ended December 31, 2006 from $9.1 million for the comparable period in 2005.
      The
      increase is primarily related to an increase of $7.5 million in payroll and
      payroll related expenses, $2.0 million in rent related to our Somerset facility,
      $827,000 in office and related expenses, $800,000 in broker fees and expenses
      in
      relation to the sale of our state operating losses, $261,000 for professional
      fees and $172,000 in marketing research expenses, offset by a decrease in travel
      and entertainment expenses of $179,000. The increase in payroll and associated
      overhead is primarily the result of an increase in non-cash stock compensation
      expense of $5.9 million for stock options and $1.2 million for restricted stock,
      an increase in severance obligations of $1.4 million for our then chief
      executive officer, Dr. Hudson, and our then general counsel, Mr. Horton,
      pursuant to their respective severance agreements offset partly by a decrease
      in
      severance obligation recorded in the comparable period in 2005 of $790,000
      for
      our then chief executive officer, Dr. Lippa. Included in these non-cash
      compensation charges are charges of $4.3 million related to the acceleration
      of
      stock options and RSAs for Dr. Hudson and $1.1 million resulting from the
      acceleration of all outstanding stock options for Mr. Horton, pursuant to their
      respective severance agreements. The non-cash compensation charges are based
      on
      the fair value of the RSAs and options at the date of grant as opposed to
      current fair value. The increase in office and office related expenses is due
      primarily to increased facility build-out expenses, supplies and utilities
      related to our Somerset facility.





*Interest
      Income.* Interest
      income decreased $817,000 to $2.9 million in the year ended December 31, 2006
      from $3.7 million in the comparable period in 2005 primarily due to lower
      average cash balances offset in part by a higher effective interest rate
      yield.





*Interest
      Expense.* Interest
      expense increased $1.5 million to $4.0 million in the year ended December 31,
      2006 from $2.5 million in the comparable period in 2005. In the year ended
      December 31, 2006 and 2005 we incurred $1.9 million and $2.0 million in interest
      expense on the convertible debentures placed in December 2004 and January 2005.
      In addition, in the year ended December 31, 2006, we amortized $2.1 million
      of
      deferred issuance costs on our convertible subordinated debt due to the
      requirement that we offer to repurchase the obligations upon our delisting
      from
      NASDAQ. In 2005, we recorded $400,000
      in amortization of deferred charges on this debt. Please
      refer to Note 7 of our financial statements included under Part II, Item
      8of this Form 10-K.




43





*Debt
      Conversion Expense and Other Expenses, net.* On
      July
      26, 2006, we exchanged an aggregate of 3,445,000 shares of our common stock
      for
      an aggregate of $10 million in original principal amount of our outstanding
      convertible debentures. As a result of the exchange, and as required by SFAS
      84
“Induced Conversions of Convertible Debt” we recorded a $5.7 million non-cash
      charge related to the fair value of the additional shares issued to induce
      the
      exchange. Please refer to Note 7 of our financial statements included under
      Part II, Item 8 of this Form 10-K





*Income
      Tax Benefit* . In
      2006
      and 2005 we sold a portion of our previous years’ state net operating losses as
      part of the New
      Jersey Economic Development Authority technology business tax certificate
      program, thus recognizing a net income tax benefit of $5.7 million and $273,000,
      respectively.





*Years
      Ended December 31, 2005 and 2004*





*Revenue.* Revenue
      increased $6.1 million to $8.6 million in 2005 from $2.5 million in 2004. In
      2005 and 2004, our revenue was comprised of $6.6 million and $2.4 million,
      respectively, of amortization of the $35.0 million fee we received on the
      signing of the license, research and development agreement for our collaboration
      with Merck. The up-front payment was deferred and amortized to revenue over
      the
      estimated research and development period. As of June 1, 2005, we revised this
      estimate to 72 months from 51 months and, accordingly, the amortization of
      the
      remaining balance beginning June 1, 2005 reflects this revised time period.
      This
      adjustment to the estimate for the development period was made as a result
      of
      the need to collect and assess additional clinical data, which has extended
      the
      total development timeline. In addition, in 2005 we recorded $2.0
      million  for
      the
      achievement of a milestone under the Neurocrine agreement described above.
      In
      2004, we recorded $140,000 of contract services revenue associated with work
      we
      performed under the Merck collaboration.




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




*Research
      and Development Expense.* Research
      and development expense increased $29.2 million to $54.0 million in 2005 from
      $24.8 million in 2004. The
      increase in research and development expense was primarily associated with
      increased external development costs of $23.4 million, compensation and related
      expenses of $3.7 million and associated overhead of $2.1 million as we increased
      our personnel to support our expanded programs, offset by a decrease in non-cash
      stock compensation to outside consultants of
      $183,000. Included in the increase in external development costs is an increase
      of $20.1 million for bicifadine, $2.1 million for ocinaplon, $716,000 for DOV
      dilitazem, $332,000 for DOV 102,677 and $2.3 million for our discovery and
      preclinical programs offset by a decrease in costs of $996,000 for DOV 21,947,
      $856,000 for DOV 51,892 and $305,000 for DOV 216,303.




*General
      and Administrative Expense.* General
      and administrative expense increased $2.7 million to $9.1 million in 2005 from
      $6.4 million in 2004. The
      increase was primarily attributable to an increase in compensation expense
      of
      $2.4 million and professional fees of $365,000. The increase in compensation
      expense is due primarily to $790,000 in severance expense related to the
      termination of employment of our co-founder Dr. Lippa, $809,000 in non-cash
      compensation expense related
      to the amortization of the restricted stock granted to Dr. Hudson upon his
      appointment as Chief Executive Officer in July 2005 and to Dr. Lippa, our former
      Chief Executive Officer, in May 2005 (please refer to note 11 of our
      financial statements included
      under Part II, Item 8 of this Form 10-K) and
      $497,000 related to compensation and related expenses of $323,000 as we increased our personnel
      to
      support our operations. Professional fees increased primarily due to an increase in consulting fees
      of
      $237,000 and in legal fees of $295,000.




44





*Interest
      Income.* Interest
      income increased $2.8 million to $3.7 million from $934,000 in 2004 primarily
      due to
      higher
      average cash balances and the
      increase in average interest rates over the period.





*Interest
      Expense.* Interest
      expense decreased $452,000 to $2.5 million in 2005 from $3.0 million in 2004. We
      recorded an increase in interest expense of $2.0 million on the convertible
      debentures placed in December 2004 and January 2005 and $400,000 in amortization
      of deferred charges on this debt in 2005. This increase was offset by a decrease
      of $2.9 million of interest recorded on our convertible promissory note and
      convertible line of credit promissory note in 2004. This decrease was due to
      the
      conversion of the notes in May 2004 and January 2005.





*Other
      Expense, net.* ****** Other
      expense, net was virtually unchanged from prior year.





*Income
      Tax Benefit* . In
      2005
      and 2004 we sold a portion of our previous years’ state net operating losses as
      part of the New
      Jersey Economic Development Authority technology business tax certificate
      program, thus recognizing an income tax benefit of $273,000 and $290,000,
      respectively. In 2004,
      taking into account the $35.0 million up-front fee we received on the closing
      of
      the license, research and development agreement for our collaboration with
      Merck, we generated taxable income for the 2004 tax year under the New Jersey
      alternative minimum assessment thus recognizing an income tax expense to
      $101,000.





**Liquidity
      and Capital Resources**




At
      December 31, 2006, our cash and cash equivalents and marketable securities
      totaled $42.3 million compared with $97.6 million at December 31, 2005. The
      decrease in cash balances at December 31, 2006 resulted primarily from cash
      used
      in operations of $51.5 million, the establishment of a letter of credit related
      to our new facility of $4.2 million and purchases of property and equipment
      of
      $1.1 million. At December 31, 2006, we had working capital of $21.1 million
      compared with working capital of $78.5 million at December 31, 2005. In March
      2007, we consummated an Exchange Offer pursuant to which $67.5 million of the
      debentures were exchanged for 439,784 shares of series C and 100,000 shares
      of
      series D convertible preferred stock and $14.3 million in cash. Additionally,
      the $2.5 million in principal amount of Debentures that remained outstanding
      after the consummation of the Exchange Offer was recently accelerated by the
      majority holder of such Debentures in accordance with the Indenture governing
      the Debentures and, on March 29, 2007, we repaid such Debentures at par plus
      accrued interest. ** Although
      we estimate that we have remaining capital to fund operations through December
      31, 2007, we
      will
      continue to have capital needs. We intend to raise additional capital in 2007
      through public or private financing or collaborative agreements; however, if
      adequate funds are not available to us as we need them, we will be required
      to
      curtail significantly or eliminate at least temporarily one or more product
      development programs. These matters raise substantial doubt over our ability
      to
      continue as a going concern.





Net
      cash
      used in operations during the year ended December 31, 2006 amounted to $51.5
      million, as compared to $48.3 million in the same period of 2005. The increase
      in cash used in operations resulted primarily from the reduction in accruals
      and
      payables. Net non-cash expense (income) related to stock-based compensation,
      interest expense, debt conversion expense and depreciation and amortization
      expenses were $19.1 million in the year ended December 31, 2006 and $1.7 million
      in the comparable period in 2005. Non-cash amortization of premium paid on
      marketable securities was $255,000 and $1.3 million, net for the years ended
      December 31, 2006 and 2005, respectively.





Net
      cash
      provided by investing activities during the years ended December 31, 2006 and
      2005 amounted to $76.6 million and $12.1 million, respectively. This fluctuation
      resulted primarily from the timing differences in investment purchases,
      liquidation of marketable securities to meet operating cash flow needs, sales
      and maturities and the fluctuations in our portfolio mix between cash
      equivalents and short-term investment holdings. We expect similar fluctuations
      to continue in future periods. In
      addition, cash provided by investing activities was decreased by the
      establishment of a letter of credit related to our new facility of $4.2
      million.




45





Net
      cash
      provided by financing activities during the year ended December 31, 2006 was
      $1.5 million as compared to $15.6 million in the comparable period in 2005. Net
      cash
      provided by financing activities in the year ended December
      31, 2005 was primarily related to net
      proceeds of $14.6 million from the issuance of $15.0 million of 2.5%
      subordinated convertible debentures in January 2005 .





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





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





We
      believe that our existing cash and cash equivalents will be sufficient to fund
      our anticipated operating expenses, debt obligations and capital requirements
      until at least December 31, 2007. Our future capital uses and requirements
      depend on numerous factors, including:


·
              our
                  progress with research and development;
  ·
              our
                  ability to maintain and establish, and the scope of, collaborations
                  that
                  finance research and development of our clinical
                  candidates;
  ·
              the
                  progress and success of clinical trials and preclinical studies
                  of our
                  product candidates;
  ·
              the
                  costs and timing of obtaining, enforcing and defending our patent
                  and
                  intellectual rights; and
  ·
              the
                  costs and timing of regulatory
                  approvals.





In
      addition to the foregoing, our future capital uses and requirements are also
      dependent in part on the ability of our licensees and collaborative partners
      to
      meet their obligations to us, including the fulfillment of their development
      and
      commercialization responsibilities in respect of our product candidates. Our
      sublicensee and collaborative partners, Neurocrine and XTL, may encounter
      conflicts of interest, changes in business or clinical strategy, or they may
      acquire or develop rights to competing products, all of which could adversely
      affect their ability or willingness to fulfill their obligations to us and,
      consequently, require us to satisfy, through the commitment of additional funds
      or personnel or both, any shortfalls in their performance.





To
      meet
      future capital requirements, we may attempt to raise additional funds through
      equity or debt financings, collaborative agreements with corporate partners
      or
      from other sources. If adequate funds are not available, or available on an
      acceptable basis, we may be required to curtail or delay significantly one
      or
      more of our product development programs. In addition, future milestone payments
      under some of our collaborative or license agreements are contingent upon our
      meeting particular research or development goals. The amount and timing of
      future milestone payments are contingent upon the terms of each collaborative
      or
      license agreement. Milestone performance criteria are specific to each agreement
      and based upon future performance. Therefore, we are subject to significant
      variation in the timing and amount of our revenues, milestone expenses and
      results of operations from period to period.





**Contractual
      Obligations**





Future
      minimum payments for all contractual obligations for years subsequent to
      December 31, 2006, are as set forth in the table that follows. The table below
      does not adjust for the Exchange Offer described in the Special Note Regarding
      DOV Pharmaceutical, Inc.’s Common Stock and 2.5% Convertible Debentures due 2025
      in Part I of this Form 10-K.




**Payments
                Due by Period****Less
                Than 1 Year**
            
            **1-3
                Years**
            
            **3-5
                Years**
            
            **More
                    Than 5 Years**
            
            **Total
                (2)**Convertible
                subordinated debentures (1)(3)
            
            $
            1,750,000
            
            $
            3,500,000
            
            $
            3,500,000
            
            $
            92,822,917
            
            $
            101,572,917Operating
                leases
            
            
            2,865,231
            
            
            5,705,581
            
            
            5,931,648
            
            
            13,039,955
            
            
            27,542,415Other
                contractual liabilities(3)
            
            
            702,200
            
            
            229,500
            
            
            —
            
            
            —
            
            
            931,700Total
            
            $
            5,317,431
            
            $
            9,435,081
            
            $
            9,431,648
            
            $
            105,862,872
            
            $
            130,047,032





(1)
            Included
                are interest payments of approximately $1.8 million annually.




46




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




(3)
            Upon
                the consummation of the Exchange Offer on March 15, 2007, described
                in the
                Special Note Regarding DOV Pharmaceutical, Inc.’s Common Stock and 2.5%
                Convertible Debentures due 2025 in Part I of this Form 10-K, we were
                obligated to pay a $1.0 million success fee to one of the investment
                bankers and have made a cash payment of $14.3 million and issued
                equity
                securities in full settlement of our obligations for $67.5 million
                in
                principal amount of outstanding debentures. Additionally, the $2.5
                million
                in principal amount of Debentures that remained outstanding after
                the
                consummation of the Exchange Offer was recently accelerated by the
                majority holder of such Debentures in accordance with the Indenture
                governing the Debentures and, on March 29, 2007, we repaid such Debentures
                at par plus accrued interest. Thus, the total contractual obligations
                and
                the convertible subordinated debentures on a proforma basis for the
                Exchange Offer and this subsequent debenture repayment would be reduced
                to
                $45.3 million and $16.0 million, respectively, and the other contractual
                liabilities would be increased to $1.7
                million.





The
      table
      above excludes future milestones and royalties (as summarized in the table
      below) that may be owed to Wyeth, Elan and Biovail under terms of existing
      agreements as payments are contingent upon future events. We do not expect
      to
      pay any royalties under these agreements in 2007.





**Milestone
                Payments****NDA
                Filing**
            
            **NDA
                Approval or Marketing Authorization**
            
            **Upon
                License or Introduction to Market**
            
            **Royalty/Payments
                on Net Sales, if Any**Bicifadine
            
            $
            5,000,000
            (1)
            $
            4,500,000
            
            $
            1,000,000
            (1)
            
            5.5
            %DOV
                21,947(2)
            
            
            —
            
            $
            2,250,000
            
            
            —
            
            
            —DOV
                102,677(2)
            
            
            —
            
            $
            2,250,000
            
            
            —
            
            
            —DOV
                216,303(2)
            
            
            —
            
            $
            4,500,000
            
            
            —
            
            
            3.5
            %DOV
                Diltazem
            
            
            —
            
            $
            3,000,000
            
            
            —
            
            
            Up
                to $7.5 millionOcinaplon
            
            $
            2,500,000
            
            $
            4,500,000
            
            $
            2,000,000
            
            
            3.5
            %




(1) Upon
      sublicensing bicifadine to XTL in January 2007, the
      milestone of $5.0 million payable to Wyeth upon NDA filing for
      bicifadine was
      accelerated and paid and $500,000 was paid to Elan.




47





(2)
      We
      are obligated to pay milestones upon NDA (or equivalent) approval in the United
      States, Europe or Japan, but only if such milestone becomes payable prior to
      payment of the $4.5 million milestone payable on an NDA (or equivalent) approval
      for DOV 216,303. Any milestone payments made with respect to DOV 21,947 or
      DOV
      102,677 reduce, dollar-for-dollar, our $4.5 million milestone obligation for
      DOV
      216,303.





The
      table
      also excludes any severance or termination payments that would be due to certain
      of our employees under their employment contracts should they be terminated
      without cause or terminate following a change of control prior to the expiration
      of their contract term as the amounts are not determinable at this time. If
      on
      February 28, 2007 the relevant employees were terminated without cause the
      amounts due pursuant to these contracts would have been $932,000. We file our
      employment agreements with our current and former executive officers with the
      SEC and these agreements are available at www.sec.gov.





**Off-Balance
      Sheet Arrangements**





The
      $70
      million of outstanding Debentures we had outstanding at December 31, 2006 were
      convertible into approximately 3.5 million shares of our common stock.
 If all these Debentures were converted, our stockholders would have
      experienced significant dilution. We would not have received any additional
      cash proceeds upon the conversion of the Debentures. In July 2006, we
      exchanged an aggregate of 3,445,000 of our common stock for an aggregate of
      $10
      million in original principal amount of these Debentures. We have canceled
      the
      Debentures received in the exchange transactions which reduced the aggregate
      Debentures outstanding from $80 million in original principal amount to $70
      million in original principal amount. With
      this
      reduction in principal amount, the shares reserved for issuance upon conversion
      of the Debentures has been reduced to 3,076,923. Upon
      the
      consummation of the Exchange Offer on March 15, 2007, described in the Special
      Note Regarding DOV Pharmaceutical, Inc.’s Common Stock and 2.5% Convertible
      Debentures due 2025 in Part I of this Form 10-K , we
      have
      made a cash payment of $14.3 million and issued 439,784 shares of our series
      C
      convertible preferred stock, and 100,000 shares of our series D convertible
      preferred stock in exchange for $67.5 million Debentures. Additionally, the
      $2.5
      million in principal amount of Debentures that remained outstanding after the
      consummation of the Exchange Offer was recently accelerated by the majority
      holder of such Debentures in accordance with the Indenture governing the
      Debentures and, on March 29, 2007, we repaid such Debentures at par plus accrued
      interest.





**Recent
      Accounting Pronouncements**





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





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




48





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





In
      February 2007, the FASB issued SFAS No. 159 which permits entities to choose
      to
      measure many financial instruments and certain other items at fair value. The
      objective is to improve financial reporting by providing entities with the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply complex
      hedge
      accounting provisions. SFAS No. 159 is effective as of the beginning of an
      entity’s first fiscal year that begins after November 15, 2007, which for us
      will be as of the beginning of fiscal 2008. We are currently evaluating the
      impact this statement will have on our consolidated financial position or
      results of operations.





**Critical
      Accounting Policies**




The
      preparation of financial statements requires us to make estimates, assumptions
      and judgments that affect the reported amounts of assets, liabilities, revenues
      and expenses, and related disclosures of contingent assets and liabilities.
      We
      believe the following critical accounting policies affect the more significant
      judgments and estimates used in the preparation of our financial
      statements.





*Collaboration
      and license agreements* .
      Revenue
      from up-front payments, technology license fees and milestone payments received
      for the delivery of products and services representing the culmination of a
      separate earnings process is recognized when due and the amounts are judged
      to
      be collectible. Revenue from up-front payments, technology license fees and
      milestone payments received in connection with other rights and services, which
      represent continuing obligations to us, is deferred and recognized over the
      term
      of the continuing obligation. Historically, recognition of revenue for such
      an
      up-front payment included an estimate by management as to the development period
      associated with such up-front payments.





*Research
      and development.* **** Research
      and development costs are expensed when incurred and include allocations for
      payroll and related costs and other corporate overhead.  Costs assigned to
      assets to be used in a particular research and development project acquired
      that
      have no alternative further use are charged to expenses as in-process research
      and development expense as of the date of consummation.





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




We
      adopted SFAS 123(R) using the modified prospective method which requires the
      application of the accounting standard as of January 1, 2006. Our consolidated
      financial statements as of and for the year ended December 31, 2006 reflect
      the
      impact of SFAS 123(R). In accordance with the modified prospective method,
      the
      consolidated financial statements for prior periods have not been restated
      to
      reflect, and do not include, the impact of SFAS 123(R).




49




*Investments.*  We
      review
      our investment portfolio for potential “other-than-temporary” declines in value
      on an individual investment basis. We assess, on a quarterly basis, significant
      declines in value that may be considered other-than-temporary and, if necessary,
      recognize and record the appropriate charge by writing-down the carrying value
      of such investments. In making this assessment, we take into consideration
      a
      wide range of objective and subjective information, including but not limited
      to
      the following: the magnitude and duration of historical decline in market
      prices, credit rating activity, assessments of liquidity, public filings and
      statements made by the issuer. We have not identified any investments with
      “other-than-temporary” declines in value as of December 31, 2006.





*Income
      taxes.* We have
      net deferred tax assets at December 31, 2006 that are totally offset by a
      valuation allowance due to our determination that the criteria for recognition
      have not been met. We believe that a full valuation allowance on deferred tax
      assets will continue to be required if losses are reported in future periods.
      If, as a result of profitable operations, we determine that we are more likely
      than not able to realize our net deferred tax assets in the future, an
      adjustment to the deferred tax asset would be made, increasing income (or
      decreasing loss) in the period in which such a determination is made.





On
      an
      ongoing basis, we evaluate our estimates that
      affect our reported assets, liabilities, revenues, earnings, financial position
      and various disclosures .
      We base
      our estimates on circumstances, the results of which form our basis for making
      judgments about the carrying values of assets and liabilities that are not
      readily apparent from other sources. Actual results may differ from those
      estimates under different assumptions and conditions. Our significant accounting
      policies are also described in note 3 to our financial statements included
      under
      Part II, Item 8 of this Form 10-K.





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





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





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




See
      the
      list of our Financial Statements filed with this Form 10-K under Item 15
      below.




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




None.





**ITEM
      9A. CONTROLS AND PROCEDURES**





**Disclosure
      Controls and Procedures**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our Exchange Act reports is recorded,
      processed, summarized and reported within the timelines specified in the SEC’s
      rules, and that such information is accumulated and communicated to our
      management, as appropriate, to allow timely decisions regarding required
      disclosure. In designing and evaluating the disclosure controls and procedures,
      management recognizes that any controls and procedures, no matter how well
      designed and operated, can only provide reasonable assurance of achieving the
      desired control objectives, and in reaching a reasonable level of assurance,
      management necessarily is required to apply its judgment in evaluating the
      cost-benefit relationship of possible disclosure controls and
      procedures .




50





As
      required by SEC Rule 13a-15(b), we carried out an evaluation, with the
      participation of Ms. Barbara Duncan, our Principal Financial and Principal
      Executive Officer, of the effectiveness of the operation of our disclosure
      controls and procedures and our internal controls over financial reporting
      as of
      December 31, 2006. Based on the foregoing, our Principal Financial and Principal
      Executive Officer concluded that our disclosure controls and procedures were
      effective .





**Changes
      in Internal Control over Financial Reporting**





There
      have been no changes in our internal control over financial reporting during
      the
      quarter ended December 31, 2006 that have materially affected or are reasonably
      likely to materially affect our internal control over financial
      reporting.





**ITEM
      9B. OTHER INFORMATION**





On
      March
      29, 2007, we entered into a letter agreement with Dr. Warren Stern. Effective
      April 1, 2007, the letter agreement will replace Dr. Stern’s expiring employment
      agreement with the Company and will provide for Dr. Stern’s continued employment
      until June 30, 2007 as senior vice president of drug development. Per the terms
      of the letter agreement, Dr. Stern will devote eight hours per week to his
      employment with DOV and will receive $1,702 per week (minus standard
      withholdings and deductions required by law). Dr. Stern will be entitled to
      1.5
      vacation days during the period from April 1, 2007 until June 30, 2007; however,
      he will not be entitled to any additional benefits generally provided to DOV
      employees.





**PART
      III**





**ITEM
      10.**  **DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**





**Executive
      Officers and Directors**




The
      following table provides information about our directors, executive officers
      and
      key employees. Pursuant to the consummation of the Exchange Offer described in the Special Note Regarding DOV Pharmaceutical, Inc.’s Common Stock
      and 2.5% Convertible Debentures due 2025 in Part I of this Form 10-K ,
      the
      series C convertible preferred stockholders have the right to select five board
      members on or prior to April 29, 2007. If all five board members are selected,
      four of the existing board members will voluntarily resign.




**Name**
            
            **Age**
            
            **Position**Barbara
                G. Duncan
            
            42
            
            Chief
                Executive Officer, Principal Financial Officer, Treasurer and
                DirectorPhil
                Skolnick, Ph.D., D.Sc. (hon)
            
            60
            
            President
                and Chief Scientific OfficerWarren
                Stern, Ph. D.
            
            62
            
            Senior
                Vice President, Drug Development and Assistant
                SecretaryArnold
                S. Lippa, Ph.D.
            
            60
            
            Executive
                Chairman of the BoardPatrick
                Ashe
            
            44
            
            DirectorTheresa
                A. Bischoff
            
            53
            
            DirectorZola
                Horovitz, Ph.D.
            
            72
            
            DirectorDennis
                Podlesak
            
            49
            
            DirectorDaniel
                S. Van Riper
            
            66
            
            Director




51




**Barbara
      G. Duncan** joined
      us
      in August 2001 and serves as our chief executive officer, principal
      financial officer, treasurer and a member of our board of directors. Prior
      to
      joining us, Ms. Duncan served as a vice president of Lehman
      Brothers Inc. in its corporate finance division from August 1998 to August
      2001, where she provided financial advisory services primarily to companies
      in
      the life sciences and general industrial industries. From September 1994 to
      August 1998, Ms. Duncan was an associate and director at SBC Warburg Dillon
      Read, Inc. in its corporate finance group,
      where she focused primarily on structuring mergers, divestitures and financings
      for companies in the life sciences and general
      industrial industries. She also worked for PepsiCo, Inc. from 1989 to 1992
      in its international audit division, and was a certified public accountant
      in
      the audit division of Deloitte & Touche from 1986 to 1989.
      Ms. Duncan received her B.S. from Louisiana State University in 1985 and
      her M.B.A. from the Wharton School, University of Pennsylvania, in 1994.




**Phil
      Skolnick, Ph.D., D.Sc. (hon.)** joined
      us
      in January 2001 and serves as our president and chief scientific officer.
      Prior to joining us, Dr. Skolnick served as a Lilly research fellow
      (Neuroscience) at Eli Lilly & Company from January 1997 to January 2001
      where he spearheaded several innovative programs in drug discovery. From 1986
      to
      August 1997, he served as senior investigator and chief, laboratory of
      neuroscience, at the National Institutes of Health. Dr. Skolnick served as
      a research professor of psychiatry at the Uniformed Services University of
      the
      Health Sciences from 1989 to 1998. He is currently an adjunct professor of
      anesthesiology at The Johns Hopkins University, an adjunct professor of
      pharmacology and toxicology at Indiana University School of Medicine and
      research professor of psychiatry at New York University School of Medicine.
      Dr. Skolnick is an editor of Current Protocols in Neuroscience and also
      serves on the editorial advisory boards of the European Journal of Pharmacology,
      Cellular and Molecular Neurobiology, the Journal of Molecular Neuroscience,
      and
      Pharmacology, Biochemistry & Behavior. He received a B.S. (summa cum
      laude) from Long Island University in 1968 and his Ph.D. from The George
      Washington University in 1972. Dr. Skolnick was awarded the D.Sc. *honoris
      causa* from
      Long Island University in 1993 and the University of Wisconsin-Milwaukee in
      1995.




**Warren
      Stern, Ph.D.** joined
      us as a consultant in September 2003 and started full-time in December 2003
      as
      senior vice president, drug development and is also our assistant secretary.
      Dr. Stern also serves as a consultant in charge of drug development for
      Jubilant Biosys, a company located in India. Previously he was senior vice
      president of scientific and medical Services at PAREXEL International
      Corporation, a major contract research organization, or CRO, where he had worked
      for the past five and one-half years. Dr. Stern has also held senior level
      positions in clinical research at Cato Research Ltd., a CRO, Forest
      Laboratories, Inc. and earlier, Burroughs Wellcome Co. Previously,
      Dr. Stern was president and CEO of Pharmatec Inc., a CNS-oriented drug
      delivery company. He has also founded two drug delivery companies, Research
      Triangle Pharmaceuticals and Nobex, Inc. Dr. Stern has over 25 years’
experience in drug development in CNS and other fields. He directed the
      successful NDA submissions of bupropion (Wellbutrin) and citalopram (Celexa).
      He
      has performed preclinical studies and clinical trials in psychopharmacology
      and
      published some 90 papers describing the results of his research in animal
      pharmacology and CNS-oriented clinical trials. Dr. Stern is the inventor on
      six patents and on three patent applications, including patents related to
      CNS
      products, and two drug delivery systems. He received his Ph.D. in
      psychopharmacology from Indiana University in 1969 and completed postdoctoral
      fellowships at Boston State Hospital and at the Worcester Foundation for
      Experimental Biology.




**Arnold
      S. Lippa, Ph.D.** is a
      co-founder and serves as executive chairman of our board of directors.
      Dr. Lippa served as our chief executive officer since our inception in
      April 1995 through June 2005. Dr. Lippa
      also currently serves as chairman of Xintria Pharmaceutical Corporation, as
      senior managing director of Aurora Capital LLC and as manager of Atypical
      BioCapital Management LLC, Atypical BioVentures LLC and T Morgen Capital LLC. Prior
      to
      founding DOV in 1995, Dr. Lippa founded Fusion Associates, Ltd., an
      investment and management company specializing in the creation and management
      of
      biomedical companies. Dr. Lippa served as Fusion’s managing director from
      1989 to 1995. From 1989 through 1990, Dr. Lippa served as Vega
      Biotechnologies, Inc.’s chairman and chief executive officer. In 1984,
      Dr. Lippa co-founded Praxis Pharmaceuticals, Inc. and served as president
      and chief operating officer until 1988. Prior to 1985, he served as director
      of
      molecular neurobiology and held other positions at American Cyanamid. In
      addition, Dr. Lippa has consulted for various pharmaceutical and
      biotechnology companies and has been a graduate faculty professor at the New
      York University School of Medicine and the City University of New York. He
      received his B.A. from Rutgers University in 1969 and his Ph.D. in psychobiology
      from the University of Pittsburgh in 1973 .




52




**Patrick
      Ashe** has been
      a member of our board of directors since January 1999. He currently serves
      as
      senior vice president, business development and as a member of the board of
      directors at AGI Therapeutics, plc. From May 1994 to November 2001,
      Mr. Ashe served as vice president, commercial development at Elan
      Pharmaceutical Technologies, a division of Elan Corporation, plc. Additionally,
      from January 1999 to November 2001, Mr. Ashe served as co-manager of
      Nascime Limited. Mr. Ashe was graduated from University College Dublin with
      a B.Sc. in pharmacology in 1985 and completed his M.B.A. at Dublin City
      University's Business School in 1994.




**Theresa
      A. Bischoff** became a
      member of our board of directors in December 2003. Ms. Bischoff is also a
      trustee of Mutual of America Capital Asset Management. Ms. Bischoff currently
      serves as the chief executive officer of the American Red Cross in Greater
      New
      York. She has also served as chair of the Association of American Medical
      Colleges, the policy setting and advocacy organization for the 125 medical
      schools and 400 major teaching hospitals in the United States. From 1984 to
      2003, Ms. Bischoff served as president and also held various other positions
      at
      the NYU Medical Center. Prior to joining NYU Medical Center, she worked in
      corporate finance at Squibb Corporation and Great Northern Nekoosa. Ms. Bischoff
      received a B.S. in accounting from University of Connecticut in 1975 and a
      M.B.A. from the New York University in 1991. Ms. Bischoff is also a certified
      public accountant.




**Zola
      Horovitz, Ph.D** .
      has
      been a member of our board of directors since our inception in April 1995.
      Dr. Horovitz currently is a consultant to the pharmaceutical and
      biotechnology industries and serves as a director of Genvec, Inc., BioCryst
      Pharmaceuticals, Inc., Palatin Technologies, Inc., Avigen, Inc.,
      Genaera Pharmaceuticals, Inc., Immunicon Corp. and Nitromed, Inc. Before
      joining us, Dr. Horovitz served 35 years in various managerial and
      research positions at Bristol-Myers Squibb and its affiliates. At Bristol-Myers
      Squibb, Dr. Horovitz served as vice president, business development and planning from
      1991-1994, vice president, licensing in 1990, and vice president, research,
      pl a nning
      and
      scientific liaison from 1985-1989. Dr. Horovitz received a B.S. in pharmacy
      and his M.S. and Ph.D. in pharmacology from the University of Pittsburgh in
      1955, 1958 and 1960 respectively.




**Dennis
      Podlesak** became a
      member of our board of directors in April 2006. Mr. Podlesak is the chief
      executive officer of Cerexa, Inc., a wholly-owned subsidiary of Forest
      Laboratories, Inc. Cerexa is an innovation-driven biopharmaceutical company
      focused on developing and commercializing a growing portfolio of novel
      anti-infective therapies to treat serious and life-threatening infections.
      Prior
      to Cerexa, Mr. Podlesak was the chief executive officer of Peninsula
      Pharmaceuticals, Inc. Before Peninsula, Mr. Podlesak served as senior vice
      president and head of a North American Business Unit for Novartis AG and as
      a
      member of Novartis’ pharmaceutical executive committee and global leadership
      team. Earlier in his career, Mr. Podlesak served as vice president and head
      of the CEC division of Allergan, Inc. and as member of Allergan’s North American
      and global management team. Mr. Podlesak spent the first ten years of his
      career with SmithKline Beecham (now GlaxoSmithKline plc) where he was promoted
      to eight positions of increasing responsibility during his tenure with the
      company. Mr. Podlesak is a director of Avanir Pharmaceuticals, and Prevent
      Blindness, a non-profit organization that focuses on preventable blindness
      with
      a particular emphasis on children. Mr. Podlesak holds an M.B.A. from
      Pepperdine University and a B.A. in Business Administration from Western
      Illinois University.





**Daniel
      S. Van Riper** became a
      member of our board of directors in March 2002. Mr. Van Riper is also a
      director of Hubbell Incorporated, where he serves on the audit, compensation
      and
      finance committees, a director of New Brunswick Scientific Co., Inc. where
      he serves on the compensation and governance committee and a director of 3D
      Systems Corporation, where he chairs the audit and finance committees and serves
      on the compensation committee. Mr. Van Riper is an independent financial
      consultant and served as special advisor to Sealed Air Corporation from 2002
      to
      2005. He previously served as senior vice president and chief financial officer
      of Sealed Air Corporation from July 1998 to January 2002. He is a former
      director of Millennium Chemicals Inc., where he served on the audit
      committee and chaired the compensation committee. Previously, Mr. Van Riper
      was
      a partner of KPMG LLP, where he worked from June 1962 to June 1998. Mr. Van
      Riper was graduated with high honors and a B.S. in accounting and completed
      his
      M.B.A. in economics and finance from Rutgers University. He is a certified
      public accountant and is a member of the American Institute of Certified Public
      Accountants and Beta Gamma Sigma, national honorary business
      fraternity.




53




**Board
      Committees**




*Audit
      Committee and Audit Committee Financial Expert*





We
      have
      an established audit committee comprised solely of non-management directors all
      of
      whom are independent under both Section 10A of the Securities Act of 1934,
      or
      Exchange Act .
      The
      audit committee determines the selection and retention of our independent
      registered public accounting firm, reviews the
      scope and results of audits, submits appropriate recommendations to the board
      of
      directors regarding audits, reviews our internal controls, provides pre-approval
      of principal accountant fees and services and is
      responsible for reviewing quarterly and annual filings with the SEC and releases
      containing our financial statements. The current members of the audit committee
      are Theresa Bischoff, Zola Horovitz and Daniel Van Riper (chairman). The audit
      committee met five times during 2006. Our
      board
      of directors has determined that our audit committee members are independent
      and
      that Daniel Van Riper and Theresa Bischoff each qualify as an audit committee
      financial expert in accordance with SEC rules. For Mr. Van Riper’s and Ms.
      Bischoff’s relevant experience, see their biographies listed in “Executive
      Officers and Directors” above.




*Compensation
      Committee*





The
      compensation committee reviews and approves the compensation of our executive
      officers and directors, carries out duties under our incentive compensation
      plans and other plans approved by us as may be assigned to the committee by
      the
      board of directors and makes recommendations to the board of directors regarding these matters. The committee also reviews and approves the
      compensation including stock option grants of all new employees and promotions
      if their compensation reaches $150,000 per annum plus the aggregate allowance
      for raises, bonuses and options to be awarded annually to all non-executive
      employees. The current members of the compensation committee are Patrick Ashe,
      Zola Horovitz (chairman) and Daniel Van Riper. The compensation committee met
      or
      acted by unanimous written consent eight times during 2006.




*Nominating
      and Governance Committee*





The
      nominating and governance committee has the responsibility of identifying, recommending and nominating a director to fill any existing board vacancies,
      overseeing DOV’s corporate governance practices as well as overseeing the
      evaluation of the board’s other committees other than the audit committee. It
      may also make recommendations regarding an increase in board size and candidates
      to fill membership increases. Currently, its only member is Theresa Bischoff.
      It
      met once during 2006.




**Section
      16(a) Beneficial Ownership Reporting Compliance**




Section
      16(a) of the Exchange Act requires our directors and executive officers, and
      persons who own more than ten percent of a registered class of our equity
      securities, to file reports of ownership with the SEC. Directors, executive
      officers and greater than ten-percent beneficial owners are required by SEC
      regulations to furnish us with copies of all Section 16(a) forms they file.




54




Based
      solely on a review of filings with the SEC, all of our directors and executive
      officers have complied with the reporting requirements of Section 16(a) of
      the
      Securities Exchange Act of 1934, during 2006.





We
      undertake to prepare Section 16 filings for our officers and directors.





**Code
      of Ethics**




We
      have
      adopted a code of ethics that applies to all our employees, including our chief
      executive officer and chief financial officer. A copy of our Code of Business
      Conduct and Ethics Policy may be obtained on our website at http://www.dovpharm.com .
      We
      intend to post on our website any amendments to, or waiver from, our code of
      ethics for the benefit of our principal executive officer, principal financial
      officer, principal accounting officer or controller, or persons performing
      a
      similar function, and other named executives.


55


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




**Compensation
      Discussion and Analysis**




Our
      named
      executive officers for 2006 include:




· Barbara G. Duncan, our chief executive officer and principal financial officer,




· Phil Skolnick, Ph.D., D.Sc. (hon), our president and chief scientific
      officer,




· Warren Stern, Ph.D., our senior vice president of drug development,




· Scott Myers, who held the office of senior vice president of marketing and
      commercialization until January 2007,




· Arnold Lippa, Ph.D., who is our executive chairman and who held the position
      of
      chief executive officer until July 2005,




· Leslie Hudson, Ph.D., who held the position of director, chief executive officer
      and president until June 2006, and




· Robert Horton, who held the office of senior vice president, general counsel
      and
      secretary until May 2006.




The
      discussion below is intended to help you understand the detailed information
      provided in the following tables below and put that information into context
      within our overall compensation program.




*Overview
      of Compensation Structure*




The
      compensation committee is responsible for establishing and monitoring our
      general compensation policies and compensation plans, as well as the specific
      compensation levels for executive officers and certain other employees depending
      on base salary levels. It also makes recommendations to the board of directors
      concerning option and other grants under the 2000 Plan to other employees as
      a
      group.




*General
      Compensation Policy*




Under
      the
      supervision of the board of directors, our compensation policy has been designed
      to attract and retain qualified key executives critical to our growth and
      long-term success. In light of events occurring during 2006, which are discussed
      under the heading of “2006 Circumstances and Compensation Adjustments”, the
      objectives during the second half of fiscal 2006 were also focused on retention
      of executives to ensure the short-term viability of the Company. It is the
      objective of the board of directors to have a portion of each executive's
      compensation contingent upon our corporate performance as well as upon the
      individual's personal performance. Accordingly, each executive officer's
      compensation package is comprised of three elements: (i) base salary, which
      reflects individual background, performance and expertise, progress
      and collaboration objectives and, to a lesser extent, his or her success in
      achieving designated individual goals ,
      (ii) variable bonus awards payable in cash and tied to the achievement of
      certain performance goals that the board of directors and compensation committee
      establish from time to time for the company and (iii) long-term stock-based
      incentive awards designed to strengthen the mutuality of interests between
      executive officers and shareholders.




The
      summary below describes in more detail the factors that the compensation
      committee considers in establishing each of the three primary components of
      the
      compensation package provided to the executive officers.




56




*Base
      Salary*




The
      level
      of base salary is established primarily on the basis of the individual's
      qualifications and relevant experience, the strategic goals for which he or
      she
      has responsibility, the compensation levels at similar companies and the salary
      necessary to attract and retain qualified management. Base salary is adjusted
      each year to take into account the individual's performance and to maintain
      a
      competitive salary structure. Company performance historically has not played
      a
      significant role in the determination of base salary. However, the continuing
      senior executives’ base salary were not adjusted for the 2007 year as part of
      the annual review process as the compensation committee will engage a
      compensation consultant in the second quarter of 2007 to help establish an
      overall compensation program in light of the events that occurred during 2006,
      as discussed under the heading “2006 Circumstances and Compensation
      Adjustments”.




*Variable
      Bonus Awards*




Cash
      bonuses are awarded on a discretionary basis to executive officers on the basis
      of their success in or contribution to achieving specific company-wide corporate
      goals as well as the
      individual's personal performance .
      For the
      2006 awards paid in January 2007, the compensation committee approved these
      specific goals in December 2005.




*Long-Term
      Incentive Compensation*




We
      have
      utilized our stock option plans to provide executives and other key employees
      with incentives to maximize long-term shareholder values. Awards under the
      2000
      plan by the compensation committee have taken the form of stock options and
      restricted stock awards designed to give the recipient a significant equity
      stake and thereby closely align his or her interests with those of our
      shareholders. Factors considered in making such awards include the individual's
      position, his or her performance and responsibilities and internal comparability
      considerations. Each
      option grant allows the executive officer or key employee to acquire shares
      of
      our common stock at a fixed price per share (in all cases to date, fair market
      value on the date of grant) over a specified period of time (up to
      10 years). For our employees, the options typically vest in 25% annual
      installments over a four-year period. The executive officers’ have historically
      been granted options upon employment or upon employment contract renewals that
      vested over a three-year period, 50% after 18 months and the balance quarterly
      over the remaining 18-month vesting period, contingent in each case upon the
      executive officer's or key employee’s continued employment with us. Accordingly,
      options will provide a return to the executive officer or key employee to a
      significant degree only if he or she remains in our service, and then only
      if
      the market price of our common stock appreciates over the option term. However,
      special option grants were made during 2006 to reflect the renegotiated
      contracts for our senior executives as part of a management reorganization
      that
      occurred in June 2006. Given the significant decline of our stock price in
      2006
      from a high of $19.94 to a low of $0.29 per share, the long-term incentive
      compensation previously granted to our employees and executive officers may
      not
      provide the incentive anticipated by the grants. The
      compensation committee will engage a compensation consultant in the second
      quarter of 2007 to evaluate the long-term incentive plan and make
      recommendations for consideration by the compensation committee towards
      structuring a new long-term incentive program.





*Perquisites;
      Other Compensation*





Our
      named
      executive officers, except for Dr. Lippa, were granted car allowances of $1,000
      per month in 2006 during their employment period. In addition to the cash and
      equity compensation described above, we provide our named executive officers
      with the same benefit package available to all of our salaried employees. This
      package includes:




·
            Health
                and dental insurance, life insurance and disability insurance;






57




·
            Participation
                in 401k plan,





·
            Tuition
                reimbursement, and·
            Commuting
                expenses for the excess mileage incurred as a result of our headquarter
                relocation to Somerset, New Jersey.





We
      also
      provide relocation assistance, which is determined on a case by case basis.
      In
      2006, we reimbursed Mr. Myers for housing expenses incurred prior to the
      relocation of our headquarters to Somerset, New Jersey. The named executive
      officers are entitled to severance in various circumstances upon a
      change-in-control as described under the heading ‘‘Potential Payments Upon
      Termination or Change in Control’’ below.





*Pension
      Benefits*





We
      do not
      sponsor any plans that provide for payments or other benefits at, following,
      or
      in connection with retirement, excluding a tax-qualified defined contribution
      plan.





*Nonqualified
      Deferred Compensation*





We
      currently do not sponsor any non-qualified defined contribution or other
      non-qualified deferred compensation plans.





*Accounting
      and Tax Treatment*





Section
      162(m) of the Internal Revenue Code of 1986, as amended, generally denies
      publicly-held corporations a federal income tax deduction for compensation
      exceeding $1,000,000 paid to named executive officers, excluding
      performance-based compensation. Through December 31, 2006, this provision has
      limited our ability to deduct executive compensation of approximately $800,000,
      and the compensation committee will continue to monitor the potential impact
      of
      Section 162(m) on our ability to deduct executive compensation.





The
      accounting treatment of our compensation plans, including without limitation
      shared-based payments accounted for under SFAS No. 123(R) which we adopted
      as
      required on January 1, 2006, is not a significant factor in how we design our
      executive compensation plans.





*Role
      of Executive Officers in Determining Compensation*




Pay
      levels for each named executive officer, other than our Chief Executive Officer,
      largely reflect the recommendation of our Chief Executive Officer based upon
      individual experience and breadth of knowledge, internal considerations and
      other subjective factors.  Our Chief Executive Officer was not involved
      with any aspect of determining his/her own compensation.




*Allocation
      of Compensation*




There
      is
      no pre-established policy or target for the allocation of compensation. 
The factors described above, as well as the overall compensation philosophy,
      is
      reviewed to determine the appropriate level and mix of compensation. 
Historically, and in fiscal 2006, the greatest weighting of compensation granted
      to named executive officers was in the form of long-term incentive compensation.




*Timing
      of Compensation*




As
      discussed elsewhere, compensation, including salary base adjustments, incentive
      plan goal specifications and incentive plan payments, for our named executive
      officers are reviewed annually, usually in the first quarter of the fiscal
      year.




58




*Minimum
      Stock Ownership Requirements*




There
      are
      no minimum stock ownership guidelines for our executives or employees.





*2006
      Circumstances and Compensation Adjustments*





Beginning
      in 2006, the Company was anticipating two potential transforming events. The
      first was the potential for an NDA approval for our lead compound, indiplon,
      which should have enabled the Company to generate capital from the contractual
      royalty stream due from the sales of that compound. The second was the potential
      receipt of positive efficacy results in the first of our two CLBP studies with
      our analgesic, bicifadine, which should have enabled the Company to raise
      significant capital either through the partnering of the compound or from
      outside investors. Through April 2006, the management team was encouraged to
      work towards either entering into a substantial licensing arrangement for
      bicifadine or selling the Company at substantial premiums. Therefore, the
      compensation committee felt that it was appropriate to establish a special
      bonus
      pool for certain employees should a sale of the Company occur that reflected
      the
      potential for these two transforming events for the Company thus supplementing
      the performance bonus based upon corporate and individual goals established
      in
      December of 2005.




However
      in April 2006, we received disappointing results from the first Phase III
      clinical trial of bicifadine in patients with CLBP and our common stock price
      experienced a substantial decline from the previous day’s close price of $14.69
      to $7.92. Further, in May 2006, our partner Neurocrine announced that the FDA
      had issued two complete responses regarding indiplon capsule and tablet NDAs.
      These responses indicated that indiplon 5 mg and 10 mg capsules were
      approvable and that the 15 mg tablets were not approvable and thus our
      common stock price experienced a further decline from the previous day’s close
      price of $7.05 to $3.02. These two negative events significantly altered the
      outlook and strategy for the Company as the potential for capital infusions
      resulting from these two compounds was diminished significantly.




The
      Company responded to these changes by reorganizing its senior management team
      to
      maximize the value of DOV's existing pipeline and explore and pursue the
      Company's most attractive financing opportunities. As such, Dr. Leslie Hudson
      resigned from his position as chief executive officer and president, and our
      chief financial officer, Barbara Duncan, took on the role and title of
      president, chief financial officer and director. Additionally, our chief
      scientific officer, Dr. Phil Skolnick, was named executive vice president and
      chief scientific officer. The compensation committee worked with an external
      consultant to determine appropriate employment and compensation arrangements
      for
      Ms. Duncan and Dr. Skolnick to reflect their increased roles and
      responsibilities as well as the Company’s business situation. In summary, each
      of these executives were granted 350,000 options and were given extensions
      of
      their employment agreements until June 2008.




**COMPENSATION
      COMMITTEE REPORT ON EXECUTIVE COMPENSATION**





The
      compensation committee has reviewed and discussed the Compensation Discussion
      and Analysis section of this Annual Report on Form 10-K with management and,
      based on such review and discussion, the compensation committee recommends
      to
      the board of directors that it be included in this Annual Report on Form 10-K.




**COMPENSATION
                COMMITTEE**Zola
                Horovitz (chairman)
              Patrick
                Ashe
              Daniel
                S. Van Riper




59




**Potential
      Payments Upon Termination or Change in Control**





The
      following tables set forth potential payments payable to our named executive
      officers that are current employees upon termination of employment or a change
      in control of us under their current employment. Potential payments upon
      termination or change of control come from two sources:





(i)    We
      have entered into employment agreements with each of our current named executive
      officers as described in the section entitled “Employment Agreements” which
      entitles them to severance in the event of death, disability or a termination
      of
      their employment by us without cause or a termination of employment by the
      employee for good reason or within six months of certain events constituting
      a
      change of control of the Company; and





(ii)    We
      adopted in April 2006 a bonus incentive program which included our current
      named
      executive officers should a change of control occur before April 17, 2007.
      The
      program indicated that certain employees would be entitled to receive a bonus
      calculated upon an acquisition of the Company in which the sale price per share
      is at a premium equal to or greater than 30% over the average daily price per
      share during the twelve months immediately prior to the execution of a term
      sheet for the sale of the Company. However, given the Company’s stock price
      decline from December 31, 2005 to December 31, 2006, there would have been
      no
      bonus payable under the bonus plan should an acquisition have occurred even
      at a
      1,000% premium to our year end stock price. Please refer to the section entitled
      “2006 Circumstances and Compensation Adjustments”. Although this bonus incentive
      will expire in April 2007, the compensation committee will hire a compensation
      consultant to establish appropriate incentives going forward which may or may
      not include a bonus incentive program for the sale of the Company.




The
      following table sets forth the estimated value of payments and benefits due
      to
      our named executive officers pursuant to their employment agreements and
      assuming our continuing named executive officers’ employment was terminated on
      December 31, 2006.




60


**Name**
              
              **Severance**
              
              **Health
                  Benefits**Barbara
                  DuncanTermination
                  due to change of control
              
              $
              516,000
              
              $
              -Termination
                  due to disability
              
              
              258,000
              
              
              15,642Termination
                  due to death
              
              
              86,000
              
              
              5,214Phil
                  Skolnick, Ph.D., D.Sc. (hon)Termination
                  due to change of control
              
              
              516,000
              
              
              -Termination
                  due to disability
              
              
              258,000
              
              
              6,545Termination
                  due to death
              
              
              86,000
              
              
              2,181Warren
                  Stern, Ph.D.Termination
                  due to change of control
              
              
              -
              
              
              -Termination
                  due to disability
              
              
              259,006
              
              
              3,952Termination
                  due to death
              
              
              86,000
              
              
              11,856




**2006
      Compensation Information for our Continuing Named Executive Officers for
      2007**





On
      January 19, 2007, the compensation committee approved the compensation for
      the named executive officers for 2006. The compensation committee also approved
      the following base salaries for 2007 and for 2006 as set forth
      below.


**Annualized
                    Base Salary****2006**
                
                **2007**Ms.
                    Duncan
                
                $
                344,000
                
                $
                344,000Dr.
                    Skolnick
                
                $
                344,000
                
                $
                344,000Dr.
                    Stern(1)
                
                $
                345,000
                
                $
                345,000


(1)
            Dr.
                Stern reduced his employment level to 70% beginning October 1, 2006
                and to
                50% beginning January 1, 2007. Accordingly, his annualized base salary
                was
                reduced by 30% beginning October 1, 2006 and 50% beginning January
                1,
                2007.




As
      discussed under the heading of “2006 Circumstances and Compensation
      Adjustments”, in December 2005, the compensation committee defined specific
      award opportunities as a percentage of salary for each executive. The 2006
      award
      goals were weighted to reflect the Company’s strategic objectives and were
      contingent primarily on performance relative to achievement of corporate goals
      (60% of target bonus) and for individual performance (40% of target bonus).
      For
      the determination of the actual awards for 2006 to be paid in 2007, the
      compensation committee reviewed the detailed goals that had been approved and
      determined that the corporate goals for 2006 were achieved at a 40% level and
      that individual goals for the most part were achieved. The following table
      shows
      the potential awards at maximum, as well as each executive’s actual award paid
      in 2007, as a percentage of salary.




61




**Annual
                Incentive Opportunities as a Percentage of
                Annualized**
              **Salary
                for 2006 and Actual Paid in 2007****Executive**
            
            **Maximum
                Percentage**
            
            **Actual Award**Ms.
                Duncan(1)
            
            
            40
            %
            
            24
            %Dr.
                Skolnick
            
            
            30
            %
            
            18
            %Dr.
                Stern
            
            
            30
            %
            
            18
            %




(1)
            Ms.
                Duncan’s original incentive award was a maximum of 30%; however, she took
                on the additional role of President in July 2006 and, in early 2007,
                the
                committee determined that the incentive award maximum should be increased
                to reflect the maximum award originally set for the former chief
                executive
                officer.




**Summary
      Compensation Table** ****




The
      following table sets forth certain compensation information for the years
      indicated as to our CEO and the named executive officers for the fiscal
      years ended December 31, 2006, 2005 and 2004. In addition, we have included
      information for former officers whose employment terminated within the last
      twelve months and for our executive chairman whose employment as chief executive
      officer terminated in July 2005 and
      therefore their compensation also includes amounts paid pursuant to severance
      arrangements. We have not included the column for nonqualified
      deferred compensation earnings as we do not have deferred compensation
      programs .




The
      equity compensation costs included in the Stock and Option Awards columns below
      are associated with the 2000 Plan and are recognized for financial
      statement reporting purposes for the fiscal year ended December 31, 2006, in
      accordance with SFAS No. 123(R). Therefore, awards pursuant to the 2000 Plan
      may
      include restricted stock and stock options given during and prior to 2006.
      Assumptions used in the calculation of these amounts are included in Note 4
      to the Company’s audited consolidated financial statements for the fiscal year
      ended December 31, 2006 included in this Form 10-K.




62




**Name
                and Principal Position**
            
            **Year**
            
            **Salary**
            
            **Bonus**
            
            **Stock**
              **Awards(9)**
            
            **Option**
              **Awards(9)**
            
            **Non-Equity
                Incentive**
              **Plan
                Compensation(1)**
            
            **All
                Other****Compensation**
            
            **Total****Continuing
                Employees:**Barbara
                Duncan (2)
            
            
            2006
            
            $
            343,731
            
            $
            —
            
            $
            —
            
            $
            845,796
            
            $
            30,000
            
            $
            16,550
            
            $
            1,236,077Director,
                Chief Executive
            
            
            2005
            
            
            327,692
            
            
            —
            
            
            —
            
            
            160,562
            
            
            75,000
            
            
            12,242
            
            
            575,496Officer
and
                Treasurer
            
            
            2004
            
            
            298,077
            
            
            —
            
            
            —
            
            
            345,286
            
            
            50,000
            
            
            12,300
            
            
            705,663Phil
                Skolnick, Ph.D., D.Sc. (hon)(3)
            
            
            2006
            
            
            343,731
            
            
            —
            
            
            —
            
            
            343,419
            
            
            30,000
            
            
            17,716
            
            
            734,866President
                and
            
            
            2005
            
            
            327,692
            
            
            —
            
            
            —
            
            
            646,271
            
            
            75,000
            
            
            13,042
            
            
            1,062,005Chief
                Scientific Officer
            
            
            2004
            
            
            299,038
            
            
            —
            
            
            —
            
            
            58,871
            
            
            50,000
            
            
            13,290
            
            
            421,199Warren
                Stern, Ph.D. (4)
            
            
            2006
            
            
            320,827
            
            
            —
            
            
            —
            
            
            1,262,031
            
            
            45,000
            
            
            66,206
            
            
            1,694,064Senior
                Vice President, Drug
            
            
            2005
            
            
            327,692
            
            
            —
            
            
            —
            
            
            2,391,150
            
            
            75,000
            
            
            13,599
            
            
            2,807,441Development
                and Assistant Secretary
            
            
            2004
            
            
            300,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            13,815
            
            
            313,815**Former
                Employees:**Arnold
                S. Lippa, Ph.D(5)
            
            
            2006
            
            
            —
            
            
            —
            
            
            —
            
            
            211,334
            
            
            —
            
            
            557,065
            
            
            768,399Executive
                Chairman
            
            
            2005
            
            
            248,991
            
            
            —
            
            
            903,000
            
            
            160,562
            
            
            100,000
            
            
            9,726
            
            
            1,422,2792004
            
            
            363,212
            
            
            —
            
            
            —
            
            
            —
            
            
            125,000
            
            
            33,895
            
            
            522,197Leslie
                Hudson(6)
            
            
            2006
            
            
            463,376
            
            
            85,000
            
            
            —
            
            
            3,491,400
            
            
            —
            
            
            268,216
            
            
            4,307,992Former
                Director, Chief Executive Officer and President
            
            
            2005
            
            
            174,904
            
            
            —
            
            
            2,120,000
            
            
            —
            
            
            —
            
            
            84,710
            
            
            2,379,614Scott
                Myers(7)
            
            
            2006
            
            
            330,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            13,357
            
            
            343,357Senior
                Vice President, Marketing and Commercialization
            
            
            2005
            
            
            21,577
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,021
            
            
            22,598Robert
                Horton (8)
            
            
            2006
            
            
            124,038
            
            
            —
            
            
            —
            
            
            1,710,241
            
            
            15,000
            
            
            245,799
            
            
            2,095,078Senior
                Vice President,
            
            
            2005
            
            
            327,692
            
            
            —
            
            
            —
            
            
            402,571
            
            
            75,000
            
            
            15,077
            
            
            820,340General
Counsel
                and Secretary
            
            
            2004
            
            
            307,211
            
            
            —
            
            
            —
            
            
            187,498
            
            
            50,000
            
            
            15,048
            
            
            559,757




(1)
              Does
                  not reflect non-contractual bonuses paid in 2007 to the three current
                  named executive officers aggregating $205,000 as described in “2006
                  Compensation Information for our Continuing Named Executives Paid
                  in 2007”
                  section above.




(2)
            All
                other compensation represents $16,250, $12,000 and $12,000 in 2006,
                2005
                and 2004 for automobile allowance and $300, $242 and $300 in 2006,
                2005
                and 2004 for life insurance premiums.




(3)
            All
                other compensation represents $16,426, $12,000 and $12,000 in 2006,
                2005,
                and 2004 for automobile allowance and $1,290, $1,042 and $1,290 in
                2006,
                2005 and 2004 for life insurance
                premiums.




(4)
            All
                other compensation represents $15,195, $12,000 and $12,000 in 2006,
                2005
                and 2004 for automobile allowance, $49,031 for accrued vacation in
                2006
                and $1,980, $1,599 and $1,815 in 2006, 2005 and 2004 for life insurance
                premiums.




(5)
            Dr.
                Lippa’s employment as chief executive officer and president of the Company
                terminated effective July 2005. In connection with this termination,
                Dr.
                Lippa will receive severance of $731,500 over two years. He continues
                as
                executive chairman of the board. All other compensation represents
                $557,065 in severance for 2006; $9,180 and $16,723 in 2005 and 2004
                for
                automobile allowance, $546, and $8,018 in 2005 and 2004 for life
                insurance
                premiums and $9,154 in 2004 for advances repaid in 2005.




63




(6)
            Dr.
                Hudson joined us effective July 28, 2005 and terminated his employment
                in
                June 2006 and relinquished all options awarded to him. In connection
                with
                this termination Dr. Hudson will receive severance of $656,625 over
                two
                years. Other compensation includes $218,875 in severance paid in
                2006 and
                $19,783 in payment for unused accrued vacation in 2006; $13,300 and
                $78,966 in relocation expense reimbursement in 2005; $6,000 and $5,000
                in
                2006 and 2005 for automobile allowance; $8,963 for reimbursement
                of legal
                fees in 2006; and $1,295 and $744 in 2006 and 2005 for life insurance
                premiums.




(7)
            Mr.
                Myers terminated his employment in January 2007. All other compensation
                represents $12,000 and $1,000 in 2006 and 2005 for automobile allowance,
                $300 and $21 in 2006 and 2005 for life insurance premiums and $1,058
                for
                housing allowance in 2006.




(8)
            Mr.
                Horton terminated his employment in May 2006. All other compensation
                represents $215,769 and $23,539 in 2006 for severance and paid vacation;
                $4,000, $12,000 and $12,000 in 2006, 2005 and 2004 for automobile
                allowance; and $2,491, $3,077 and $3,048 in 2006, 2005 and 2004 for
                life
                insurance premiums.




(9)
            Option
                award amounts are the fair value (as determined on the date of grant)
                of
                all options vested during the fiscal year.We
                have used the Black-Scholes valuation model to estimate fair value
                of our
                stock-based awards, which requires various judgmental assumptions
                including estimating stock price volatility, forfeiture rates, and
                expected life. Although the amounts for option and restricted stock
                awards
                reflected appear large based upon our current market capitalization,
                the
                grants and fair value established were made at a point when our market
                capitalization was substantially higher.




**Option
      Grants in Last Fiscal Year** ****





The
      following table sets forth information with respect to the named executive
      officers and our former executive officers concerning the grant of stock options
      during 2006. All the options were granted at the fair market value on the date
      of grant as determined by the board of directors. We have not
      included information for estimated future payouts under non-equity and equity
      incentive plan awards as we do not presently have an incentive plan established
      for 2007. As noted above, the compensation committee intends to engage
      a
      compensation consultant in the second quarter of 2007 to evaluate the long-term
      incentive plan and make recommendations for consideration by the compensation
      committee towards structuring a new long-term incentive program.




**Individual
                Grants****Name**
            
            **Options**
              **Granted**
            
            **%
                of Total**
              **Options**
              **Granted**
            
            **Exercise or**
              **Base
                Price**
              **($/Sh)**
            
            **Expiration**
              **Date**
            
            **Grant
                Date**
              **Fair
                Value(1)**Barbara
                Duncan
            
            
            350,000
            
            
            22.8
            %
            $
            2.12
            
            
            6/30/2016
            
            $
            520,45015,000
            
            
            1.0
            
            
            17.61
            
            
            2/7/2016
            
            
            148,305Phil
                Skolnick, Ph.D. D. Sc. (hon)
            
            
            350,000
            
            
            22.8
            
            
            2.12
            
            
            6/30/2016
            
            
            520,45015,000
            
            
            1.0
            
            
            17.61
            
            
            2/7/2016
            
            
            148,305Warren
                Stern, Ph.D.
            
            
            75,000
            
            
            4.9
            
            
            2.12
            
            
            6/30/2016
            
            
            106,35025,000
            
            
            1.6
            
            
            17.61
            
            
            2/7/2016
            
            
            247,175*Former
                Employees:*Leslie
                Hudson, Ph.D.
            
            
            50,000
            
            
            3.3
            
            
            17.61
            
            
            2/7/2016
            
            
            494,350Scott
                Myers
            
            
            50,000
            
            
            3.3
            
            
            2.08
            
            
            6/28/2016
            
            
            69,800Arnold
                Lippa, Ph.D.
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Robert
                Horton
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -




(1)
      Although the amounts reflected appear large based upon our current market
      capitalization, the grants and fair value established were made at a point
      when
      our market capitalization was substantially higher. Please refer to the section
      “2006 Circumstances and Compensation Adjustments”.


64




**2006
      Option Exercises** **and
      Stock Vested Table**




The
      following table sets forth certain information concerning the values realized
      upon exercise of options or vesting of restricted stock awards by the named
      executive officers and our
      former senior executives during fiscal 2006 .




**Option
                Awards**
            
            **Stock
                Awards****Name**
            
            **Shares**
              **Acquired
                on**
              **Exercise**
            
            **Value
                ($)**
              **Realized(1)**
            
            **Number
                of Shares**
              **Acquired
                on**
              **Vesting**
            
            **Value
                Realized Upon**
              **Vesting(2)**Barbara
                Duncan
            
            
            65,000
            
            $
            913,830
            
            
            —
            
            $
            —Phil
                Skolnick, Ph.D. D. Sc. (hon)
            
            
            60,000
            
            
            885,830
            
            
            —
            
            
            —Warren
                Stern, Ph.D.
            
            
            —
            
            
            —
            
            
            —
            
            
            —*Former
                Employees:*Arnold
                S. Lippa, Ph.D.
            
            
            —
            
            
            —
            
            
            20,000
            
            
            53,800Leslie
                Hudson, Ph.D.
            
            
            —
            
            
            —
            
            
            100,000(3
            )
            
            213,000Scott
                Myers
            
            
            —
            
            
            —
            
            
            —
            
            
            —Robert
                Horton
            
            
            —
            
            
            —
            
            
            —
            
            
            —




(1)
                Determined
                    by multiplying the number of shares acquired on exercise by the
                    difference
                    between the closing price on the date of exercise and the exercise
                    price.




(2)
            Determined
                by multiplying the number of shares of restricted stock that vested
                by the
                closing price of the stock on the vesting date.




(3)
            The
                vesting of the restricted shares was accelerated during the year
                pursuant
                to the severance agreement entered into with Dr. Hudson in June
                2006.




**Granting
      of Equity Awards**




The
      compensation committee approves the eligible equity award recipients along
      with
      the amount and types of the equity awards. An award agreement is sent to each
      recipient. This grant agreement describes the amount and type of awards, as
      well
      as the terms and conditions of the awards.




These
      awards are made in accordance with the terms of the 2000 Plan. The 2000 Plan
      has
      been approved by the stockholders and may be modified in limited instances
      by
      the compensation committee. The exercise price for options was based on the
      closing stock price on the award date.




**Calculation
      of Fair Value of Equity Awards**




*Options* -
      In
      accordance with SFAS No. 123(R), the Company determines the fair value of
      options as of the grant date. For all options the Company uses the Black Scholes
      valuation model.




*Restricted
      Stock Awards, or RSAs* -
      In
      accordance with SFAS No. 123(R), the Company determines the fair value of
      Restricted Stock Awards as the closing price of the Company’s common stock as of
      the grant date.




**2006
      Outstanding Equity Awards at Fiscal Year-End Table**




The
      following table sets forth information concerning outstanding awards as of
      December 31, 2006. We have not included columns for equity incentive plan awards
      as we do not currently have such a plan in place.




65




**Number
                  of Securities Underlying Unexercised Options at Fiscal
                  Year-End**
              
              **Stock
                  Awards****Name**
              
              **Number**
                **Exercisable**
              
              **Number**
                **Unexercisable
                  (1)**
              
              **Option
                  Exercise Price ($)**
              
              **Option
                  Expiration Date**
              
              **Number
                  of RSAs Unvested(1)**
              
              **Market
                  Value of RSAs Unvested**
              
              **Number
                  of RSAs Vested**
              
              **Market
                  Value of RSAs Vested**Barbara
                  Duncan
              
              
              234,500
              
              
              —
              
              $
              4.01
              
              
              8/20/2011
              
              
              —
              
              
              
              
              
              —22,916
              
              
              2,084
              
              
              13.66
              
              
              1/26/201474,999
              
              
              25,001
              
              
              12.79
              
              
              8/3/2014—
              
              
              15,000
              
              
              17.61
              
              
              2/7/2016—
              
              
              350,000
              
              
              2.12
              
              
              6/30/2016Phil
                  Skolnick, Ph.D. D. Sc. (hon)
              
              
              250,000
              
              
              —
              
              
              2.78
              
              
              7/10/2010
              
              
              —
              
              
              
              
              
              —91,655
              
              
              8,335
              
              
              13.58
              
              
              1/9/20146,250
              
              
              18,750
              
              
              16.77
              
              
              2/1/2015—
              
              
              15,000
              
              
              17.61
              
              
              2/7/2016—
              
              
              350,000
              
              
              2.12
              
              
              6/30/2016Warren
                  Stern, Ph.D.
              
              
              285,000
              
              
              —
              
              
              15.36
              
              
              9/10/2013
              
              
              —
              
              
              
              
              
              —6,250
              
              
              18,750
              
              
              16.77
              
              
              2/1/2015—
              
              
              25,000
              
              
              17.61
              
              
              2/7/2016—
              
              
              75,000
              
              
              2.12
              
              
              6/30/2016*Former
                  Employees:*Arnold
                  S. Lippa, Ph.D.
              
              
              22,916
              
              
              2,084
              
              
              13.66
              
              
              1/26/2014
              
              
              40,000
              
              $
              10,800
              
              
              20,000
              
              $
              5,40011,250
              
              
              33,750
              
              
              16.77
              
              
              2/1/201548,600
              
              
              —
              
              
              2.47
              
              
              1/17/2010162,000
              
              
              —
              
              
              2.73
              
              
              12/10/2008Leslie
                  Hudson, Ph.D.
              
              
              —
              
              
              —
              
              
              
              
              
              
              
              
              —
              
              
              
              
              
              100,000
              
              
              27,000—
              
              
              —Scott
                  Myers
              
              
              —
              
              
              285,000
              
              
              14.28
              
              
              12/01/2015
              
              
              —
              
              
              
              
              
              ——
              
              
              50,000
              
              
              2.08
              
              
              6/28/2016Robert
                  Horton
              
              
              150,000
              
              
              —
              
              
              4.40
              
              
              8/16/2012
              
              
              —
              
              
              
              
              
              —25,000
              
              
              —
              
              
              13.66
              
              
              1/26/201425,000
              
              
              —
              
              
              16.77
              
              
              2/1/2015100,000
              
              
              —
              
              
              21.15
              
              
              7/29/2015—
              
              
              —
              
              
              2.78
              
              
              5/31/2010


(1)
            All
                unexercisable options and restricted stock awards became exercisable
                on
                March 15, 2007 pursuant to the consummation of the Exchange
                Offer.




66




**Employment
      Agreements**





*Current
      Employees*





*Barbara
      Duncan.* In
      connection with her employment by us in August 2001, we entered into an
      employment agreement with Ms. Duncan (as amended in August 2004 and June 2006),
      which provides for her employment as president and chief financial officer
      until
      June 30, 2008. Ms. Duncan’s title was changed to chief executive officer in
      February 2007. Under the amended agreement, we will pay Ms. Duncan base
      compensation of at least $300,000 per year. For 2007, we will pay her $344,000
      in base salary. The agreement provides for benefits, the reimbursement of
      expenses and the payment of incentive compensation, which will be determined
      by
      our board of directors in its sole discretion. Upon the commencement of Ms.
      Duncan's employment, we granted her options to purchase 364,500 shares of our
      common stock (adjusted for subsequent 1.62-for-1 stock split) at an exercise
      price of $4.01 per share (as so adjusted) which are completely vested. In
      addition, in August 2004, in connection with renewal of her employment
      agreement, we granted her options to purchase 100,000 shares of our common
      stock
      at an exercise price of $12.79 per share which are completely vested as a change
      of control occurred upon the consummation of the exchange offer which
      accelerated the vesting of outstanding options under the 2000 Plan except for
      those granted in January 2007. In June 2006, in connection with her promotion
      to
      President, we granted
      her options to purchase 350,000 shares of our common stock at an exercise price
      of $2.12 per share which are completely vested as a
      change of control occurred upon the consummation of the exchange offer which
      accelerated the vesting of outstanding options under the 2000 Plan except for
      those granted in January 2007 .
      Options
      granted to Ms. Duncan, to the extent not vested, shall vest immediately upon
      a
      termination of Ms. Duncan’s employment by DOV without cause or a termination of
      employment by Ms. Duncan for good reason or within six months of certain events
      constituting a change of control of the Company. We
      are
      obligated to continue to pay Ms. Duncan her base and incentive compensation
      and
      to continue her benefits for a period of nine months if she is terminated upon
      becoming disabled or for a period of 90 days upon her death. Additionally,
      in the event of a termination of Ms. Duncan’s employment by DOV without cause or
      a termination of employment by Ms. Duncan for good reason or within six months
      of certain events constituting a change of control of DOV, Ms. Duncan will
      be
      entitled to severance payments equal to the greater of (i) basic compensation
      for the period commencing on the date of such termination and ending June 30,
      2008 and (ii) basic compensation for the period commencing on the date of such
      termination and ending on the date that is 12 months thereafter. The amendment
      also provides that Ms. Duncan will resign as a member of the Company’s board of
      directors in the event Ms. Duncan’s employment with the Company is terminated
      for any reason.





*Dr.
      Phil Skolnick* *Ph.D., D.Sc.(hon)* *.*  In
      connection with his employment by us in January 2001, we entered into an
      employment agreement (as amended in January 2004 and June 2006) with
      Dr. Skolnick, which provides for his employment as executive
      vice-president, research and chief scientific officer until June 30, 2008. In
      February 2007, Dr. Skolnick’s title was changed to president and chief
      scientific officer. Under
      the
      amended agreement, we will pay Dr. Skolnick base compensation of at least
      $300,000 per year. For 2007, we will pay him $344,000 in base salary. The
      agreement provides for benefits, the reimbursement of expenses and the payment
      of incentive compensation, which will be determined by our board of directors
      in
      its sole discretion. Upon the commencement of Dr. Skolnick's employment, we
      granted him options to purchase 405,000 shares of our common stock (adjusted
      for
      subsequent 1.62-for-1 stock split) at an exercise price of $2.78 per share
      (as
      so adjusted) which are completely vested. In January 2004, in connection with
      renewal of his employment agreement, we granted him options to purchase 100,000
      shares of our common stock at an exercise price of $13.58 per share which are
      completely vested. In
      connection with the execution of the June 2006 amendment, Dr. Skolnick was
      granted options to purchase 350,000 shares of our common stock at an exercise
      price of $2.12 per share which are completely vested as a
      change of control occurred upon the consummation of the exchange offer which
      accelerated the vesting of outstanding options under the 2000 Plan except for
      those granted in January 2007 . We
      are
      obligated to continue to pay Dr. Skolnick his base and incentive
      compensation and to continue his benefits for a period of nine months if he
      is
      terminated upon becoming disabled or for a period of 90 days upon his
      death. Additionally,
      in the event of a termination of Dr. Skolnick’s employment by DOV without cause
      or a termination of employment by Dr. Skolnick for good reason or within six
      months of certain events constituting a change of control of the Company
      including if either Dr. Horovitz or Dr. Lippa are not on our board of directors,
      Dr. Skolnick will be entitled to severance payments equal to the greater of
      (i)
      basic compensation for the period commencing on the date of such termination
      and
      ending June 30, 2008 and (ii) basic compensation for the period commencing
      on
      the date of such termination and ending on the date that is 12 months
      thereafter. The
      agreement also requires Dr. Skolnick to refrain from competing with us and
      from soliciting our customers and clients for the duration of his employment
      and
      for a period following employment equal to the length of time we make severance
      payments to him.




67




*Dr.
      Warren Stern* *,
      Ph.D.*   In
      connection with his engagement in September 2003, Dr. Stern and we
      entered into a consulting agreement and an employment agreement which was
      amended on June 30, 2006. The
      amended employment agreement provides for an extension of the term of Dr.
      Stern’s service to DOV as senior vice president of drug development from
      September 10, 2006 until June 30, 2007; provided, however, that the hours of
      service provided by Dr. Stern to us and Dr. Stern’s basic compensation will be
      reduced by (i) 30% from October 1, 2006 until January 1, 2007and (ii) 50% from
      January 1, 2007 until March 31, 2007 .
      Under
      the consulting agreement, pending commencement of full-time employment, we
      paid
      Dr. Stern $45,000. Under the employment agreement, once Dr. Stern
      commenced full-time employment in December 2003, we agreed to pay him
      $300,000 per year. The employment agreement provides for benefits, the
      reimbursement of expenses and the payment of incentive compensation, which
      will
      be determined by our board of directors in its sole discretion. Additionally,
      as
      of September 10, 2003, we granted Dr. Stern options to purchase
      285,000 shares of our common stock at an exercise price of $15.36 per share
      which are completely vested. In
      connection with the execution of the amendment, Dr. Stern was granted options
      to
      purchase 75,000 shares of DOV common stock at an exercise price of $2.12 per
      share which are completely vested. We
      are
      obligated to continue to pay Dr. Stern his base and incentive compensation
      and to continue his benefits for a period of nine months if he is terminated
      upon becoming disabled or for a period of 90 days upon his death. The
      employment agreement also requires Dr. Stern to refrain from competing with
      us and from soliciting our customers and clients for the duration of his
      employment and for a period following employment equal to the time we make
      severance payments to him.





Effective
      April 1, 2007, Dr. Stern’s employment agreement will expire and the terms of Dr.
      Stern’s continued employment with DOV will be governed by a Letter Agreement,
      dated as of March 29, 2007. The letter agreement provides for Dr. Stern’s
      continued employment until June 30, 2007 as senior vice president of drug
      development. Dr. Stern will devote 8 hours per week to his employment with
      DOV
      and will receive $1,702 per week (minus standard withholdings and deductions
      required by law). Dr. Stern will be entitled to 1.5 vacation days during the
      period from Apri1 1, 2007 until June 30, 2007; however, he will not be entitled
      to any additional benefits generally provided to DOV employees.




*Prior
      Employees*





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





*Leslie
      Hudson* .
      In
      connection with his employment by us in July 2005, we entered into an employment
      agreement with Dr. Hudson which provided for his employment as Chief Executive
      Officer and President until July 28, 2008. Under the agreement, we agreed
      to pay Dr. Hudson base compensation of at least $425,000 per year. The
      agreement provided for benefits, the reimbursement of expenses and the payment
      of incentive compensation. Additionally, upon commencement of employment on
      July
      28, 2005, we granted Dr. Hudson 100,000 shares of restricted stock and options
      to purchase 225,000 shares of our common stock at an exercise price of 21.20,
      each vesting ratably annually over four years. Dr. Hudson also received a bonus
      of $85,000 in January 2006, and the parties agreed that his target bonus for
      fiscal year 2006 and each subsequent year of his employment agreement will
      be
      40% of base compensation upon achievement of milestones established by the
      compensation committee of the board of directors. He was also eligible for
      other
      benefits, including relocation allowances of which $78,966 was paid in 2005.
      We
      were obligated to continue to pay Dr. Hudson his base and incentive
      compensation and to continue his benefits for a period of nine months if he
      was
      terminated upon becoming disabled or for a period of 90 days upon his
      death. For qualified events of severance, Dr. Hudson was entitled to base
      compensation for the balance of his agreement subject to a minimum of one-year
      base compensation and an additional severance payment equal to his prior
      incentive bonus in the case of a termination following a change of control.
      The
      agreement also required Dr. Hudson to refrain from competing with us and
      from soliciting our customers and clients for the duration of his employment
      and
      for a period following employment equal to the length of time we make severance
      payments to him. On
      June
      29, 2006, Dr. Hudson resigned as president and chief executive officer and
      as a
      member of the board of directors. We entered into a Separation and General
      Release Agreement with Dr. Hudson, dated as of June 29, 2006, pursuant to which
      we agreed to make severance payments to Dr. Hudson in an aggregate amount equal
      to 24 months of basic compensation. Additionally, the 100,000 shares of RSAs
      granted to Dr. Hudson in connection with the commencement of his employment
      were
      vested and Dr. Hudson elected to have the tax withheld from the RSAs granted,
      thus DOV has agreed to remove any restrictions on 68,550 of such shares which
      are now fully-owned by Dr. Hudson. In addition, in accordance with the
      provisions of Dr. Hudson’s Separation and General Release Agreement, all stock
      options held at the date of termination were immediately
      terminated.




68





*Robert
      Horton.* In
      connection with his employment by us in August 2002, we entered into an
      employment agreement with Mr. Horton (as amended in July 2005), which
      provided for his employment as Vice President and General Counsel until August
      16, 2008. Mr. Horton’s title was changed to Senior Vice President and General
      Counsel in February 2005. Under the agreement, we agreed to pay Mr. Horton
      base
      compensation of at least $330,000 per year. The agreement provided for benefits,
      the reimbursement of expenses and the payment of incentive compensation, which
      will be determined by our board of directors in its sole discretion.
      Additionally, upon the commencement of Mr. Horton's employment, we granted
      him
      options to purchase 250,000 shares of our common stock at an exercise price
      of
      $4.40 per share. In addition, in July 2005, in connection with renewal of his
      employment agreement, we granted him options to purchase 100,000 shares of
      our
      common stock at an exercise price of $21.15 per share that are completely
      vested. We were obligated to continue to pay Mr. Horton his base and
      incentive compensation and to continue his benefits for a period of nine months
      if he was terminated upon becoming disabled or for a period of 90 days upon
      his death. If Mr. Horton terminated his employment with us for good reason,
      or
      within six months of a change of control, or if we terminated Mr. Horton
      without cause, he was entitled to receive his base compensation for balance
      of
      his employment agreement, namely August 16, 2008, and all stock options granted
      to him would vest .
      The
      agreement also requires Mr. Horton to refrain from competing with us and
      from soliciting our customers and clients for the duration of his employment
      and
      for a period following employment equal to the length of time we make severance
      payment to him. In
      May
      2006, Mr. Horton’s employment was terminated. As part of his severance
      agreement, we agreed to pay base salary and benefits over the next 15 months
      and, pursuant to the provisions of his employment agreement, his unvested
      options have been vested and the exercise period for all outstanding options
      has
      been extended to December 31, 2007.





*Scott
      Myers.* In
      connection with his employment by us in December 2005, we entered into an
      employment agreement with Mr. Myers which provided for his employment as Senior
      Vice President, Strategic Marketing and Commercialization until December 2008.
      Under the employment agreement, we agreed to pay him base
      compensation of at least $330,000 per year . The
      agreement provided for benefits, the reimbursement of expenses and the payment
      of incentive compensation, which will be determined by our board of directors
      in
      its sole discretion. Additionally, upon the commencement of Mr. Myers’
employment, we granted him options to purchase 285,000 shares of our common
      stock at an exercise price of $14.28 per share that would have vested 50% on
      June 1, 2007 and ratably thereafter over the next six quarters. We were
      obligated to continue to pay Mr. Myers his base and incentive compensation
      and to continue his benefits for a period of nine months if he is terminated
      upon becoming disabled or for a period of 90 days upon his death. If Mr.
      Myers terminates his employment with us for good reason, or within six months
      of
      a change of control, or if we terminate Mr. Myers without cause, he was
      entitled to receive his base compensation for balance of his employment
      agreement, namely December 2008, and all stock options granted to him would
      have
      vested. Mr. Myers terminated his employment with us in January 2007 and thus
      no
      severance payments are owing to him.




**Compensation
      of Directors**





Our
      non-employee and independent outside directors each receive $5,000 for each
      fiscal quarter and receive 5,000 shares of restricted stock, or RSA’s, for a
      full year of service on the annual meeting date. New, independent members of
      the
      board receive 8,333 RSA’s in their first year of service in lieu of the 5,000
      RSA’s noted in the prior sentence. In May 2006, Mr. Ashe, Ms. Bischoff, Dr.
      Horovitz and Mr. Van Riper each received 5,000 RSA’s. These RSA’s generally vest
      in three annual installments after the completion of each full year of service
      following such grant but became immediately exercisable upon the consummation
      of
      our exchange offer, which constituted a change of control under our 2000 Plan.
      In addition Mr. Podlesak received 8,333 shares of restricted stock upon joining
      our board in 2006. Our compensation committee members receive $1,000 for each
      meeting in which they participate with a limit of one such payment per quarter
      and the chairman of the compensation committee receives additional compensation
      of $500 per quarter. Our audit committee members receive $1,000 for each meeting
      in which they participate and the chairman of the audit committee receives
      additional compensation of $3,000 per quarter with a limit of one such payment
      per quarter. We have agreed to reimburse our directors for their reasonable
      expenses incurred in attending meetings of the board of directors and its
      committees. Dr. Lippa, the executive chairman, and Ms. Duncan, our Chief
      Executive Officer, did not receive any compensation for their membership on
      the
      board of directors in 2006.




69





The
      table
      below summarizes compensation information for each of our non-employee
      independent directors for fiscal year 2006. We have not included columns in
      the
      table below for non-equity incentive plan compensation or change in pension
      value and nonqualified deferred compensation earnings as we do not have such
      plans in place.




**Compensation
                Recognized for Year Ended**
              **December
                31,****2006**
            
            **Outstanding
                at**
              **December
                31, 2006****Name**
            
            **Fees**
              **Earned
                or**
              **Paid
                in**
              **Cash******
            
            **Stock**
              **Awards(1)**
            
            **Option**
              **Awards(1)**
            
            **Total**
            
            **Options**
            
            **Stock**
              **Awards**Patrick
                Ashe
            
            $
            26,000
            
            $
            5,450
            
            $
            132,334
            
            $
            163,784
            
            
            121,200
            
            
            5,000Theresa
                A. Bischoff
            
            
            28,000
            
            
            5,450
            
            
            100,139
            
            
            133,589
            
            
            39,300
            
            
            5,000Zola
                Horovitz, Ph.D.
            
            
            34,000
            
            
            5,450
            
            
            132,334
            
            
            171,784
            
            
            89,300
            
            
            5,000Dennis
                Podlesak
            
            
            15,000
            
            
            9,084
            
            
            -
            
            
            24,084
            
            
            -
            
            
            8,333Daniel
                S. Van Riper
            
            
            43,000
            
            
            5,450
            
            
            146,602
            
            
            195,052
            
            
            57,150
            
            
            5,000





(1)
      The
      directors are paid their equity compensation at the end of each annual term
      and
      therefore compensation related to the stock and option awards represents the
      expense recognized in the Company’s financial statements for the year ended
      December 31, 2006. Although
      the amounts reflected for the option awards appear large based upon our current
      market capitalization, the grants and fair value established were made at a
      point when our market capitalization was substantially higher. Please refer
      to
      the section “2006 Circumstances and Compensation Adjustments”. The grant date
      fair value of stock awards to each of the directors except Mr. Podlesak was
      $14,600 and for Mr. Podlesak was $24,332 during 2006.





**Compensation
      Committee Interlocks and Insider Participation**





During
      fiscal 2006, the compensation committee consisted of Dr. Horovitz (chairman),
      Mr. Ashe and Mr. Van Riper. No member of the compensation committee was an
      officer or employee of the Company during 2006 or was formerly an officer or
      employee of the Company. In addition, no executive officer of the Company served
      as a member of another entity’s board of directors or as a member of the
      compensation committee of another entity (or other board committee performing
      equivalent functions) during 2006, which entity had an executive officer serving
      on the board of directors of the Company.




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




The
      following table sets forth, as of March 15, 2007, certain information regarding
      the beneficial ownership of our common stock by:




·
                each
                    person known by us to beneficially own 5% or more of a class
                    of our common
                    stock;




·
                each
                    of our directors;




70




·
                each
                    of our current executive officers; and




·
                all
                    our directors and executive officers of as a group.




The
      number of shares beneficially owned by each stockholder is determined under
      rules issued by the SEC (Rule 13d-3(d)(1) under the Exchange Act) and
      includes voting or investment power with respect to securities. Under these
      rules, beneficial ownership includes any shares as to which the individual
      or
      entity has sole or shared voting power or investment power and includes any
      shares to which an individual or entity has the right to acquire beneficial
      ownership within 60 days of March 15, 2007, through the exercise of any
      warrant, stock option or other right. The inclusion in this calculation of
      such
      shares, however, does not constitute an admission that the named stockholder
      is
      a direct or indirect beneficial owner of such shares. Each of the stockholders
      listed has sole voting and investment power with respect to the shares
      beneficially owned by the stockholder unless noted otherwise, subject to
      community property laws where applicable.




The
      table
      below does not set forth any information with regard to former holders of
      Debentures that received shares of series C convertible preferred stock in
      the
      Exchange Offer as no such former holder has filed any report with respect to
      such securities with the Securities and Exchange Commission. Neither the shares
      of series C convertible preferred stock nor the shares of series D convertible
      preferred stock may be converted into shares of common stock unless and until
      the amendment to the Company’s Certificate of Incorporation described in this
      annual report is approved by the Company’s stockholders and filed with the
      Secretary of State for the State of Delaware. The shares of series C convertible
      preferred stock vote generally on an as-converted basis on all matters that
      may
      come before the Company’s common stockholders except for the consideration of
      the amendment to the Company’s Certificate of Incorporation described in this
      annual report that is subject to the consideration only of the Company’s holders
      of common stock. Neither series C convertible preferred stock, nor series D
      convertible preferred stock have any voting rights with respect to the amendment
      to the Company’s Certificate of Incorporation described in this annual
      report.




Unless
      otherwise specified below, each stockholder's
      address is c/o DOV Pharmaceutical, Inc., 150 Pierce Street, Somerset, NJ
      08873.




**Name
                of Beneficial Owner**
            
            **Number
                of Shares**
              **Beneficially
                Owned**
            
            **Percentage
                of**
              **Class(1)**Prescott
                Group Capital Management, LLC(2)
              1924
                South Utica, Suite 1120
              Tulsa,
                Oklahoma 74104-6529
            
            
            2,397,970
            
            
            9.0
            %Paul
                Davis(2)
              Bosque
                Dd Durazino 127, Piso 10
              Mexico
                D.F. 11700, Mexico
            
            
            1,590,000
            
            
            6.0Arnold
                S. Lippa(3)
            
            
            499,200
            
            
            1.9Patrick
                Ashe(4)
            
            
            166,200
            
            
            *Zola
                Horovitz(5)
            
            
            144,500
            
            
            *Daniel
                S. Van Riper(6)
            
            
            62,150
            
            
            *Theresa
                A. Bischoff(7)
            
            
            44,300
            
            
            *Barbara
                G. Duncan(8)
            
            
            25,000
            
            
            *Dennis
                Podlesak (9)
            
            
            8,333
            
            
            *Phil
                Skolnick(10)
            
            
            -
            
            
            *Warren
                Stern(11)
            
            
            -
            
            
            *All
                directors and executive officers as a group (9
                persons)(12)
            
            
            949,683
            
            
            3.2







*
              Lessthan
                  one percent.





(1)
            As
                of March 15, 2007, the number of outstanding shares of our common
                stock
                and common stock equivalents was 26,743,657. Such number of outstanding
                shares of common stock does not include any shares of series C or
                series D
                convertible preferred stock as such shares do not yet have the right
                to
                convert into shares of common stock.


(2)
              The
                  information reported herein is based solely upon public filings
                  made with
                  the SEC by or on behalf of the beneficial holders so listed.


(3)
            Includes
                499,200 shares of common stock. Excludes (i) options to purchase
                280,600
                shares of common stock that are currently vested but are subject
                to a
                restriction on exercise unless and until the amendment to the Certificate
                of Incorporation is approved by the Company’s stockholders and filed with
                the Secretary of State of the State of Delaware and (ii) warrants
                to
                purchase 559,983 shares of our common stock that will be distributed
                to
                holders of our outstanding common stock in one or more distributions
                or
                other transactions prior to July 1, 2007 that are not exercisable
                within
                60 days of March 15, 2007.




71




(4)
            Includes
                45,000 shares of common stock and options to purchase 121,200 shares
                of
                common stock that are currently exercisable. Excludes warrants to
                purchase
                50,479 shares of our common stock that will be distributed to holders
                of
                our outstanding common stock in one or more distributions or other
                transactions prior to July 1, 2007 that are not exercisable within
                60 days of March 15, 2007.




(5)
            Includes
                55,200 shares of common stock and options to purchase 89,300 shares
                of
                common stock that are currently exercisable. Excludes warrants to
                purchase
                61,921 shares of our common stock that will be distributed to holders
                of
                our outstanding common stock in one or more distributions or other
                transactions prior to July 1, 2007 that are not exercisable within
                60 days of March 15, 2007.


(6)
              Includes
                  5,000 shares of common stock and options to purchase 57,150 shares
                  of
                  common stock that are currently exercisable. Excludes warrants
                  to purchase
                  5,609 shares of our common stock that will be distributed to holders
                  of
                  our outstanding common stock in one or more distributions or other
                  transactions prior to July 1, 2007 that are not exercisable within
                  60 days of March 15, 2007.


(7)
            Includes
                5,000 shares of common stock and options to purchase 39,300 shares
                of
                common stock that are currently exercisable. Excludes warrants to
                purchase
                5,609 shares of our common stock that will be distributed to holders
                of
                our outstanding common stock in one or more distributions or other
                transactions prior to July 1, 2007 that are not exercisable within
                60 days of March 15, 2007.


(8)
              Includes
                  25,000 shares of common stock. Excludes (i) options to purchase
                  724,500
                  shares of common stock that are currently vested but are subject
                  to a
                  restriction on exercise unless and until the amendment to the Certificate
                  of Incorporation is approved by the Company’s stockholders and filed with
                  the Secretary of State of the State of Delaware, (ii) warrants
                  to purchase
                  28,044 shares of our common stock that will be distributed to holders
                  of
                  our outstanding common stock in one or more distributions or other
                  transactions prior to July 1, 2007 that are not exercisable within
                  60 days
                  of March 15, 2007, and (iii) options to purchase 75,000 shares
                  of common
                  stock that are not exercisable within 60 days of March 15, 2007.


(9)
            Includes
                8,333 shares of common stock. Excludes warrants to purchase 9,347
                shares
                of our common stock that will be distributed to holders of our outstanding
                common stock in one or more distributions or other transactions prior
                to
                July 1, 2007 that are not exercisable within 60 days of March 15,
                2007.


(10)
              Excludes
                  (i) options to purchase 740,000 shares of common stock that are
                  currently
                  vested but are subject to a restriction on exercise unless and
                  until the
                  amendment to the Certificate of Incorporation is approved by the
                  Company’s
                  stockholders and filed with the Secretary of State of the State
                  of
                  Delaware and (ii) options to purchase 50,000 shares of common stock
                  that
                  are not exercisable within 60 days of March 15,
                  2007.


(11)
            Excludes
                (i) options to purchase 410,000 shares of common stock that are currently
                vested but are subject to a restriction on exercise unless and until
                the
                amendment to the Certificate of Incorporation is approved by the
                Company’s
                stockholders and filed with the Secretary of State of the State of
                Delaware and (ii) options to purchase 50,000 shares of common stock
                that
                are not exercisable within 60 days of March 15, 2007.





(12)
              Includes
                  642,733 shares of common stock and options to purchase 306,950
                  shares of
                  common stock that are currently exercisable. Excludes options to
                  purchase
                  2,115,100 shares of common stock that are currently vested but
                  not
                  exercisable, warrants to purchase 720,993 shares of our common
                  stock that
                  will be distributed to holders of our outstanding common stock
                  in one or
                  more distributions or other transactions prior to July 1, 2007
                  that are
                  not exercisable within 60 days of March 15, 2007 and options to
                  purchase
                  175,000 shares of common stock that are not exercisable within
                  60 days of March 15, 2007.


**Stock
      Option Plans**




The
      following table provides information with respect to compensation plans under
      which equity compensation is authorized at December 31, 2006.




72





**Securities
                to be**
              **Issued
                Upon**
              **Exercise
                of**
              **Outstanding**
              **Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price
                of**
              **Outstanding**
              **Options**
            
            **Number
                of**
              **Securities**
              **Remaining**
              **Available
                for**
              **Future
                Issue**Equity
                Compensation Plans Approved by Shareholders
            
            
            3,813,441
            
            $
            7.98
            
            
            719,985Equity
                Compensation Plan Not Approved by Shareholders
            
            
            285,000
            
            
            14.28
            
            
            —Total
            
            
            4,098,441
            
            $
            8.84
            
            
            719,985





***1998
      Stock Option Plan***




Our
      1998
      Stock Option Plan, or 1998 Plan, adopted by our board of directors and approved
      by our stockholders in September 1998, provided for the issuance of
      2,025,000 shares of our
      common stock. As of December 31, 2006, options to purchase 337,800 shares of
      our
      common stock were outstanding under our 1998 Plan. Options to purchase an
      aggregate of 805,110 shares of common stock have been exercised under our 1998
      Stock Option Plan. Generally, options terminate on the tenth anniversary of
      the
      date of grant. All outstanding options are vested and exercisable. The
      Compensation Committee administers the 1998 Plan. We will not make any
      additional grants under our 1998 Plan.




***Stock
      Option Grants to Phil Skolnick and Scott Myers***




In
      connection with the commencement of Dr. Skolnick's employment with us in
      January 2001, we granted him stock options to acquire 405,000 shares of our
      common stock at an exercise price of $2.78 per share (such shares and price
      as
      adjusted for our subsequent 1.62-for-1 stock split). As of December 31, 2006,
      all the 250,000 options outstanding were vested. During 2006, Dr. Skolnick
      exercised 60,000 options.




In
      connection with the commencement of Mr. Myer's employment with us in
      December 2005, we granted him stock options to acquire 285,000 shares of our
      common stock at an exercise price of $14.28 per share. As of December 31, 2006,
      none were vested. Mr. Myer’s terminated his employment with us effective January
      15, 2007 and all options were forfeited.




***2000
      Stock Option and Grant Plan***




Our
      board
      of directors adopted, and our stockholders approved, our 2000 Stock Option
      and
      Grant Plan, or 2000 Plan, in November 2000. In May 2003, 2004, 2005 and
      2006 our stockholders approved amendments to the 2000 Plan to increase the
      number of shares authorized for grant by 500,000, 750,000, 750,000 and 1,000,000
      shares, respectively. The 2000 Plan now provides for the issuance of up to
      4,692,090 shares of common stock plus that number of shares of common stock
      underlying any future termination, cancellation or reacquisition of options
      granted under the 1998 Stock Option Plan. As of December
      31, 2006 ,
      options
      to purchase 3,218,351 shares of common stock and 68,333 restricted stock awards
      were outstanding and 719,985 shares of common stock were available for future
      grants under the 2000 Plan. Options to purchase an aggregate of 565,000 shares
      of common stock have been exercised under our 2000 Plan. Our compensation
      committee administers the 2000 Plan.




Under
      the
      2000 Plan ,
      our
      compensation committee may among other things:




·
                grant
                    incentive stock options;


·
              grant
                  non-qualified stock options;


·
            grant
                stock appreciation rights;


·
              issue
                  or sell common stock with or without vesting or other restrictions;
                  and


·
            grant
                common stock upon the attainment of specified performance goals.




These
      grants and issuances may be made
      to our officers, employees, directors, consultants, advisors and other key
      persons.




73




Our
      compensation committee has the right, in its discretion, to select the
      individuals eligible to receive awards, determine the terms and conditions
      of
      the awards granted,
      accelerate the vesting schedule of any award and generally administer and
      interpret the 2000 Plan.




The
      exercise price of options granted under the 2000 Plan is determined by our
      compensation committee. Under present law, incentive stock options and options
      intended to qualify as performance-based compensation under Section 162(m)
      of the Internal Revenue Code of 1986 may not be granted at an exercise price
      less than the fair market value of our common stock on the date of grant, or
      less than 110% of the fair market value in the case of incentive stock options
      granted to optionees holding more than 10% of our voting power. Generally
      vesting under the 2000 Plan occurs 25% after the first year and the balance
      ratably annually over the next three years or 50% after the first 18 months
      and
      the balance ratably quarterly thereafter.




Options
      typically terminate ten years from the date of grant and may be exercised for
      specified periods after the termination of the optionee's employment or other
      service relationship with us. Upon the exercise of options, the option exercise
      price must be paid in full either in cash or by certified or bank check or
      other
      instrument acceptable to the committee.




Non-qualified
      stock options may be granted under the 2000 Plan at prices that are less than
      the fair market value of the underlying shares on the date granted. Restricted
      stock awards may be granted to eligible service providers at the compensation
      committee's discretion. The compensation committee determines the terms of
      restricted stock awards and a restricted stock agreement may give us the option,
      or impose an obligation, to repurchase some or all of the shares of restricted
      stock held by a grantee upon the termination of the grantee's employment or
      other service relationship with us. Restricted stock awards will vest at a
      rate
      determined by the compensation committee and may be granted without
      restrictions.




Stock
      appreciation rights may be granted to eligible service providers at the
      compensation committee's discretion. Stock appreciation rights entitle the
      optionee to elect to receive an amount of cash or shares of stock or a
      combination thereof having a value equal to the excess of the value of the stock on the
      date of exercise over the exercised price of the award. The terms of the stock
      appreciation rights will be determined by the compensation committee. Stock
      appreciation rights will generally terminate upon the termination of an
      optionee's employment or other service relationship with us.




The
      2000
      Plan and all awards granted under the plan will terminate upon a merger,
      reorganization or consolidation, the sale of all or substantially all our assets
      or all our outstanding capital stock or a liquidation or other similar
      transaction, unless we and the other parties to such
      transactions agree otherwise. All participants under the 2000 Plan will be
      permitted to exercise before any such termination of all awards held by them
      that are then exercisable or will become exercisable upon the closing of the
      transaction. Awards granted under the 2000 Plan shall fully vest immediately
      prior to the consummation of certain events constituting a change of control,
      unless such accelerated vesting is waived in the individual agreements governing
      such awards. The
      Exchange Offer consummated on March 15, 2007 resulted in a change of control
      of
      the Company and, as such, approximately 1.1 million outstanding unvested options
      and 68,333 RSAs were immediately vested. This will result in a non-cash
      compensation charge in the first quarter of 2007 of approximately $6.1
      million.





Pursuant
      to Section 382 of the Internal Revenue Code of 1986, as amended, the annual
      utilization of a company's net operating loss carryforwards may be limited
      if
      the Company experiences a change in ownership of more than 50 percentage
      points within a three-year period. The
      Company is presently subject to a general limitation on the annual utilization
      of carryforward tax benefits of approximately $3.2 million.  As
      a
      result of the consummation of the Exchange Offer, it is likely that the
      Company’s ability to use these tax benefit carryforwards under the general
      limitation will be further restricted.





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





In
      July
      2005, our then chief executive officer and president, Dr. Arnold Lippa,
      terminated his employment with us. As
      a
      result, the Company recorded a severance obligation of $790,000 as of June
      30,
      2005, of which approximately $557,000 was paid in 2006. Dr.
      Lippa
      remains as executive chairman of our board of directors.




74




In
      2005
      and 2006, Dr. Stern received 20,000 options to purchase common stock in Suven
      Life Sciences, the parent company to Asian Clinical Trials, and $10,000,
      respectively, for services he provided to Suven as a consultant. In 2006, Dr.
      Stern also served as a paid consultant to Asian Clinical Trials, which has
      provided CRO services to DOV in connection with certain of DOV’s clinical
      trials.




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





The
      audit
      committee regularly reviews and determines whether specific projects or
      expenditures with our independent registered public accounting firm,
      PricewaterhouseCoopers LLP, potentially affects their independence. The audit
      committee's policy is to pre-approve all audit and permissible non-audit
      services provided by PricewaterhouseCoopers LLP. Pre-approval is generally
      provided by the audit committee for up to one year, is detailed as to the
      particular service or category of services to be rendered, and is generally
      subject to a specific budget. The audit committee may also pre-approve
      additional services or specific engagements on a case-by-case basis. Management
      is required to provide quarterly updates to the audit committee regarding the
      extent of any services provided in accordance with this pre-approval, as well
      as
      the cumulative fees for all non-audit services incurred to date.





The
      aggregate fees and expenses billed for professional services rendered by our
      independent registered public accounting firm, PricewaterhouseCoopers LLP,
      with
      respect to fiscal years ended 2005 and 2004 were as follows:


**Years
                  Ended December 31,****2006**
              
              **2005**(1)  
                  Audit
              
              $
              370,500
              
              $
              323,670(2)  
                  Audit Related
              
              
              -
              
              
              35,830(3)  
                  Tax
              
              
              75,600
              
              
              140,700(4)  
                  All Other
              
              
              -
              
              
              4,600Total
              
              $
              446,100
              
              
              504,800




Audit
      fees include fees for the audit of our financial statements, quarterly
      reviews, review
      of significant agreements and transactions during the year .
      In
      2006, the audit fee also includes the review of our implementation process for SFAS 123(R), the review of the accounting for our
      lease on the Somerset facility, the review of the accounting for our $10 million
      convertible debt exchange, the impact of our delisting from NASDAQ as well
      as an
      S-8 filing. In
      2005,
      audit fees also include the audit fees for Nascime Ltd., our wholly-owned
      subsidiary, fees for review of the S-8 filing for our shareholder rights plan,
      fees for review of S-1 and S-3 filings, fees for review of our convertible
      debt
      offering and management’s assessment of the effectiveness of internal control
      over financial reporting at December 31, 2005 (Sarbanes-Oxley 404 compliance)
      and the effectiveness of internal control of financial reporting at December
      31,
      2005. Audit fees related to the Sarbanes-Oxley 404 compliance in 2005 totaled
      $115,000. In 2006 and 2005, tax related fees include fees for tax advice in
      relation to our former subsidiary Nascime, an analysis of the Section 382
      limitations on the utilization of NOL’s, and tax impact on certain transactions
      and related footnote disclosures.





**Non-Audit
      Services**





Prior
      to
      adoption of the Sarbanes-Oxley Act of 2002, our audit committee’s charter
      required pre-approval of all non-audit services by our independent registered
      public accounting firm, PricewaterhouseCoopers LLP, which would include the
      following: tax research and consultations; international tax consulting; tax
      assistance and compliance in international locations; assistance with transfer
      pricing; expatriate tax services; consultations and assistance with other taxes
      including state and local taxes, sales and use taxes, customs and duties; review
      of intercompany agreements; and assistance with international manufacturing
      tax
      issues. The audit committee’s amended charter adopted in March 2004 continues
      pre-approval requirements for permitted and non-audit services.




75




**PART
      IV**





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





(a)
            The
                following documents are filed as part of this
                report:





(1)
            List
                of Financial Statements.




The
      following financial statements of DOV Pharmaceutical, Inc. and Report of
      PricewaterhouseCoopers LLP are included in this report:




Report
      of
      Independent Registered Public Accounting Firm




Consolidated
      Balance Sheets as of December 31, 2006 and 2005




Consolidated
      Statements of Operations for the Years Ended December 31, 2006, 2005 and
      2004




Consolidated
      Statements of Stockholders’ (Deficit)/ Equity for the Years Ended December 31,
      2006, 2005 and 2004




Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and
      2004




Notes
      to
      Consolidated Financial Statements





(2)
            List
                of all Financial Statement
                Schedules.




All
      the
      schedules called for are omitted because they are not applicable or the required
      information is included in the financial statements or notes
      thereto.





(3)
            List
                of Exhibits.




Exhibits
      are incorporated herein by reference or are filed with this report as indicated
      in the “Index to Exhibits” in part (c) below (numbered in accordance with Item
      601 of Regulation S-K).





(b)
            Reports
                on Form 8-K.





We
      filed
      the following current reports on Form 8-K during the fourth quarter of
      2006:


Item
                  Number
              
              Filing
                  DateItem
                  Nos. 3.01, 7.01, 8.01 and 9.01
                
                Item
                  Nos. 2.04, 3.01 and 8.01
                
                Item
                  Nos. 2.02 and 9.01
                
                Item
                  No. 8.01
                
                Item
                  No. 1.02
                
                Item
                  No. 1.01
              
              October
                  11, 2006
                
                October
                  30, 2006
                
                November
                  14, 2006
                
                November
                  14, 2006
                
                December
                  11, 2006
                
                December
                  13, 2006





76




(c)
            Exhibits.





The
      following exhibits are filed as part of, or incorporated by reference into,
      this
      report:





**Exhibit**
              **No.**
            
            **Description**3.1
            
            Fourth
                Amended and Restated Certificate of Incorporation (filed as Exhibit
                3.1 to
                the Quarterly Report on Form 10-Q on May 29, 2002 and incorporated
                herein
                by reference).3.2
            
            Amended
                and Restated By-Laws of Registrant (filed as Exhibit 3.2 to the Quarterly
                Report on Form 10-Q on May 29, 2002 and incorporated herein by
                reference).3.3
            
            Certificate
                of Designations, Preferences and Rights of a Series of Preferred
                Stock of
                Registrant classifying and designating the Series E Junior Participating
                Cumulative Preferred Stock (filed as Exhibit 3.1 to the Current Report
                on
                Form 8-K on October 16, 2002 and incorporated herein by
                reference).3.4
            
            Certificate
                of Designation of the Relative Rights and Preferences of the Series
                C
                Convertible Preferred Stock of Registrant.3.5
            
            Certificate
                of Designation of the Relative Rights and Preferences of the Series
                D
                Convertible Preferred Stock of Registrant.4.1
            
            See
                Exhibits 3.1, 3.3, 4.3 and 4.4 for instruments defining the rights
                of
                holders of common stock of Registrant.4.2
            
            Specimen
                certificate for shares of common stock, $0.0001 par value per share,
                of
                Registrant (filed as Exhibit 4.2 to Amendment No. 4 to the Registration
                Statement on Form S-1 (File No. 333-81484) on April 5, 2002 and
                incorporated herein by reference).4.3
            
            Shareholder
                Rights Agreement dated as of October 8, 2002, by and between Registrant
                and Continental Stock Transfer & Trust Co., as Rights Agent (filed as
                Exhibit 4.1 to the Current Report on Form 8-K on October 16, 2002
                and
                incorporated herein by reference).4.4
            
            Amendment
                No. 1 dated as of January 24, 2007 to Shareholder Rights Agreement
                dated
                as of October 8, 2002, by and between Registrant and Continental
                Stock
                Transfer & Trust Co., as Rights Agent.4.5
            
            Indenture,
                dated December 22, 2004, between Registrant, as Issuer, and Wells
                Fargo
                Bank, National Association, as Trustee (incorporated by reference
                to
                Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed December 23,
                2004).4.6
            
            Specimen
                certificate for shares of Series C Convertible Preferred Stock, $1.00
                par
                value per share, of Registrant.4.7
            
            Specimen
                certificate for shares of Series D Convertible Preferred Stock, $1.00
                par
                value per share, of Registrant.10.1
            
            Lease
                Agreement dated as of May 24, 1999, by and between Continental Investors,
                L.P. and Registrant for commercial premises located at 433 Hackensack
                Avenue, Hackensack, New Jersey (filed as Exhibit 10.1 to the Registration
                Statement on Form S-1 (File No. 333-81484) on January 28, 2002 and
                incorporated herein by reference).10.2
            
            License
                Agreement dated as of May 29, 1998, by and between Registrant and
                American Cyanamid Company (filed as Exhibit 10.2 to Amendment No.
                1 to the
                Registration Statement on Form S-1 (File No. 333-81484) on February
                6,
                2002 and incorporated herein by reference).110.3
            
            Sublicense
                and Development Agreement dated as of June 30, 1998, by and between
                Registrant and Neurocrine Biosciences, Inc. as amended by that certain
                Consent and Agreement referred to in item 10.19 (filed as
                Exhibit 10.4 to Amendment No. 5 to the Registration Statement on
                Form S-1 (File No. 333-81484) on April 24, 2002 and
                incorporated herein by reference).110.4
            
            License,
                Research and Development Agreement dated as of January 12, 2001, by
                and between Registrant and Biovail Laboratories Incorporated as amended
                by
                that certain Confidential Patent License, Settlement, and Special
                Mutual
                Release Agreement (filed as Exhibit 10.4 to Amendment No. 1 to
                the Registration Statement on Form S-1 (File No. 333-81484) on
                February 6, 2002 and incorporated herein by
                reference).110.5
            
            Guaranty
                dated as of January 12, 2001, by Biovail Corporation in favor of
                Registrant (filed as Exhibit 10.5 to the Registration Statement on
                Form
                S-1 (File No. 333-81484) on January 28, 2002 and incorporated herein
                by
                reference).




77




**Exhibit**
              **No.**
            
            **Description**10.6
            
            Joint
                Development and Operating Agreement dated as of January 21, 1999,
                by and
                among Registrant, Elan Corporation, plc, Elan International Services,
                Ltd., DOV Bermuda, Ltd. (formerly DOV Newco, Ltd.), and Nascime Limited
                as
                amended by that certain Termination Agreement referred to in item
                10.23
                (filed as Exhibit 10.7 to Amendment No. 1 to the Registration Statement
                on
                Form S-1 (File No. 333-81484) on February 6, 2002 and incorporated
                herein
                by reference).110.7
            
            Letter
                Agreement dated as of January 21, 1999, by and among Registrant,
                Elan
                Corporation, plc, Elan International Services, Ltd., and DOV Bermuda,
                Ltd.
                as amended by that certain Termination Agreement referred to in item
                10.23
                (filed as Exhibit 10.8 to the Registration Statement on Form S-1
                (File No.
                333-81484) on January 28, 2002 and incorporated herein by
                reference).10.8
            
            License
                Agreement dated as of January 20, 1999, by and between Registrant
                and
                Nascime Limited as amended by that certain Termination Agreement
                referred
                to in item 10.23 (filed as Exhibit 10.9 to Amendment No. 1 to the
                Registration Statement on Form S-1 (File No. 333-81484) on February
                6,
                2002 and incorporated herein by reference).110.9
            
            License
                Agreement dated as of January 20, 1999, by and between Nascime Limited
                and
                Elan Corporation, plc as amended by that certain Termination Agreement
                referred to in item 10.23 (filed as Exhibit 10.10 to Amendment No.
                1 to
                the Registration Statement on Form S-1 (File No. 333-81484) on February
                6,
                2002 and incorporated herein by reference).110.10
            
            Registration
                Rights Agreement dated as of January 21, 1999, by and between Registrant
                and Elan International Services, Ltd.as
                amended by that certain Letter Agreement and further amended by that
                certain Termination Agreement(filed
                as Exhibit 10.13 to the Registration Statement on Form S-1 (File
                No. 333-
                81484) on January 28, 2002 and incorporated herein by
                reference).10.11
            
            Registration
                Rights Agreement dated as of January 21, 1999, by and among Registrant,
                DOV Bermuda, Ltd. (formerly known as DOV Newco, Ltd.), and Elan
                International Services, Ltd. for shares of common stock received
                pursuant
                to the Joint Development and Operating Agreement referred to in 10.6
                as
                amended by that certain Termination Agreement referred to in item
                10.23
                (filed as Exhibit 10.14 to the Registration Statement on Form S-1
                (File
                No. 333-81484) on January 28, 2002 and incorporated herein by
                reference).10.12
            
            Registration
                Rights Agreement dated as of June 20, 2000, by and among Registrant
                and
                Series C Investors (filed as Exhibit 10.16 to the Registration
                Statement on Form S-1 (File No. 333-81484) on January 28, 2002 and
                incorporated herein by reference).10.13
            
            Amended
                and Restated Stockholders Agreement dated as of August 30, 2001 by
                and
                among Registrant, Arnold Lippa, Bernard Beer, Series C Investors
                and
                Series D Investors (filed as Exhibit 10.18 to the Registration Statement
                on Form S-1 (File No. 333-81484) on January 28, 2002 and incorporated
                herein by reference).10.14
            
            Registration
                Rights Agreement dated as of August 30, 2001 by and among Registrant,
                Series C Investors and Series D Investors (filed as Exhibit 10.19
                to the
                Registration Statement on Form S-1 (File No. 333-81484) on January
                28,
                2002 and incorporated herein by reference).10.15
            
            Form
                of Warrant Agreement (filed as Exhibit 10.20 to the Registration
                Statement
                on Form S-1 (File No. 333-81484) on January 28, 2002 and incorporated
                herein by reference).10.16
            
            1998
                Stock Option Plan (filed as Exhibit 10.21 to the Registration Statement
                on
                Form S-1 (File No. 333-81484) on January 28, 2002 and incorporated
                herein
                by reference).10.17
            
            2000
                Stock Option and Grant Plan (filed as Exhibit 10.22 to the Registration
                Statement on Form S-1 (File No. 333-81484) on January 28, 2002 and
                incorporated herein by reference) as amended by the Amended and Restated
                2000 Stock Option and Grant Plan, the Second Amendment thereto (each
                filed
                as Appendix C to the Proxy Statement on April 28, 2004 and incorporated
                herein by reference), the Third Amendment thereto (filed as Appendix
                B to
                the Proxy Statement on April 25, 2005 and incorporated herein by
                reference), the Fourth Amendment thereto (filed as Appendix A to
                the Proxy
                Statement on April 18, 2006 and incorporated herein by reference)
                and the
                Fifth Amendment thereto (filed as Exhibit 10.48 to the Quarterly
                Report on
                Form 10-Q on August 9, 2006 and incorporated herein by
                reference).




78





**Exhibit**
              **No.**
            
            **Description**10.18
            
            Stock
                Option Agreement dated as of July 10, 2000, by and between Registrant
                and
                Phil Skolnick for the grant of 250,000 stock options (filed as
                Exhibit 10.25 to Amendment No. 4 to the Registration Statement
                on Form S-1 (File No. 333-81484) on April 5, 2002 and incorporated
                herein
                by reference).10.19
            
            Consent
                and Agreement dated as of March 24, 2003, by and between Registrant,
                Neurocrine Biosciences, Inc. and ACY (filed as Exhibit 10.35 to the
                Annual
                Report on Form 10-K on March 31, 2003 and incorporated herein by
                reference).10.20
            
            Securities
                Purchase Agreement dated as of July 1, 2003 by and among Registrant,
                PW
                Juniper Crossover Fund, L.L.C., Caduceus Private Investment, LP,
                and
                OrbiMed Associates LLC (filed as Exhibit 10.1 to the Current Report
                on
                Form 8-K on July 8, 2003 and incorporated herein by
                reference).10.21
            
            Registration
                Rights Agreement dated as of July 1, 2003 by and among Registrant,
                PW
                Juniper Crossover Fund, L.L.C., Caduceus Private Investments, LP,
                and
                OrbiMed Associates LLC (filed as Exhibit 10.2 to the Current Report
                on Form 8-K on July 8, 2003 and incorporated herein by
                reference).10.22
            
            Form
                of Warrant Agreement dated as of July 1, 2003, by and among Registrant,
                PW
                Juniper Crossover Fund, L.L.C., Caduceus Private Investments, LP,
                and
                OrbiMed Associates LLC (filed as Exhibit 10.3 to the Current Report
                on Form 8-K on July 8, 2003 and incorporated herein by
                reference).10.23
            
            Termination
                Agreement dated as of October 21, 2003 by and among Registrant, Elan
                Corporation, plc, Elan International Services, Ltd., Elan Pharma
                International Limited, DOV (Bermuda), Ltd., and Nascime Limited
                (filed as Exhibit 10.1 to the Current Report on Form 8-K on
                October 22, 2003 and incorporated herein by
                reference).10.24
            
            Restated
                Employment Agreement dated as of January 19, 2004, by and between
                Registrant and Phil Skolnick(filed
                as Exhibit 10.40 to the Annual Report on Form 10-K on March 15, 2004
                and
                incorporated herein by reference).10.25
            
            Employment
                Agreement dated as of June 23, 2005, by and between Registrant and
                Robert
                Horton (filed as Exhibit 10.58 to the Quarterly Report on Form 10-Q
                on
                August 9, 2005 and incorporated herein by reference).10.26
            
            Employment
                Agreement dated as of September 10, 2003, by and between Registrant
                and
                Warren Stern (filed as Exhibit 10.42 to the Annual Report on Form
                10-K on
                March 15, 2004 and incorporated herein by reference).10.27
            
            Severance
                Agreement dated as of March 12, 2004, by and between Registrant and
                Bernard Beer (filed as Exhibit 10.43 to the Annual Report on Form
                10-K on
                March 15, 2004 and incorporated herein by reference).10.28
            
            Third
                Amendment to Lease Agreement dated as of February 13, 2004, by and
                between
                Continental Investors, L.P. and Registrant for commercial premises
                located
                at 433 Hackensack Avenue, Hackensack, New Jersey (filed as Exhibit
                10.44
                to the Annual Report on Form 10-K on March 15, 2004 and incorporated
                herein by reference).10.29
            
            Audit
                Committee Charter dated March 6, 2006 (filed as Exhibit 10.29 to
                the
                Annual Report on Form 10-K on March 15, 2006 and incorporated herein
                by
                reference).10.30
            
            Fourth
                Amendment to Lease Agreement dated as of March 11, 2004, by and between
                Continental Investors, L.P. and Registrant for commercial premises
                located
                at 433 Hackensack Avenue, Hackensack, New Jersey (filed as Exhibit
                10.46
                to the Annual Report on Form 10-K on March 15, 2004 and incorporated
                herein by reference).




79




**Exhibit**
              **No.**
            
            **Description**10.31
            
            Consent
                Agreement and Amendment dated February 25, 2004 by and among Wyeth
                Holdings Corporation, Neurocrine Biosciences, Inc. and Registrant(filed
                as Exhibit 10.49 to the Quarterly Report on Form 10-Q on November
                9, 2004
                and incorporated herein by reference).10.32
            
            License
                Agreement dated February 25, 2004 by and among Wyeth Holdings Corporation
                and Registrant(filed
                as Exhibit 10.50 to the Quarterly Report on Form 10-Q on November
                9, 2004
                and incorporated herein by reference).10.33
            
            Amended
                and Restated License Agreement dated February 25, 2004 by and among
                Wyeth
                Holdings Corporation and Registrant(filed
                as Exhibit 10.51 to the Quarterly Report on Form 10-Q on November
                9, 2004
                and incorporated herein by reference).10.34
            
            Employment
                Agreement dated as of August 3, 2004, by and between Registrant and
                Barbara Duncan(filed
                as Exhibit 10.52 to the Quarterly Report on Form 10-Q on November
                9, 2004
                and incorporated herein by reference).10.35
            
            Exclusive
                License, Development and Commercialization Agreement, dated August
                5,
                2004, by and between MSD Warwick (Manufacturing) Ltd. and Registrant,
                terminated as of December 6, 2006 (incorporated by reference to Exhibit
                10.1 to the Current Report on Form 8-K filed September 14,
                2004).110.36
            
            Registration
                Rights Agreement, dated December 22, 2004, among Registrant, Citigroup
                Global Markets, Inc., Banc of America LLC, and CIBC World Markets
                Corp.
                (incorporated by reference to Exhibit 4.3 tothe
                Current Report on Form 8-K filed December 23, 2004).10.37
            
            Indenture,
                dated December 22, 2004, between Registrant, as Issuer, and Wells
                Fargo
                Bank, National Association, as Trustee(incorporated by reference to Exhibit 4.1 toRegistrant’s
                Current Report on Form 8-K filed December 23, 2004).10.38
            
            Fifth
                Amendment to Lease Agreement dated November 15, 2004 by and among
                MSNW
                Continental Associates, LLC and Registrant(filed
                as Exhibit 10.56 to the Annual Report on Form 10-K on March 15, 2004
                and
                incorporated herein by reference).10.39
            
            Form
                of stock option agreement (filed as Exhibit 10.57 to the Annual Report
                on
                Form 10-K on March 15, 2004 and incorporated herein by
                reference).10.40
            
            Amended
                and Restated Employment Agreement, dated as of May 23, 2005, by and
                between DOV Pharmaceutical, Inc. and Arnold S. Lippa(filed
                as Exhibit 10.1 to Form 8-K on May 27, 2005 and incorporated herein
                by
                reference).10.41
            
            Restricted
                Stock Award Agreement, dated as of May 23, 2005, by and between DOV
                Pharmaceutical, Inc. and Arnold S. Lippa(filed
                as Exhibit 10.2 to Form 8-K on May 27, 2005 and incorporated herein
                by
                reference).10.42
            
            Amendment
                Agreement dated August 5, 2005, between MSD Warwick (Manufacturing)
                Ltd.
                and Registrant, terminated as of December 6, 2006 (filed as Exhibit
                10.1
                to the Quarterly Report on Form 10-Q on November 9, 2005 and incorporated
                herein by reference). 110.43
            
            Employment
                Agreement, dated as of June 29, 2005, by and between DOV Pharmaceutical,
                Inc. and Leslie Hudson(filed
                as Exhibit 10.1 to Form 8-K on July 6, 2005 and incorporated herein
                by
                reference).10.44
            
            Employment
                Agreement, dated as of December 1, 2005, by and between DOV
                Pharmaceutical, Inc. and Scott Myers (filed as Exhibit 10.42 to the
                Annual
                Report on Form 10-K on March 15, 2006 and incorporated herein by
                reference).10.45
            
            Stock
                Option Agreement, dated as of December 1, 2005, by and between Registrant
                and Scott Myers (filed as Exhibit 10.43 to the Annual Report on Form
                10-K
                on March 15, 2006 and incorporated herein by
                reference).10.46
            
            Sixth
                Amendment to Lease Agreement dated July 7, 2005 by and among MSNW
                Continental Associates, LLC and Registrant(filed as Exhibit 10.44 to the Annual Report on Form 10-K on March
                15,
                2006 and incorporated herein by reference).10.47
            
            Seventh
                Amendment to Lease Agreement dated September 7, 2005 by and among
                MSNW
                Continental Associates, LLC and Registrant(filed
                as Exhibit 10.45 to the Annual Report on Form 10-K on March 15, 2006
                and
                incorporated herein by reference).




80




**Exhibit**
              **No.**
            
            **Description**10.48
            
            Lease
                Agreement dated December 20, 2005 by and among Paragon 150 Pierce
                Street,
                LLC and Registrant as amended by the Lease Modification Agreement
                dated as
                of February 28, 2005 and the Second Lease Modification Agreement
                dated as
                of February 28, 2006(filed
                as Exhibit 10.46 to the Annual Report on Form 10-K on March 15, 2006
                and
                incorporated herein by reference).10.49
            
            Separation
                and General Release Agreement, dated May 4, 2006, by and between
                Robert
                Horton and Registrant (filed as Exhibit 10.47 to the Quarterly Report
                on
                Form 10-Q on May 9, 2006 and incorporated herein by
                reference).10.50
            
            Separation
                and General Release Agreement, dated as of June 29, 2006, by and
                between
                Dr. Leslie Hudson and Registrant (filed as Exhibit 99.2 to Form 8-K
                on
                July 6, 2006 and incorporated herein by reference).10.51
            
            Amendment
                No. 1 to Employment Agreement, dated as of June 30, 2006, by and
                between
                Barbara Duncan and Registrant (filed as Exhibit 99.3 to Form 8-K
                on July
                6, 2006 and incorporated herein by reference).10.52
            
            Amendment
                No. 1 to Employment Agreement, dated as of June 30, 2006, by and
                between
                Phil Skolnick and Registrant (filed as Exhibit 99.4 to Form 8-K on
                July 6,
                2006 and incorporated herein by reference).10.53
            
            Amendment
                No. 1 to Employment Agreement, dated as of June 30, 2006, by and
                between
                Warren Stern and Registrant (filed as Exhibit 99.5 to Form 8-K on
                July 6,
                2006 and incorporated herein by reference).10.54
            
            Form
                of Stock Option Agreement for stock options granted under the 2000
                Stock
                Option and Grant Plan (filed as Exhibit 10.49 to the Quarterly Report
                on
                Form 10-Q on September 11, 2006 and incorporated herein by
                reference).10.55
            
            Amended
                and Restated License Agreement, dated December 7, 2006, by and between
                Registrant, Wyeth Holdings Corporation and Wyeth, acting through
                its Wyeth
                Pharmaceuticals Division.10.56
            
            License
                Agreement, dated December 7, 2006, by and between Registrant and
                Wyeth
                Holdings Corporation.10.57
            
            License
                Agreement, dated December 7, 2006, by and between Registrant, Wyeth
                Holdings Corporation and Wyeth, acting through its Wyeth Pharmaceuticals
                Division.10.58
            
            License
                Agreement, dated January 15, 2007, by and between Registrant and
                XTL
                Development, Inc. (portions of which are subject to confidential
                treatment
                request).10.59
            
            Letter
                Agreement, dated March 29, 2007, by and between Registrant and Warren
                Stern.14.1
            
            Code
                of Business Conduct and Ethics (filed as Exhibit 14.1 to the Annual
                Report
                on Form 10-K on March 15, 2004 and incorporated herein by reference).14.2
            
            Audit
                Committee Complaint Procedures (filed as Exhibit 14.2 to the Annual
                Report
                on Form 10-K on March 15, 2004 and incorporated herein by
                reference).21.1
            
            Subsidiaries
                of Registrant.23.1
            
            Consent
                of PricewaterhouseCoopers LLP.31.1
            
            Certification
                of Chief Executive Officer and Principal Financial Officer of DOV
                Pharmaceutical, Inc., pursuant to Rules 13a-14(a) and 15d-14(a),
                as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32
            
            Certification
                of Chief Executive Officer and Principal Financial Officer of DOV
                Pharmaceutical, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.1
            
            Previously
                filed with confidential treatment of certain provisions




81




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Act of 1934,
      Registrant has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.


DOVPharmaceutical,
                Inc.DATE: MARCH30, 2007
            By:
            /s/
                BARBARADUNCANName:Barbara
                DuncanTitle:Chief Executive Officer and Treasurer
              DATE: MARCH30, 2007




Pursuant
      to the requirements of the Securities Act of 1933, 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**
            
            **Capacity**
            
            **Date**/s/
                Barbara G. Duncan
            
            Chief
              Executive Officer, Treasurer and Director
            
            March
                30, 2007Barbara
                G. Duncan
            
            (Principal
                Executive Officer, Principal Financial Officer)/s/
                Arnold S. Lippa
            
            Executive
                Chairman of the Board of Directors
            
            March
                30, 2007Arnold
                S. Lippa/s/
                Zola Horovitz
            
            Director
            
            March
                30, 2007Zola
                Horovitz/s/
                Patrick Ashe
            
            Director
            
            March
                30, 2007Patrick
                Ashe/s/
                Daniel S. Van Riper
            
            Director
            
            March
                30, 2007Daniel
                S. Van Riper/s/
                Theresa A. Bischoff
            
            Director
            
            March
                30, 2007Theresa
                A. Bischoff/s/
                Dennis Podlesak
            
            Director
            
            March
                30, 2007Dennis
                Podlesak/s/
                William Kaltnecker
            
            Controller
                (Principal Accounting Officer)
            
            March
                30, 2007William
                Kaltnecker




82




**FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





**INDEX
      TO FINANCIAL STATEMENTS**





**Page****DOV
                Pharmaceutical, Inc.**Report
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            
            F-3Consolidated
                Statements of Operations for the Years Ended December 31, 2006, 2005
                and
                2004
            
            F-4Consolidated
                Statements of Stockholders' (Deficit) /Equity for the Years Ended
                December
                31, 2006, 2005 and 2004
            
            F-5Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006, 2005
                and
                2004
            
            F-6Notes
                to Consolidated Financial Statements
            
            F-7




F-1





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders of


DOV
      Pharmaceutical, Inc.





In
      our
      opinion, the accompanying consolidated balance sheets and the related
      consolidated statements of income, shareholders' equity and cash flows present
      fairly, in all material respects, the financial position of DOV Pharmaceutical,
      Inc. and its subsidiaries at December 31, 2006 and December 31, 2005, and the
      results of their operations and their cash flows for each of the three years
      in
      the period ended December 31, 2006 in conformity with accounting principles
      generally accepted in the United States of America. These financial statements
      are the responsibility of the Company’s management. Our responsibility is to
      express an opinion on these financial statements based on our audits. We
      conducted our audits of these statements in accordance with the standards of
      the
      Public Company Accounting Oversight Board (United States). Those standards
      require that we plan and perform the audit to obtain reasonable assurance about
      whether the financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, and evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





As
      discussed in Note 4 to the consolidated financial statements, the Company
      changed the manner in which it accounts for share-based compensation in
      2006.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 2 to the financial
      statements, the Company has suffered recurring losses from operations and has
      a
      net capital deficiency that raise substantial doubt about its ability to
      continue as a going concern. Management's plans in regard to these matters
      are
      also described in Note 2. The financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.




PricewaterhouseCoopers
      LLP







Florham
      Park, New Jersey


March
      30,
      2007




F-2


**DOV
      PHARMACEUTICAL, INC.**


**CONSOLIDATED
      BALANCE SHEETS**




**December
                    31,****2006**
                
                **2005****Assets**Cash
                    and cash equivalents
                
                $
                35,088,467
                
                $
                8,425,552Marketable
                    securities—short-term
                
                
                7,203,327
                
                
                89,126,835Prepaid
                    expenses and other current assets
                
                
                2,644,230
                
                
                2,011,051Total
                    current assets
                
                
                44,936,024
                
                
                99,563,438Restricted
                    cash—long-term
                
                
                4,211,109
                
                
                —Property
                    and equipment, net
                
                
                1,214,189
                
                
                623,520Deferred
                    charges, net
                
                
                —
                
                
                1,999,548Total
                    assets
                
                $
                50,361,322
                
                $
                102,186,506**Liabilities
                    and Stockholders’ Deficit**Current
                    liabilities:Accounts
                    payable
                
                $
                2,465,141
                
                $
                8,643,356Accrued
                    expenses
                
                
                5,054,594
                
                
                6,892,738Deferred
                    revenue - current
                
                
                —
                
                
                5,511,810Deferred
                    credit - current
                
                
                257,313
                
                
                —Convertible
                    subordinated debentures
                
                
                16,021,600
                
                
                —Total
                    current liabilities
                
                
                23,798,648
                
                
                21,047,904Deferred
                    revenue - non-current
                
                
                —
                
                
                20,439,633Deferred
                    credits - non-current
                
                
                2,218,362
                
                
                —Convertible
                    subordinated debentures
                
                
                53,978,400
                
                
                80,000,000Commitments
                    and contingenciesStockholders’
                    deficit:Preferred
                    stock—undesignated preferred stock,$1.00
                    par value, 6,550,357 shares authorized, 0shares
                    issued and outstanding at December 31, 2006and
                    December 31, 2005
                
                
                —
                
                
                —Common
                    stock, $.0001 par value, 60,000,000 sharesauthorized,
                    26,743,657 and 23,090,970 issued andoutstanding
                    at December 31, 2006 and 2005,respectively
                
                
                2,674
                
                
                2,309Treasury
                    stock, at cost; 31,450 common shares atDecember
                    31, 2006
                
                
                (66,985
                )
                
                —Additional
                    paid-in capital
                
                
                162,088,677
                
                
                136,495,644Accumulated
                    other comprehensive loss
                
                
                (5,170
                )
                
                (298,411
                )Accumulated
                    deficit
                
                
                (191,653,284
                )
                
                (153,284,922
                )Unearned
                    compensation
                
                
                —
                
                
                (2,215,651
                )Total
                    stockholders’ deficit
                
                
                (29,634,088
                )
                
                (19,301,031
                )Total
                    liabilities and stockholders’ deficit
                
                $
                50,361,322
                
                $
                102,186,506


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




F-3




**DOV
      PHARMACEUTICAL, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Revenue
            
            $
            25,951,443
            
            $
            8,646,596
            
            $
            2,542,381Operating
                expenses:License
                expense
            
            
            —
            
            
            —
            
            
            2,500,000Research
                and development expense
            
            
            42,799,714
            
            
            53,982,908
            
            
            24,764,118General
                and administrative expense
            
            
            20,541,158
            
            
            9,110,135
            
            
            6,360,158Loss
                from operations
            
            
            (37,389,429
            )
            
            (54,446,447
            )
            
            (31,081,895
            )Interest
                income
            
            
            2,894,363
            
            
            3,711,747
            
            
            934,360Interest
                expense
            
            
            (4,007,955
            )
            
            (2,501,676
            )
            
            (2,953,986
            )Debt
                conversion and other expense net
            
            
            (5,611,929
            )
            
            (4,415
            )
            
            (7,855
            )Net
                loss before tax
            
            
            (44,114,950
            )
            
            (53,240,791
            )
            
            (33,109,376
            )Income
                tax benefit
            
            
            5,746,588
            
            
            272,955
            
            
            188,772Net
                loss
            
            $
            (38,368,362
            )
            $
            (52,967,836
            )
            $
            (32,920,604
            )Basic
                and diluted net loss per share
            
            $
            (1.55
            )
            $
            (2.32
            )
            $
            (1.67
            )Weighted
                average shares used in computing basic and diluted net loss per
                share
            
            
            24,703,333
            
            
            22,837,265
            
            
            19,729,765





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




F-4


**DOV
      PHARMACEUTICAL, INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' (DEFICIT)/ EQUITY**





**Series
                B**
              **Preferred**
              **Stock**
            
            **Common**
              **Stock**
            
            **Treasury**
              **Stock**
            
            **Additional**
              **Paid-In**
              **Capital**
            
            **Accumulated**
              **Deficit**
            
            **Unearned**
              **Compensation**
            
            **Accumulated
                Other Comprehensive Loss**
            
            **Total**
              **Stockholders’**
              **(Deficit)/**
              **Equity**Balance,
                December 31, 2003
            
            $
            354,643
            
            $
            1,649
            
            $
            —
            
            $
            103,013,813
            
            $
            (67,396,482
            )
            $
            (40,102
            )
            $
            (28,228
            )
            $
            35,905,293Issuance
                of stock
            
            
            —
            
            
            67
            
            
            —
            
            
            9,964,938
            
            
            —
            
            
            —
            
            
            —
            
            
            9,965,005Issuance
                of stock for exercise of options and warrants
            
            
            —
            
            
            82
            
            
            —
            
            
            1,135,644
            
            
            —
            
            
            —
            
            
            —
            
            
            1,135,726Issuance
                of stock for conversion of preferred
            
            
            (354,643
            )
            
            57
            
            
            —
            
            
            354,586
            
            
            —
            
            
            —
            
            
            —
            
            
            —Issuance
                of stock for conversion of debt
            
            
            —
            
            
            291
            
            
            —
            
            
            11,499,694
            
            
            —
            
            
            —
            
            
            —
            
            
            11,499,985Amortization
                of unearned compensation, net
            
            
            —
            
            
            —
            
            
            —
            
            
            314,635
            
            
            —
            
            
            29,938
            
            
            —
            
            
            344,573Issuance
                of options for services
            
            
            —
            
            
            —
            
            
            —
            
            
            (8,773
            )
            
            —
            
            
            8,773
            
            
            —
            
            
            —Interest
                payable in convertible securities
            
            
            —
            
            
            —
            
            
            —
            
            
            2,225,679
            
            
            —
            
            
            —
            
            
            —
            
            
            2,225,679Comprehensive
                loss:Net
                loss, year ended December 31, 2004
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (32,920,604
            )
            
            —
            
            
            —
            
            
            (32,920,604
            )Unrealized
                loss on marketable securities
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (219,325
            )
            
            (219,325
            )Comprehensive
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (33,139,929
            )Balance,
                December 31, 2004
            
            
            —
            
            
            2,146
            
            
            —
            
            
            128,500,216
            
            
            (100,317,086
            )
            
            (1,391
            )
            
            (247,553
            )
            
            27,936,332Issuance
                of stock for exercise of options and warrants
            
            
            —
            
            
            29
            
            
            —
            
            
            1,058,644
            
            
            —
            
            
            —
            
            
            —
            
            
            1,058,673Issuance
                of stock for compensation
            
            
            —
            
            
            16
            
            
            —
            
            
            3,022,984
            
            
            —
            
            
            (3,023,000
            )
            
            —
            
            
            —Issuance
                of stock for conversion of debt
            
            
            —
            
            
            118
            
            
            —
            
            
            4,024,520
            
            
            —
            
            
            —
            
            
            —
            
            
            4,024,638Amortization
                of unearned compensation, net
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            808,740
            
            
            —
            
            
            808,740Issuance
                of options for services
            
            
            —
            
            
            —
            
            
            —
            
            
            (194,504
            )
            
            —
            
            
            —
            
            
            —
            
            
            (194,504
            )Interest
                payable in convertible securities
            
            
            —
            
            
            —
            
            
            —
            
            
            83,784
            
            
            —
            
            
            —
            
            
            —
            
            
            83,784Comprehensive
                loss:Net
                loss, year ended December 31, 2005
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (52,967,836
            )
            
            —
            
            
            —
            
            
            (52,967,836
            )Unrealized
                loss on marketable securities
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (50,858
            )
            
            (50,858
            )Comprehensive
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (53,018,694Balance,
                December 31, 2005
            
            
            —
            
            
            2,309
            
            
            —
            
            
            136,495,644
            
            
            (153,284,922
            )
            
            (2,215,651
            )
            
            (298,411
            )
            
            (19,301,031
            )Common
                stock and stock based awards exercised
            
            
            —
            
            
            24
            
            
            —
            
            
            607,178
            
            
            —
            
            
            —
            
            
            —
            
            
            607,202Issuance
                of stock for conversion of debt
            
            
            —
            
            
            344
            
            
            —
            
            
            15,657,521
            
            
            —
            
            
            —
            
            
            —
            
            
            15,657,865Non-cash
                stock compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            10,818,923
            
            
            —
            
            
            —
            
            
            —
            
            
            10,818,923Common
                stock acquired for treasury
            
            
            —
            
            
            (3
            )
            
            (66,985
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (66,988
            )Adoption
                of SFAS 123R
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,215,651
            )
            
            —
            
            
            2,215,651
            
            
            —
            
            
            —Deferred
                cost related to debt conversion
            
            
            —
            
            
            —
            
            
            —
            
            
            (274,938
            )
            
            —
            
            
            —
            
            
            —
            
            
            (274,938
            )Sale
                of state NOLs related to non-qualified options
            
            
            —
            
            
            —
            
            
            —
            
            
            1,000,000
            
            
            —
            
            
            —
            
            
            —
            
            
            1,000,000Comprehensive
                loss:Net
                loss, year ended December 31, 2006
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (38,368,362
            )
            
            —
            
            
            —
            
            
            (38,368,362
            )Unrealized
                gain on marketable securities
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            293,241
            
            
            293,241Comprehensive
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (38,075,121
            )Balance,
                December 31, 2006
            
            $
            —
            
            $
            2,674
            
            $
            (66,985
            )
            $
            162,088,677
            
            $
            (191,653,284
            )
            $
            —
            
            $
            (5,170
            )
            $
            (29,634,088
            )




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




F-5


**DOV
      PHARMACEUTICAL, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004****Cash
                flows from operating activities**Net
                loss
            
            $
            (38,368,362
            )
            $
            (52,967,836
            )
            $
            (32,920,604
            )Adjustments
                to reconcile net loss to net cash (used in) provided by operating
                activities:Non-cash
                amortization of premium paid on marketable securities
            
            
            254,954
            
            
            1,317,033
            
            
            909,486Non-cash
                interest expense
            
            
            —
            
            
            105,147
            
            
            2,913,361Depreciation
                of assets
            
            
            553,746
            
            
            531,170
            
            
            221,109Amortization
                of deferred charges
            
            
            2,027,068
            
            
            401,068
            
            
            58,302Non-cash
                compensation charges
            
            
            10,802,447
            
            
            808,740
            
            
            29,938Warrants,
                options and common stock issued for services
            
            
            16,476
            
            
            (194,504
            )
            
            314,635Non-cash
                debt conversion expense
            
            
            5,657,865
            
            
            —
            
            
            —Tenant
                allowance reimbursement
            
            
            1,245,805
            
            
            —
            
            
            —Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            —
            
            
            355,969
            
            
            (355,969
            )Prepaid
                expenses and other current assets
            
            
            294,233
            
            
            (315,289
            )
            
            (97,878
            )Accounts
                payable
            
            
            (6,178,215
            )
            
            5,369,999
            
            
            1,433,702Accrued
                expenses
            
            
            (1,838,144
            )
            
            2,981,188
            
            
            2,690,736Deferred
                revenue
            
            
            (25,951,443
            )
            
            (6,646,596
            )
            
            32,598,039Net
                cash (used in) provided by operating activities
            
            
            (51,483,570
            )
            
            (48,253,911
            )
            
            7,794,857**Cash
                flows from investing activities**Purchases
                of marketable securities
            
            
            (113,128,845
            )
            
            (139,579,923
            )
            
            (125,039,485
            )Sales
                of marketable securities
            
            
            195,090,640
            
            
            152,372,796
            
            
            63,494,000Establishment
                of restricted cash
            
            
            (4,211,109
            )
            
            —
            
            
            —Purchases
                of property and equipment
            
            
            (1,144,415
            )
            
            (678,271
            )
            
            (332,578
            )Net
                cash (used in) provided by investing activities
            
            
            76,606,271
            
            
            12,114,602
            
            
            (61,878,063
            )**Cash
                flows from financing activities**Borrowings
                under convertible debenture, net of issuance costs
            
            
            —
            
            
            14,571,715
            
            
            62,625,949Proceeds
                from issuance of stock, net of cash costs
            
            
            —
            
            
            —
            
            
            9,965,005Sale
                of state NOLs related to non-qualified options
            
            
            1,000,000
            
            
            —
            
            
            —Treasury
                stock purchased
            
            
            (66,988
            )
            
            —
            
            
            —Proceeds
                from options and warrants exercised
            
            
            607,202
            
            
            1,058,673
            
            
            1,135,726Net
                cash provided by financing activities
            
            
            1,540,214
            
            
            15,630,388
            
            
            73,726,680Net
                increase (decrease) in cash and cash equivalents
            
            
            26,662,915
            
            
            (20,508,921
            )
            
            19,643,474Cash
                and cash equivalents, beginning of year
            
            
            8,425,552
            
            
            28,934,473
            
            
            9,290,999Cash
                and cash equivalents, end of year
            
            $
            35,088,467
            
            $
            8,425,552
            
            $
            28,934,473**Supplemental
                disclosures of cash flow information**Interest
                paid
            
            $
            2,000,000
            
            $
            1,127,778
            
            $
            3,818Issuance
                of stock upon conversion of debt
            
            $
            15,657,521
            
            $
            4,024,638
            
            $
            11,570,504




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




F-6




**DOV
      PHARMACEUTICAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**1.
      The Company**





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





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





**2.
      Liquidity and Going Concern**





Since
      the
      Company’s inception, it has incurred significant operating losses and management
      expects that it will continue to do so for the foreseeable future. As of
      December 31, 2006, it had an accumulated deficit of $191.7 million. The Company
      has depended upon equity and debt financings and license fee and milestone
      payments from its collaborative partners and licensees to fund its operations
      and research and product development programs and expects to do so for the
      foreseeable future. The
      Company has projected that it has enough remaining capital (after funding the
      exchange offer described below) to fund operations through December 31, 2007,
      however the
      Company will continue to have capital needs. The Company intends to raise
      additional capital in 2007 through public or private financing or collaborative
      agreements; however, if adequate funds are not available to the Company as
      it
      needs them, the Company will be required to curtail significantly or eliminate
      at least temporarily one or more product development programs. These matters
      raise substantial doubt over the Company’s ability to continue as a going
      concern.





*Convertible
      Debentures* .
      In 2004
      and 2005, the Company issued a total of $80.0 million of debentures of which
      $70.0 million in aggregate principal amount remains outstanding as of December
      31, 2006. Effective at the opening of business on October 27, 2006, the
      Company’s common stock was delisted from The NASDAQ Global Market because it did
      not meet the aggregate market value of listed securities requirement of
      Marketplace Rule 4450(b)(1)(A). The delisting of the Company’s common stock from
      The NASDAQ Global Market constituted a “fundamental change” under the Indenture
      governing the debentures. As a result, the Company was obligated to make an
      offer to repurchase to all holders of the debentures under the Indenture at
      a
      price of $1,012.50 per $1,000 principal amount, representing such principal
      amount plus $12.50 of accrued but unpaid interest thereon (the “Offer to
      Repurchase”). Please refer to Note 7 for a description of the original terms of
      the debentures.





The
      Offer
      to Repurchase expired in January 2007. Through the expiration of the Offer
      to
      Repurchase, the Company received tenders of debentures in the aggregate
      principal amount of $67.8 million, representing approximately 96.9% of the
      $70.0
      million in aggregate principal amount of outstanding debentures. Upon the
      expiration of the Offer to Repurchase, the Company did not have the capital
      necessary to pay the aggregate purchase price of approximately $68.7 million
      in
      principal amount for the Debentures that were tendered. As a result, no
      debentures were accepted for payment in connection with the Offer to Repurchase,
      and all of the debentures were returned to the holders and remained outstanding.
      The Company’s failure to pay for the debentures tendered for repurchase in the
      Offer to Repurchase constitutes an “event of default” under the Indenture, which
      could have resulted in the exercise of available remedies by the Trustee or
      the
      bondholders under the Indenture and/or applicable law. In particular, the
      Trustee or holders of at least 25% in aggregate principal amount of the
      debentures could have declared due and payable 100% of the principal amount
      of
      the debentures, plus any accrued and unpaid interest thereon, and each holder
      of
      a Debenture who tendered had the right under the terms of the Indenture to
      payment of the purchase price for such Debenture in connection with the Offer
      to
      Repurchase.




F-7




*Recent
      Event.* In
      March
      2007, the Company consummated an exchange offer pursuant to which $67.5 million
      of the debentures were exchanged for 439,784 shares of series C and 100,000
      shares of series D convertible preferred stock and $14.3 million in cash.
      Additionally, the $2.5 million in principal amount of Debentures that remained
      outstanding after the consummation of the Exchange Offer was recently
      accelerated by the majority holder of such Debentures in accordance with the
      Indenture governing the Debentures and, on March 29, 2007, the Company repaid
      such Debentures at par plus accrued interest. In addition, the Company will
      distribute to holders of its common stock as of a date to be determined by
      its
      board of directors, and in any event prior to July 1, 2007, in one or more
      distributions or other transactions, warrants to purchase 30 million shares
      of
      its common stock. The exercise price will be approximately $0.523 per share.
      The
      warrants will be exercisable on or after July 1, 2007 until December 31, 2009.
      The Company expects to record a gain on debt extinguishment related to the
      Exchange Offer in the first quarter of 2007.




**3.
      Significant Accounting Policies**





**Use
      of Estimates**





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





**Segment
      and Geographic Information**





The
      Company has determined it has one reportable operating segment as defined by
      Statement of Financial Accounting Standards No. 131, "Disclosures about
      Segments of an Enterprise and Related Information."





**Cash,
      Cash Equivalents and Marketable Securities**





The
      Company considers all highly liquid investments with a maturity of 90 days
      or less when purchased to be cash equivalents. The
      Company has evaluated its investment policies consistently with Statement of
      Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
      Investments in Debt and Equity Securities," and has determined that all its
      investment securities are to be classified as available-for-sale.
      Available-for-sale securities are carried at fair value, with the unrealized
      gains and losses reported in Stockholders ́ Equity under the caption "Accumulated
      Other Comprehensive Income (Loss)." The amortized cost of debt securities is
      adjusted for amortization of premiums and accretion of discounts to maturity.
      Such amortization is included in interest income. Realized gains and losses
      and
      declines in value judged to be other-than-temporary on available-for-sale
      securities are included in other income and expense. The cost of securities
      sold
      is based on the specific identification method. Interest and dividends on
      securities classified as available-for-sale are included in interest income.
      At
      December 31, 2006 and 2005, short-term marketable securities included $7.2
      million and $21.2 million of investments, respectively, primarily comprised
      of
      investment grade asset-backed, variable-rate debt obligations, commercial paper.  Accordingly,
      the investments in these securities are recorded at cost, which approximates
      fair value due to their variable interest rates, which typically reset every
      28
      days.  Despite
      the long-term nature of their stated contractual maturities, the Company has
      the
      ability to quickly liquidate these securities, thus they are classified as
      short-term marketable securities.




F-8


**Property
      and Equipment**





Property
      and equipment are stated at cost. Depreciation is provided on furniture and
      fixtures and machinery and equipment over their estimated useful lives ranging
      from 2 to 7 years, using principally the straight-line method. Leasehold
      improvements are amortized over the lesser of the term of the respective lease
      or the useful lives of the related assets. Expenditures for maintenance and
      repairs are expensed to operations as incurred. Gains and losses from sales
      and
      retirements are included in income (loss) from operations as they occur.





**Impairment
      of Long-Lived Assets**




The
      Company reviews its long-lived assets for impairment whenever events or changes
      in circumstances indicate that the carrying amount of an asset may not be
      recoverable. Recoverability of assets held and used is measured by a comparison
      of the carrying amount of an asset to future net cash flows expected to be
      generated by the asset. If such assets are considered to be impaired, the
      impairment to be recognized is measured by the amount by which the carrying
      amount of the assets exceeds the fair value of the assets. Assets to be disposed
      of are reported at the lower of their carrying amount or fair value, less cost
      to sell.





**Deferred
      Charges**





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





**Revenue
      Recognition**





Revenue
      is recognized under collaboration or research and development agreements when
      services are performed or when contractual obligations and/or milestones are
      met
      and amounts are considered collectible. The Company has adopted the milestone
      payment method to account for milestone payments received pursuant to
      development agreements. Revenues from milestone payments that represent the
      culmination of a separate earnings process are recorded when the milestone
      is
      achieved. Cash received in advance of revenue recognition for license fees
      is
      recorded as deferred revenue and recognized when earned over the research and
      development period. On
      August
      5, 2004, the Company entered into an agreement with Merck (and amended in August
      2005) for the worldwide development and commercialization of all indications
      for
      DOV 21,947 and certain indications for DOV 216,303 in
      exchange for a $35.0 million up-front payment and the right to receive further
      payments of up to $420.0 million upon the achievement of certain milestones
      and
      royalties based on product net sales, if any. The up-front payment was deferred
      and amortized to revenue over the estimated research and development period.
      The
      time period of the development period was a significant estimate used in the
      preparation of the financial statements. In December 2006, the agreement with
      Merck was terminated and thus the remaining deferred revenue of $22.2 million
      was recognized as revenue in the fourth quarter of 2006.





Royalty
      revenue will be recognized upon the sale of the related products, provided
      the
      royalty amounts are fixed or determinable and collection of the related
      receivable is probable. The Company has not recognized royalty revenue to date.




F-9




**Research
      and Development**





Research
      and development costs are expensed when incurred and include allocations for
      payroll and related costs and other corporate overhead. Costs
      assigned to acquired assets to be used in a particular research and development
      project that have no alternative future use are charged to expenses as
      in-process research and development expense as of the date of acquisition.





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





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Payroll
                related and associated overhead
            
            $
            14,191,190
            
            $
            10,720,094
            
            $
            5,773,704Clinical
                and preclinical trial costs
            
            
            26,730,979
            
            
            41,525,596
            
            
            18,103,432Professional
                fees
            
            
            1,282,157
            
            
            1,128,136
            
            
            503,789Travel
            
            
            595,388
            
            
            609,082
            
            
            383,193Total
                research and development expense
            
            $
            42,799,714
            
            $
            53,982,908
            
            $
            24,764,118




**Net
      Loss Per Share**





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





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Net
                loss
            
            $
            (38,368,362
            )
            $
            (52,967,836
            )
            $
            (32,920,604
            )Basic
                and diluted:Weighted-average
                shares used in computing basic and diluted net loss per
                share
            
            
            24,703,333
            
            
            22,837,265
            
            
            19,729,765Basic
                and diluted net loss per share
            
            $
            (1.55
            )
            $
            (2.32
            )
            $
            (1.67
            )Antidilutive
                securities not included in basic and diluted net loss per share
                calculation:Convertible
                subordinated debentures
            
            
            3,076,923
            
            
            3,516,484
            
            
            2,857,143Convertible
                line of credit promissory note
            
            
            —
            
            
            —
            
            
            1,173,981Options
            
            
            4,098,441
            
            
            3,540,966
            
            
            2,646,176Warrants
            
            
            375,296
            
            
            819,731
            
            
            895,3667,550,660
            
            
            7,877,181
            
            
            7,572,666





**Comprehensive
      Loss**


**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Net
                loss
            
            $
            (38,368,362
            )
            $
            (52,967,836
            )
            $
            (32,920,604
            )Net
                unrealized gain (losses) on marketable securities
            
            
            293,241
            
            
            (50,858
            )
            
            (219,325
            )Comprehensive
                loss
            
            $
            (38,075,121
            )
            $
            (53,018,694
            )
            $
            (33,139,929
            )




F-10




**Debt
      Conversion and Other Expense, net**


**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Debt
                conversion expense, net
            
            $
            (5,657,865
            )
            $
            —
            
            $
            —Other
                income (expense), net
            
            
            45,936
            
            
            (4,415
            )
            
            (7,855
            )Debt
                conversion and other expense, net
            
            $
            (5,611,929
            )
            $
            (4,415
            )
            $
            (7,855
            )





**Income
      Taxes**





Deferred
      income taxes are recognized for the tax consequences in future years of
      differences between the tax bases of assets and liabilities and their financial
      reporting amounts at each year end, based on enacted tax laws and statutory
      tax
      rates applicable to the periods in which the differences are expected to affect
      taxable income. Valuation allowances are established when necessary to reduce
      deferred tax assets to the amount expected to be realized.





**Risks
      and Uncertainties**





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





**Concentration
      of Credit Risk**





Cash
      and
      cash equivalents are invested in deposits with significant financial
      institutions. The Company has not experienced any losses on its deposits of
      cash
      and cash equivalents. Management believes that the financial institutions are
      financially sound and, accordingly, minimal credit risk exists. Approximately
      $6.8 million of the Company's cash balance was uninsured at December 31, 2006.





**Derivatives**





In
      accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
      Activities, all derivative instruments are recorded on the balance sheet at
      fair
      value. Changes in fair value of derivatives are recorded each period in current
      earnings or
      other
      comprehensive income depending on whether a derivative is designated as part
      of
      a hedge transaction and if so depending on the type of hedge
      transaction.





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




On
      February 28, 2006, the Company entered into a ten-year operating lease with
      a
      leasing entity for a 133,686 square-foot facility in Somerset, New Jersey which
      has served as the Company’s corporate headquarters and principal place of
      business since June 2006. The sole purpose of the leasing entity is to manage
      the Somerset facilities on behalf of its tenant(s) and is therefore considered
      a
      VIE as defined by FIN 46R. At December 31, 2006, the Company is the only tenant
      of the building and is therefore considered to hold a significant variable
      interest. With respect to the Company’s leasing arrangement, the Company has
      determined that it is not the primary beneficiary and accordingly is not
      required to consolidate the related assets and liabilities of the leasing
      entity. The Company’s maximum exposure to any potential losses, should they
      occur, associated with this VIE is limited to the Company’s standby letter of
      credit of $4.2 million and, where applicable, receivables for unused tentant
      allowance from this VIE, which, as of December 31, 2006, totaled approximately
      $1.3 million, which was collected in January 2007.




F-11




**Recent
      Accounting Pronouncements**





In
      February 2007, the FASB issued SFAS No. 159 which permits entities to choose
      to
      measure many financial instruments and certain other items at fair value. The
      objective is to improve financial reporting by providing entities with the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply complex
      hedge
      accounting provisions. SFAS No. 159 is effective as of the beginning of an
      entity’s first fiscal year that begins after November 15, 2007, which for the
      Company will be as of the beginning of fiscal 2008. The Company is currently
      evaluating the impact this statement will have on our consolidated financial
      position or results of operations.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”), which is effective for the Company beginning
      January 1, 2008 and provides a definition of fair value, establishes a
      framework for measuring fair value, and expands disclosures about fair value
      measurements for future transactions. The Company does not expect the adoption
      of this pronouncement to have a material impact on our financial position or
      results of operations.




In
      July
      2006, the FASB issued FIN 48, which is effective for the Company as of the
      interim reporting period beginning January 1, 2007. The validity of any tax
      position is a matter of tax law, and generally there is no controversy about
      recognizing the benefit of a tax position in a company’s financial statements
      when the degree of confidence is high that the tax position will be sustained
      upon examination by a taxing authority. The tax law is subject to varied
      interpretation, and whether a tax position will ultimately be sustained may
      be
      uncertain. Under FIN 48, the impact of an uncertain income tax position on
      the
      income tax provision must be recognized at the largest amount that is
      more-likely-than-not to be sustained upon audit by the relevant taxing
      authority. An uncertain income tax position will not be recognized if it has
      less than a 50% likelihood of being sustained. FIN 48 also requires
      additional disclosures about unrecognized tax benefits associated with uncertain
      income tax positions and a reconciliation of the change in the unrecognized
      benefit. In addition, FIN 48 requires interest to be recognized on the full
      amount of deferred benefits for uncertain tax positions. An income tax penalty
      is recognized as expense when the tax position does not meet the minimum
      statutory threshold to avoid the imposition of a penalty. The Company continues
      to evaluate the impact of FIN 48 on its consolidated financial statements.
      At
      this time, the Company does not believe the impact upon adoption of this
      standard will be significant to results of operations or financial position.





**4.
      Stock-Based Compensation**





**1998
      Stock Option Plan**





The
      Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the Company's
      board of directors on September 10, 1998. Under the 1998 Plan, the Company
      has granted stock options to selected officers, employees, directors and
      consultants of the Company. The Company's board of directors administers the
      1998 Plan. The 1998 Plan provided for the issuance of 2,025,000 shares of
      common stock. As of December 31, 2006, options to purchase 337,800 shares of
      common stock were outstanding under the 1998 Plan. As of October 15, 2000
      all new option grants are issued under the 2000 Plan. The term of the options
      granted under the 1998 Plan is ten years. Awards under the 1998 Plan are fully
      vested.





**2000
      Stock Option and Grant Plan**





The
      Company’s 2000 Stock Option and Grant Plan (the “2000 Plan”) was adopted by the
      Company’s board of directors on November 18, 2000, was amended and restated
      on March 28, 2002, and further amended on May 30, 2003, May 24, 2004, May 23,
      2005,May 22, 2006 and May 30, 2006. The 2000 Plan provides for the granting
      of
      stock, stock options, restricted stock and stock appreciation rights. Under
      the
      2000 Plan, the Company has granted options and restricted stock, or RSAs, to
      certain employees and non-employee advisors. The Company’s board of directors
      administers the 2000 Plan. Options granted under the 2000 Plan have a maximum
      term of ten years. Options issued generally vest either 25% on the first
      anniversary of grant and the balance ratably over the next three years or 50%
      18
      months after grant and the balance ratably quarterly over the next 18 months.
      The 2000 Plan also provides the Company’s board of directors with the discretion
      to accelerate exercisability of any award. In May 2006, the Company amended
      the
      2000 Plan providing for the full acceleration and vesting of all outstanding
      options and RSAs immediately prior to a change of control of the Company. This
      change did not impact the fair value of the options and did not impact expense
      recognized under SFAS 123(R). The recently consummated Exchange Offer as
      discussed in Note 2 effected a technical change of control and pursuant to
      the
      2000 Plan all outstanding options issued prior to January 2007 and restricted
      stock awards will be immediately accelerated. Thus the Company will recognize
      the total unrecognized compensation expense for these awards, if outstanding
      at
      the time of the change of control in the first quarter of 2007.




F-12




The
      Exchange Offer consummated on March 15, 2007 resulted in a change of control
      of
      the Company and as such approximately 1.1 million outstanding unvested options
      and 68,333 RSAs were immediately vested. This will result in a non-cash
      compensation charge in the first quarter of 2007 of approximately $6.1 million.





**Employee
      and Director Grants**





Prior
      to
      2003, the Company granted stock options to employees and directors with an
      exercise price less than fair market value. These options gave rise to unearned
      compensation as of the date of the grant, which amount has been amortized to
      operations over the vesting period. These options resulted in a charge to
      operations of $1,389 and $29,938 in 2005 and 2004, respectively.





**Non-Employee
      Options and Warrants**





In
      February 2002, the Company issued 8,100 options to a non-employee
      consultant. 25% of the options vest at the end of each year for the next four
      years. The
      options resulted in a reduction of expenses in operations of $11,504 in 2005
      and
      a charge to operations of $16,476 and $21,020 in 2006 and 2004, respectively.





The
      Company granted 64,800 options to non-employees for the year ended
      December 31, 2001. These options were valued at fair value and resulted in
      a reduction of expenses in operations of $183,000 in 2005 and a charge to
      operations of $293,616 in 2004.





**Accounting**





Effective
      January 1, 2006, the Company adopted the provisions of Statement of Financial
      Accounting Standards No. 123(R) Share-Based payment, and related
      interpretations, or SFAS 123(R), to account for stock-based compensation using
      the modified prospective transition method and therefore will not restate its
      prior period results. SFAS 123(R) supersedes Accounting Principles Board Opinion
      No. 25, “Accounting for Stock Issued to Employees,” or APB No. 25, and
      revises guidance in SFAS 123, Accounting for Stock-Based Compensation. Among
      other things, SFAS 123(R) requires that compensation expense be recognized
      in
      the financial statements for share-based awards based on the grant date fair
      value of those awards. The modified prospective transition method applies to
      (a)
      unvested stock options under the Company’s 2000 Plan and non-plan awards based
      on the grant date fair value estimated in accordance with the pro forma
      provisions of SFAS 123, and (b) any new share-based awards granted subsequent
      to
      December 31, 2005, based on the grant-date fair value estimated in accordance
      with the provisions of SFAS 123(R). Additionally, stock-based compensation
      expense includes an estimate for forfeitures and is recognized over the
      requisite service periods of the awards on a straight-line basis, which is
      generally commensurate with the vesting term. The Company has recorded $8.7
      million of stock-based compensation expense, net of estimated forfeitures,
      during the year December 31, 2006. The Company recorded $2.1 million during
      the
      year ended December 31, 2006 of compensation expense related to RSAs. SFAS
      123(R) requires forfeitures to be estimated at the time of grant and revised,
      if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. Unearned compensation related to the RSAs of $2.2 million as of
      December 31, 2005 was eliminated to additional paid in capital as of January
      1,
      2006.




F-13




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





SFAS
      123(R) requires the benefits associated with tax deductions in excess of
      recognized compensation cost to be reported as a financing cash flow rather
      than
      as an operating cash flow as previously required. For the year ended December
      31, 2006, the Company did not record any excess tax benefit generated from
      option exercises.




The
      table
      below summarizes the impact on the Company’s results of operations for the year
      ended December 31, 2006 of stock based compensation expense under the Company’s
      2000 Plan and non-plan grants recognized under the provisions of SFAS 123(R).





**Year
                Ended**
              **December
                31, 2006**Research
                and development
            
            $
            (2,863,840
            )General
                and administrative
            
            
            (5,885,426
            )Stock
                based compensation
            
            $
            (8,749,266
            )Basic
                and diluted net loss per share
            
            $
            (0.36
            )





For
      the
      year ended December 31, 2005 and 2004, if the Company had elected to recognize
      compensation expense based upon the fair value at the date of grant for awards
      under these plans, consistent with the methodology prescribed by SFAS 123,
      the effect on the Company's net loss would be as follows:




**Year
                Ended****December
                31, 2005**
            
            **Year
                Ended**
              **December
                31, 2004**Net
                loss as reported
            
            $
            (52,967,836
            )
            $
            (32,920,604
            )Add:
                total stock-based employee compensation expense determined under
                APB No.
                25
            
            
            808,740
            
            
            29,938Deduct:
                total stock-based employee compensation expense determined under
                fair
                value based method for all awards
            
            
            (6,116,809
            )
            
            (3,871,325
            )Pro
                forma
            
            $
            (58,275,905
            )
            $
            (36,761,991
            )Basic
                and diluted net loss per share:As
                reported
            
            $
            (2.32
            )
            $
            (1.67
            )Pro
                forma
            
            $
            (2.55
            )
            $
            (1.86
            )





F-14





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





**Year
                Ended**
              **December
                31,****2006**
            
            **2005**
            
            **2004**Risk-free
                interest rate
            
            
            4.28%
                - 5.35
            %
            
            3.73%-4.49
            %
            
            3.78%-4.90
            %Expected
                lives
            
            
            6.25
                years
            
            
            6
                years
            
            
            6-10
                yearsExpected
                dividends
            
            
            —
            
            
            —
            
            
            —Expected
                volatility
            
            
            52.30%
                - 74.86
            %
            
            64.27%-67.90
            %
            
            69.74%-76.27
            %





The
      expected term and volatility are highly subjective assumptions. The Company
      has
      reviewed its historical pattern of option exercises and has determined that
      there were no meaningful differences in option exercise activity among employee
      functions. The Company estimates the expected life of the options granted
      through review of historical exercise patterns for those options granted prior
      to January 1, 2006 and has used the SAB 107’s simplified method of estimating
      the expected life of option grants for ‘plain vanilla’ options granted in the
      year ended December 31, 2006. The Company estimates the expected volatility
      of
      its common stock based on its historical volatility as it did not view a
      combination of historical and implied a more meaningful volatility measure.
      The
      Company believes that historical volatility may be representative of future
      stock price trends. The risk-free rate assumption is determined using the
      Federal Reserve nominal rates of U.S. Treasury zero-coupon bonds with maturities
      similar to those of the expected terms of the award being valued. The Company
      has never paid any cash dividends on its common stock and does not anticipate
      paying any cash dividends in the foreseeable future. Therefore, the Company
      assumed an expected dividend yield of zero.





The
      weighted average grant date fair value of options granted during the years
      ended
      December 31, 2006, 2005 and 2004, respectively was $3.22, $10.56 and $10.88
      per
      option. The total intrinsic value, determined as of the date of exercise, of
      options exercised in the year ended December 31, 2006, 2005 and 2004 was $2.9
      million, $2.7 million and $6.2 million, respectively. The Company received
      $607,000, $1.1 million and $1.1 million in cash for option exercises in the
      years ended December 31, 2006, 2005 and 2004, respectively.





At
      December 31, 2006, there was $6.1 million, net of estimated forfeitures of
      $1.7
      million, of total unrecognized compensation cost related to non-vested
      share-based compensation arrangements granted under all its equity compensation
      plans, which include stock options and RSAs. The recently consummated exchange
      offer as discussed in Note 2 effected a technical change of control and pursuant
      to the 2000 Plan all outstanding options issued prior to January 2007 and
      restricted stock awards will be immediately accelerated. Thus the Company will
      recognize the total unrecognized compensation expense for these awards, if
      outstanding at the time of the change of control in the first quarter of 2007.




F-15




The
      following is a summary of stock option activity for the years ended December
      31,
      2006, 2005 and 2004:





**Options**
            
            **Weighted
                Average Options****Exercise
                Price**
            
            **Aggregate****Intrinsic
                Value**Options
                outstanding, December 31, 2003
            
            
            2,631,370
            
            $
            5.51Granted
            
            
            610,750
            
            $
            13.86Exercised
            
            
            (519,507
            )
            $
            3.27
            
            **$**
            6,160,182Forfeited
            
            
            (76,437
            )
            $
            10.97Options
                outstanding, December 31, 2004
            
            
            2,646,176
            
            $
            7.72Granted
            
            
            1,282,250
            
            $
            16.75Exercised
            
            
            (231,520
            )
            $
            4.57
            
            
            2,672,852Forfeited
            
            
            (155,940
            )
            $
            13.36Options
                outstanding, December 31, 2005
            
            
            3,540,966
            
            $
            10.94Granted
            
            
            1,538,175
            
            $
            5.33Exercised
            
            
            (201,400
            )
            $
            3.01
            
            
            2,926,993Forfeited
            
            
            (779,300
            )
            $
            15.24Options
                outstanding, December 31, 2006
            
            
            4,098,441
            
            $
            8.41
            
            
            —Options
                exercisable, December 31, 2006
            
            
            2,125,063
            
            $
            8.84
            
            
            —





The
      total
      intrinsic value is calculated as the difference between the exercise price
      of
      the underlying awards and the quoted price of the Company’s common stock for the
      options that were in-the-money as of December 31, 2006. As of December, 2006,
      the Company had 719,985 shares available for future grants. The following is
      a
      summary of outstanding stock options at December 31, 2006.




**Options
                Outstanding as of**
              **December
                31, 2006**
            
            **Options
                Exercisable as of**
              **December
                31, 2006****Weighted
                Average Remaining Contractual Life**
            
            **Number
                Outstanding**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Life**
            
            **Number
                Exercisable**
            
            **Weighted
                Average Exercise Price**Price
                range $1.40-$11.30
            
            
            6.6
                years
            
            
            2,310,141
            
            $
            2.96
            
            
            4.05
                years
            
            
            1,195,891
            
            $
            3.69Price
                range $11.31-$21.20
            
            
            7.9
                years
            
            
            1,788,300
            
            $
            15.46
            
            
            7.29
                years
            
            
            929,172
            
            $
            15.464,098,441
            
            
            
            
            
            
            
            
            2,125,063




F-16




The
      following is a summary of outstanding RSAs at December 31, 2006:





**Number**
            
            **Weighted
                Average Fair Value (1)**
            
            **Weighted
                Average Remaining Term**Nonvested,
                December 31, 2005
            
            
            160,000
            
            $
            18.89
            
            
            3.1
                yearsNonvested,
                December 31, 2006
            
            
            68,333
            
            $
            10.02
            
            
            1.7
                years





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





As
      of
      December 31, 2006, the total remaining unrecognized compensation cost related
      to
      RSAs amounted to $245,000.





**5.
      Marketable Securities**




Available-for-sale
      securities are classified as short-term regardless of their maturity date if
      the
      Company has them available to fund operations within one year of the balance
      sheet date. Auction-rate securities are highly liquid securities that have
      floating interest or dividend rates that reset periodically through an
      auctioning process that sets rates based on bids. Issuers include
      municipalities, closed-end bond funds and corporations. These securities can
      either be debt or preferred shares.  The
      following is a summary of marketable securities classified as
      "available-for-sale" securities as required by SFAS 115 as of December 31,
      2006.




**Gross
                Unrealized Losses****Amortized
                Cost**
            
            **Gross
                Unrealized Gains**
            
            **Less
                than 12 Months**
            
            **Greater
                than 12 Months**
            
            **Estimated
                Fair Value**Institutional
                money market
            
            $
            24,088,103
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            24,088,103Commercial
                paper
            
            
            3,495,640
            
            
            —
            
            
            —
            
            
            —
            
            
            3,495,640Amounts
                included in cash and cash equivalents
            
            $
            27,583,743
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            27,583,743Corporate
                debt
            
            $
            7,208,497
            
            $
            —
            
            $
            (5,170
            )
            $
            —
            
            $
            7,203,327Amounts
                included in marketable securities - short-term
            
            $
            7,208,497
            
            $
            —
            
            $
            (5,170
            )
            $
            —
            
            $
            7,203,327




The
      following is a summary of the amortized cost and estimated value of debt
      securities by contractual maturity at December 31, 2006, excluding securities
      classified as cash and cash equivalents.




**Amortized
                Cost**
            
            **Estimated**
              **Fair
                Value**Due
                in less than one year
            
            $
            7,208,497
            
            $
            7,203,327Due
                between one and two years
            
            
            —
            
            
            —Total
            
            $
            7,208,497
            
            $
            7,203,327




F-17


**6.
      Property and Equipment**




Property
      and equipment consist of the following at:


**December
                31,****Years**
            
            **2006**
            
            **2005**Furniture
                and fixtures
            
            
            7
            
            $
            631,459
            
            $
            409,454Machinery
                and equipment
            
            
            2-5
            
            
            546,331
            
            
            1,183,067Leasehold
                improvements
            
            
            2-5
            
            
            894,476
            
            
            300,4812,072,266
            
            
            1,893,002Less
                accumulated depreciation
            
            
            
            
            
            858,077
            
            
            1,269,482Property
                and equipment, net
            
            
            
            
            $
            1,214,189
            
            $
            623,520





**7.
      Debt** **Convertible
      Subordinated Debentures**





In
      December 2004 and January 2005, the Company completed a private placement of
      $80
      million aggregate principal amount of 2.5% convertible subordinated debentures
      due January 15, 2025 of
      which
      $70.0 million in aggregate principal amount remained outstanding as of December
      31, 2006.





*Recent
      Event.* In
      March
      2007, the Company consummated an exchange offer pursuant to which $67.5 million
      in principal amount of the debentures were exchanged for series C and series
      D
      convertible preferred stock and $14.3 million in cash. Additionally, the $2.5
      million in principal amount of debentures that remained outstanding after the
      consummation of the exchange offer was recently accelerated by the majority
      holder of such debentures in accordance with the indenture governing the
      debentures and, on March 29, 2007, we repaid such debentures at par plus accrued
      interest. Thus, the amount paid in cash for the principal repayment of the
      debentures has been classified as a current liability.





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




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




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




F-18




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




The
      fair
      value of our subordinated convertible debentures, based on the price for the
      debentures at December 31, 2006 and 2005 approximated $34.7 million and $70.6
      million respectively.





**Elan
      Notes**





In
      January 1999, the Company issued a convertible promissory note in the
      amount of $8,010,000 and a convertible line of credit promissory note in the
      maximum initial principal amount of $7,008,750 to EIS. The fair value of the
      convertible line of credit promissory note outstanding was $21,190,356 as of
      December 31, 2004. The excess fair value over the carrying amount is due to
      the increased value of the conversion feature in this note since its issuance.
      The estimated fair-value amount has been determined using the Black-Scholes
      methodology.





**a.
      Convertible Promissory Note**





On
      May
      25, 2004, EIS converted the outstanding principal and accrued interest totaling
      $11.6 million into 2,907,162 shares of the Company’s common stock. The
      convertible promissory note provided for interest to accrue at the rate of
      7%
      per annum compounded on a semi-annual basis.





During
      2004, the interest feature in the convertible promissory note was determined
      to
      include a beneficial conversion feature as the interest is convertible into
      shares of the Company or payable in cash at the option of EIS. The Company
      is
      accounting for this feature in accordance with EITF 98-5 "Accounting for
      Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios" and EITF 00-27 "Application of Issue 98-5 to
      Certain Convertible Instruments." The Company recorded $893,792 of additional
      interest expense associated with this beneficial conversion feature in 2004
      with
      a corresponding increase in additional paid-in capital.




**b.
      Convertible Line of Credit Promissory Note**




During
      2004, EIS sold the convertible line of credit promissory note to an
      institutional investor and on January 20, 2005, the holder converted the entire
      balance of the note and the accrued interest into 1,180,246 shares of the
      Company’s common stock. The convertible line of credit promissory note provided
      for interest to accrue at the rate of 10% per annum compounded on a semi-annual
      basis.




F-19




**8.
      Accrued Expenses**





Accrued
      expenses consist of the following:





**December
                31,****2006**
            
            **2005**Accrued
                investigator fees
            
            $
            2,113,294
            
            $
            2,473,676Accrued
                professional fees
            
            
            198,168
            
            
            380,950Accrued
                bonuses
            
            
            650,120
            
            
            1,131,940Accrued
                severance and other
            
            
            1,085,784
            
            
            667,881Accrued
                taxes
            
            
            5,100
            
            
            40,500Accrued
                interest
            
            
            797,222
            
            
            922,222Accrued
                payroll, vacation and other
            
            
            204,906
            
            
            1,275,569$
            5,054,594
            
            $
            6,892,738




**9.
      Income Taxes**





No
      U.S.
      Federal taxes are payable at December 31, 2006 and 2005. However, as of
      December 31, 2006, the Company did have a $10,000 state tax liability computed
      under the New Jersey  alternative
      minimum assessment regime.





During
      2006 and 2005, the Company sold $72.0 million and $3.5 million, respectively,
      of
      state net operating loss (“NOL”) carryforwards under the New Jersey Tax Benefit
      Transfer Program. The net proceeds from the sale of the NOLs amounted to $5.6
      million and $273,000, which are reported as a tax benefit in 2006 and 2005,
      respectively.





At
      December 31, 2006, the Company had approximately $140.0 million of federal
      and
      $49.7 million of state NOL carryforwards available to offset future taxable
      income. The federal and state NOL carryforwards will begin expiring in 2010
      and
      2013 if not utilized. The Company’s recently completed Exchange Offer discussed
      in Note 2 will significantly impair the Company’s ability to utilize these
      losses before their expiration. Please see discussion below. The
      Company accounts for its income taxes under Statement of Financial Accounting
      Standards No. 109, Accounting for Income Taxes (SFAS No. 109). Included in
      the
      federal and state NOL carryforwards is approximately $13.0 million related
      to
      non-qualified stock option expense.




For
      financial reporting purposes, a valuation allowance of $68.5 million has been
      recorded at December 31, 2006, to fully offset the deferred tax asset related
      to
      these carryforwards in
      accordance with SFAS 109. SFAS 109 requires the Company to record a valuation
      allowance when it is "more likely than not that some portion or all of the
      deferred tax assets will not be realized."





Pursuant
      to Section 382 of the Internal Revenue Code of 1986, as amended, the annual
      utilization of a company's net operating loss carryforwards may be limited
      if
      the Company experiences a change in ownership of more than 50 percentage
      points within a three-year period. An
      ownership change occurs with respect to a corporation if it is a loss
      corporation on a testing date and, immediately after the close of the testing
      date, the percentage of stock of the corporation owned by one or more
      five-percent shareholders has increased by more than 50 percentage points over
      the lowest percentage of stock of such corporation owned by such shareholders
      at
      any time during the testing period. Under
      such section, the ability of the Company to use its existing tax loss and credit
      carryforwards (and certain other tax benefits) following an “ownership change”
of the Company is generally limited to an annual amount equal to the product
      of
      the fair market value of the corporation’s stock immediately before the
      ownership change (subject to certain reductions) and the “long-term tax-exempt
      rate” in effect for the month in which the ownership change occurs. This general
      limitation on the use of tax benefit carryforwards can be increased or reduced
      respectively by the amount of “recognized built-in gains” (“RBIG”) or recognized
“built-in losses” (“RBIL”) in the event the Company has “net unrealized built-in
      gains” (“NUBIG”) or “net unrealized built-in losses” (“NUBIL”), at the date of
      an ownership change. The Company is presently subject to a general limitation
      on
      the annual utilization of carryforward tax benefits of approximately $3.2
      million.  As
      a
      result of the consummation of the Exchange Offer discussed in Note 2, it is
      likely that the Company’s ability to use these tax benefit carryforwards under
      the general limitation will be further restricted.




F-20





The
      principal components of the deferred tax asset, assuming a 34% Federal tax
      rate
      and a 9% gross state tax rate, are as follows:





**December
                31,****2006**
            
            **2005**Deferred
                tax assets:Fixed
                assets and intangible assets
            
            $
            692,497
            
            $
            592,805Research
                and development expense amortization
            
            
            7,715,346
            
            
            9,570,480Deferred
                other
            
            
            —
            
            
            11,159,120Accrued
                other
            
            
            8,065,514
            
            
            392,361Net
                operating loss carryforward
            
            
            52,058,347
            
            
            37,190,602Total
                gross deferred tax assets
            
            
            68,531,704
            
            
            58,905,369Valuation
                allowance
            
            
            (68,531,704
            )
            
            (58,905,369
            )Net
                deferred tax assets
            
            $
            —
            
            $
            —




The
      net
      change in valuation allowance for 2006 and 2005 was an increase of approximately
      $9.5 million and $33.5 million respectively which is primarily the result of
      additional net operating losses incurred by the Company for which a benefit
      has
      not been recorded as well as the retroactive capitalization of certain research
      and development expenditures previously deducted. The
      Company's subsidiaries operating in Ireland did not incur income taxes in 2006
      or 2005 based on current tax laws.





The
      difference between the Federal Statutory Rate (34%) and the effective tax rate
      (13%) is primarily due to the increase in valuation allowance in all periods
      presented and the sale of the state NOL carryforwards.




**10.
      Equity Transactions**





**Common
      Stock**




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




F-21




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




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





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





On
      January 20, 2005, the Company’s convertible promissory line of credit note
      totaling $4.0 million of outstanding principal and accrued interest was
      converted into 1,180,246 shares of the Company’s common stock.





**Warrants**





At
      December 31, 2006, warrants to purchase 375,396 shares of the Company's common
      stock were outstanding with an exercise price of $10.00. All outstanding
      warrants are fully vested and expire in June 2009.





**11.
      Employment Agreements**





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





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




F-22




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





On
      June
      30, 2006, Ms. Barbara Duncan was promoted to president, continued as chief
      financial officer of the Company and will serve as a member of the board of
      directors. In connection with Ms. Duncan’s promotion, DOV entered into Amendment
      No. 1 with Ms. Duncan, dated as of June 30, 2006, to Ms. Duncan’s employment
      agreement, which was originally dated as of August 3, 2004. The amendment
      provides for Ms. Duncan’s service to DOV as president and chief financial
      officer until June 30, 2008. In connection with the execution of the amendment,
      Ms. Duncan was granted options to purchase 350,000 shares of DOV common stock
      at
      an exercise price of $2.12 per share that will vest ratably annually over four
      years. Such options, to the extent not vested, shall vest immediately upon
      a
      termination of Ms. Duncan’s employment by DOV without cause or a termination of
      employment by Ms. Duncan for good reason or within six months of certain events
      constituting a change of control of the Company. Additionally, in the event
      of a
      termination of Ms. Duncan’s employment by DOV without cause or a termination of
      employment by Ms. Duncan for good reason or within six months of certain events
      constituting a change of control of DOV, Ms. Duncan will be entitled to
      severance payments equal to the greater of (i) basic compensation for the period
      commencing on the date of such termination and ending June 30, 2008 and (ii)
      basic compensation for the period commencing on the date of such termination
      and
      ending on the date that is 12 months thereafter. In February 2007, Ms. Duncan
      title was changed to chief executive officer. Ms. Duncan will continue to serve
      as a member of the board of directors, treasurer and principal financial
      officer.




On
      June
      30, 2006, Dr. Phil Skolnick was promoted to executive vice president and will
      continue to serve as chief scientific officer of the Company. In connection
      with
      Dr. Skolnick’s promotion, DOV has entered into Amendment No. 1 with Dr.
      Skolnick, dated as of June 30, 2006, to Dr. Skolnick’s restated employment
      agreement, which was originally dated as of January 9, 2004. The amendment
      provides for Dr. Skolnick’s service to DOV as Executive Vice President and Chief
      Scientific Officer until June 30, 2008. In connection with the execution of
      the
      amendment, Dr. Skolnick was granted options to purchase 350,000 shares of DOV
      common stock at an exercise price of $2.12 per share (the closing price on
      the
      grant date of June 30, 2006) that will vest ratably annually over four years.
      Such options, to the extent not vested, shall vest immediately upon a
      termination of Dr. Skolnick’s employment by DOV without cause or a termination
      of employment by Dr. Skolnick for good reason or within six months of certain
      events constituting a change of control of the Company. Additionally, in the
      event of a termination of Dr. Skolnick’s employment by DOV without cause or a
      termination of employment by Dr. Skolnick for good reason or within six months
      of certain events constituting a change of control of the Company, Dr. Skolnick
      will be entitled to severance payments equal to the greater of (i) basic
      compensation for the period commencing on the date of such termination and
      ending June 30, 2008 and (ii) basic compensation for the period commencing
      on
      the date of such termination and ending on the date that is 12 months
      thereafter. Dr. Skolnick’s annual basic compensation was not altered by the
      amendment and will remain at $344,000 for 2006. In February 2007, Dr. Skolnick’s
      title was changed to president. Dr. Skolnick will continue to serve as chief
      scientific officer.




F-23




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




**12.** **Savings
      and Investment Plan**




The
      Company adopted the DOV Pharmaceutical, Inc. 401(k) Savings and Investment
      Plan
      (the "401(k) Plan"), effective January 1, 2002, which qualifies under Section
      401(k) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan is
      a
      defined contribution plan established to provide retirement benefits for all
      employees who have attained 21 years of age.





The
      401(k) Plan is employee funded up to an elective annual deferral and also
      provides an option for the Company to contribute to the 401(k) Plan at the
      discretion of the 401(k) Plan's trustees. During the years ended December 31,
      2006, 2005 and 2004, the Company did not contribute to the 401(k)
      Plan.





**13.
      Significant Agreements**





**Wyeth
      Agreement**





In
      May 1997, the Company entered into an option agreement with American
      Cyanamid, now Wyeth, to license four compounds from them and paid $10,000 as
      an
      option fee. In May 1998, the Company exercised its option and entered into
      a license agreement with Wyeth pursuant to which the Company paid $300,000
      to
      Wyeth for certain rights to four compounds, indiplon, ocinaplon, bicifadine
      and
      DOV 216,303. As each of the four compounds licensed in from Wyeth require the
      approval of the FDA prior to their commercialization, are prior to technological
      feasibility and have no alternative future use, the Company wrote off the entire
      amount paid to Wyeth as research and development expense. If
      Wyeth
      terminates the license upon an uncured breach by the Company, the Company must
      transfer all information, data and know-how relating to the products and any
      government authorizations, in addition to the Company’s rights derived from its
      sublicensees with regard to the products. The agreement expires as to each
      compound the later of the
      expiration of the Wyeth patents in such country and  ten
      years
      following the launch of each compound in each country. Upon such expiration,
      with respect to each country the Company will have a fully-paid, royalty-free
      license with the right to make, use or sell the compounds without any further
      monetary obligation to Wyeth.




F-24





On
      February 25, 2004, the Company entered into agreements to reorganize its
      exclusive license agreement with Wyeth and its sublicense agreement with
      Neurocrine in respect of indiplon. The
      restated agreement with Wyeth amends among other items the financial obligations
      due to Wyeth in respect of bicifadine, ocinaplon and DOV 216,303 such that
      the
      Company is now obligated to pay a fixed royalty percentage and fixed milestone
      payments. The restated agreement provides that if the Company sells the product
      itself, the Company will be obligated to pay Wyeth 3.5% of net sales for
      ocinaplon and DOV 216,303 and 5.0% of net sales for bicifadine, and potential
      additional aggregate milestones of $7.0 million for ocinaplon, $7.0 million
      for
      DOV 216,303 and $9.5 million for bicifadine. The
      royalty rate for bicifadine, ocinaplon and DOV 216,303 will increase by 0.5%
      should the Company partner or sublicense that compound, in which case the next
      milestone payable to Wyeth for that compound will be accelerated to become
      due
      upon partnering.  As
      the
      Company has licensed certain rights to DOV 216,303 to Merck, should Merck
      achieve sales on this compound, the Company will owe Wyeth a royalty of 4.0%
      on
      those sales. In
      connection with the closing of the Merck Agreement, the Company owed Wyeth
      $2.5
      million related to DOV 216,303. As this milestone payment is prior to FDA
      approval, the entire amount was expensed in the third quarter of
      2004.





In
      December, 2006, the Company entered into three separate and distinct license
      agreements with Wyeth that together modified the terms of the existing licenses.
      Under the amended licensing arrangements, the Company gained an exclusive
      license to certain additional Wyeth intellectual property to allow it to develop
      products incorporating the three compounds for the treatment of human diseases,
      disorders and conditions except for the treatment of vasomotor symptoms in
      certain areas of women’s health. The Company granted to Wyeth an exclusive
      license to certain DOV intellectual property to allow Wyeth to develop products
      incorporating the three compounds for the treatment of vasomotor symptoms in
      those areas of women’s health, provided that the parties agreed to negotiate to
      jointly develop and commercialize any such products. The Company remains
      obligated to pay royalties as well as milestones as detailed above for each
      of
      the three compounds. In addition, the Company is obligated to pay milestones
      of
      $2.25 million upon NDA (or equivalent) approval in the United States, Europe
      or
      Japan for any product containing DOV 21,947 or DOV 102,677, but only if such
      milestone becomes payable prior to payment of the $4.5 million milestone payable
      on an NDA (or equivalent) approval for DOV 216,303. Any milestone payments
      made
      with respect to DOV 21,947 or DOV 102,677 reduce, dollar-for-dollar, DOV's
      $4.5
      million milestone obligation for DOV 216,303.





**Neurocrine
      Agreement**





In
      June 1998, the Company entered into a sublicense and development agreement
      for one of the Company's compounds (indiplon) with Neurocrine. The Company
      is
      entitled to receive milestone payments on certain development events and
      royalties on net sales, if any.





In
      December 2002, Neurocrine and Pfizer Inc. announced a global agreement for
      the
      exclusive worldwide development and commercialization of indiplon.  In
      connection with this agreement, the Company and Neurocrine, together with its
      licensor Wyeth, agreed to establish three standby licenses, one to Neurocrine
      from Wyeth in case the Company’s license agreement is terminated by reason of
      the Company’s default, another to Neurocrine's partner (subsequently Pfizer, as
      noted below) from the Company in case the sublicense agreement with Neurocrine
      is terminated by reason of Neurocrine's default and a third standby license
      from
      Wyeth to Neurocrine's partner in case both Neurocrine and the Company default
      in
      the respective agreements.




F-25


As
      noted
      above, on February 25, 2004, the Company entered into agreements to reorganize
      its sublicense agreement with Neurocrine. The restated agreement provides for
      a
      royalty term of the last to expire of Wyeth patents or any patent owned or
      controlled by Neurocrine covering indiplon and ten years. As part of the
      reorganization, Neurocrine acquired Wyeth’s interest under the license covering
      indiplon. Accordingly, the reorganization with
      Neurocrine allows
      Neurocrine to pay to DOV royalty and milestone payments net of those amounts
      that would be owed by the Company to Wyeth under the earlier
      agreement .
      The
      Company’s economics will therefore remain unchanged and it will continue to be
      entitled to receive $1.5 million in aggregate milestones upon Neurocrine’s NDA
      approval and 3.5% royalty on worldwide sales. In 2004, the Company received
      a
      $2.0 million milestone payment from Neurocrine for the NDA filing for indiplon.
      However, because the original NDA filing was not accepted by the FDA and the
      agreement with Neurocrine indicates that the $2.0 million milestone is earned
      once an NDA has been submitted according to certain FDA regulations, the Company
      recognized this payment as revenue once the filing was accepted by the FDA
      on
      June 14, 2005.





**XTL
      Agreement**





On
      January 15, 2007, the Company entered into an agreement with XTL Development,
      Inc., or XTL, relating to bicifadine. Under the agreement the Company granted
      XTL the exclusive right to develop products incorporating bicifadine for
      the treatment of human diseases, disorders and conditions, except for treatment
      of symptoms in certain areas of women’s health. The Company received an up-front
      payment of $6.5 million, of which $5.0 million was paid to Wyeth as a result
      of
      the acceleration of a milestone payable pursuant to our agreement with
      Wyeth.  Additionally, XTL was required to make a $1.0 million payment
      within 30 days if the Company successfully transferred to XTL an existing
      investigational new drug application and certain program documentation relating
      to bicifadine, which was completed and thus payment made in February 2007. 
Total up-front and milestone payments by XTL under the agreement could exceed
      $130.0 million if all milestones are achieved, with escalating low double-digit
      royalties on annual net sales of bicifadine.  At its election, XTL may make
      certain non-royalty payments, including milestone payments, to the Company
      in
      shares of freely tradeable stock of XTL’s parent company, XTL Biopharmaceuticals
      Ltd. XTL will fund future research, development, manufacturing and
      commercialization costs of bicifadine.





**Merck
      Agreement**





On
      August
      5, 2004, the Company entered into a license agreement with a subsidiary of
      Merck
& Co. Inc., or Merck, for the worldwide development and commercialization of
      DOV 21,947 for all therapeutic indications and of DOV 216,303 for the treatment
      of depression, anxiety and addiction. The agreement became effective in
      September 2004. Additionally, Merck obtained rights of first offer and refusal
      regarding a licensing agreement for DOV 102,677 under certain circumstances
      and
      for additional consideration. The parties agreed to work together to clinically
      develop licensed product and DOV reserved the right to co-promote the sales
      of
      product in the United States to psychiatrists and other specialists who treat
      depression.





Under
      the
      agreement, DOV received a $35.0 million up-front licensing payment. In addition,
      the Company is entitled to receive milestone payments of up to $420.0 million,
      as well as royalties on worldwide net sales, if any. In
      accordance with the Emerging Issues Task Force (EITF) Issue No. 00-21,
“Accounting for Revenue Arrangements with Multiple Deliverables” the
      Company has evaluated the arrangement to determine if the deliverables are
      separable into units of accounting and then applied applicable revenue
      recognition criteria.  The Company has determined that the license and the
      collaboration are a single element for accounting purposes.  As  the
      Company had a continuing obligation with respect to collaboration on development
      of product candidates, until an NDA is filed, the up-front payment was deferred
      and amortized into revenue over the estimated research and development period
      of 72 months. In
      December 2006, Merck and DOV terminated the agreements and as such the remaining
      deferred revenue of $22.2 million was taken into revenue
      immediately.




F-26




**Operating
      Leases**





In
      February 2006, the Company committed to a ten year operating lease for 133,686
      sq. feet facility in Somerset, New Jersey which has served as its corporate
      headquarters and principal place of business since May 2006. In connection
      with
      this lease the Company has entered into a stand-by letter of credit facility
      for
      $4.2 million to serve as collateral for its performance under the
      lease. The
      Company also leases various office and transportation equipment under operating
      leases with terms ranging from one to three years.





As
      of
      December 31, 2006, the total non-cancelable future minimum rental payments
      under
      the above-mentioned leases are as follows:





Year
                ending December 31,2007
            
            $
            2,865,2312008
            
            
            2,856,7332009
            
            
            2,848,8492010
            
            
            2,848,849$
            11,419,662





Rent
      expense incurred for office space and equipment leases amounted to $3,122,510,
      $699,588 and $406,838 for the years ended December 31, 2006, 2005 and 2004.





**14.
      Quarterly Financial Data (Unaudited)**





The
      following table contains selected unaudited statement of operations information
      for each quarter of 2006 and 2005. The Company believes that the following
      information reflects all normal recurring adjustments necessary for a fair
      presentation of the information for the periods presented. The operating results
      for any quarter are not necessarily indicative of results of any future
      period.




**Quarters
                Ended****Mar
                31**
            
            **Jun
                30**
            
            **Sep
                30 (a)**
            
            **Dec
                31(b)****2006**
            
            (In
                thousands, except per share data)Revenue
            
            $
            1,378
            
            $
            1,280
            
            $
            1,083
            
            $
            22,210Net
                income (loss) before tax
            
            
            (20,269
            )
            
            (20,615
            )
            
            (17,496
            )
            
            14,265Net
                income (loss)
            
            
            (20,269
            )
            
            (20,615
            )
            
            (17,496
            )
            
            20,010Basic
                net income (loss) per share
            
            $
            (0.87
            )
            $
            (0.88
            )
            $
            (0.68
            )
            $
            0.75Diluted
                net income (loss) per share
            
            $
            (0.87
            )
            $
            (0.88
            )
            $
            (0.68
            )
            $
            0.69**2005**Revenue
            
            $
            2,059
            
            $
            3,832
            
            $
            1.378
            
            $
            1,378Net
                loss before tax
            
            
            (9,108
            )
            
            (11,218
            )
            
            (15,710
            )
            
            (17,205
            )Net
                loss
            
            
            (9,108
            )
            
            (11,218
            )
            
            (15,710
            )
            
            (16,932
            )Basic
                and diluted net loss per share
            
            $
            (0.41
            )
            $
            (0.49
            )
            $
            (0.68
            )
            $
            (0.73
            )




F-27




(a ) In the
      third quarter of 2006, the Company issued 3,445,000
      shares of common stock in exchange for $10 million in original principal amount
      of its convertible subordinated debentures. As
      a
      result of the exchange, and as required by SFAS 84 “Induced Conversions of
      Convertible Debt, the Company recorded a $5.7 million non-cash charge related
      to
      the fair value of the additional shares issued to induce the exchange.





(b)
      In
      the fourth quarter of 2006 the Company’s agreement with Merck was terminated
      thus the remaining deferred revenue of $22.2 million was taken into revenue
      immediately. In addition, in the fourth quarter of 2006, the Company sold
      historical net operating losses pursuant to the New Jersey Economic Development
      Authority technology business tax certificate program for which the Company
      recorded a net $5.7 million tax benefit. ****





F-28