**SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
 
 **FORM
10-K**
 
 (Mark
One)
 [X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE
SECURITIES EXCHANGE ACT OF 1934
 
 For the
fiscal year ended December 31, 2004
 
 OR
 
 [ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE
SECURITIES EXCHANGE ACT OF 1934
 
 For the
transition period from ___________ to ____________
 
 **Commission
file number 000-49730**
 
 
 
 **DOV
PHARMACEUTICAL, INC.**
 (Exact
Name of Registrant as Specified in its Charter)
 **Delaware**
      (State
      or Other Jurisdiction
      of
      Incorporation or Organization)
    
    **22-3374365**
      (I.R.S.
      Employer
      Identification
      No.)
 ****
 **Continental
Plaza**
 **433
Hackensack Avenue**
 **Hackensack,
New Jersey 07601**
 (Address
of principal executive office)
 
 **(201) 968-0980**
 (Registrant’s
telephone number, including area code)
 
 
 
 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 [X] No [ ]
  1
 
 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. [ ]
 
 Indicate
by check mark whether registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes [X] No [ ]
 
 The
aggregate market value of the voting stock held by non-affiliates of registrant
as of June 30, 2004 totaled approximately $297.2 million based on the
then-closing stock price as reported by the Nasdaq National Market.
 
 On
February 17, 2005,  there
were outstanding 22,667,929 shares of registrant’s common stock, par value
$0.0001 per share.










2




**DOV
PHARMACEUTICAL, INC.**





**Form
10-K**





**For
the Year Ended December 31, 2004**





**Table
of Contents**





**PageNumber****PART
      1**Special
      Note Regarding Forward-Looking Statements
    4ITEM
      1.
    Business
    5ITEM
      2.
    Properties
    35ITEM
      3.
    Legal
      Proceedings
    35ITEM
      4.
    Submission
      of Matters to a Vote of Security Holders
    35**PART
      II**ITEM
      5.
    Market
      for Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities
    36ITEM
      6.
    Selected
      Financial Data
    37ITEM
      7.
    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
    38ITEM
      7A.
    Quantitative
      and Qualitative Disclosures About Market Risk
    48ITEM
      8.
    Financial
      Statements and Supplementary Data
    48ITEM
      9.
    Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
    48ITEM
      9A.
    Controls
      and Procedures
    49ITEM
      9B.
    Other
      Information
    50**PART
      III**ITEM
      10.
    Directors
      and Executive Officers of Registrant
    50ITEM
      11.
    Executive
      Compensation
    55ITEM
      12.
    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
    60ITEM
      13.
    Certain
      Relationships and Related Transactions
    64ITEM
      14.
    Principal
      Accountant Fees and Services
    65**PART
      IV**ITEM
      15.
    Exhibits
      and Financial Statement Schedules
    66Signatures
    71





3





**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:





·
    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;





·
    obtain
      substantial additional funds;





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





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





You
should refer to the “Item 1.
Business - Risk Factors and Factors Affecting Forward-Looking Statements" for a
detailed discussion of some of the factors that may cause our actual results to
differ materially from our forward-looking statements. We qualify all our
forward-looking statements by these cautionary statements. There may also be
other 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.





4





**ITEM
I. BUSINESS**





**Overview**





We are a
biopharmaceutical company focused on the discovery, in-licensing, development
and commercialization of novel drug candidates for central nervous system, or
CNS, and other disorders, including cardiovascular, that involve alterations in
neuronal processing. We have six product candidates undergoing clinical
development that address therapeutic indications with significant unmet needs.
In addition, our sublicensee, Neurocrine Biosciences, Inc., or Neurocrine, in
the fourth quarter of 2004 filed two new drug applications, or NDAs, for
indiplon, our product candidate for the treatment of insomnia. However,
Neurocrine has reported that these applications were not accepted by the Food
and Drug Administration, or FDA, due to technical difficulties in navigating the
electronic filing and that it intends to refile the applications in the first
half of 2005. Bicifadine, our product candidate for pain, is the subject of an
extensive Phase III clinical development program and a Phase III trial has
recently been initiated for ocinaplon, our product candidate for the treatment
of anxiety disorders.




Bicifadine
has demonstrated efficacy in both a Phase II and Phase III clinical trial
involving post-surgical dental pain and is currently in three Phase III studies.
In two Phase II clinical trials, ocinaplon has produced significant clinical
improvement in patients with general anxiety disorder, or GAD. An
investigational new drug application, or IND, for DOV 102,677 has been obtained
and we initiated a Phase I clinical trial in February of 2005. Based upon
preclinical studies, we believe DOV 102,677 may have utility in the treatment of
depression and other neuropsychiatric disorders, including attention deficit
disorder and obesity.




A
subsidiary of Merck & Co. Inc., or Merck, has licensed exclusive worldwide
rights for all therapeutic indications of DOV 21,947, another of our product
candidates for the treatment of depression. Prior to entering into this
development and commercialization agreement, we had completed four Phase I
clinical trials with DOV 21,947. Merck has also licensed exclusive worldwide
rights to DOV 216,303 for the treatment of depression, anxiety and addiction. We
retain rights to DOV 216,303 for all other indications. We have completed two
Phase I clinical trials and a Phase II clinical trial with this compound in
depressed patients and will continue the clinical development of DOV 216,303 in
indications outside of depression, anxiety and addiction.




In July
2004, we reached agreement with the FDA on the scope and design of the clinical
trials required for submission of an NDA for DOV diltiazem, our product
candidate for angina and hypertension. We are currently evaluating strategic
alternatives for its development and commercialization.




We also
have several compounds in preclinical development. For 2005, we expect to
initiate a Phase I clinical trial for DOV 51,892, our preclinical candidate for
the treatment of anxiety disorders.




Our core
scientific expertise is in cellular and molecular pharmacology underlying
neurotransmission. Our senior management team has substantial experience in CNS
drug discovery and development. During their careers, they have participated in
the discovery and development of new drugs that have been successfully brought
to market.




To
enhance our drug development and commercialization efforts, we have licensed
rights to certain of our products. We have sublicensed indiplon to
Neurocrine, which entered into a development and commercialization agreement
with Pfizer, Inc., or Pfizer, in December 2002. The development and
commercialization agreement with Merck for DOV 21,947 and DOV 216,303 was
entered into in August 2004.








5





**Our
Business Strategy**





Our goal
is to become a leading biopharmaceutical company focused chiefly on the
treatment of central nervous system and other disorders involving alterations in
neuronal processing. The key elements of our strategy are to:





*Aggressively
pursue development and commercialization of our lead product
candidates.* We have
six product candidates undergoing clinical development and one product candidate
for which two separate NDAs are expected to be filed in the first half of 2005,
addressing five separate and substantial pharmaceutical markets. These markets
include insomnia, anxiety, pain, depression and angina and hypertension. 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 focus substantial resources on completing clinical testing and
commercializing these product candidates as quickly as possible.







*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.
For example, our product candidates for the treatment of pain, insomnia and
anxiety, bicifadine, indiplon and ocinaplon, respectively, have demonstrated
positive results equivalent to, or better than, currently marketed products. 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. For
example, in 2004 we made significant progress in our transport inhibitor
and GABA modulator discovery programs,
having begun clinical development of DOV 102,677. From our own internal
discovery program, we expect to
progress one new product candidate into clinical development each subsequent
year.We also intend 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 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 reduce the risks associated with the clinical development of any one specific
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 positive clinical data while maintaining a substantial
internal discovery program. 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 multiple 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 our
dependence on any single compound or therapeutic application to achieve
commercial success and creates multiple potential sources of
revenue.


*Establish
alliances with industry leaders to access their unique technologies and
capabilities* .
Currently, we have a collaborative arrangement with Neurocrine and Pfizer with
respect to indiplon, our product for the treatment of insomnia. In 2004,
we sublicensed DOV 216,303 for certain indications and DOV 21,947 for all
indications to Merck without retaining any material rights other than our right
to participate in the ongoing clinical plan collaboration, receive milestone
payments and royalties on product sales, if any, and to co-promote in the United
States.  We have
terminated our collaborative arrangement with Elan Corporation, plc, or Elan,
for bicifadine and ocinaplon and with Biovail Laboratories, Inc., or Biovail,
for DOV diltiazem. We intend to seek to establish alliances that will enhance
our product development and commercialization efforts, including alliances that
allow us to retain significant development rights for our product
candidates.










6





**Our
Product Pipeline**





The
following table summarizes our product candidates currently in clinical and
preclinical development as of March 15, 2005:





**Product**
    
    **Indication(s)**
    
    **Status**
    
    **Marketing
      Rights**Indiplon
    
    Insomnia
    
    NDAs
      Planned for First Half of 2005*
    
    Pfizer/NeurocrineOcinaplon
    
    Generalized
      Anxiety Disorder
    
    Phase
      III
    
    DOVBicifadine
    
    Pain
    
    Phase
      III
    
    DOVDOV
      21,947 and DOV 216,303
    
    Depression
    
    **
    
    Merck/DOVDOV
      102,677
    
    Depression
      and Other Neuropsychiatric Disorders
    
    Phase
      I
    
    DOVDOV
      216,303
    
    Indications
      other than Depression, Anxiety and Addiction
    
    Phase
      I/II
    
    DOVDOV
      Diltiazem
    
    Angina
      and Hypertension
    
    Phase
      I, Phase III Planned
    
    DOVDOV
      51,892
    
    Anxiety
      Disorders
    
    Preclinical,
      Phase I Planned
    
    DOV


___________


*
I n the
fourth quarter of 2004, Neurocrine filed two NDAs for indiplon for the treatment
of insomnia. However, Neurocrine has reported that these applications were not
accepted by the FDA due to technical difficulties in navigating the electronic
filing and that it intends to refile the applications in the first half of 2005.


** Our
sublicensee for DOV 21,947 and DOV 216,303, Merck, has elected not to authorize
disclosure of the stage of clinical development of DOV 21,947 or its plans for
the DOV 216,303 indications licensed to it, namely, depression, anxiety and
addiction.





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





**Our
Products Under Development**





***Central
Nervous System Disorders***





*Insomnia
and Anxiety*





The most
frequently prescribed drugs currently marketed to treat insomnia and anxiety
target the neurotransmitter gamma-aminobutryic acid, or GABA. Neurotransmitters
are chemicals in the central nervous system that either excite or inhibit
neuronal function. GABA is the principal inhibitory neurotransmitter in the
central nervous system. Benzodiazepines, or BDZs, such as Valium, Librium and
Xanax, target the GABA A receptors.







BDZs have
enjoyed widespread use for over 40 years for the treatment of anxiety,
insomnia and epilepsy. Along with their desired therapeutic effects, however,
BDZs are known to produce a variety of undesired side effects. For example, when
used to treat anxiety, these side effects can include sedation, muscular
incoordination and memory impairment. Further, overdoses of BDZs are potentially
lethal when taken with alcohol. BDZs also produce tolerance and physical
dependence and can be abused.







For many
years, our senior management team, including Dr. Beer, now retired, has
conducted research on GABA A receptors. Their pioneering work classified GABA A receptors into biochemically, pharmacologically and functionally distinct
receptor subtypes. They
demonstrated that different receptor subtypes influence different behaviors such
as anxiety, sedation and amnesia. Furthermore,
through their research delineating the actions of BDZs on GABA A receptors, they were the first to discover non-BDZ compounds that act on
specific subtypes of GABA A receptors.





7


BDZs are
believed to produce their undesirable effects at therapeutic doses because they
affect all GABA A receptor
subtypes. 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 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.





*Indiplon.* Indiplon
is our product candidate for the treatment of insomnia. In 1998, we licensed
indiplon from Wyeth Holdings Corporation, or Wyeth, and subsequently sublicensed
it to Neurocrine and in
December 2002, Neurocrine entered into a development and commercialization
agreement with Pfizer for indiplon. Neurocrine in the
fourth quarter of 2004 filed two NDAs, the first for an immediate release (IR)
formulation and the second for a modified release (MR) formulation of indiplon
for the treatment of insomnia. However, Neurocrine has reported that these
applications were not accepted by the FDA because of technical difficulties in
navigating the electronic filing and Neurocrine has indicated that it intends to
refile the applications in the first half of 2005.





Insomnia
is a neurological disorder defined as persistent difficulty in initiating or
maintaining sleep, or condition of not feeling rested after an otherwise
adequate amount of sleep. According
to the National Sleep Foundation, approximately one-half of the adults surveyed
reported trouble sleeping at least a few nights a week in the past year, with
approximately 30% of the U.S. population reporting that they experience insomnia
every night or almost every night. IMS reported total U.S. sales of prescription
drugs for the treatment of insomnia exceeded $2.1 billion in 2004.





In the
1980's, BDZs such as Dalmane and Halcion were extensively used to treat
insomnia. Sedation, an undesirable side effect of BDZs when used to treat
anxiety, became an intended primary therapeutic effect of BDZs to treat
insomnia. BDZs demonstrated substantial sedative effectiveness with a greater
margin of safety than previous treatments such as barbiturates. Nonetheless,
despite the efficacy of BDZs to treat insomnia, they produce significant
undesirable side effects, including:




·
    impaired
      psychomotor coordination;
 
 ·
    confusion and memory impairment;
 
 ·
    rebound insomnia and anxiety after
    discontinuation;
 
 ·
    next-day residual sedation;
 
 ·
    development of tolerance with repeated use;
  and
 
 ·
    potentially lethal effects when combined with
      alcohol.




Impaired
motor coordination, confusion and memory impairment are especially problematic
when BDZs are used by older patients. We believe that many of these side effects
are due to the non-selective action of BDZs on all GABA A receptor
subtypes, as well as their delayed onset and extended duration of action.





A small
number of non-BDZs have been introduced for the treatment of insomnia. In
March 1993, Ambien, the first and largest selling non-BDZ, was introduced
in the United States. It has shown a reduced side effect profile and a shorter
duration of action as compared to BDZs. Ambien, however, also has some of the
undesirable side effects associated with BDZs, including amnesia and next-day
residual sedation. Despite these undesirable side effects, Ambien is
the current market leader, with approximately $1.8 billion in worldwide
sales in 2004, according to Sanofi-Aventis, with reported sales growing in
excess of 15% per year.





8


Our
insomnia product candidate, indiplon, is a non-BDZ shown to be more potent than
currently marketed non-BDZs, including Ambien, and to target more selectively
the specific GABA A receptor
subtype that appears to be associated with promoting sleep. Furthermore,
Neurocrine has noted that, in its Phase II and Phase III clinical studies,
indiplon demonstrated efficacy with no significant next-day residual sedation at
clinically relevant doses. We believe that indiplon's greater selectivity and
improved pharmacokinetic profile are responsible for the more favorable side
effect profile compared to currently marketed products.





Neurocrine’s
initial NDA filings for the IR capsules and MR tablets contained studies that
comprise one of the most extensive programs conducted to date in insomnia, with
data from 68 clinical trials and over 80 preclinical studies and includes a
comprehensive safety and efficacy evaluation in over 7,500 adult and elderly
subjects and over 300,000 patient exposures. The IR and MR NDAs were filed in
eCTD electronic format and contain approximately 1,500 volumes or 524,000 pages
of data. In its Phase II clinical studies, indiplon was shown to be safe and
effective in helping both younger and older adult subjects with both chronic and
transient insomnia to fall asleep rapidly without adverse side effects as
compared to placebo.







During
2004, Neurocrine reported positive results from a total of five Phase III
clinical trials for indiplon IR capsules and MR tablets and in February 2005
Neurocrine reported positive results for another Phase III clinical trial with
the MR tablets. The Phase III program clinical trials have consistently shown
statistically significant positive results with no next day residual effects. Neurocrine's
clinical studies have shown that blood levels of indiplon reach levels high
enough to induce sedation approximately 15 minutes after ingestion followed by
rapid removal from the blood stream to the point that it cannot be detected four
hours later. This results in rapid sleep onset followed by rapid removal of the
drug from the body, reducing the risk of next-day residual sedation. Neurocrine
believes that this short duration of action will permit bedtime dosing for
people who have trouble falling asleep, and dosing in the middle of the night
for people who have trouble staying asleep, without causing the side effects and
next-day residual sedation that occur with longer-acting drugs like Ambien.
Neurocrine has formulated the drug in a modified release form to provide two
doses of the drug within one tablet, one dose released immediately for sleep
induction and one dose released later for sleep maintenance.






The
preceding descriptions of Neurocrine's clinical development and clinical trial
results of indiplon are based on Neurocrine’s public disclosures through
February 16, 2005.





*Ocinaplon.* Ocinaplon is our product candidate for the treatment of anxiety disorders,
including GAD, the first indication for which we intend to seek FDA approval.
Anxiety can be defined in broad terms as a state of unwarranted or inappropriate
worry and is made up of various disorders, including GAD, panic disorder and
phobias.







BDZs such
as Xanax and Valium, the non-BDZ BuSpar and certain antidepressants, such as the
selective serotonin reuptake inhibitors, or SSRIs, and selective serotonin and
norepinephrine reuptake inhibitors, or SNRIs, such as Celexa, Paxil and Effexor
and their generic equivalents, are currently used to treat GAD and other anxiety
disorders. Each of these therapeutics, however, has side effects associated with
its use. As noted above, BDZs produce significant side effects such as sedation,
impaired motor coordination, memory impairment and physical dependence and are
potentially lethal when taken with alcohol. These side effects make them less
desirable treatments for anxiety, particularly for the treatment of GAD, when
long-term usage is needed. While BuSpar is non-sedating and displays no
withdrawal effects or abuse potential, its efficacy has been reported to be
relatively low, particularly in patients who have previously used BDZs.
Additionally, BuSpar often takes three to six weeks of drug administration to
achieve clinically significant reduction in anxiety, requires termination of BDZ
therapy 30 days before initiating treatment and has its own side effects
such as dizziness and nausea. Because of these issues, many physicians continue
to prescribe BDZs for the treatment of anxiety. Like BuSpar, the efficacy of
antidepressants in relieving anxiety is relatively low, and several weeks of
treatment are required to achieve clinically meaningful relief. In addition,
antidepressants display their own side effects, including nervousness,
agitation, insomnia and sexual dysfunction.







9


We
believe ocinaplon, a non-BDZ, can address significant unmet needs for the
treatment of anxiety disorders. Ocinaplon appears to selectively modulate a
specific subset of GABA A receptors that we believe are involved in the mediation of anxiety. Preclinical
studies have demonstrated that ocinaplon produces an anti-anxiety effect at
doses 20 to 40 times lower than doses that produce sedation and muscle
relaxation, and 10 times lower than doses that produce amnesia. In preclinical
studies, ocinaplon was also shown to be 15 times less likely than Valium to
increase the effects of alcohol. By contrast, BDZs often produce these side
effects at doses approximating those that produce an anti-anxiety effect.





To date,
eleven clinical trials on ocinaplon have been conducted, including nine
double-blind, placebo-controlled Phase I trials. In these clinical trials,
ocinaplon was shown to be safe and well tolerated at the maximum doses used,
with no evidence of sedation or any other side effects typically associated with
BDZs. One serious side effect experienced by one test subject, discussed below,
occurred in 2001.





In our
two Phase II double-blind, placebo-controlled clinical trials, ocinaplon
exhibited the following characteristics:





·
    efficacy at least comparable to what has
      been reported for BDZs and greater than what has been reported for Buspar,
      SSRIs or SNRIs;

·
    rapid onset of
action;

·
    a favorable side effect profile not
      significantly different from placebo; and

·
    no "rebound" anxiety following treatment
      cessation.





Our first
Phase II clinical trial in 2001 investigated the effects of an immediate
release formulation of ocinaplon on 60 GAD patients. In this clinical trial,
ocinaplon demonstrated a highly statistically significant reduction of anxiety
during the four-week study period using a number of anxiety measurements,
including the Hamilton Anxiety Scale. In addition, statistically significant
effects were measured as early as one week after treatment commenced, a much
shorter period than reported results for current treatments. The incidence of
side effects did not differ significantly from placebo. There was
one possibly drug-related serious adverse event, jaundice experienced by one
test subject, that was associated with elevated liver enzymes and required
hospitalization. The patient fully recovered from the event.





Our
second Phase II clinical trial evaluated two controlled release formulations of
ocinaplon. This multicenter trial involved 127 patients and was a 14-day
double-blind, placebo-controlled clinical trial of ocinaplon in patients with
GAD. The data indicated that both formulations of ocinaplon produced
statistically significant reductions in anxiety as compared to placebo after 14
days of dosing, with initial effects observed as early as one week, a more rapid
response than reported results for current treatments. Both formulations were
safe and well tolerated.





The start
of our scheduled Phase III clinical trial of ocinaplon in the treatment of GAD
was placed on hold by the FDA in October 2003. Citing concerns over the
serious adverse event in 2001 experienced by one patient in our first Phase II
clinical trial as discussed above, the FDA asked us to provide additional safety
information. We supplied this information to the FDA and with FDA approval
initiated a Phase III clinical trial in November 2004. The Phase III
clinical trial is being conducted in approximately 45 centers in the United
States and will enroll about 373 patients with GAD. This clinical trial is a
randomized, double-blind, placebo-controlled outpatient, multi-center study
assessing the efficacy and tolerability of ocinaplon. After a seven-day placebo
lead-in, qualifying patients will be randomized into one of three groups and
dosed over a 28-day period with either placebo, 30 mg of ocinaplon twice a day
or 60 mg of ocinaplon once a day. The primary efficacy endpoint is change from
baseline in the Hamilton Anxiety Rating Scale. Additionally, at the request of
the FDA, this clinical trial protocol includes twice-weekly blood draws for
liver enzyme function test (LFT) measurement. If an LFT abnormality occurs, even
if it is not clinically significant or occurs in the placebo control group, the
patient is required to be monitored daily until his or her LFT value returns to
within the normal range. We have obtained approval from the FDA to modify the
clinical trial to permit the enrollment of normal volunteers for whom
the protocol safety measures, but not the psychiatric scale information, will be
obtained. We believe this amendment will help speed enrollment and obtain more
rapid information demonstrating the expected level of safety in LFT and other
safety measures. We expect to have the required safety information on the 373
subjects including patients and normals as agreed with the FDA by the end of
2005. At that time, we intend to request a further amendment to the protocol to
allow for less frequent liver enzyme testing. With these anticipated changes we
believe enrollment of the 373 GAD patients (excluding normals) can be completed
by mid-2006. A
futility analysis for this clinical trial may be completed as early as the first
quarter of 2006.





10


We also
initiated the FDA-required two-year carcinogenicity study for ocinaplon in the
third quarter of 2003 and expect to complete dosing for this study in the third
quarter of 2005.





*Pain*


**


*Bicifadine.* Bicifadine is our product candidate for the treatment of pain. Drugs for the
treatment of pain, or analgesics, have historically been placed into one of two
general categories:


·
    narcotics, e.g., morphine, codeine, Demerol
      and Percodan; and
 
 ·
    non-narcotic prostaglandin inhibitors,
      e.g., aspirin, acetaminophen, ibuprofen and COX-2 inhibitors.




While
drugs in both of these categories are regularly used in the treatment of pain,
their use has been limited because of various side effect profiles. In addition,
administering these drugs for extended durations 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 the liver. Narcotics are also used to treat pain, but
tolerance develops rapidly and higher doses eventually lead to physical
dependence and additional side effects, including respiratory depression. Ultram,
originally thought to be a non-narcotic, has been reported to act at certain
opiate receptors and has the potential to cause morphine-like psychic and
physical dependence. Despite these drawbacks, according to IMS, U.S. sales in
2004 of narcotic and non-narcotic analgesics exceeded $8.0 billion. In
September 2004, Merck withdrew Vioxx, a COX-2 inhibitor, from the market, citing
increased risk of stroke and heart attack with extended use. A recent FDA
special advisory group cited heart health concerns with Vioxx and Pfizer
products Celebrex and Bextra, but voted overwhelmingly that benefit outweighed
risk in use of the Pfizer drugs and voted the same, but narrowly, in the use of
Vioxx. The future of COX-2 inhibitors may be considered uncertain. While the
full mechanism of action of bicifadine is uncertain, it is not believed to act
in a manner akin to prostaglandin inhibitors.







The FDA
has also granted approval to two other classes of compounds for the management
of specific types of chronic pain. Gabapentin (Neurontin) is an anticonvulsant
whose actions on ion channels in neuronal tissue is likely responsible for
its therapeutic effects in a certain type of neuropathic pain (postherpetic
neuralgia). In late 2004, duloxetine (Cymbalta) was granted approval for the
management of diabetic neuropathic pain. Duloxetine’s mechanism of action is
believed to result from the inhibition of the uptake of serotonin and
norepinephrine (SNRI) in nerve cells, a property also possessed by bicifadine.







Bicifadine
is a chemically distinct molecule with 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 their physiological actions. While we believe that bicifadine
also possesses additional neurochemical properties that contribute to its
analgesic effects, the exact nature of these other properties is under
investigation. Preclinical studies and clinical trials indicate that either or a
combination of these individual actions may account for the analgesic properties
of bicifadine.





11


Bicifadine
is not a narcotic and, in preclinical studies, it has been shown not to act at
any opiate receptor. In animal models, bicifadine does not demonstrate abuse,
addiction or dependence potential. Four Phase I clinical trials and 14 Phase II
clinical trials involving over 1,000 patients were conducted by Wyeth or us with
an immediate release formulation of bicifadine. In five double-blind,
placebo-controlled Phase II clinical trials of the immediate release
formulation, bicifadine demonstrated a statistically significant reduction in
pain, in some cases comparable to or better than positive controls such as
codeine. In addition, we have conducted seven Phase I clinical trials using a
controlled release formulation.





In August
2002, we completed a Phase II clinical trial in the United States 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 with each of the two higher doses of bicifadine
and was shown to be an effective analgesic as compared to placebo. 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. The two higher doses of bicifadine did
produce significantly more adverse events than placebo, with 400 mg and 600 mg
producing 22% and 37%, respectively, versus placebo producing 11%. The most
frequently reported 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 these effects were 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. Tramadol (100 mg) and the 400 mg and 600 mg doses of bicifadine produced
significantly more adverse events than placebo with the most frequently reported
symptoms being nausea and vomiting. Both the 200 mg and 400 mg doses of
bicifadine, however, produced significantly fewer adverse events, including
nausea and vomiting, than tramadol, suggesting a superior therapeutic safety
ratio for bicifadine.





In March
2004, we reached agreement with the FDA on a plan for the balance of the Phase
III bicifadine program necessary to submit an NDA for both acute pain and
chronic lower back pain. For an acute pain indication, we are expected to
provide evidence demonstrating bicifadine's analgesic properties in three
pivotal, multiple dose pain models, one of which will require replication. For a
chronic back pain indication, we are expected to provide positive results from
two placebo controlled dose-response studies of three months’ treatment
duration. We will need to obtain long-term safety observations from at least 100
patients treated with bicifadine for one year and 300 patients treated with
bicifadine for 6 months. The FDA did not express any particular concerns
regarding the safety profile of bicifadine based on the results of preclinical
and clinical testing, including observations from previously conducted clinical
trials in which over 1,500 subjects received bicifadine.







In
September 2004, we initiated a Phase III randomized, double-blind,
placebo-controlled, outpatient, multi-center U.S. clinical trial that will
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 primary efficacy
endpoint is the Summed Pain Relief and Intensity Difference score, a widely
recognized measurement of analgesia. Secondary endpoints include time-to-use of
rescue medication, clinical global evaluations and other measures. The
original protocol included three treatment arms of bicifadine (an initial 400 mg
loading dose followed by randomization to 200 mg, 300 mg or 400 mg t.i.d.), one
of tramadol (100 mg t.i.d.) and one of placebo. The design anticipated enrolling
approximately 480 patients.  We have recently submitted a protocol
amendment to the FDA in which among other changes, the 300mg arm would be
discontinued, thus reducing the total enrollment anticipated to 320 patients,
and restrictive enrollment criteria, no longer considered necessary in light of
subsequent testing, were removed. This
clinical trial is intended to satisfy one of the four efficacy trials required
for an acute pain indication in an NDA filing. It is anticipated that patient
enrollment will be completed in the second quarter of 2005 and that results of
the study will be available by mid-2005.







12




Also, in
September 2004, we initiated a pivotal, Phase III, U.S. clinical trial of
bicifadine in approximately 600 patients with moderate to severe chronic lower
back pain. The clinical trial is a randomized, double-blind, placebo-controlled,
outpatient, multi-center study assessing the efficacy and tolerability of three
dose levels of bicifadine over a three-month period. Patients who complete the
study may be eligible for up to one year of additional treatment in a follow-up
study. There are three, co-primary efficacy endpoints in the trial based upon
change in scores from pre-treatment baseline to end of treatment. These include
changes in pain severity ratings by the patient, measures of functional
disability and patients' global impression of change. Secondary endpoints
include changes in these measures at several time points prior to end of
treatment, incidence of discontinuation due to lack of efficacy, use of rescue
medication and other analgesia-related rating scales. We expect to complete
enrollment in the fourth quarter of 2005. Recently, DOV amended the protocol to
relax stringent concomitant, medication enrollment exclusion criteria no longer
considered necessary, as well as other minor changes. Inasmuch as such protocol
changes were made to a protocol informally approved for special protocol
assessment, or SPA, according to FDA guidelines the SPA technically may be no
longer effective, although we have requested that it nonetheless be continued.
DOV considers that the changes do not materially affect the design or analysis
of the study. The clinical efficacy endpoints and safety measures in this trial
were not modified. If our request to continue the SPA is not granted, given this
history, we do not anticipate any significant effect on the acceptability of the
study for registration purposes.







In
November 2004, we initiated
a Phase III, U.S. multi-center clinical trial to evaluate the long-term safety
of bicifadine in patients with chronic lower back pain. This clinical trial will
enroll approximately 1,550 patients with chronic lower back pain, 1,050 of whom
will be entered directly into this study and randomized to receive either 400 mg
of bicifadine b.i.d. or any appropriate pharmacological analgesic treatment
selected by the investigator. In addition, the clinical trial will enroll
approximately 500 patients who will have completed 12 weeks of treatment in
either the ongoing Phase III chronic lower back pain clinical trial or the
confirmatory Phase III chronic lower back pain clinical trial currently planned
for the second half of 2005. Such patients will receive 400 mg of bicifadine
b.i.d. The primary objective of this clinical trial is to evaluate the safety of
bicifadine for up to one year in patients with chronic lower back pain. This
trial is expected to be conducted in approximately 150 centers. We expect to
complete enrollment in 2006.





During
2005, we expect to initiate three additional Phase III clinical trials in acute
pain models and initiate the confirmatory Phase III clinical trial in lower
chronic back pain. We initiated the FDA-required two-year carcinogenicity study
for bicifadine in October 2003 and dosing is expected to be completed by the end
of 2005. As part of the ongoing clinical development of bicifadine, we plan to
continue our Phase I program investigating such standard variables as age and
drug interactions. We expect
to complete all clinical trials necessary for NDA submissions for both
indications by the end of 2006.This expectation is based upon among
other things, projected rate of patient enrollment, positive clinical trial
outcomes and continued absence of safety concerns.





*Depression*





*DOV
216,303, DOV 21,947 and DOV 102,677.* These
product candidates for the treatment of depression, are triple uptake inhibitors
affecting the neurotransmitters norepinephrine, serotonin and dopamine. These
neurotransmitters regulate numerous functions in the central nervous system, 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 of these neurotransmitters at their receptors.





The
emergence of 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 IMS figures, sales of antidepressants in the United States increased from
approximately $424 million in 1987, the year prior to the introduction of
Prozac, to approximately $13.7 billion in 2004. Despite
this widespread commercial success, SSRIs suffer from the following limitations:




·
    30% - 40% of patients do not experience an
      adequate therapeutic response;
 
 
  13
 ·
    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, block the uptake of both
serotonin and norepinephrine. 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, dizziness
and sexual dysfunction.





No
currently marketed antidepressant inhibits the uptake of all three
neurotransmitters linked to depression. Both preclinical studies and clinical
trials indicate that a drug inhibiting uptake of 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 would represent a breakthrough in the treatment of depression.





In
preclinical studies conducted by DOV prior to licensing to Merck, DOV 216,303
and DOV 21,947 were shown to potently inhibit the uptake of all three
neurotransmitters, serotonin, norepinephrine and dopamine. In animal
models highly predictive of antidepressant action, DOV 216,303 and DOV 21,947
were more potent than both Tofranil, an SNRI, Prozac and Celexa . Because
of their ability to inhibit the uptake of all three neurotransmitters implicated
in depression, we believe DOV 216,303 and DOV 21,947 may be more effective and
have a more rapid onset than other antidepressants.





Before
sublicensing DOV 216,303 to Merck, we had completed two Phase I pharmacokinetic
clinical trials and a Phase II multi-centered, double-blind, safety, efficacy
and tolerability clinical trial that compared DOV 216,303 to citalopram, an
SSRI, in patients with major depressive disorder. Before licensing DOV 21,947 to
Merck, we obtained an IND and completed four Phase I pharmacokinetic clinical
trials, including a Phase
IB clinical trial of multiple doses of DOV 21,947.





DOV
102,677 is also a triple reuptake inhibitor with preferential action on the
dopamine transporter protein and is related to DOV 216,303 and DOV 21,947. Based
upon preclinical studies, DOV 102,677 has potential utility in the treatment of
depression, attention deficit disorder and obesity.  We
initiated a Phase IA clinical trial of single doses of DOV 102,677 in February
2005. We intend, in 2005, to initiate two additional Phase I clinical trials and
a Phase II clinical trial for DOV 102,677.





*Preclinical
Development*





Our
discovery program remains focused on GABA A receptor
modulators and reuptake inhibitors for the treatment of CNS
disorders.  Our
internal discovery effort with GABA A receptor
modulators has yielded a series of compounds we are currently evaluating, as
well as, DOV 51,892. DOV 51,892 is believed to function as a partial  positive
allosteric modulator at specific GABA A receptor
subtypes that may  be
involved in the treatment of various anxiety disorders, including generalized
anxiety disorder and panic. Based
upon preclinical pharmacological data, we intend to move DOV 51,892 into
clinical testing in the second half of 2005.





Our
discovery efforts with reuptake
inhibitors have
yielded a growing library of novel triple reuptake inhibitors and we intend to
bring at least one of these compounds into clinical development annually.





***Cardiovascular
Disorders***





*DOV
Diltiazem.* DOV
diltiazem, our proprietary formulation of diltiazem, is our product candidate
for the treatment of angina and hypertension. Diltiazem belongs to a well-known
class of drugs called calcium channel blockers. 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.





14


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 United States with stable angina was
estimated at 16.5 million. According
to Decision Resources, high blood pressure or hypertension was estimated to
affect over 50 million people in the United States.







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, total sales of diltiazem products in the United States were
$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% 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 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.





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 July 2004, 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 evaluating strategic alternatives to carry out DOV diltiazem’s Phase
III clinical development and commercialization that will enable us to continue
our focus on our CNS programs.





**Collaborations
and Licensing Agreements**





One of
our business strategies is to establish alliances with industry leaders to
access their unique technologies and capabilities. To date, we have established
the following collaborations and licensing agreements:





***Neurocrine
Biosciences, Inc. and Pfizer, Inc.***





In
June 1998, we sublicensed indiplon to Neurocrine on an exclusive, worldwide
basis for ten years or, if later, the expiration of the patent covering
either the compound or the marketed product, currently August 2020. 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 and after payments to our licensor, Wyeth, we are entitled to receive
a royalty equal to 3.5% of net sales for the later
of the expiration of the Wyeth patents 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. 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.





15


In
December 2002, we and Neurocrine, together with our licensor Wyeth, agreed to
establish three standby licenses, one to Neurocrine from Wyeth in case our
license agreement is terminated by reason of our default, another to
Neurocrine's partner (subsequently Pfizer, as noted below) from us 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 we default in our respective agreements. These provisions
assure any new partner with Neurocrine that, should a party or parties above it
on the license chain default, it will be able to develop and sell indiplon. If
the standby measures are ever used, the Neurocrine partner must first cure any
defaults, thus protecting any milestones and royalties owing to us and Wyeth.
The standby license in each case is the same as the one issued by the party that
defaults.





Following
this agreement on standby licenses, in December 2002, Neurocrine and Pfizer
announced a global agreement for the exclusive worldwide development and
commercialization of indiplon. Neurocrine
and Pfizer are 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 United States, 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% 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 changed to $1.0 million upon an NDA filing and
$1.5 million upon an NDA approval.







***Merck
Agreement***





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 has assumed financial responsibility for development and commercialization
of a product containing at least one of the licensed compounds. The parties have
agreed to work together to clinically develop licensed product and we have
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, we received a $35.0 million up-front licensing payment. In
addition, we could receive 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 will assume responsibility for the development,
manufacturing and commercialization of DOV 21,947 and pay us royalties on
worldwide sales, if any, which increase based upon certain sales thresholds. We
have an option to co-promote in the United States to psychiatrists and other
specialists who treat depression.








16





***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% and 80.1%, 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% from 80.1%.




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% 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 ends 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% 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. If we decide to retain Elan to provide additional
development and manufacturing services, we and Elan will have to negotiate
appropriate terms under a new agreement.





***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. We received an
up-front license fee of $7.5 million, plus under the license agreement
Biovail funded clinical trial costs. If the agreement had continued, we would
have been entitled to further payments, if milestones were met, as well as
royalties on sales, if any. 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. Biovail has agreed to return all confidential information,
DOV intellectual property and clinical supporting data and discoveries developed
and made during the two-year collaboration.





**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.





17


***The
Hatch-Waxman Act***





Under the
United States 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 that provide protection
for bicifadine, DOV 216,303 and ocinaplon have expired, in the absence of new
patent protection these market exclusivity provisions will 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
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
are considering applying for 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 and factors involved in the filing and
approval of an NDA.





***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 twelve issued U.S. patents, seven of which
have expired, including the patent for the use of bicifadine for pain, the use
of DOV 216,303 for the treatment of depression and a patent covering
ocinaplon.





The
patent that currently provides protection for the use of bicifadine and DOV
216,303 for alcohol, cocaine and other addictive disorders is due to expire in
December 2018. In 2002, we filed a provisional patent application, which we
perfected in 2003 as a regular utility patent application, claiming a novel,
three-dimensional composition of matter for bicifadine, as well as therapeutic
uses and methods of manufacture for this composition. Also in 2002 and 2003, we
filed provisional and utility patent applications claiming novel controlled
release formulations of bicifadine. In 2004, we filed a provisional patent
application directed to the use of bicifadine for controlling fever and
menopausal symptoms, including hot flashes. We recently filed a patent
application for processes and intermediates for the production of bicifadine. In
2005, we intend to file at least two additional patent applications directed to
novel therapeutic uses of bicifadine. Moreover, we expect to file additional
patent applications in 2005 directed to new compositions and uses for DOV
216,303.





The
patent covering ocinaplon composition of matter expired in June 2003.
Intermediates useful for manufacturing ocinaplon are currently protected by a
patent that is due to expire in February 2007. In 2002, we filed a
provisional patent claiming controlled release formulations of ocinaplon.
Additional patent applications are planned for filing in 2005 directed to new
compositions, formulations and methods for production for
ocinaplon.





18


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.





In
December 2000, a patent issued covering the compound formulation of DOV
diltiazem. This patent is due to expire in April 2018. Additionally, in
May 2001, we filed a patent application covering an additional release
characteristic of DOV diltiazem.





In April
2002, a patent was issued claiming the composition of matter, use and method of
treatment and method of 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
January 2003, a patent was issued claiming the composition of matter, use and
method of manufacture of DOV 102,677, our candidate for the treatment of
indications including depression, obesity, parkinson’s disease, restless leg
syndrome and attention deficit disorder. This patent will expire in 2023.
Additional patent applications are planned for filing in 2005 directed to new
compositions and uses for DOV 102,677.





Regarding
DOV 51,892 and related molecules, addressing anxiety disorders, we have filed
patent applications covering composition of matter, use and methods of
manufacture.





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 in
respect of four compounds, indiplon, ocinaplon, bicifadine and DOV 216,303.
Under the restated agreement, we are obligated to pay Wyeth royalties of 3.5% of
net sales for ocinaplon and DOV 216,303 and 5.0% of net sales for bicifadine,
and milestones of $2.5 million 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% 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. Since we
licensed certain rights to DOV 216,303 to Merck, should Merck achieve sales on
this compound, we will owe Wyeth a royalty of 4.0% on those sales. The milestone
payable to them upon NDA filing of $2.5 million was accelerated and paid in
2004. As part
of the reorganization, Neurocrine acquired Wyeth’s interest under the license
covering indiplon, with the result that the 2.5% royalty payable by DOV 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 DOV to Wyeth.





19


If Wyeth
terminates the license upon an uncured breach by us, and by Neurocrine under the
standby license, we must transfer 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 agreement expires
as to each compound 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, the 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.





**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 sales, marketing or distribution capabilities. In order to commercialize any
of our product candidates, we must either acquire or internally develop sales,
marketing and distribution capabilities, or make arrangements with third parties
to perform these services for us.





**Government
Regulation**





Regulation
by government authorities in the United States 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 United States, 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
we can begin clinical trials in the United States. 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 United States 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 many of our clinical trials in the United Kingdom, France and
Germany where they are monitored by the cognizant agency. Current, on-going
clinical trials are being conducted in the United States and Switzerland. All
clinical trial test design and results, whether the trial is conducted in the
United States 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. 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 United
States.





If the
FDA approves the NDA, the drug becomes available for physicians to prescribe in
the United States. 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 United States. 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,
development and commercialization 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
six product candidates in clinical development addressing five different and
substantial pharmaceutical markets. In
addition, our sublicensee, Neurocrine, in the fourth quarter of 2004 filed two
NDA’s for indiplon, our product candidate for the treatment of insomnia.
However, these applications were not accepted by the FDA due to technical
difficulties in navigating the electronic filing and Neurocrine has indicated
that it intends to refile the applications in the first half of
2005. These
markets are insomnia, anxiety, pain, depression and angina and hypertension.
Competition in these markets includes the following drugs and pharmaceutical
companies:





***Insomnia
Market***





Indiplon,
our sleep promoting compound sublicensed to Neurocrine and Pfizer, will compete
in the sedative market. This market is dominated by Ambien, marketed by
Sanofi-Aventis, and Sonata, marketed by King Pharmaceuticals, Inc.
Sanofi-Aventis is following Ambien with a controlled-release formulation of the
same product (Ambien CR), which is now in registration with the FDA. Additionally,
in 2004, Sepracor received approval from the FDA for Lunesta (eszopiclone) for
the treatment of insomnia and has indicated that it will begin marketing the
product in 2005. Takeda Pharmaceuticals is developing Ramelteon, a melatonin
agonist, for insomnia, for which an NDA was filed in late 2004. H. Lundbeck A/S
and Merck are developing gaboxadol, a GABA A agonist,
for sleep disorders, which is currently in Phase III clinical
trials.





***Anxiety
Market***





Ocinaplon,
our compound for the treatment of anxiety, will compete in the anxiolytic
market, which includes the BDZs such as Valium, Xanax, lorazepam and
chlordiazepoxide. These drugs, together with BuSpar, marketed by Bristol-Myers
Squibb Company, and the SSRIs and SNRIs make up the majority of drug sales in
the treatment of anxiety.





***Pain
Market***





Bicifadine,
our compound for the treatment of pain, targets the analgesic market. A number
of pharmaceutical companies sell generic and branded narcotic and non-narcotic
prescription analgesics. In the narcotic section of this market, Oxycontin,
marketed by Purdue, Duragesic, marketed by Johnson & Johnson, and Actiq,
marketed by Cephalon, comprised approximately 61% of all non-injectible
narcotics sold in the United States in 2004 according to IMS reports. Ultram and
Ultracet, marketed by Johnson & Johnson, remained the dominant synthetic
non-narcotic analgesic in 2004, with approximately 21% of the market as defined
by IMS excluding the COX-2 inhibitors that are listed as a separate class. A
generic version of Ultram has been introduced to the market and has
significantly reduced sales of Ultram.





22


***Depression
Market***





DOV
216,303, DOV 21,947 and DOV 102,677 will target the antidepressant market, which
is dominated by SSRIs and SNRIs that comprise nearly 80% of the antidepressant
market. Significant market positions are held by Zoloft, marketed by Pfizer,
Effexor, marketed by Wyeth, Celexa and Lexapro, marketed by Forest Laboratories,
and Paxil, marketed by GlaxoSmithKline. Other drugs in this market include
Wellbutrin, marketed by GlaxoSmithKline, Prozac marketed by Eli Lilly and other
companies in generic form, as well as, generic tricyclics and tetracyclics.





***Angina
and Hypertension Markets***





DOV
diltiazem will compete in the chronic stable angina and hypertension markets.
Calcium channel blockers are used extensively in the treatment of both these
conditions. The diltiazem class of calcium channel blockers has demonstrated
efficacy in both conditions. Chronic stable angina remains the most prevalent
type of angina. Leading branded diltiazem products include Cardizem CD, marketed
by Biovail, Tiazac, marketed by Forest in the United States and Biovail
elsewhere in the world, and Cartia XT, a branded generic drug, marketed by
Andrx. In March 2003, Biovail launched Cardizem LA, a long-acting diltiazem
formulation intended for nighttime dosing in the treatment of hypertension and
angina, and has been the only diltiazem actively promoted in 2004, Cardizem LA
generated approximately 10% of the diltiazem sales in 2004.





**Employees**





As of
December 31, 2004, we had 52 employees, consisting of 50 full-time employees and
two part-time employees. Of the full-time employees, fifteen hold Ph.D., M.D. or
equivalent degrees. None of our employees is represented by a collective
bargaining arrangement, and we believe our 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 or 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. A formal,
three-day meeting is held off-site annually in the spring. We compensate 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. Since
1976, Dr. Cancro has been 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. 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.





23


**Morton
E. Goldberg, D.Sc.** is a
director of several biopharmaceutical companies, including Exocell, Inc.,
Procyon Pharmaceuticals, Inc. and Theragem, Inc. He is also a member
of the scientific advisory boards of Adolor Corporation, Arena
Pharmaceuticals, Inc., and InKine Pharmaceutical Company, Inc. From
1991 to 1996, Dr. Goldberg was Clinical Professor of Pharmacology and
Experimental Therapeutics in the Department of Pharmacology at the University of
Pennsylvania School of Medicine where he served as a liaison in development of
collaborative research programs between faculty and the pharmaceutical and
biotechnology industry. From 1984 to 1991, Dr. Goldberg served as Senior
Vice President of Research, Development and Regulatory Affairs at ICI
Pharmaceuticals Group and corporate vice president at ICI Americas, now
AstraZeneca PLC. From 1977 to 1984, he was Vice President of Biomedical
Research at ICI Pharmaceuticals Group. Previously, he was Director of
Pharmacology at the Squibb Institute for Medical Research and prior thereto,
Director of Pharmacodynamics at the Warner Lambert Research Institute.





**Larry
Stein, Ph.D.** is
professor and former chairman of the Department of Pharmacology and professor in
the Department of Psychiatry and Human Behavior at the University of California,
Irvine. In addition, he is Chief Scientific Officer, Corporate Affairs and
Initiatives in the University of California Irvine College of Medicine. From
1969 to 1979, Dr. Stein served as the head of the Psychopharmacology
Department at Wyeth Laboratories and adjunct professor in the Psychology
Department at Bryn Mawr College and in the Departments of Psychology and
Psychiatry at the University of Pennsylvania. Dr. Stein is a world renowned
neuropsychopharmacologist and has served as a consultant for several
pharmaceutical companies, including the Schering-Plough Corporation, American
Cyanamid, Syntex Laboratories, Inc. and CoCensys, Inc.





**David
H. Farb, Ph.D.** is a
molecular pharmacologist and neuroscientist and serves as professor and chairman
of the Department of Pharmacology and Experimental Therapeutics at Boston
University School of Medicine. He served previously as Professor of Anatomy and
Cell Biology and head of the Molecular Pharmacology Research Program at SUNY
Downstate Medical Center. Dr. Farb's accomplishments include selection as
the Fogarty Senior International Fellow at the Molecular Genetics Unit of the
Medical Research Council (Cambridge, UK), membership in the Harvey Society,
participation in the panel of Independent Assessors of the National Health and
Medical Research Council of the Commonwealth of Australia and service on the
Executive Committee at Boston University Medical School. Dr. Farb was
elected chair of the Section of Biological Sciences and founded the Section of
Neuroscience at the New York Academy of Sciences.





**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.





**Roger
Guillemin, M.D., Ph.D.** is a
Nobel Laureate and distinguished professor at The Salk Institute.
Dr. Guillemin received the Nobel Prize for his work on brain hormones,
which brought to light an entirely new class of hormones important in regulating
growth, development, reproduction and stress response. Drugs based upon these
molecules are used for the management or treatment of infertility, precocious
puberty, dwarfism, diabetes and prostate cancer. He has served on several
committees of the National Institutes of Health, as President of the Endocrine
Society and is a member of the National Academy of Science, and of several other
foreign academies.





**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
Internet website as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. Our Internet website and the
information contained therein or connected thereto are not intended to be
incorporated into this Annual Report on Form 10-K.





24





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





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





**Risks
Related to our Business**





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





Market
prices for securities of biopharmaceutical companies have been particularly
volatile. In
particular, our stock price experienced a substantial decline following our
initial public offering and has fluctuated between a high of $20.17 and a low of
$11.60 since January 1, 2004. Some of the factors that may cause the market
price of our common stock to fluctuate include:





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


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




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


·
    developments
      or disputes concerning patents or other proprietary
  rights;


·
    changes
      in estimates or recommendations by securities
analysts;


·
    public
      concern over our drugs;


·
    litigation;


·
    future
      sales of our common stock;


·
    general
      market conditions;


·
    changes
      in the structure of health care payment
systems;


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


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


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


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





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





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





25


***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, 2004, we have incurred significant
operating losses and, as of December 31, 2004, we had an accumulated deficit of
$100.3 million. We have not yet completed the development, including obtaining
regulatory approvals, of any product candidate and, consequently, have not
generated any revenues from the sale of products. Even if we succeed in
developing and commercializing one or more of our product candidates, we may
never achieve significant sales revenue and we expect to incur operating losses
for the foreseeable future. We also expect to continue to incur significant
operating expenses and capital expenditures and anticipate that our expenses
will increase substantially in the foreseeable future as we:





·
    conduct
      clinical trials;


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




·
    make
      milestone and royalty payments;


·
    seek
      regulatory approvals for our product
candidates;


·
    commercialize
      our product candidates, if approved;


·
    hire
      additional clinical, scientific and management
  personnel;


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


·
    identify
      additional compounds or product candidates and acquire rights from third
      parties to those compounds or product candidates through a grant of a
      license to us, referred to as
in-licensing.





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 six lead
product candidates.***





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





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





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


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


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


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





26


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




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




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





·
    patient
      recruitment may be slower than expected;
and


·
    patients
      may drop out of our clinical trials.





In
October 2003, the FDA placed the start of our Phase III clinical trial of
ocinaplon, our lead anti-anxiety product candidate, on hold and requested that
we produce additional safety information. We supplied this information to the
FDA and with FDA approval initiated
a Phase III clinical trial in the fourth quarter of 2004. Given the
uncertainty surrounding the regulatory and clinical trial process, we may not be
able to successfully advance the development of effective or safe, commercially
viable products including ocinaplon, or results from the pivotal clinical trial
for ocinaplon may lead the FDA to reinstate its clinical hold or to impose
requirements or conditions on clinical testing on the future clinical trial
program.





I f we are
unable to successfully develop and commercialize any of our product candidates,
this could severely harm our business, impair our ability to generate revenues
and adversely impact our stock price.





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





Regulation
by government authorities in the United States and foreign countries is a
significant factor in the development, manufacture and commercialization of our
product candidates and in our ongoing research and development activities. Our
partner, Neurocrine, in the
fourth quarter of 2004 filed two NDAs, the first for an IR formulation and the
second for a MR formulation of indiplon for the treatment of insomnia. However,
Neurocrine has announced that these applications were not accepted by the FDA
and that it intends to refile the applications in the first half of
2005. All our
other product candidates are in various stages of research and development and
we have not yet requested or received regulatory approval to commercialize any
product candidate from the FDA or any other regulatory body .





In
particular, human therapeutic products are subject to rigorous preclinical
testing, clinical trials and other approval procedures of the FDA and similar
regulatory authorities in foreign countries. The FDA regulates, among other
things, the development, testing, manufacture, safety, efficacy, record keeping,
labeling, storage, approval, advertising, promotion, sale and distribution of
biopharmaceutical products. Securing FDA approval requires the submission of
extensive preclinical and clinical data and supporting information to the FDA
for each therapeutic indication to establish the product candidate’s safety and
efficacy. The approval process may take many years to complete. Additionally,
even after receipt of FDA approval, the FDA may request additional clinical
trials to evaluate any adverse reactions or long-term effects. The scope and
expense of such post-approval trials could be extensive and costly to us. Any
FDA or other regulatory approval of our product candidates, once obtained, may
be withdrawn. If our product candidates are marketed abroad, they will also be
subject to extensive regulation by foreign governments.





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





27


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.




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




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





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





***We
rely entirely on the efforts of Neurocrine and Pfizer and Merck for the
development, design and implementation of clinical trials, regulatory approval
and commercialization of indiplon and our depression candidates, DOV 216,303 and
DOV 21,947.***





In 1998,
we sublicensed indiplon to Neurocrine without retaining any material rights
other than the right to receive milestone payments and royalties on product
sales, if any. In December 2002, Neurocrine entered into a development and
commercialization agreement with Pfizer for indiplon. In 2004,
we sublicensed DOV 216,303 for certain indications and DOV 21,947 for all
indications to Merck without retaining any material rights other than our
participation in the ongoing clinical plan collaboration, the right to receive
milestone payments and royalties on product sales, if any, and co-promotion. The
clinical development, design and implementation of clinical trials, the
preparation of filings for FDA approval and, if approved, the subsequent
commercialization of these product candidates, and all other matters relating to
indiplon, are entirely within the control of our partners. We will have no
control over the process and, as a result, our ability to receive any revenue
from these product candidates is entirely dependent on the success of their
efforts. Our partners may fail or otherwise decide not, or otherwise not have
the ability, to devote the resources necessary to successfully develop and
commercialize the product candidates, which would impair our ability to receive
milestone or royalty payments, if any, in respect of the product
candidates.





28


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





Our
efforts to develop, obtain regulatory approval for and commercialize our
existing and any future product candidates depend in part upon the performance
of our licensees and collaborative partners. Currently, we have license and
collaborative agreements with Merck, Neurocrine, Pfizer and Wyeth. Neurocrine
has entered into a development and commercialization agreement with Pfizer
involving a further sublicense under our agreement with Neurocrine. In
connection with certain of these agreements, we have granted certain rights,
including development and marketing rights and rights to defend and enforce our
intellectual property. We do not have day-to-day control over the activities of
our licensees or collaborative partners and cannot assure you that they will
fulfill their obligations to us, including their development and
commercialization responsibilities in respect of our product candidates. 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, changes in business
strategy or other business issues, or that they will not acquire or develop
rights to competing products, all of which could adversely affect their
willingness or ability to fulfill their obligations to us.




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




Any
failure on the part of our licensees or collaborators to perform or satisfy
their obligations to us could lead to delays in the development or
commercialization of our product candidates and affect our ability to realize
product revenues. Disagreements with our licensees or collaborators could
require or result in litigation or arbitration, which could be time-consuming
and expensive. If we 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.





***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 with 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.





29


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





At
December 31, 2004, we had cash and cash equivalents and marketable securities of
$132.2 million. We currently have no commitments or arrangements for any
financing. We believe that our existing cash, cash equivalents and marketable
securities will be sufficient to fund our anticipated operating expenses, debt
obligations and capital requirements until at least mid-2006. We believe that we
may require additional funding to continue our research and development
programs, including preclinical testing and clinical trials of our product
candidates, for operating expenses and to pursue regulatory approvals for our
product candidates. We may continue to seek additional capital through public or
private financing or collaborative agreements. If adequate funds are not
available to us as we need them, we may be required to curtail significantly or
eliminate at least temporarily one or more of our product development
programs.





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





In December
2004 and January 2005 , we sold
$ 80.0 million
aggregate principal amount of 2.5 %
subordinated convertible
debentures due in January
2025 . Our
annual debt service obligation on these debentures is $ 2.0 million. The
holders of the debentures may require us to purchase all or a portion of their
debentures on January 15, 2012, January 15, 2015 and January 15,
2020 . If we
issue other debt securities in the future, our debt service obligations may
increase further.





We intend
to fulfill our debt service obligations from our existing cash , cash
equivalents and marketable securities . In the
future, if the
holders require us to purchase all or a portion of their debentures and we are
unable to generate cash or raise additional cash through financings sufficient
to meet these obligations, we may have to delay or curtail research, development
and commercialization programs.





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





We are
dependent on the members of our senior management team, in particular, our Chief
Executive Officer and President, Dr. Arnold Lippa, our Senior Vice President and
Chief Scientific Officer, Dr. Phil Skolnick, and our Senior Vice President, Drug
Development, Dr. Warren Stern, for our business success. Moreover, because of
the specialized scientific and technical nature of our business, we are also
highly dependent upon our scientific staff, the members of our scientific
advisory board and our continued ability to attract and retain qualified
scientific, technical and business development personnel. Dr. Lippa holds a
substantial amount of vested common stock not subject to repurchase in the event
of termination. We do not carry key man life insurance on the lives of any of
our key personnel. There is intense competition for human resources, including
management in the scientific fields in which we operate and there can be no
assurance that we will be able to attract and retain qualified personnel
necessary for the successful development of our product candidates, and any
expansion into areas and activities requiring additional expertise. In addition,
there can be no assurance that such personnel or resources will be available
when needed. The loss of the services of Drs. Lippa, Skolnick or Stern, or other
key personnel, could severely harm our business if a
replacement possessing a similar level of expertise cannot be retained or if the
key person’s responsibilities cannot be assumed by existing
employees .





30


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





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





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





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





***We
intend to pursue a rapid growth strategy, which could give rise to difficulties
in managing and successfully implementing such
growth.***





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





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





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





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





31


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





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





**Risks
Related to our Industry**





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





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





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





·
    capital
      resources;





·
    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.





32





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





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





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





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





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





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





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





In
addition, although we own or otherwise have certain rights to a number of
patents and patent applications, the issuance of a patent is not conclusive as
to its validity or enforceability, and third parties may challenge the validity
or enforceability of our patents or the patents of our collaborators or
licensees. We cannot assure you how much protection, if any, will be given to
our patents if we attempt to enforce them or if they are challenged in court or
in other proceedings. It is possible that a competitor may successfully
challenge our patents, or the patents of our collaborators or licensees, or that
challenges will result in elimination of patent claims and therefore limitations
of coverage. Moreover, competitors may infringe our patents, the patents of our
collaborators or licensees, or successfully avoid them through design
innovation. To prevent infringement or unauthorized use, we may need to file
infringement claims, which are expensive and time-consuming. In addition, in an
infringement proceeding, a court may decide that a patent of ours is not valid
or is unenforceable, or may refuse to stop the other party from using the
technology at issue on the ground that our patents do not cover its technology.
In addition, interference proceedings brought by the USPTO 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.








33





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





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





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





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





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





·
    safe,
      effective and medically necessary;





·
    appropriate
      for the specific patient;





·
    cost-effective;
      and





·
    neither
      experimental nor investigational.





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





34


***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, 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 $3.0 million per occurrence and $3.0 million in the aggregate. Our
insurance coverage, however, may not reimburse us or may not be sufficient to
reimburse us for any expenses or losses we may suffer. Moreover, insurance
coverage is becoming increasingly expensive, and we may not be able to maintain
insurance coverage at a reasonable cost or in sufficient amounts to protect us
against losses due to liability. We intend to expand our insurance coverage to
include the sale of commercial products if we obtain marketing approval for our
product candidates in development, but we may be unable to obtain commercially
reasonable product liability insurance for any products approved for marketing.
On occasion, large judgments have been awarded in class action lawsuits based on
drugs that had unanticipated side effects. A successful product liability claim
or series of claims brought against us would decrease our cash and could cause
our stock price to fall.





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





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





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





We
currently lease and occupy approximately 18,985 square feet in our executive
offices located in Hackensack, New Jersey. Our lease will expire if not renewed
in June 2008.





**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.








35





**PART
II**





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





Our
common stock is traded on the Nasdaq National Market under the symbol
DOVP.





The
following table sets forth the high and low sales prices for our common stock,
as quoted on the Nasdaq National Market, for each quarter since our initial
public offering on April 24, 2002. The purchase price to underwriters on that
date was $13.00.





**Year
      2002**
    
    **High**
    
    **Low**Second
      Quarter (since April 25, 2002)
    
    $
    12.00
    
    $
    3.89Third
      Quarter
    
    
    4.67
    
    
    3.29Fourth
      Quarter
    
    
    7.30
    
    
    3.70**Year
      2003**First
      Quarter
    
    $
    6.90
    
    $
    5.10Second
      Quarter
    
    
    11.75
    
    
    5.64Third
      Quarter
    
    
    18.78
    
    
    10.59Fourth
      Quarter
    
    
    17.95
    
    
    9.01**Year
      2004**First
      Quarter
    
    $
    17.97
    
    $
    12.26Second
      Quarter
    
    
    20.17
    
    
    11.60Third
      Quarter
    
    
    17.16
    
    
    12.66Fourth
      Quarter
    
    
    19.82
    
    
    16.05**Year
      2005**First
      Quarter (through March 8, 2005)
    
    $
    18.40
    
    $
    13.14





As of
December 31, 2004, there were approximately 12 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.





36


**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, 2000, 2001, 2002, 2003 and 2004. The statement of operations
data for the years ended December 31, 2002, 2003 and 2004, and the balance
sheet data at December 31, 2003 and 2004, 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, 2000, 2001 and 2002 and the statements of
operations data for the year ended December 31, 2000 and 2001, have been derived
from our audited financial statements not included in this Form 10-K.





**Years
      Ended December 31,****2000**
    
    **2001**
    
    **2002**
    
    **2003**
    
    **2004****Statement
      of Operations Data:**
    
    **(in
      thousands, except per share data)**Revenue
    
    $
    —
    
    $
    5,711
    
    $
    2,390
    
    $
    2,969
    
    $
    2,542Operating
      expenses:License
      expense
    
    
    —
    
    
    1,111
    
    
    —
    
    
    1,000
    
    
    2,500Research
      and development expense
    
    
    2,640
    
    
    5,525
    
    
    10,311
    
    
    22,684
    
    
    24,764General
      and administrative expense
    
    
    1,348
    
    
    2,343
    
    
    3,903
    
    
    5,173
    
    
    6,360Loss
      from operations
    
    
    (3,988
    )
    
    (3,268
    )
    
    (11,824
    )
    
    (25,888
    )
    
    (31,082
    )Loss
      in investment in DOV Bermuda
    
    
    (1,318
    )
    
    (1,434
    )
    
    (1,017
    )
    
    —
    
    
    —Interest
      income
    
    
    223
    
    
    366
    
    
    1,067
    
    
    851
    
    
    934Interest
      expense
    
    
    (852
    )
    
    (1,491
    )
    
    (2,017
    )
    
    (2,947
    )
    
    (2,954
    )Other
      income (expense), net
    
    
    —
    
    
    423
    
    
    (3,029
    )
    
    1,104
    
    
    (8
    )Net
      loss before tax
    
    
    (5,935
    )
    
    (5,404
    )
    
    (16,820
    )
    
    (26,880
    )
    
    (33,110
    )Income
      tax benefit
    
    
    —
    
    
    —
    
    
    —
    
    
    149
    
    
    189Net
      loss
    
    
    (5,935
    )
    
    (5,404
    )
    
    (16,820
    )
    
    (26,731
    )
    
    (32,921
    )Deemed
      dividend on issuance of series C preferred
    
    
    (49
    )
    
    —
    
    
    —
    
    
    —
    
    
    —Deemed
      dividend on issuance of series D preferred
    
    
    —
    
    
    (97
    )
    
    —
    
    
    —
    
    
    —Net
      loss attributable to common stockholders
    
    $
    (5,984
    )
    $
    (5,501
    )
    $
    (16,820
    )
    $
    (26,731
    )
    $
    (32,921
    )Basic
      and diluted net loss per share
    
    $
    (1.23
    )
    $
    (1.12
    )
    $
    (1.47
    )
    $
    (1.73
    )
    $
    (1.67
    )Weighted
      average shares used in computing basic and diluted net loss per
      share
    
    
    4,877,496
    
    
    4,894,138
    
    
    11,440,731
    
    
    15,489,426
    
    
    19,729,765





**As
      of December 31,****2000**
    
    **2001**
    
    **2002**
    
    **2003**
    
    **2004****Balance
      Sheet Data:**
    
    **(in
      thousands)**Cash
      and cash equivalents and marketable securities
    
    $
    4,338
    
    $
    13,652
    
    $
    60,346
    
    $
    52,162
    
    $
    132,222Working
      capital(1)
    
    
    3,237
    
    
    11,831
    
    
    54,114
    
    
    46,516
    
    
    91,334Total
      assets
    
    
    5,550
    
    
    18,080
    
    
    66,150
    
    
    53,852
    
    
    136,723Long-term
      debt
    
    
    11,866
    
    
    12,796
    
    
    13,800
    
    
    14,886
    
    
    65,000Redeemable
      preferred stock
    
    
    6,021
    
    
    14,838
    
    
    —
    
    
    —
    
    
    —Accumulated
      deficit
    
    
    (18,440
    )
    
    (23,845
    )
    
    (40,665
    )
    
    (67,396
    )
    
    (100,317
    )Total
      stockholders' (deficit) equity
    
    
    (14,022
    )
    
    (18,036
    )
    
    40,759
    
    
    35,905
    
    
    27,936


(1)
Represents current assets less current liabilities .





37





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





**Executive
Overview**





We are a
biopharmaceutical company focused on the discovery, in-licensing, development
and commercialization of novel drug candidates for central nervous system, or
CNS and other disorders, including cardiovascular, that involve alterations in
neuronal processing. In 1998, we licensed four of our product candidates from
Wyeth: indiplon, for the treatment of insomnia, bicifadine, for the treatment of
pain, ocinaplon, for the treatment of anxiety, and DOV 216,303, for the
treatment of depression and other indications.





We
sublicensed the worldwide
development and commercialization of indiplon
to Neurocrine in 1998 in exchange for the right to receive payments upon the
achievement of certain clinical development milestones and royalties based on
product sales, if any. Neurocrine subsequently entered into a worldwide
development and commercialization agreement with Pfizer for indiplon. On August
5, 2004, we entered into an agreement with Merck for the worldwide development
and commercialization of all indications for DOV 21,947 and certain indications
for DOV 216,303 in
exchange for a $35.0 million up-front payment and the right to receive further
payments of up to $420.0 million upon the achievement of certain milestones and
royalties based on product net sales, if any. The up-front payment has been
deferred and is being amortized to revenue over the estimated research and
development period of 51 months. The time period of the development period is a
significant estimate used in the preparation of our financial statements and is
subject to Merck developing the compound in accordance with the last estimated
development schedule presented by Merck. As such this development period
estimate may fluctuate from period to period and this fluctuation might be
significant. For
example, if as of January 1, 2005 we were to increase by 10% the estimated
development period, we would
record approximately $749,000 less of revenue in 2005. Future
milestone payments, if any, will also be recorded over the remaining term of the
collaboration. In 2004, we received a $2.0 million milestone payment from
Neurocrine for the NDA filing for indiplon. However, because Neurocrine has
reported that the NDA filing was not accepted by the FDA and our agreement with
Neurocrine indicates that the $2.0 million milestone is earned once an NDA has
been submitted according to certain FDA regulations, we will not record this
payment as revenue until such time that a NDA has been filed and accepted by the
FDA.





Since our
inception, we have incurred significant operating losses and we expect to do so
for the foreseeable future. As of December 31, 2004, we had an accumulated
deficit of $100.3 million. We have depended upon equity and debt financings and
license fee and milestone payments from our collaborative partners and licensees
to fund our research and product development programs and expect to do so for
the foreseeable future.





We have a
relatively limited history of operations and anticipate that our quarterly
results of operations will fluctuate for several reasons, including the timing
and extent of research and development efforts, the timing and extent of adding
new employees and infrastructure, the timing of milestone, license fee and
royalty payments and the timing and outcome of regulatory approvals.





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





38


Our
operating expenses consist primarily of license expense, costs associated with
research and development and general and administrative costs associated with
our operations. License expense consists of milestone payments associated with
our license agreement with Wyeth and license fees paid in connection with the termination
of the 2001 Biovail agreement. Research
and development expense consists primarily of compensation and other related
costs of our personnel dedicated to research and development activities,
clinical and preclinical trial expenses, including toxicology studies, costs of
manufacturing clinical and preclinical trial materials and preclinical studies,
and professional fees related to clinical trials. Research and development
expense also includes our expenses related to development activities of Nascime
Limited, our wholly-owned subsidiary. General and administrative expense
consists primarily of the costs of our senior management, finance and
administrative staff, business insurance, professional fees and costs associated
with being a public reporting entity.





We expect
research and development expense to increase substantially in the foreseeable
future. We have recently initiated three Phase III clinical trials for bicifadine, a Phase
III clinical trial for ocinaplon and a Phase I clinical trial for DOV 102,677.
In 2005, we intend to initiate four pivotal efficacy clinical trials, two Phase
II clinical trials and six additional Phase I clinical trials for bicifadine,
two additional Phase I clinical trials and a Phase II clinical trial for DOV
102,677 and a Phase I clinical trial for DOV 51,892. In addition, we intend to
continue the clinical development of DOV 216,303 for retained indications, that
is, other than depression, anxiety and substance abuse. We also expect to
increase our expenditures in fortifying our patent portfolio for each of our
lead product candidates.





It is not
unusual for the clinical development of these types of products to each take
five to ten years or more, and for total development costs for each to exceed
$75 million. We are not responsible financially for the clinical program
for indiplon or for DOV 21,947, and we are unable to estimate the amount of
expenditures necessary to complete any of such product candidate’s development.
As of December 31, 2004, we have spent approximately $23.2 million and $21.5
million on the development of bicifadine and ocinaplon, respectively, in
connection with their clinical development programs. Additionally, we have
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, 2004, we have
incurred approximately $3.4 million, $1.7 million and $1.1 million in
development expenses for DOV 216,303, DOV 102,677 and DOV 51,892, respectively.





We expect
that the development of our six 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.




In
January 1999, Elan
loaned us $8.0 million in the form of a 7% convertible promissory note to
fund our investment in DOV Bermuda. In May 2004, Elan converted the entire
outstanding principal and accrued interest of this note totaling $11.6 million
on that date into 2,907,162 shares of our common stock. Elan agreed, in January
1999, to lend us up to $7.0 million to fund our pro rata share of research
and development funding in DOV Bermuda. For this purpose, we issued to Elan a
convertible line of credit promissory note that bears interest at 10% per annum
compounded semi-annually on the amount outstanding. This convertible line of
credit promissory note was sold to an institutional holder during 2004 and upon
maturity on January 20, 2005, was converted into 1,180,246 shares of our
common stock. Please
refer to note 6 of our financial statements under Part II, Item 8 of this
Form 10-K.




During
2002 and 2003, we granted options and warrants to outside consultants at fair
value on the date of grant in exchange for future services. These options and
warrants are required to be accounted for in accordance with Statement of
Financial Accounting Standards, or SFAS 123 "Accounting for Stock Based
Compensation" and EITF 96-18 "Accounting for Equity Instruments that are Issued
to other than Employees for Acquiring, or in Conjunction with Selling Goods or
Services" and at the fair value of the consideration received, or the fair value
of the equity instrument issued, whichever may be more readily measured. As the
performance of services is completed, we revalue the options and warrants that
have been earned during the period. We valued these securities at the fair value
using a Black-Scholes methodology. During 2002, 2003 and 2004, in connection
with the grant of these stock options and warrants to outside consultants, we
recorded expenses totaling $233,000, $694,000 and $315,000 respectively. We may
be required to record additional expense on a quarterly basis based upon
increases in the fair value of our common stock. Please refer to note 9 of
our financial statements, “Stock Option Plans - Non-Employee Options and
Warrants,” included under Part II, Item 8 of this Form 10-K.





39


**Results
of Operations**





*Years
Ended December 31, 2004 and 2003*





*Revenue.* Revenue
decreased $426,000 to $2.5 million from $3.0 million in 2003. In 2004, our
revenue was comprised of $2.4 million 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 and $140,000 of contract services revenue
associated with work we performed under the collaboration. The up-front payment
has been deferred and is being amortized to revenue over the estimated research
and development period of 51 months. In 2003, revenue was comprised solely of
the recognition of $3.0 million of deferred revenue from the Biovail agreement
as described below.





On
March 28, 2003 we entered into a separation agreement with Biovail that
provided for the return of our December 2000 patent for the immediate and
controlled release formulation of diltiazem and termination of the 2001
exclusive license agreement with Biovail for development of the DOV compound for
the treatment of angina and hypertension. As the
separation agreement ends our performance obligations, we recognized the
remaining deferred revenue, totaling $3.0 million as of December 31,
2002, as revenue in the first quarter of 2003. Going forward, we will not record
any additional revenue from Biovail for this product candidate.





*License
Expense.*  ** License
expense increased $1.5 million to $2.5 million in 2004 from $1.0 million in
2003. 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. In connection with the termination
in 2003 of the 2001 Biovail agreement and the return of the patent as described
below, we agreed to a $1.0 million payment to Biovail upon signing. This
payment was to obtain the patent and related clinical data from Biovail. As this
product will require FDA approval prior to marketing and the patent has no
alternative future use, we expensed the entire license fee in 2003.





In
January 2001, Biovail and we entered into a license, research and
development agreement to develop, manufacture and market DOV diltiazem for the
treatment of angina and hypertension. Through January 2003, DOV diltiazem
was being jointly developed through the collaborative arrangement. In March
2003, we entered into a separation agreement with Biovail that provided for the
return of our December 2000 patent for the immediate release and controlled
release formulations of diltiazem and termination of the 2001 exclusive license
agreement with Biovail for the development of DOV diltiazem.


**


*Research
and Development Expense.* Research
and development expense increased $2.1 million to $24.8 million in 2004 from
$22.7 million in 2003. However, in 2003, research and development expense
included $5.3 million for the purchase of the remaining interest in bicifadine
and ocinaplon discussed below. Therefore the overall relative increase was
approximately $7.4 million of which approximately $5.7 million of the increase
was attributable to increased costs associated with the clinical development for
bicifadine, including an increase of $3.5 million in manufacturing and packaging
related costs and $1.1 million in toxicology costs, and $1.2 million in clinical
trial expenditures. In addition we increased our expenditures on two of our
preclinical compounds in preparation for moving these two compounds into
clinical trials in 2005. For DOV 102,677 we increased our expenditures by $1.7
million and for DOV 51,892 by $1.1 million. We increased our expenditures on DOV
21,947 by $636,000, however as this compound has now been licensed to Merck we
do not expect to incur additional expenditures in relation to this compound. As
a result of the prolonged clinical trial hold for ocinaplon, we decreased our
expenditures on this compound in 2004 by $3.1 million and also had a decrease in
costs for DOV 216,303 of $229,000. These decreases were offset by an increase in
expenditures for DOV diltiazem of $335,000 and in our general preclinical and
research and development program of $433,000. The remaining increase in research
and development expense was attributable to an increase in costs associated with
payroll and overhead allocated of $1.1 million offset by a decrease in
professional fees including consulting and medical writing of $332,000. Non-cash
compensation expense for consultants and employees decreased
$386,000.




40


In the
fourth quarter of 2003 we paid $5.0 million for the purchase of Elan’s interest
in Nascime
Limited and the joint venture product candidates, bicifadine and ocinaplon, and
$306,000 for transfer taxes associated with the acquisition. The purchase
relates to early stage technology that, in our opinion, has not yet reached
technological feasibility, since the products will ultimately require regulatory
approval prior to commercialization. Therefore, the $5.3 million purchase
price was expensed as in-process research and development in the fourth quarter
of 2003.




*General
and Administrative Expense.* General
and administrative expense increased $1.2 million to $6.4 million in 2004 from
$5.2 million in 2003. The increase was primarily attributable to increased
office and related expenses of $293,000, increased professional fees of
$292,000, and increased payroll related costs associated with our increase in
personnel of $602,000. The increase in office and related expenses was primarily
related to an increase in directors’ and officers’ insurance of $104,000, fees
and permits of $95,000, travel and entertainment expense of $74,000 and rent
expense of $29,000. The increase in professional fees was primarily related to
an increase in accounting fees of $320,000 and an increase in recruitment fees
of $114,000, offset by a reduction in legal expenses of $144,000. The increase
in payroll costs was primarily attributable to an increase in salaries of
$779,000 and an increase in payroll overhead of $55,000 offset by a decrease in
non-cash compensation expense for consultants and employees of $254,000.





*Interest
Income.* Interest
income increased $83,000 to $934,000 from $851,000 in 2003 primarily due to the
increase in average interest rates over the period.





*Interest
Expense.* Interest
expense remained relatively unchanged as we recorded $3.0 million in 2004 and
$2.9 million in 2003. In May
2004, the holder of the convertible promissory note converted the outstanding
principal and accrued interest totaling $11.6 million into 2,907,162 shares of
our common stock, thus reducing the contractual interest expense recorded in
2004 by $432,000 from 2003. We
recorded contractual interest expense of $372,000 on our convertible line of
credit promissory note in 2004 and $337,000 in the comparable period in 2003.
Both the convertible promissory note and convertible line of credit promissory
note contained interest payable either in cash or common stock at the holder's
option. In accordance with EITF 00-27, we evaluate this conversion feature each
time interest is accrued to the notes. This feature resulted in additional
interest expense of $2.2 million in 2004 a net increase of $368,000 from 2003,
due primarily to the increase in the fair value of our common stock offset by
the reduction due to the conversion of the convertible promissory note. On
January 20, 2005, the convertible line of credit promissory note was converted
into 1,180,246 shares of our common stock.





*Other
Income (Expense), net*. Other income (expense), net decreased $1.1 million
to $8,000 in other expense, net in 2004 from $1.1 million in other income, net
in 2003. In 2003, other income, net, consisted primarily of the $1.6 million in
other income attributable to the directors’ and officers’ insurance recovery
discussed below, offset by a decrease in the value of warrants to acquire
Neurocrine common stock of $251,000 and loss on sale of securities of $191,000. 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. In
connection with the settlement, we reached an agreement with the primary carrier
of our directors' and officers' liability insurance policy. In that regard, our insurance carrier paid
$1.6 million to us in settlement of the shareholder class action
lawsuits.





41




*Income
Tax Benefit* . 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. As a
result, taxable income and recorded state tax expense for the third quarter of
2004 was $679,000. We have since completed our review of taxable income for the
year ended December 31, 2004 and determined that although we have generated
taxable income in 2004, as a result of a change in tax strategy, it is less than
has been estimated as of September 30, 2004. Thus, we
revised income tax expense to $101,000 in the fourth quarter which resulted in a
tax benefit of $578,000 for the fourth quarter of 2004. The
income tax expense was offset by a $290,000 income tax benefit as 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. In 2003, we sold a portion of our New Jersey net operating loss as part
of the program, thus recognized a income tax benefit of $149,000.







***Years
Ended December 31, 2003 and 2002***





*Revenue.* Revenue
increased $579,000 to $3.0 million from $2.4 million in 2002. In 2003, revenue
was comprised solely of the recognition of $3.0 million of deferred revenue from
the Biovail agreement as described below. In 2002, our revenue was primarily
comprised of $2.2 million in amortization of the $7.5 million fee we received on
signing of the license, research and development agreement for our collaboration
with Biovail in January 2001.





On
March 28, 2003 we entered into a separation agreement with Biovail that
provided for the return of our December 2000 patent for the immediate and
controlled release formulation of diltiazem and termination of the 2001
exclusive license agreement with Biovail for development of the DOV compound for
the treatment of angina and hypertension. As the separation agreement ends our
performance obligations, we recognized the remaining deferred revenue, totaling
$3.0 million as of December 31, 2002, as revenue in the first quarter
of 2003. Going forward, we will not record any additional revenue from Biovail
for this product candidate.





*Royalty
and Licensing Expense.* In
connection with the termination
of the 2001 Biovail agreement and the return of the patent as described above,
we agreed to a $1.0 million payment to Biovail upon signing. This payment
was to obtain the patent and related clinical data from Biovail. As this product
will require FDA approval prior to marketing and the patent has no alternative
future use, we expensed the entire license fee. Thus in the first quarter of
2003, we recorded an expense of $1.0 million. There was no such expense in the
comparable period in 2002.




*Research
and Development Expense.* Research
and development expense for 2003 includes 100% of the research and development
expenses of DOV Bermuda as we are now consolidating the results of DOV Bermuda
effective January 1, 2003. Research and development expense increased $12.4
million to $22.7 million for 2003 from $10.3 million in 2002. Approximately $4.8
million of the increase in research and development expense was attributable to
increased costs associated with the clinical development for ocinaplon and
bicifadine, including an increase of $2.5 million in manufacturing and packaging
related costs, $1.7 million in toxicology costs and $564,000 in clinical trial
costs. In addition, in the fourth quarter of 2003 we paid $5.0 million for the
purchase of Nascime
Limited and the product candidates, bicifadine and ocinaplon, and $306,000 for
transfer taxes associated with the acquisition. As the purchase relates to early
stage technology that, in our opinion, has not yet reached technological
feasibility, as the products will ultimately require regulatory approval prior
to commercialization, the $5.3 million purchase price was expensed as
in-process research and development in the fourth quarter of 2003. Approximately
$474,000 of the increase in research and development expense was attributable to
net increased costs related to additional clinical development for our other
compounds including DOV 21,947 of $216,000, DOV diltiazem of $176,000, and
preclinical compounds of $125,000 offset by a decrease in costs for DOV 216,303
of $42,000. The remaining increase in research and development expense was
attributable to an increase in costs associated with payroll and overhead
allocated of $1.2 million, an increase in professional fees including consulting
and medical writing of $561,000 and an increase in travel related expenses of
$97,000. Non-cash compensation expense increased $234,000.





42


*General
and Administrative Expense.* General
and administrative expense for 2003 includes 100% of the general and
administrative expenses of DOV Bermuda as we are now consolidating the results
of DOV Bermuda effective January 1, 2003. General and administrative expense
increased $1.3 million to $5.2 million in 2003 from $3.9 million in 2002. The
increase was primarily attributable to increased office and related expenses of
$780,000, increased professional fees of $329,000, and increased payroll related
costs associated with our increase in personnel of $162,000. The increase in
office and related expenses was primarily related to an increase in directors’
and officers’ insurance of $374,000, an increase in costs related to operating a
public company of $167,000, an increase in amortization and depreciation expense
of $95,000, an increase in travel and entertainment expense of $75,000, an
increase in rent expense of $44,000, and an increase of $25,000 as we expanded
operations. The increase in professional fees was primarily related to an
increase in accounting fees of $154,000, an increase in recruitment fees of
$159,000, and an increase in consulting fees of $51,000, offset by a decrease in
legal expenses of $34,000. The increase in payroll costs was primarily
attributable to an increase in salaries of $494,000 and an increase in payroll
overhead of $134,000, offset by a decrease in bonuses of $260,000 and a decrease
in non-cash compensation expense of $206,000.





*Loss
in Investment in DOV Bermuda.* In 2002,
loss in investment in DOV Bermuda represented our 80.1% of the expenses of DOV
Bermuda related to Elan’s formulation work for the joint venture products and
administrative expenses. As we are now consolidating the results of DOV Bermuda,
all such expenses are now recorded in research and development expense and
general and administrative expense.





*Interest
Income.* Interest
income decreased $216,000 to $851,000 in 2003 from $1.1 million in 2002. The
increase was due to lower average cash balances offset by the fact that cash
proceeds from the initial public offering earned interest for eight months in
2002 versus twelve months in 2003.





*Interest
Expense.* Interest
expense increased $930,000 to $2.9 million in 2003 from $2.0 million in 2002.
Both the Elan convertible promissory note and convertible line of credit
promissory note contain interest that will be paid, at Elan’s option, either in
cash or our common stock. In accordance with EITF 00-27, we evaluate this
conversion feature each time interest is accrued on the notes. This feature
resulted in interest expense of $1.9 million in 2003, an increase of $846,000
from 2002, due primarily to the increase in the fair value of our common stock.
To the extent the value of our common stock is at or above $3.98 per share with
respect to the convertible promissory note or $3.41 per share with respect to
the convertible line of credit promissory note, we will continue to incur
additional interest expense each time interest is accrued on the notes. This
increase was accompanied by higher interest expense recorded due to higher
outstanding balances, owing to accrued interest on the convertible promissory
note and the convertible line of credit promissory note.





*Other
Income (Expense), net*. Other income (expense), net decreased $4.1 million
to $1.1 million in net income in 2003 from $3.0 million of other expense, net in
2002. In 2003, other income, net, consisted primarily of the $1.6 million in
other income attributable to the directors’ and officers’ insurance recovery
discussed below, offset by a decrease in the value of warrants to acquire
Neurocrine common stock of $251,000 and loss on sale of securities of $191,000. 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, in 2003 we 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 in June 2003, the value of the warrants was
determined to be $2.2 million. In connection with the settlement, we reached an
agreement with the primary carrier of our directors' and officers' liability insurance policy. In that regard, our insurance carrier paid
$1.6 million to us in settlement of the shareholder class action
lawsuits. In 2002,
other income (expense), net consisted primarily of $2.5 million for settlement
of the securities class action lawsuit discussed above and $501,000 of expense
associated with the net decrease in the value of the warrants to acquire
Neurocrine common stock, which we earned in 2001 upon the achievement of a
certain milestone offset by the corresponding decrease in the liability to
Wyeth.





43


*Income
Tax Benefit.* In 2003,
we sold a portion of our New Jersey net operating loss as part of the New Jersey
Economic Development Authority technology business tax certificate program. We
recognized no such benefit in 2002.





**Liquidity
and Capital Resources**





For the
three years ended December 31, 2002, 2003 and 2004, we funded our operations
principally from sales of our equity and debt securities and license revenues.
At December 31, 2004, our cash and cash equivalents and marketable securities
totaled $132.2 million compared with $52.2 million at December 31, 2003. At
December 31, 2004, we had working capital of $91.3 million. In
January 2005, we
completed the issuance of an additional $15.0 million aggregate principal amount
of the Company's 2.50% convertible subordinated debentures due 2025.





Net cash
provided by operations during the year ended December 31, 2004 amounted to $7.8
million, as compared to net cash used in operations of $18.7 million in 2003.
The increase in cash provided in operations resulted primarily from
the up-front
licensing payment of $35.0 million discussed above offset by an increase
in clinical development activities and increases in compensation expense. Net cash
provided by operations benefited from an increase in accounts payable and
accrued liabilities of $4.1 million due to an increase in volume and timing of
payments. Non-cash
expenses related to stock-based compensation, interest expense and depreciation
and amortization expenses were $3.5 million, $4.2 million and $3.1 million in
the years ended December 31, 2004, 2003 and 2002, respectively. Non-cash
amortization of premium paid on marketable securities and depreciation in the
value of investments was $909,000, $1.4 million and $501,000, net in the years
ended December 31, 2004, 2003 and 2002, respectively.





Net cash
used in investing activities during the year ended December 31, 2004 was $61.9
million compared to $7.8 million for the comparable period in 2003. This
fluctuation resulted primarily from the timing differences in investment
purchases, sales and maturities and the fluctuations in our portfolio mix
between cash equivalents and short-term investment holdings. We expect similar
fluctuations to continue in future periods.





Net cash
provided by financing activities during the period ended December 31, 2004 was
$73.7 million as compared to $16.5 million in the comparable period in 2003.
This increase was primarily due to
net proceeds of $62.6 million from the issuance of $65.0 million of 2.5%
subordinated convertible debentures in December 2004  and $10.0
million from the sale of our common stock to an institutional investor in March
2004. In the period ended December 31, 2003, we generated $14.8 million from the
sale of our common stock to a group of funds led by OrbiMed Advisors, LLC in
July 2003.






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 mid-2006. Our convertible line of credit promissory note matured
on January 20, 2005, at which time the principal amount and unpaid accrued
interest was converted into 1,180,246 shares of common stock. Our
future capital uses and requirements depend on numerous factors, including:







·
    our
      progress with research and development;





·
    our
      ability to establish, and the scope of, any new collaborations;





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





44


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





·
    the
      costs and timing of regulatory approvals; and





·
    the
      note holders choice of having the notes repaid in cash or converting the
      notes into our common stock.





In
addition to the foregoing, our future capital uses and requirements are also
dependent in part on the ability of our licensees and collaborative partners to
meet their obligations to us, including the fulfillment of their development and
commercialization responsibilities in respect of our product candidates. Our
sublicensee and collaborative partners, Neurocrine, Pfizer and Merck, may
encounter conflicts of interest, changes in business strategy or other business
issues, 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 ope rations
from period to period.





**Contractual
Obligations**





Future
minimum payments for all contractual obligations for years subsequent to
December 31, 2004, are as follows:





**Years
      Ended December 31,****2005**
    
    **2006**
    
    **2007**
    
    **Thereafter**
    
    **Total****(in
      thousands)**Convertible
      subordinated debentures(1)
    
    $
    1,666
    
    $
    1,625
    
    $
    1,625
    
    $
    92,625
    
    $
    97,541Convertible
      line of credit promissory note(2)
    
    
    4,024
    
    
    —
    
    
    —
    
    
    —
    
    
    4,024Operating
      leases
    
    
    547
    
    
    570
    
    
    574
    
    
    306
    
    
    1,997Total
    
    $
    6,237
    
    $
    2,195
    
    $
    2,199
    
    $
    92,931
    
    $
    103,562


(1)
    Included
      is interest payments of approximately $1.6 million annually through
      2025.


(2)
    On
      January 20, 2005, the holder converted the entire balance of the note and
      the accrued interest into 1,180,246 shares of our common
      stock.





The table
above excludes future milestones and royalties that may be owed to Wyeth, Elan
and Biovail under terms of existing agreements as payments are contingent upon
future events. We do not expect to pay any royalties under these agreements in
2005. In addition, the table excludes an additional $15.0 million aggregate
principal amount of convertible subordinated debentures issued in January 2005
and the related interest payments of $375,000 annually through 2025, if not
earlier converted into shares of our common stock. In May 1998, we licensed
from Wyeth, on an exclusive, worldwide basis, indiplon, bicifadine, ocinaplon
and DOV 216,303. We have the right to develop and commercialize these compounds,
including the right to grant sublicenses to third parties, subject to Wyeth's
right of first refusal. In
February 2004, we entered into agreements to reorganize our exclusive license
agreement with Wyeth in respect of these four compounds and our sublicense
agreement with Neurocrine in respect of indiplon. Under the restated license
agreements, if we sell the products ourselves, we are obligated to pay Wyeth
royalties of 3.5% of net sales for ocinaplon and DOV 216,303 and 5.0% of net
sales for bicifadine, and milestones of $2.5 million for ocinaplon and
$5.0 million for bicifadine upon NDA filing and $4.5 million each for
bicifadine, ocinaplon and DOV 216,303 upon a NDA approval. The royalty rate for
bicifadine, ocinaplon and DOV 216,303 will increase by 0.5% should we partner or
sublicense that compound. In addition, should we partner or sublicense a
compound, the next milestone payable to Wyeth for that compound will be
accelerated to become due upon partnering. As we have licensed certain rights to
DOV 216,303 to Merck, should Merck achieve sales on this compound, we will owe
Wyeth a royalty of 4.0% on those sales and the next milestone payable to them of
$2.5 million has been accelerated and paid in 2004. As part of the
reorganization, Neurocrine acquired Wyeth’s interest under the license covering
indiplon. Accordingly, the reorganization with Neurocrine allows Neurocrine to
pay to us royalty and milestone payments net of those amounts that would be owed
by us to Wyeth under the
earlier agreement . In
connection with Elan’s license grant to us in October 2003, Elan is entitled to
receive up to an aggregate of $3.0 million when bicifadine and ocinaplon are
licensed or come to market. In connection with the Biovail separation agreement,
we face contingent
payments by us to Biovail of $3.0 million upon issuance of marketing
authorization for DOV diltiazem and up to $7.5 million based upon sales, if
any. The table also excludes any severance or termination payments that would be
due to certain of our employees under their employment contracts should they be
terminated without cause or terminate following a change of control prior to the
expiration of their contract term as the amounts are not determinable at this
time.





45


**Recent
Accounting Pronouncements**







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







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





In
December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29.” The amendments made by Statement 153 are based
on the principle that exchanges of nonmonetary assets should be measured based
on the fair value of the assets exchanged. The amendment also eliminates the
exception of for nonmonetary exchanges of similar productive assets and replaces
it with a narrower exception for exchanges of nonmonetary assets that do not
have commercial substance. The provisions of the Statement are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Management does not expect the adoption of SFAS 153 to have a material
impact on our financial condition or our results of operations.





In March
2004, the EITF reached a final consensus on Issue 03-01, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments. EITF
03-01 provides guidance on when an investment is considered impaired, whether
that impairment is other than temporary and the measure of the impairment loss.
EITF 03-01 also provides new disclosure requirements for other than temporary
impairments on debt and equity investments. In September 2004, the FASB delayed
the effective date of the measurement and recognition guidance contained in EITF
03-01, although, the disclosure requirements remain effective. The adoption of
EITF 03-01 is not expected to have a material impact on our financial position,
results of operations or cash flows.





46


**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. On August
5, 2004, we entered into an agreement with Merck for the worldwide development
and commercialization of all indications for DOV 21,947 and certain indications
for DOV 216,303 in
exchange for a $35.0 million up-front payment and the right to receive further
payments of up to $420.0 million upon the achievement of certain milestones and
royalties based on product net sales, if any. The up-front payment has been
deferred and is being amortized to revenue over the estimated research and
development period of 51 months. The time period of the development period is a
significant estimate used in the preparation of our financial statements and is
subject to Merck developing the compound in accordance with the last estimated
development schedule presented by Merck. As such,
this development period estimate may fluctuate from period to period and this
fluctuation might be significant. For example, if as of January 1, 2005 we were
to increase by 10% the estimated development period, we would record
approximately $749,000 less of revenue in 2005.







*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. We recognize no compensation expense on these employee stock option
grants. Prior to our common stock becoming publicly traded, we granted stock
options for a fixed number of shares to employees with an exercise price less
than the fair market value of our common stock on the date of grant. We
recognize the difference between the exercise price and fair market value as
compensation expense, which is recognized on an accelerated basis over the
vesting period of the stock options. Our accounting treatment will change
effective the third quarter of 2005. See above under “Recent Accounting
Pronouncements.” W e also
have, in the past, granted options and warrants to outside consultants at fair
value on the date of grant in exchange for future services. These options and
warrants are required to be accounted for in accordance with SFAS 123
"Accounting for Stock Based Compensation" and EITF 96-18 "Accounting for Equity
Instruments that are Issued to other than Employees for Acquiring, or in
Conjunction with Selling Goods or Services" at the fair value of the
consideration received, or the fair value of the equity instrument issued,
whichever may be more readily measured. As the performance of services is
completed, we revalue the options and warrants that have been earned during the
period. We value these securities at the fair value using a Black-Scholes
methodology.







*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, 2004.





47





*Income
taxes.* We have
net deferred tax assets at December 31, 2004 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 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 2 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.


48





**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, including our Chief Executive Officer and Chief Financial Officer,
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 .





As
required by SEC Rule 13a-15(b), we carried out an evaluation, with the
participation of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the operation of our disclosure controls and procedures and our
internal controls over financial reporting as of December 31, 2004. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective .





***Management’s
Report on Internal Control Over Financial Reporting***





Internal
control over financial reporting refers to a process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and
procedures that:




(1) Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets;




(2) Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorization of our management and directors; and




(3) Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the company. Management has used the framework set forth
in *Internal
Control—Integrated Framework* published by the Committee of Sponsoring Organizations of the Treadway
Commission, known as COSO, to evaluate the effectiveness of the Company’s
internal control over financial reporting. Based on this evaluation, management
has concluded that, as of December 31, 2004, our internal control over financial
reporting is effective.





49


Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report
which appears in Part IV, Item 15 of this Form 10-K.






***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, 2004 that have materially affected or are reasonably
likely to materially affect our internal control over financial
reporting.






**Item
9B. OTHER INFORMATION**





None.





**PART
III**








**ITEM
10.**  **DIRECTORS
AND EXECUTIVE OFFICERS OF REGISTRANT**





**Executive
Officers and Directors**




The
following table provides information about our directors, executive officers and
key employees.




**Name**
    **Age**
    **Position**Arnold
      S. Lippa, Ph.D.
    58
    Chairman
      of the Board, Chief Executive Officer, President and
    DirectorPhil
      Skolnick, Ph.D., D.Sc. (hon)
    58
    Senior
      Vice President, Research and Chief Scientific OfficerBarbara
      G. Duncan
    40
    Senior
      Vice President, Finance, Chief Financial Officer and
    TreasurerRobert
      Horton
    65
    Senior
      Vice President, General Counsel and SecretaryWarren
      Stern, Ph.D.
    60
    Senior
      Vice President, Drug DevelopmentBernard
      Beer, Ph.D.(1)
    72
    Co-Chairman
      of the Board and DirectorZola
      Horovitz, Ph.D.
    70
    DirectorPatrick
      Ashe
    41
    DirectorDaniel
      S. Van Riper
    64
    DirectorTheresa
      A. Bischoff
    51
    DirectorJonathan
      Silverstein
    36
    Director


(1) Dr.
Beer will resign from our board of directors effective March 15,
2005.





**Arnold
S. Lippa, Ph.D** . is a
co-founder and has served as our chief executive officer since our inception in
April 1995. Dr. Lippa also serves as our president and chairman of our
board of directors. Dr. Lippa also serves as chairman of Nascime Limited,
the operating company initially formed in connection with the Elan joint venture
that is now wholly owned by us. 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 1991 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.







50





**Phil
Skolnick, Ph.D., D.Sc. (hon)** joined us
in January 2001 and serves as our senior vice president, research 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.




**Barbara
G. Duncan** joined us
in August 2001 and serves as our senior vice president, finance and chief
financial officer and treasurer. 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.




**Robert
Horton** joined
us in August 2002 and serves as senior vice president and general counsel
and as secretary. Prior to joining us, Mr. Horton served with Goodwin
Proctor LLP from 2001 - 2003 and with Friedman Siegelbaum LP from
1996 - 2001, in their New York law offices. Prior thereto,
Mr. Horton served with Balber Pickard et. al. (formerly, Stults Balber
Horton and Slotnick) in New York City. He has served in the JAG Corps and in New
Jersey and New York City government. He has practiced corporate and securities
law for over 25 years and represented us since shortly after our formation.
He was graduated Beta Gamma Sigma from the University of Virginia in 1961 and
Order of the Coif from the University of Chicago, where he received his law
degree, in 1964. He is a member of the California and New York bars.




**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. Dr. Stern
also serves as a director of Nascime Limited. 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, 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.







51





**Bernard
Beer, Ph.D.** is a
co-founder and has served as director and co-chairman of our board of directors
since our inception in April 1995 and as president throughout this period until
his retirement as president in March 2004. Dr. Beer will resign from our board
of directors effective March 15, 2005. Dr. Beer provides consulting services to
us as needed. Prior to his retirement Dr. Beer’s employment terms were the same
as Dr. Lippa’s. From 1977 to 1995, Dr. Beer was employed by American
Cyanamid, now Wyeth, and served as its Global Director of Central Nervous System
Biological and Clinical Research. Dr. Beer has extensive experience in
pharmaceutical research starting at Squibb Corporation from 1966 to 1976 where
he was section head, Neuropsychopharmacology. He is currently an adjunct
professor of psychiatry at the New York University School of Medicine and a
special professor in pharmacology at Boston University Medical School.
Dr. Beer received his B.A. from Brooklyn College in 1956 and his M.S. and
Ph.D. from The George Washington University in 1961 and 1966, respectively.




**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.




**Patrick
Ashe** has been
a member of our board of directors since January 1999. He currently serves as
senior vice president, business development at AGI Therapeutics, Ltd. 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, and currently serves as a director, 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.




**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 both the audit 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. Mr. Van Riper currently serves as special advisor to Sealed Air
Corporation, where he previously served as senior vice president and chief
financial officer 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.




**Theresa
A. Bischoff** became a
member of our board of directors effective 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.







52





**Jonathan
Silverstein** became a
member of our board of directors in December 2003. Mr.
Silverstein is a general partner of OrbiMed Advisors LLC., a health care fund
manager based in New York. Mr.
Silverstein is also a director of Given
Imaging, Ltd., Emphasys Medical, Avanir Pharmaceuticals and Predix
Pharmaceuticals. Mr. Silverstein is a former director of LifeCell Corporation,
Orthovita and Auxilium Pharmaceuticals. From 1996 to 1998, he was the
director of life sciences at Sumitomo Bank Limited.  From 1994 to 1996, he
was an associate at Hambro Resource Development. Mr. Silverstein has a B.A. in
economics from Denison University and a J.D. and M.B.A. from the University of
San Diego.




**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, and under the Nasdaq marketplace rules . 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 six times during 2004. 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 five times during 2004.




*Search
and Nominating Committee*







The
search and nominating committee has the responsibility of identifying, recommending and nominating a director to fill any existing board vacancies. It
may also make recommendations regarding an increase in board size and candidates
to fill membership increases. Its members are Bernard Beer (chairman), Theresa
Bischoff and Jonathan Silverstein. It met once during 2004. While the nominating
committee has operated pursuant to resolution as permitted by Nasdaq rules, the
board has directed that a formal charter be adopted in the first half of 2005.
Dr. Beer is not considered independent and will resign from our board of
directors and this committee effective March 15, 2005. The two
continuing committee members are independent. The committee will consider
nominees recommended by security holders pursuant to procedures to be set forth
in our proxy statement.










53





**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 and Nasdaq. 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.





Based
solely on a review of filings with the SEC, we believe that other than the
exceptions detailed below, 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 fiscal 2004.


**Reporting
      Requirement****Name**
    
    **Form**
    
    **Required
      Filing Date**
    
    **Actual
      Filed Date**Phil
      Skolnick
    
    Form
      4
    
    January
      11, 2004
    
    February
      17, 2004Bernard
      Beer
    
    Form
      4
    
    January
      28, 2004
    
    February
      17, 2004Barbara
      Duncan
    
    Form
      4
    
    January
      28, 2004
    
    February
      17, 2004Robert
      Horton
    
    Form
      4
    
    January
      28, 2004
    
    February
      17, 2004Arnold
      Lippa
    
    Form
      4
    
    January
      28, 2004
    
    February
      17, 2004Zola
      Horovitz
    
    Form
      4
    
    May
      26, 2004
    
    July
      9, 2004Patrick
      Ashe
    
    Form
      4
    
    May
      26, 2004
    
    July
      9, 2004Daniel
      S. Van Riper
    
    Form
      4
    
    May
      26, 2004
    
    July
      9, 2004





We
undertake to prepare Section 16 filings for our officers and directors. The late
Form 4s in the case of directors resulted from finalization of the form of
option in July for options granted at the May annual meeting and in the case of
the officers to documentation of options granted by the compensation committee
in January but documented in minutes prepared in February.





**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. This code of ethics is designed
to comply with the Nasdaq marketplace rules related to codes of conduct. 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.








54





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





**Summary
Compensation Table**





The
following table sets forth certain compensation information for the years
indicated as to our CEO and the four additional most highly compensated
executive officers (the named executives) based on salary and bonus for the
fiscal years ended December 31, 2002, 2003 and 2004. In addition, we have
included information for our former president who retired effective March 15,
2004.





**Long-Term
      Compensation****Awards****Annual
      Compensation**
    
    **Securities**
      **Underlying**
    
    **All
      Other****Name
      and Principal Position**
    
    **Year**
    
    **Salary**
    
    **Bonus(1)**
    
    **Options(1)**
    
    **Compensation**Arnold
      S. Lippa, Ph.D.(2)
    
    
    2004
    
    $
    363,212
    
    $
    125,000
    
    
    25,000
    
    $
    33,895Co-Chairman,
      Chief
    
    
    2003
    
    
    325,769
    
    
    50,000
    
    
    —
    
    
    30,408Executive
      Officer and President
    
    
    2002
    
    
    296,154
    
    
    110,000
    
    
    —
    
    
    30,218Phil
      Skolnick, Ph.D., D.Sc. (hon)(3)
    
    
    2004
    
    
    299,038
    
    
    50,000
    
    
    100,000
    
    
    13,290Senior
      Vice President, Research and
    
    
    2003
    
    
    273,558
    
    
    30,000
    
    
    —
    
    
    8,100Chief
      Scientific Officer
    
    
    2002
    
    
    250,000
    
    
    40,000
    
    
    —
    
    
    8,100Barbara
      Duncan (4)
    
    
    2004
    
    
    298,077
    
    
    50,000
    
    
    125,000
    
    
    12,300Senior
      Vice President, Finance, Chief
    
    
    2003
    
    
    258,942
    
    
    30,000
    
    
    —
    
    
    8,100Financial
      Officer and Treasurer
    
    
    2002
    
    
    235,288
    
    
    75,000
    
    
    —
    
    
    8,100Robert
      Horton (5)
    
    
    2004
    
    
    307,211
    
    
    50,000
    
    
    25,000
    
    
    15,048Senior
      Vice President, General
    
    
    2003
    
    
    250,000
    
    
    —
    
    
    —
    
    
    9,525Counsel
      and Secretary
    
    
    2002
    
    
    87,500
    
    
    —
    
    
    250,000
    
    
    2,700Warren
      Stern (6)
    
    
    2004
    
    
    300,000
    
    
    —
    
    
    —
    
    
    13,815Senior
      Vice President, Drug
    
    
    2003
    
    
    24,077
    
    
    —
    
    
    285,000
    
    
    46,000DevelopmentBernard
      Beer, Ph.D.(7)
    
    
    2004
    
    
    441,988
    
    
    75,000
    
    
    25,000
    
    
    79,225Co-Chairman
    
    
    2003
    
    
    325,769
    
    
    50,000
    
    
    —
    
    
    30,7042002
    
    
    296,154
    
    
    110,000
    
    
    —
    
    
    27,229







(1)
    Does
      not reflect bonuses paid and options granted in 2005 to the five named
      executive officers aggregating $400,000 and 120,000
      respectively.(2)
    All
      other compensation represents $16,723, $16,668, and $16,800 in 2004, 2003
      and 2002 for automobile allowance, $8,018, $13,740, $13,418 in 2004, 2003
      and 2002, for life insurance premiums and $9,154 for advances repaid in
      2005.(3)
    All
      other compensation represents $12,000, $8,100 and $8,100 in 2004, 2003 and
      2002 for automobile allowance and $1,290 in 2004 for life insurance
      premiums.(4)
    All
      other compensation represents $12,000, $8,100 and $8,100 in 2004, 2003 and
      2002 for automobile allowance and $300 in 2004 for life insurance
      premiums.
  55
 (5)
    All
      other compensation represents $12,000, $8,100 and $2,700 in 2004, 2003 and
      2002 for automobile allowance $3,048 in 2004 for life insurance premiums
      and $1,425 in 2003 for moving expenses. Mr. Horton joined us effective
      August 16, 2002.(6)
    All
      other compensation represents $12,000 and $1,000 in 2004 and 2003 for
      automobile allowance, $45,000 in 2003 for consulting expenses and $1,815
      in 2004 for life insurance premiums. Dr. Stern joined the Company
      effective December 2, 2003.(7)
    Dr.
      Beer retired as president of the Company effective March 15, 2004 and will
      resign from our board of directors effective March 15, 2005. In connection
      with his retirement, Dr. Beer received a year’s salary of $365,750. He
      continues as co-chairman of the board. All other compensation represents
      $4,200, $16,800 and $16,800 in 2004, 2003 and 2002 for automobile
      allowance; $7,756, $13,904, and $10,429 in 2004, 2003, and 2002, for life
      insurance premiums; and $56,269 and $11,000 in 2004 for unused vacation
      and medical insurance for one year paid at time of
    retirement.


**Option
Grants in Last Fiscal Year**





The
following table sets forth information with respect to the named executives
concerning the grant of stock options during 2004. All the options were granted
at the fair market value on the date of grant as determined by the Board of
Directors.





**Individual
      Grants****Name**
    
    **Options**
      **Granted
      in**
      **2004**
    
    **%
      of Total**
      **Options**
      **Granted
      in**
      **2004**
    
    **Exercise or**
      **Base
      Price**
      **($/Sh)**
    
    **Expiration**
      **Date**
    
    **Grant**
      **Date**
      **Present**
      **Value**
  Arnold
      S. Lippa, Ph.D.
    
    
    25,000
    
    
    4.1
    %
    $
    13.66
    
    
    1/26/2014
    
    $
    277,527Phil
      Skolnick, Ph.D. D. Sc. (hon)
    
    
    100,000
    
    
    16.4
    
    
    13.58
    
    
    1/09/2014
    
    
    1,107,865Barbara
      Duncan(1)
    
    
    125,000
    
    
    20.5
    
    
    12.96
    
    
    8/3/2014
    
    
    1,282,902Robert
      Horton
    
    
    25,000
    
    
    4.1
    
    
    13.66
    
    
    1/26/2014
    
    
    277,527Warren
      Stern
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —





(1)
    25,000
      options were granted on January 26, 2004 at an exercise price of $13.66
      and 100,000 options were granted on August 3, 2004 in connection with
      renewal of employment agreement at an exercise price of
      $12.79.








56





**Option
Exercises in Last Fiscal Year and Year-End Option Values**





The
following table sets forth certain information as of December 31, 2004,
regarding options held by the named executives.





**Shares**
    
    
    
    **Number
      of SecuritiesUnderlying UnexercisedOptions at Fiscal
      Year-End(1)**
    
    **Value
      ($) of Unexercisedin-the-Money Options****at
      Fiscal Year-End(2)****Name**
    
    **Acquiredon
      Exercise**
    
    **Value
      ($)**
      **Realized**
    
    **Number**
      **Exercisable**
    
    **Number**
      **Unexercisable**
    
    **Value
      ($)**
      **Exercisable**
    
    **Value
      ($)**
      **Unexercisable**Arnold
      S. Lippa, Ph.D.
    
    
    —
    
    
    —
    
    
    210,600
    
    
    25,000
    
    $
    3,239,028
    
    $
    109,750Phil
      Skolnick, Ph.D. D. Sc. (hon)
    
    
    40,000
    
    
    548,112
    
    
    325,000
    
    
    100,000
    
    
    4,962,750
    
    
    447,000Barbara
      Duncan
    
    
    —
    
    
    —
    
    
    324,500
    
    
    125,000
    
    
    4,555,980
    
    
    635,750Robert
      Horton(3)
    
    
    90,500
    
    
    1,048,042
    
    
    137,498
    
    
    87,502
    
    
    1,876,848
    
    
    962,902Warren
      Stern
    
    
    —
    
    
    —
    
    
    —
    
    
    285,000
    
    
    —
    
    
    766,650


(1)
    Includes
      both in-the money and out-of-the-money options.(2)
    Fair
      value of DOV’s common stock at December 31, 2004 ($18.05 based on the
      closing sales price reported on Nasdaq) less the exercise
      price.(3)
    Includes
      40,500 options (adjusted for subsequent 1.62-for-1 stock split) at an
      exercise price of $2.78 (as so adjusted) granted in May 2000 before
      employment.


**Compensation
of the Chief Executive Officer**







Dr. Lippa’s
base salary during fiscal year 2004 was $366,025 and his aggregate bonus was
$125,000.







**Compensation
of Directors**





Our
outside directors each receive $4,000 for each quarterly board and certain
members receive 15,000 options for a full year of service on the annual meeting
date. In 2004, Dr. Horovitz, Mr. Ashe and Mr. Van Riper each received 15,000
options at an exercise price of $15.04 per share. These options will become
exercisable in equal (25%), annual installments, after the completion of each
full year of service following such grant. 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. We have agreed
to reimburse our directors for their reasonable expenses incurred in attending
meetings of the board of directors and its committees.








57





**Employment
Agreements**


**


*Arnold
S. Lippa, Ph.D.* We have
entered into an employment agreement with Dr. Lippa (as extended in January
2005), which provides for his employment as CEO. Dr. Lippa's base
compensation was $366,025 for 2004, and his base compensation was increased by
10% in December 2004. 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. Additionally, his employment
agreement provides that if we should merge or consolidate with or into an
unrelated entity, sell all or substantially all our assets, or enter into a
transaction or series of transactions with the result that 51% or more of our
capital stock is transferred to one or more unrelated third parties,
Dr. Lippa is entitled to receive a bonus equal to 2% of the gross proceeds
of such sale (as defined in the agreement). We are obligated to continue to pay
Dr. Lippa 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 Dr. Lippa terminates his
employment with us for good reason, or within six months of a change of control,
or if we terminate Dr. Lippa without cause, he is entitled to receive his
base and incentive compensation and the continuation of all benefits for two
years from the date of termination, and all stock options granted to him will
immediately vest. The agreement also requires Dr. Lippa to refrain from
competing with us and from soliciting our clients and customers for the duration
of his employment and for a period following employment equal to the length of
time we make severance payments to him.




*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) with Dr. Skolnick, which
provides for his employment as Senior Vice-President, Research and Chief
Scientific Officer until January 19, 2007. Under the agreement, we will pay
Dr. Skolnick base compensation of at least $300,000 per year. For 2005, we
will pay him $330,000 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. Additionally,
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). The options are completely vested. In addition, 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 that vest 50% on July 9, 2005 and will continue to vest ratably
thereafter over the next six quarters. 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. If Dr. Skolnick terminates
his employment with us for good reason, or within six months of a change of
control, or if we terminate Dr. Skolnick without cause, he is entitled to
receive his base compensation for the balance of his employment agreement,
namely January 19, 2007, and stock options granted to him will immediately
except that the options granted in January 2004 will vest on a
schedule of 25,000 if the change of control occurs within the first year, 37,500
to the extent not vested if the change of control occurs within the second year
and the balance of 100,000 to the extent not vested if the change of control
occurs within the third year . 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.




*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), which provides
for her employment as Vice President, Finance and Chief Financial Officer until
August 21, 2007. Ms. Duncan’s title was changed to Senior Vice President,
Finance and Chief Financial Officer in February 2005. Under the agreement, we
will pay Ms. Duncan base compensation of at least $300,000 per year. For 2005,
we will pay her $330,000 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.
Additionally, 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). The options 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 that vest 50% on February 3, 2006 and will continue to vest ratably
thereafter over the next six quarters. 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. If Ms. Duncan terminates her employment
with us for good reason, or within six months of a change of control, or if we
terminate Ms. Duncan without cause, she is entitled to receive her base
compensation for the balance of the employment agreement, namely August 21,
2007, and all stock options granted to her will immediately vest. The agreement
also requires Ms. Duncan to refrain from competing with us and from soliciting
our customers and clients for the duration of her employment and for a period
following employment equal to the length of time we make severance payments to
her.





58


*Robert
Horton.* In
connection with his employment by us in August 2002, we entered into an
employment agreement with Mr. Horton, which provides for his employment as
Vice President and General Counsel until August 16, 2005. Mr. Horton’s title was
changed to Senior Vice President and General Counsel in February 2005. Under the
agreement, we will pay Mr. Horton base compensation of at least $250,000 per
year. For 2005, we will pay him $330,000 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. 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. The options vested 50% on March 12, 2004 and
will continue to vest ratably thereafter over the next six quarters. We are
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 is terminated
upon becoming disabled or for a period of 90 days upon his death. If Mr.
Horton terminates his employment with us for good reason, or within six months
of a change of control, or if we terminate Mr. Horton without cause, he is
entitled to receive his base compensation for balance of his employment
agreement, namely August 16, 2005, and all stock options granted to him will
immediately 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 payments to him.





*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. The employment
agreement provides for Dr. Stern to serve as Senior Vice President, Drug
Development until September 10, 2006. 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 have agreed to pay him $300,000 per year. For 2005,
we will pay him $330,000 in base salary. 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. The options vest 50% on June 2, 2005,
with the remainder vesting ratably, on quarterly basis, over the next
18 months. 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. If Dr. Stern terminates his employment with us for good reason, or
within six months of a change of control, or if we terminate Dr. Stern
without cause, he is entitled to receive his base compensation for the balance
of his employment agreement, namely September 10, 2006, and stock options
granted to him will immediately vest. 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.








59





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







The
following table sets forth, as of February 17, 2005, 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;




·
    each
      of our executive officers for whom compensation information is given in
      the Summary Compensation Table in Part III, Item 11 of this Form 10-K; 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 Securities Exchange Act
of 1934, as amended) 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 February 17, 2005, 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.




**Name
      of Beneficial Owner**
    
    **Number
      of Shares**
      **Beneficially
      Owned**
    
    **Percentage
      of**
      **Class(1)**OrbiMed
      Advisors, LLC(2)767
      Third Avenue30thFloorNew
      York, NY 10017
    
    
    2,251,428
    
    
    9.8
    %Columbia
      Wanger Asset Management, L.P.(3)
      227
      West Monroe Street, Suite 3000
      Chicago,
      IL 60606
    
    
    1,495,000
    
    
    6.6Arnold
      S. Lippa(4)
    
    
    1,139,800
    
    
    5.0Bernard
      Beer
    
    
    959,245
    
    
    4.2Barbara
      G. Duncan(5)
    
    
    324,500
    
    
    1.4Phil
      Skolnick(6)
    
    
    325,000
    
    
    1.4Robert
      Horton(7)
    
    
    158,330
    
    
    *Zola
      Horovitz(8)
    
    
    151,150
    
    
    *Patrick
      Ashe(9)
    
    
    79,950
    
    
    *Daniel
      S. Van Riper(10)
    
    
    21,975
    
    
    *Theresa
      A. Bischoff(11)
    
    
    6,075
    
    
    *Warren
      Stern(12)
    
    
    —
    
    
    —Jonathan
      Silverstein(13)
    
    
    —
    
    
    —All
      directors and executive officers as a group (11
    persons)(14)
    
    
    3,166,025
    
    
    13.3


_______________


*Less
than one percent.





(1)
    As
      of February 17, 2005, the number of outstanding shares of our common stock
      and common stock equivalents was 22,667,929.(2)
    OrbiMed
      Advisors, LLC and OrbiMed Capital, LLC, together with Samuel D. Islay, who
      owns a controlling interest in each of the foregoing entities, has or
      shares, either directly or indirectly, voting and investment power with
      respect to the shares of our common stock held of record by UBS Juniper
      Crossover Fund, L.L.C., Caduceus Private Investments, LP and OrbiMed
      Associates LLC. Includes 1,858,571 shares of common stock and warrants to
      purchase 392,857 shares of common stock that are currently exercisable.
      The information reported herein is based solely upon public filings made
      with the SEC by or on behalf of the beneficial holders so listed.
  60
  (3)
    The
      information reported herein is based solely upon public filings made with
      the SEC by or on behalf of the beneficial holder so listed.(4)
    Includes
      929,200 shares of common stock and options to purchase 210,600 shares of
      common stockthat are currently exercisable.Excludes options to purchase 70,000 shares of common stock that are not
      exercisable within 60 days of February 17, 2005.(5)
    Includes
      25,000 shares of common stock and options to purchase 299,500 shares of
      common stock that are currently exercisable. Excludes options to purchase
      125,000 shares of common stock that are not exercisable within
      60 days of February 17, 2005.(6)
    Includes
      options to purchase 325,000 shares of common stock that are currently
      exercisable. Excludes options to purchase 125,000 shares of common stock
      that are not exercisable within 60 days of February 17, 2005.(7)
    Includes
      options to purchase 158,330 shares of common stock that are currently
      exercisable. Excludes options to purchase 91,670 shares of common stock
      that are not exercisable within 60 days of February 17, 2005.(8)
    Includes
      50,200 shares of common stock and options to purchase 100,950 shares of
      common stock that are currently exercisable. Excludes options to purchase
      26,250 shares of common stock that are not exercisable within 60 days
      of February 17, 2005.(9)
    Includes
      options to purchase 79,950 shares of common stock that are currently
      exercisable. Excludes options to purchase 26,250 shares of common stock
      that are not exercisable within 60 days of February 17, 2005.(10)
    Includes
      options to purchase 21,975 shares of common stock that are currently
      exercisable. Excludes options to purchase 33,325 shares of common stock
      that are not exercisable within 60 days of February 17,
      2005.(11)
    Includes
      options to purchase 6,075 shares of common stock that are currently
      exercisable. Excludes options to purchase 18,225 shares of common stock
      that are not exercisable within 60 days of February 17,
      2005.(12)
    Excludes
      options to purchase 310,000 shares of common stock that are not
      exercisable within 60 days of February 17, 2005.(13)
    Mr.
      Silverstein is a managing director of OrbiMed Advisors, LLC that, together
      with certain funds managed by OrbiMed, owns the securities referenced in
      footnote 2 above.  Mr. Silverstein's beneficial ownership does not
      include beneficial ownership of the securities that are presented for
      OrbiMed Advisors, LLC in this principal stockholder
  table.(14)
    Includes
      options to purchase 1,202,380 shares of common stock that are exercisable
      within 60 days of February 17, 2005. Excludes options to purchase 825,720
      shares of common stock that are not exercisable within 60 days of
      February 17, 2005.








61





**Stock
Option Plans**




The
following table provides information with respect to compensation plans under
which equity compensation is authorized at December 31, 2004.




**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
    
    
    2,646,176
    
    $
    7.72
    
    
    758,503Equity
      Compensation Plan Not Approved by Shareholders
    
    
    —
    
    
    —
    
    
    —Total
    
    
    2,646,176
    
    $
    7.72
    
    
    758,503





***1998
Stock Option Plan***




Our 1998
Stock Option 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, 2004, options to purchase 471,100 shares of our
common stock were outstanding under our 1998 Stock Option Plan. Options to
purchase an aggregate of 671,810 shares of common stock have been exercised
under our 1998 Stock Option Plan. Generally, options granted under our 1998
Stock Option Plan vest 50% six months from the date of grant and 50% eighteen
months from the date of grant. All options generally terminate on the tenth
anniversary of the date of grant. In the event of a change in control, all
options will become immediately exercisable. The Compensation Committee
administers the 1998 plan. We will not make any additional grants under our 1998
Stock Option Plan.




***Stock
Option Grant to Phil Skolnick***




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). Although
Dr. Skolnick's 405,000 options were not granted under our 1998 Stock Option
Plan or our 2000 Stock Option and Grant Plan, the options were charged against
the total number of options available for future grants under our 2000 Stock
Option and Grant Plan. As of December 31, 2004, all the 325,000 options
outstanding were vested. During 2004, Dr. Skolnick exercised 40,000
options.




***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 and 2004, our
stockholders approved an amendment to the 2000 Plan to increase the number of
shares authorized for grant by 500,000 and 750,000 shares, respectively. The
2000 Plan now provides for the issuance of up to 2,942,090 shares of common
stock plus that number of shares of common stock underlying any future
termination, cancellation or reacquisition of options granted under the
2000 Plan or 1998 Stock Option Plan. Additionally, if any of the 405,000
options granted to Dr. Skolnick are terminated, canceled or otherwise reacquired
by us, that number of reacquired shares will also become available for issuance
under the 2000 Stock Option and Grant Plan. As of December
31, 2004 , options
to purchase 1,850,076 shares of common stock were outstanding and 758,503 shares
of common stock were available for future grants under the 2000 Plan. Options to
purchase an aggregate of 340,801 shares of common stock have been exercised
under our 2000 Plan. Our compensation committee administers the 2000 Plan.







62





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.




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. Under employment agreements with executive officers and certain
employees as well as certain options granted to directors, vesting may be
accelerated in connection with a change of control.





63





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





In
January 1999, we established a joint venture with Elan to develop
controlled release formulations of bicifadine and ocinaplon. Elan provided us
with debt and equity financing to fund our investment in the joint venture and
our share of the operations of the joint venture. Elan purchased, for an
aggregate of $3.0 million, 525,025 shares of our common stock, 354,643
shares of series B preferred stock, and warrants to purchase 121,500 shares
of our common stock at an exercise price of $3.41 per share (such shares and
price as adjusted for the 1.62-for-1 stock split in April 2002). We issued Elan
a convertible promissory note for $8.01 million and Elan provided us a
$7.0 million convertible line of credit promissory note, which expired in
March 2002. In March 2003, we and Elan agreed to amend the convertible
promissory note to eliminate the exchange feature pursuant to which Elan could
have exchanged the note for an approximate 30% position in the joint venture,
thereby making our equity positions equal. In connection with this amendment, we
granted Elan warrants to purchase 75,000 shares of our common stock at an
exercise price of $10.00 per share. As of December 31, 2004 all equity and debt
instruments previously issued to Elan had been disposed of by Elan such that
they no longer hold an ownership interest in the Company.




In
October 2003, we entered into an agreement with Elan to acquire 100%
ownership of Nascime Limited, the joint venture's operating company, established
to develop controlled release formulations of bicifadine and ocinaplon and to
terminate the joint venture. In connection with the acquisition, we paid
$5.0 million to a subsidiary of Elan in respect of its by then diluted 17%
equity stake in the joint venture.  Elan
granted to the operating company a 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. In the
ordinary course of its business and prior to the termination of the joint
venture, DOV Bermuda incurred expenses for formulation development work provided
by Elan. These expenses amounted to approximately $509,000 in 1999,
$1.6 million in 2000, $1.8 million in 2001, $1.2 million in 2002
and $854,000 in 2003. For a further discussion of our collaboration with Elan,
please refer to the text in subheading “Collaborations and Licensing
Agreements-Elan Corporation, plc and Elan International Services, Ltd.”
under the “Business” section.




Until
August 1, 2002, Ms. Morgen Lippa, daughter of Dr. Arnold Lippa, was
employed by us as comptroller and a project manager. During 2002, she was paid
$52,654 in salary, $10,000 in bonuses and was awarded options to purchase 8,100
shares of our common stock. Ms. Lippa resigned effective August 1,
2002. As part of a severance agreement with Ms. Lippa, she was paid $46,681
in a lump sum severance payment, we accelerated the vesting on 10,000 options
and we extended the exercise date of all her options an additional nine
months from what is provided under the 1998 stock option and the 2000 stock
option and grant plans. As a result, we recorded a charge of $11,858 for the
acceleration and extended exercise date of the options.




Mr. Gary
Beer, son of Dr. Bernard Beer a
director of the Company , is
employed by us as Vice President of Data Management. During 2004, he was paid
$173,000 in salary, $10,000 in bonuses and was awarded options to purchase
11,000 shares of our common stock. Dr. Beer will resign from our board of
directors effective March 15, 2005.




In July
2003, we concluded a private placement of 1,428,571 shares of our common stock
and three-year warrants to purchase an aggregate of 392,857 shares of our common
stock at an exercise price of $16.00 per share to a group of funds managed by
OrbiMed Advisors, LLC, for gross proceeds of $15,000,000. The investors also
received the right to nominate a director to our board of directors. Jonathan
Silverstein, a director of OrbiMed Advisors, LLC joined our board effective
December 19, 2003.




On March
15, 2004, our co-founder and president, Dr. Bernard Beer, retired. In connection
with his retirement, we entered into a severance agreement with him that
provided for the termination of his employment agreement, a year’s salary of
$365,750, and payment of his unused vacation of $56,269 and health insurance
premiums of approximately $11,000. Dr. Beer remains as co-chairman of our board
of directors.




64





**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 2003 and 2004 were as follows:





**Years
      Ended December 31,****2003**
    
    **2004**(1)
    
    Audit
    
    $
    238,180
    
    $
    420,100(2)
    
    Audit
      Related
    
    
    —
    
    
    15,000(3)
    
    Tax
    
    
    34,000
    
    
    118,000(4)
    
    All
      Other
    
    
    —
    
    
    —Total
    
    $
    272,180
    
    $
    553,100







Audit
fees include fees for the audit of our 2003 financial statements and the
integrated audit of our 2004 financial statements, management’s assessment of
the effectiveness of internal control over financial reporting at December 31,
2004 (Sarbanes-Oxley 404 compliance) and the effectiveness of internal control
of financial reporting at December 31, 2004. Audit fees also include quarterly
reviews, the 2003 and 2004 audit fee 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 filings and fees for review of our convertible debt
offering. Audit fees related to the Sarbanes-Oxley 404 compliance in 2004
totaled $125,000. In 2003, tax related fees include fees for tax advice in
relation to our acquisition of 100% of the equity of Nascime and for tax return
preparation services. In 2004, tax related fees include fees for tax advice in
relation to Nascime, an analysis of the Section 382 limitations on the
utilization of NOL’s, and tax return preparation services. In 2004, audit
related fees are attributable to the review of the Merck agreement.







**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.







65
 **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 FirmConsolidated
      Balance Sheets as of December 31, 2003 and 2004Consolidated
      Statements of Operations for the Years Ended December 31, 2002, 2003 and
      2004Consolidated
      Statements of Stockholders’ (Deficit)/ Equity for the Years Ended December
      31, 2002, 2003 and 2004Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2002, 2003 and
      2004Notes
      to Consolidated Financial StatementsThe
      following financial statements of DOV (Bermuda), Ltd. (A Development Stage
      Company) and Report of PricewaterhouseCoopers LLP are included in this
      report:Report
      of Independent Registered Public Accounting FirmConsolidated
      Balance Sheets as of December 31, 2001 and 2002Consolidated
      Statements of Operations for theYears
      Ended December 31, 2001 and 2002 and the Period from Inception (January
      21, 1999) through December 31, 2002Consolidated
      Statements of Stockholders’ Deficit for the Periods from Inception
      (January 21, 1999) through December 31, 2002Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2001 and 2002
      and the Period from Inception (January 21, 1999) through December 31,
      2002Notes
      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 current reports on Form 8-K for the fourth
      quarter of 2004 on November 9, 2004 (Items 2.02 and 9.01), December 15,
      2004 (Items 7.01, 8.01, and 9.01), December 16, 2004 (Items 8.01 and
      9.01), December 21, 2004 (Items 8.01 and 9.01) and December 23, 2004
      (Items 1.01, 2.03, 3.02, and 9.01).




66





(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).4.1
    
    See
      Exhibits 3.1, 3.3 and 4.3 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).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).10.3
    
    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).110.4
    
    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 10.33 (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).110.5
    
    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).110.6
    
    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).10.8
    
    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 10.39
      (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).110.9
    
    Letter
      Agreement dated as of January 21, 1999, by and among Registrant, Elan
      Corporation, plc, Elan International Services, Ltd., DOV Bermuda, Ltd. as
      amended by that certain Termination Agreement referred to in item 10.39
      (formerly known as DOV Newco, Ltd.), and Nascime Limited signed in
      connection with the Joint Development and Operating Agreement referred to
      in 10.8 (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).





67








**Exhibit**
      **No.**
    
    **Description**10.10
    
    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 10.39 (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).110.11
    
    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 10.39 (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).110.14
    
    Registration
      Rights Agreement dated as of January 21, 1999, by and between Registrant
      and Elan International Services, Ltd. for shares of common stock received
      pursuant to the Securities Purchase Agreementas
      amended by that certain Letter Agreement and further amended by that
      certain Termination Agreement referred to in item 10.39(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).10.16
    
    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 10.8 as
      amended by that certain Termination Agreement referred to in item 10.39
      (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).10.18
    
    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).10.20
    
    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).10.21
    
    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).10.22
    
    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).10.23
    
    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).10.24
    
    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 and the Second Amendment thereto (each
      filed as Appendix C to the Proxy Statement dated April 26,
      2004).10.25
    
    Stock
      Option Agreement dated as of July 10, 2000, by and between Registrant and
      Philip 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).10.26
    
    Employment
      Agreement dated as of December 10, 1998 between Registrant and Arnold S.
      Lippa (filed as Exhibit 10.24 to the Registration Statement on Form S-1
      (File No. 333-81484) on January 28, 2002 and incorporated herein by
      reference).





68








**Exhibit****No.**
    
    **Description**10.27
    
    Extensions
      of Employment Agreement dated as of December 10, 2001 and January 25,
      2005, by and between Registrant and Arnold S. Lippa (filed as Exhibit
      10.27 to Amendment No. 4 to the Registration Statement on Form S-1 (File
      No. 333-81484) on April 5, 2002 and as Exhibit 10.1 to the Current Report
      on Form 8-K on January 28, 2005 and incorporated herein by
      reference).10.33
    
    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).10.36
    
    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).10.37
    
    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).10.38
    
    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).10.39
    
    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).10.40
    
    Restated
      Employment Agreement dated as of January 19, 2004, by and between
      Registrant and Philip Skolnick(filed
      as Exhibit 10.40 to the Annual Report on Form 10-K on March 15, 2004 and
      incorporated herein by reference).10.41
    
    Employment
      Agreement dated as of July 29, 2002, by and between Registrant and Robert
      Horton (filed as Exhibit 10.41 to the Annual Report on Form 10-K on March
      15, 2004 and incorporated herein by reference).10.42
    
    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).10.43
    
    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).10.44
    
    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).10.45
    
    Audit
      committee charter dated March 14, 2005.10.46
    
    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).10.47
    
    Securities
      Purchase Agreement dated as of March 29, 2004 by and between Registrant
      and Acqua Wellington Opportunity I Limited (filed as Exhibit 10.47 to the
      Registration Statement on Form S-1 filed on April 5, 2004 and incorporated
      herein by reference).10.48
    
    Registration
      Rights Agreement dated as of March 29, 2004 by and between Registrant and
      Acqua Wellington Opportunity I Limited (filed as Exhibit 10.48 to the
      Registration Statement on Form S-1 filed on April 5, 2004 and incorporated
      herein by reference).





69








**Exhibit****No.**
    
    **Description**10.49
    
    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).10.50
    
    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).10.51
    
    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).10.52
    
    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).10.53
    
    Exclusive
      License, Development and Commercialization Agreement, dated August 5,
      2004, by and between MSD Warwick (Manufacturing) Ltd. and Registrant,
      portions of which are subject to a request for confidential treatment
      (incorporated by reference to Exhibit 10.1 to the Current Report on Form
      8-K filed September 14, 2004).110.54
    
    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).10.55
    
    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).10.56
    
    Fifth
      Amendment to Lease Agreement dated November 15, 2004 by and among MSNW
      Continental Associates, LLC and Registrant.10.57
    
    Form
      of stock option agreement.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 (filed as Exhibit 21.1 to the Registration Statement on Form
      S-1
      (File
      No. 333-81484) and incorporated herein by reference).23.1
    
    Consent
      of PricewaterhouseCoopers LLP.23.2
    
    Consent
      of PricewaterhouseCoopers LLP.31.1
    
    Certification
      of Chief Executive Officer of DOV Pharmaceutical, Inc., pursuant to Rules
      13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
    
    Certification
      of Chief Financial Officer of DOV Pharmaceutical, Inc., pursuant to Rules
      13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32
    
    Certifications
      of Chief Executive Officer and Chief Financial Officer of DOV
      Pharmaceutical, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.1
    
    Previously filed with
      confidential treatment of certain provisions










70




**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: March 15,
2005
    By:
    /s/ ARNOLD S.
  LIPPAArnold S. LippaChief Executive Officer and
      President





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/
      Arnold S. Lippa
    Chief
      Executive Officer, President and Director (Principal Executive
      Officer)
    March
      15, 2005Arnold
      S. Lippa/s/
      Barbara G. Duncan
    Senior
      Vice President of Finance, Chief Financial Officer and
      Treasurer
      (Principal
      Financial and Accounting Officer)
    March
      15, 2005Barbara
      G. Duncan/s/
      Bernard Beer
    Director
    March
      15, 2005Bernard
      Beer/s/
      Zola Horovitz
    Director
    March
      15, 2005Zola
      Horovitz/s/
      Patrick Ashe
    Director
    March
      15, 2005Patrick
      Ashe/s/
      Daniel S. Van Riper
    Director
    March
      15, 2005Daniel
      S. Van Riper/s/
      Theresa A. Bischoff
    Director
    March
      15, 2005Theresa
      A. Bischoff/s/
      Jonathan Silverstein
    Director
    March
      15, 2005Jonathan
      Silverstein










71





**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, 2003 and 2004
    
    F-4Consolidated
      Statements of Operations for the Years Ended December 31, 2002, 2003 and
      2004
    
    F-5Consolidated
      Statements of Stockholders' (Deficit) /Equity for the Years Ended December
      31, 2002, 2003 and 2004
    
    F-6Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2002, 2003 and
      2004
    
    F-7Notes
      to Consolidated Financial Statements
    
    F-8**DOV
      (Bermuda), Ltd. (A Development Stage Company)**Report
      of Independent Registered Public Accounting Firm
    
    F-29Consolidated
      Balance Sheets as of December 31, 2001 and 2002
    
    F-30Consolidated
      Statements of Operations for theYears
      Ended December 31, 2001 and 2002 and for thePeriod
      from Inception (January 21, 1999) through December 31,
2002
    
    F-31Consolidated
      Statements of Changes in Stockholders' Deficit for the Period from
      Inception (January 21, 1999) Through December 31, 2002
    
    F-32Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2001 and 2002
      and thePeriod
      from Inception (January 21, 1999) through December 31,
2002
    
    F-33Notes
      to Consolidated Financial Statements
    
    F-34









F-1




**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To the
Board of Directors and Stockholders of


DOV
Pharmaceutical, Inc.





We have
completed an integrated audit of DOV
Pharmaceutical , Inc.’s
2004 consolidated financial statements and of its internal control over
financial reporting as of December
31 , 2004
and audits of its 2003 and 2002 consolidated financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Our opinions, based on our audits, are presented below.





Consolidated
financial statements







In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of DOV
Pharmaceutical , Inc.
and its subsidiaries (the Company) at December
31 , 2004
and December
31 , 2003,
and the results of their operations and their cash flows for each of the three
fiscal years in the period ended December
31 , 2004
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 of financial statements 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 .







Internal
control over financial reporting





Also, in
our opinion, management’s assessment, included in Management’s Report on
Internal Control Over Financial Reporting included
in Part II, Item 9A , that
the Company maintained effective internal control over financial reporting as of December
31 , 2004
based on criteria established in *Internal
Control — Integrated Framework* issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December
31 , 2004,
based on criteria established in *Internal
Control — Integrated Framework* issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness of
the Company’s internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting 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 effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.





F-2


A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





PricewaterhouseCoopers
LLP








Florham
Park, New Jersey


March 14,
2005








F-3





**DOV
PHARMACEUTICAL, INC.**


**CONSOLIDATED
BALANCE SHEETS**





**December
      31,****2003**
    
    **2004****Assets**Current
      assets:Cash
      and cash equivalents
    
    $
    9,290,999
    
    $
    28,934,473Accounts
      receivable
    
    
    —
    
    
    355,969Marketable
      securities—short-term
    
    
    39,087,699
    
    
    80,051,777Prepaid
      expenses and other current assets
    
    
    1,197,973
    
    
    1,415,712Total
      current assets
    
    
    49,576,671
    
    
    110,757,931Marketable
      securities—long-term
    
    
    3,783,227
    
    
    23,235,823Property
      and equipment, net
    
    
    364,950
    
    
    476,419Deferred
      charges, net
    
    
    127,012
    
    
    2,252,380Total
      assets
    
    $
    53,851,860
    
    $
    136,722,553**Liabilities
      and Stockholders’ Equity**Current
      liabilities:Accounts
      payable
    
    $
    1,839,655
    
    $
    3,273,357Accrued
      expenses
    
    
    1,220,814
    
    
    3,911,550Convertible
      line of credit promissory note
    
    
    —
    
    
    4,003,275Deferred
      revenue—current
    
    
    —
    
    
    8,235,294Total
      current liabilities
    
    
    3,060,469
    
    
    19,423,476Deferred
      revenue—non-current
    
    
    —
    
    
    24,362,745Convertible
      subordinated debentures
    
    
    —
    
    
    65,000,000Convertible
      promissory note
    
    
    11,254,566
    
    
    —Convertible
      line of credit promissory note
    
    
    3,631,532
    
    
    —Commitments
      and contingenciesStockholders'
      equity:Preferred
      stock—series
      B, $1.00 par value, 354,643 shares authorized, 354,643 shares issued and
      outstanding at December 31, 2003 and none issued and outstanding at
      December 31, 2004
    
    
    354,643
    
    
    —Preferred
      stock—undesignated
      preferred stock,$1.00
      par value, 6,550,357 shares authorized, 0 shares issued and outstanding at
      December 31, 2003 and 2004
    
    
    —
    
    
    —Common
      stock, $.0001 par value, 60,000,000 shares authorized, 16,494,293 issued
      and outstanding at December 31, 2003 and 21,462,628 issued and outstanding
      at December 31, 2004
    
    
    1,649
    
    
    2,146Additional
      paid-in capital
    
    
    103,013,813
    
    
    128,500,216Accumulated
      other comprehensive loss
    
    
    (28,228
    )
    
    (247,553
    )Accumulated
      deficit
    
    
    (67,396,482
    )
    
    (100,317,086
    )Unearned
      compensation
    
    
    (40,102
    )
    
    (1,391
    )Total
      stockholders' equity
    
    
    35,905,293
    
    
    27,936,332Total
      liabilities and stockholders' equity
    
    $
    53,851,860
    
    $
    136,722,553





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





F-4





**DOV
PHARMACEUTICAL, INC.**


**CONSOLIDATED
STATEMENTS OF OPERATIONS**








**Years
      Ended December 31,****2002**
    
    **2003**
    
    **2004**Revenue
    
    $
    2,389,634
    
    $
    2,968,750
    
    $
    2,542,381Operating
      expenses:License
      expense
    
    
    —
    
    
    1,000,000
    
    
    2,500,000Research
      and development expense
    
    
    10,310,900
    
    
    22,683,859
    
    
    24,764,118General
      and administrative expense
    
    
    3,902,544
    
    
    5,173,581
    
    
    6,360,158Loss
      from operations
    
    
    (11,823,810
    )
    
    (25,888,690
    )
    
    (31,081,895
    )Loss
      in investment in DOV Bermuda
    
    
    (1,016,798
    )
    
    —
    
    
    —Interest
      income
    
    
    1,066,841
    
    
    851,104
    
    
    934,360Interest
      expense
    
    
    (2,017,309
    )
    
    (2,947,084
    )
    
    (2,953,986
    )Other
      income (expense), net
    
    
    (3,029,396
    )
    
    1,104,323
    
    
    (7,855
    )Net
      loss before tax
    
    
    (16,820,472
    )
    
    (26,880,347
    )
    
    (33,109,376
    )Income
      tax benefit
    
    
    —
    
    
    149,000
    
    
    188,772Net
      loss
    
    $
    (16,820,472
    )
    $
    (26,731,347
    )
    $
    (32,920,604
    )Basic
      and diluted net loss per share
    
    $
    (1.47
    )
    $
    (1.73
    )
    $
    (1.67
    )Weighted
      average shares used in computing basic and diluted net loss per
      share
    
    
    11,440,731
    
    
    15,489,426
    
    
    19,729,765





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










F-5





**DOV
PHARMACEUTICAL, INC.**


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








**Series
      B**
      **Preferred
      Stock**
    
    **Common**
      **Stock**
    
    **Additional**
      **Paid-In
      Capital**
    
    **Accumulated**
      **Deficit**
    
    **Unearned**
      **Compensation**
    
    **Accumulated
      Other Comprehensive Loss**
    
    **Total**
      **Stockholders’**
      **(Deficit)/
      Equity**Balance,
      December 31, 2001
    
    $
    354,643
    
    $
    489
    
    $
    6,261,271
    
    $
    (23,844,663
    )
    $
    (807,899
    )
    
    —
    
    $
    (18,036,159
    )Issuance
      of common stock
    
    
    —
    
    
    500
    
    
    58,970,530
    
    
    —
    
    
    —
    
    
    —
    
    
    58,971,030Conversion
      of preferred stock, series C and D to common stock
    
    
    —
    
    
    452
    
    
    14,837,707
    
    
    —
    
    
    —
    
    
    —
    
    
    14,838,159Issuance
      of options to employees
    
    
    —
    
    
    —
    
    
    72,573
    
    
    —
    
    
    (72,573
    )
    
    —
    
    
    —Amortization
      of unearned compensation
    
    
    —
    
    
    —
    
    
    136,166
    
    
    —
    
    
    604,739
    
    
    —
    
    
    740,905Issuance
      of options for services
    
    
    —
    
    
    —
    
    
    233,371
    
    
    —
    
    
    —
    
    
    —
    
    
    233,371Interest
      payable in convertible securities
    
    
    —
    
    
    —
    
    
    1,011,616
    
    
    —
    
    
    —
    
    
    —
    
    
    1,011,616Comprehensive
      loss:Net
      loss, year ended December 31, 2002
    
    
    —
    
    
    —
    
    
    —
    
    
    (16,820,472
    )
    
    —
    
    
    —
    
    
    (16,820,472
    )Unrealized
      loss on marketable securities
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (179,091
    )
    
    (179,091
    )Comprehensive
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (16,999,563
    )Balance,
      December 31, 2002
    
    
    354,643
    
    
    1,441
    
    
    81,523,234
    
    
    (40,665,135
    )
    
    (275,733
    )
    
    (179,091
    )
    
    40,759,359Issuance
      of common stock and warrants
    
    
    —
    
    
    208
    
    
    18,883,828
    
    
    —
    
    
    —
    
    
    —
    
    
    18,884,036Amortization
      of unearned compensation
    
    
    —
    
    
    —
    
    
    54,430
    
    
    —
    
    
    235,631
    
    
    —
    
    
    290,061Issuance
      of options for services
    
    
    —
    
    
    —
    
    
    694,360
    
    
    —
    
    
    —
    
    
    —
    
    
    694,360Interest
      payable in convertible securities
    
    
    —
    
    
    —
    
    
    1,857,961
    
    
    —
    
    
    —
    
    
    —
    
    
    1,857,961Comprehensive
      loss:Net
      loss, year ended December 31, 2003
    
    
    —
    
    
    —
    
    
    —
    
    
    (26,731,347
    )
    
    —
    
    
    —
    
    
    (26,731,347
    )Unrealized
      gain on marketable securities
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    150,863
    
    
    150,863Comprehensive
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (26,580,484
    )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
    )
    $
    27,936,332





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










F-6





**DOV
PHARMACEUTICAL, INC.**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS**





**Years
      Ended December 31,****2002**
    
    **2003**
    
    **2004****Cash
      flows from operating activities**Net
      loss
    
    $
    (16,820,472
    )
    $
    (26,731,347
    )
    $
    (32,920,604
    )Adjustments
      to reconcile net loss to net cash (used in) provided by operating
      activities:Purchased
      in-process research and development
    
    
    —
    
    
    5,305,681
    
    
    —Non-cash
      amortization of premium paid on marketable securities
    
    
    —
    
    
    1,196,880
    
    
    909,486Loss
      in investment in DOV Bermuda
    
    
    1,016,798
    
    
    —
    
    
    —Non-cash
      royalty and litigation settlement expense (income)
    
    
    2,270,497
    
    
    (42,651
    )
    
    —Net
      depreciation in investments
    
    
    500,904
    
    
    250,782
    
    
    —Realized
      loss in marketable securities
    
    
    —
    
    
    182,354
    
    
    —Net
      loss on sale of investments
    
    
    —
    
    
    8,839
    
    
    —Non-cash
      interest expense
    
    
    2,016,262
    
    
    2,943,737
    
    
    2,913,361Depreciation
    
    
    104,935
    
    
    155,358
    
    
    221,109Amortization
      of deferred charges
    
    
    25,071
    
    
    94,868
    
    
    58,302Non-cash
      compensation charges
    
    
    740,905
    
    
    290,061
    
    
    29,938Warrants,
      options and common stock issued for services
    
    
    233,371
    
    
    694,360
    
    
    314,635Changes
      in operating assets and liabilities:Due
      from DOV Bermuda (Elan Portion)
    
    
    (340,202
    )
    
    193,058
    
    
    —Accounts
      receivable
    
    
    108,711
    
    
    47,289
    
    
    (355,969
    )Prepaid
      expenses and other current assets
    
    
    (625,851
    )
    
    (487,093
    )
    
    (97,878
    )Accounts
      payable
    
    
    1,546,028
    
    
    (60,004
    )
    
    1,433,702Accrued
      expenses
    
    
    572,322
    
    
    179,762
    
    
    2,690,736Deferred
      revenue
    
    
    (2,239,583
    )
    
    (2,968,750
    )
    
    32,598,039Net
      cash (used in) provided by operating activities
    
    
    (10,890,304
    )
    
    (18,746,816
    )
    
    7,794,857**Cash
      flows from investing activities**Purchase
      of in-process research and development
    
    
    —
    
    
    (5,305,681
    )
    
    —Investments
      in DOV Bermuda, net of cash received
    
    
    (1,007,287
    )
    
    —
    
    
    —Purchases
      of marketable securities
    
    
    (43,145,142
    )
    
    (76,237,406
    )
    
    (125,039,485
    )Sales
      of marketable securities
    
    
    2,000,000
    
    
    73,104,160
    
    
    63,494,000Sales
      of investments
    
    
    —
    
    
    786,854
    
    
    —Purchases
      of property and equipment
    
    
    (201,058
    )
    
    (181,808
    )
    
    (332,578
    )Net
      cash used in investing activities
    
    
    (42,353,487
    )
    
    (7,833,881
    )
    
    (61,878,063
    )**Cash
      flows from financing activities**Borrowings
      under convertible debenture, net of issuance costs
    
    
    —
    
    
    —
    
    
    62,625,949Proceeds
      from issuance of stock, net of cash costs
    
    
    58,971,030
    
    
    14,753,248
    
    
    9,965,005Proceeds
      from options and warrants exercised
    
    
    —
    
    
    1,738,875
    
    
    1,135,726Net
      cash provided by financing activities
    
    
    58,971,030
    
    
    16,492,123
    
    
    73,726,680Net
      increase (decrease) in cash and cash equivalents
    
    
    5,727,239
    
    
    (10,088,574
    )
    
    19,643,474Cash
      and cash equivalents, beginning of year
    
    
    13,652,334
    
    
    19,379,573
    
    
    9,290,999Cash
      and cash equivalents, end of year
    
    $
    19,379,573
    
    $
    9,290,999
    
    $
    28,934,473**Supplemental
      disclosures of cash flow information**Interest
      paid
    
    $
    1,047
    
    $
    3,346
    
    $
    3,818Non-cash
      issuance of warrants
    
    
    —
    
    $
    2,391,913
    
    
    —





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





F-7





**DOV
PHARMACEUTICAL, INC.**


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**





**1.
The Company**





**Organization**





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




The
Company is a biopharmaceutical company focused on the discovery, in-licensing,
development and commercialization of novel drug candidates for central nervous
system disorders. The Company has six product candidates in clinical trials, and
one product candidate for which NDAs are expected to be filed in the first half
of 2005, targeting insomnia, anxiety disorders, pain, depression and angina and
hypertension. The Company has established strategic alliances with select
partners to access their unique technologies and their commercialization
capabilities. The Company operates principally in the United States but it also
conducts clinical studies in Europe and Canada.





**2.
Significant Accounting Policies**





**Basis
of Presentation**





The
financial statements are presented on the basis of accounting principles that
are generally accepted in the United States. The consolidated financial
statements include accounts of the Company and its subsidiaries. Intercompany
accounts and transactions are eliminated in consolidation.




The
Company and Elan Corporation, plc (“Elan”) entered into a transaction to form
DOV (Bermuda), Ltd. f/k/a DOV Newco, Ltd. a Bermuda exempted limited
company (“DOV Bermuda”). While the Company owned 80.1% of the outstanding
capital stock of DOV Bermuda and Elan owned 19.9%, through its wholly-owned
subsidiary Elan Pharmaceuticals Investments II, Ltd., Elan had retained
significant minority rights that are considered "participating rights" as
defined in the Emerging Issues Task Force Consensus No. 96-16 "Investor's
Accounting for an Investee When the Investor Has a Majority of the Voting
Interest but the Minority Shareholder or Shareholders Have Certain Approval or
Veto Rights." Accordingly, the Company did not consolidate the financial
statements of DOV Bermuda, but instead accounted for its investment in DOV
Bermuda under the equity method of accounting. As Elan’s
participating rights expired as of January 2003, the Company began to
consolidate the results of DOV Bermuda as of January 1, 2003.  (See Note
6).




Through
December 31, 2002, the Company recorded its 80.1% interest in the loss in DOV
Bermuda as research and development expense for the portion of the research and
development expense incurred by the Company on behalf of DOV Bermuda and as Loss
in Investment in DOV Bermuda for the Company's 80.1% interest in the remaining
loss of DOV Bermuda. In May
2004, the Company purchased for a nominal amount the remaining equity interest
of DOV Bermuda and dissolved the entity in December 2004.





**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
accrued litigation settlement costs, the value of investments and the
development period for the Company’s products. Actual results could differ from
those estimates.





**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."




F-8


**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, 2004 and 2003, short-term marketable securities included $61.6
million and $ 13.0 million
of investments, respectively, primarily comprised of investment grade
asset-backed, variable-rate debt obligations, commercial paper and money market
funds.  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.




The
Company revised its classification of certain auction rate securities from cash
and cash equivalents to short-term marketable securities of $13.0 million and
$18.5 million for the years ended December 31, 2003 and December 31, 2002
respectively. For the years ended December 31, 2003 and 2002, net cash provided
by (used in) investing activities related to these short-term marketable
securities of $(5.5) million and $18.5 million, respectively, were included in
cash and cash equivalents in the Company’s Consolidated Statements of Cash
Flows. These changes in classification do not affect previously reported results
of operations or cash flows from operations or financing activities in the
Consolidated Statements of Cash Flows.





**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, the convertible
promissory note and the convertible line of credit promissory note and were and
are being amortized over the term of the instruments.





**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 for the worldwide
development and commercialization of all indications for DOV 21,947 and certain
indications for DOV 216,303 in
exchange for a $35.0 million up-front payment and the right to receive further
payments of up to $420.0 million upon the achievement of certain milestones and
royalties based on product net sales, if any. The up-front payment has been
deferred and is being amortized to revenue over the estimated research and
development period of 51 months. The time period of the development period is a
significant estimate used in the preparation of the financial statements and is
subject to Merck developing the compound in accordance with the last estimated
development schedule presented by Merck.




F-9


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.





**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. Prior to
January 1, 2003, certain research and development expenses incurred on behalf of
DOV Bermuda were billed to DOV Bermuda under a joint development and operating
agreement. Payments received from DOV Bermuda that reflected Elan's 19.9%
interest in the work performed by the Company for DOV Bermuda were recorded as a
reduction in research and development expense. Research and development expenses
include $5,924,785 for the year ended December 31, 2002 related to work
performed for DOV Bermuda.  Effective
January 1, 2003, Elan no longer funded its pro rata share of DOV Bermuda
expenses. Beginning January 1, 2003, the Company is consolidating DOV Bermuda
and recording 100% of the research and development costs of DOV Bermuda.




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





**Years
      Ended December 31,****2002**
    
    **2003**
    
    **2004**Payroll
      related and associated overhead
    
    $
    3,607,387
    
    $
    4,774,687
    
    $
    5,773,704Clinical
      and preclinical trial costs
    
    
    6,256,267
    
    
    11,497,889
    
    
    18,103,432Purchased
      in-process research and development
    
    
    —
    
    
    5,305,681
    
    
    —Professional
      fees
    
    
    274,636
    
    
    836,158
    
    
    503,789Travel
    
    
    172,610
    
    
    269,444
    
    
    383,193Total
      research and development expense
    
    $
    10,310,900
    
    $
    22,683,859
    
    $
    24,764,118Research
      and development attributable to DOV Bermuda
    
    $
    5,924,785Research
      and development attributable to other compounds
    
    
    4,386,115Total
      research and development expense
    
    $
    10,310,900








F-10





Prior to
the Company consolidating DOV (Bermuda), Ltd. effective January 1, 2003, the
following represents a reconciliation of the total loss of DOV Bermuda included
in our statement of operations:





**Year
      EndedDecember 31, 2002**DOV
      Pharmaceutical, Inc.’s 80.1% portion of DOV Bermuda
losses.
    
    $
    7,580,380Elimination
      of Intercompany profits
    
    
    638,797Total
      loss in DOV Bermuda recorded by DOV Pharmaceutical, Inc.
    
    $
    6,941,583Loss
      in investment in DOV Bermuda
    
    $
    1,016,798Research
      and development expense
    
    
    5,924,785Total
      loss in DOV Bermuda recorded by DOV Pharmaceutical, Inc.
    
    $
    6,941,583





**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, convertible promissory note, the convertible line of
credit promissory note, convertible preferred stock, 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,****2002**
    
    **2003**
    
    **2004**Net
      loss attributable to common stockholders
    
    $
    (16,820,472
    )
    $
    (26,731,347
    )
    $
    (32,920,604
    )Basic
      and diluted:Weighted-average
      shares used in computing basic and diluted net loss per
    share
    
    
    11,440,731
    
    
    15,489,426
    
    
    19,729,765Basic
      and diluted net loss per share
    
    $
    (1.47
    )
    $
    (1.73
    )
    $
    (1.67
    )Antidilutive
      securities not included in basic and diluted net loss per share
      calculation:Convertible
      subordinated debentures
    
    
    —
    
    
    —
    
    
    2,857,143Convertible
      preferred stock
    
    
    574,521
    
    
    574,521
    
    
    —Convertible
      promissory note
    
    
    2,639,763
    
    
    2,827,780
    
    
    —Convertible
      line of credit promissory note
    
    
    966,001
    
    
    1,064,966
    
    
    1,173,981Options
    
    
    2,950,599
    
    
    2,631,370
    
    
    2,646,176Warrants
    
    
    551,312
    
    
    1,396,766
    
    
    895,3667,682,196
    
    
    8,495,403
    
    
    7,572,666








F-11





**Comprehensive
Loss**


**Years
      Ended December 31,****2002**
    
    **2003**
    
    **2004**Net
      loss
    
    $
    (16,820,472
    )
    $
    (26,731,347
    )
    $
    (32,920,604
    )Reclassification
      for losses included in net loss....
    
    
    —
    
    
    182,354
    
    
    —Net
      unrealized losses on marketable securities
    
    
    (179,091
    )
    
    (31,491
    )
    
    (219,325
    )Comprehensive
      loss
    
    $
    (16,999,563
    )
    $
    (26,580,484
    )
    $
    (33,139,929
    )





**Other
Income (Expense), net**


**Years
      Ended December 31,****2002**
    
    **2003**
    
    **2004**Directors’
      and officers’ insurance recovery (Note 14)
    
    $
    —
    
    $
    1,556,000
    
    $
    —Decrease
      in value of warrants to acquire Neurocrine stock, net (Note
      12)
    
    
    (500,904
    )
    
    (250,759
    )
    
    —Decrease
      (increase) in value of warrants related to shareholder class action
      lawsuit (Note 14)
    
    
    (2,270,497
    )
    
    42,651
    
    
    —Other
      expense, net
    
    
    (257,995
    )
    
    (243,569
    )
    
    (7,855
    )Other
      income (expense), net
    
    $
    (3,029,396
    )
    $
    1,104,323
    
    $
    (7,855
    )





**Stock-Based
Compensation**





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




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:





**For
      the Years Ended December 31,****2002**
    
    **2003**
    
    **2004**Net
      loss attributed to common stockholders:As
      reported
    
    $
    (16,820,472
    )
    $
    (26,731,347
    )
    $
    (32,920,604
    )Add:
      total stock-based employee compensation expense determined under APB No.
      25
    
    
    740,905
    
    
    290,061
    
    
    29,938Deduct:
      total stock-based employee compensation expense determined under fair
      value based method for all awards
    
    
    (1,663,406
    )
    
    (1,684,376
    )
    
    (3,871,325
    )Pro
      forma
    
    $
    (17,742,973
    )
    $
    (28,125,662
    )
    $
    (36,761,991
    )Basic
      and diluted net loss per share applicable to common
      stockholders:As
      reported
    
    $
    (1.47
    )
    $
    (1.73
    )
    $
    (1.67
    )Pro
      forma
    
    $
    (1.55
    )
    $
    (1.82
    )
    $
    (1.86
    )








F-12





For
purposes of the computation of the pro forma effects on the net loss above, the
fair value of each employee option is estimated using the Black-Scholes option
pricing model and using the following assumptions:





**December
      31,****2002**
    
    **2003**
    
    **2004**Risk-free
      interest rate
    
    
    3.90%-5.44%
    
    
    3.46%-4.41%
    
    
    3.78%-4.90%Expected
      lives
    
    
    10
      years
    
    
    10
      years
    
    
    6-10
      yearsExpected
      dividends
    
    
    None
    
    
    None
    
    
    NoneExpected
      volatility
    
    
    0%-115.10%
    
    
    76.58%-87.41%
    
    
    69.74%-76.27%








The
weighted average per share fair value of Company's common stock options granted
to directors, officers and employees for the years ended December 31, 2002,
2003 and 2004 approximated $2.14, $10.59 and $10.97 respectively.





**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
$5.7 million of the Company's cash balance was uncollateralized at December 31,
2004.





**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.





**Recent
Accounting Pronouncements**





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




F-13






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






In
December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29.” The amendments made by Statement 153 are based
on the principle that exchanges of nonmonetary assets should be measured based
on the fair value of the assets exchanged. The amendment also eliminates the
narrow exception for nonmonetary exchanges of similar productive assets and
replaces it with a broader exception for exchanges of nonmonetary assets that do
not have commercial substance. The provisions of the Statement are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Management does not expect the adoption of SFAS 153 to have a material
impact on the Company’s financial condition or results of
operations.




In March
2004, the EITF reached a final consensus on Issue 03-01, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments. EITF
03-01 provides guidance on when an investment is considered impaired, whether
that impairment is other than temporary and the measure of the impairment loss.
EITF 03-01 also provides new disclosure requirements for other than temporary
impairments on debt and equity investments. In September 2004, the FASB delayed
the effective date of the measurement and recognition guidance contained in EITF
03-01, however, the disclosure requirements are effective. The adoption of EITF
03-01 is not expected to have a material impact on the Company’s financial
position, results of operations or cash flows.








F-14





**3.
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,
2004.




**Gross
      Unrealized Losses****Amortized
      Cost**
    
    **GrossUnrealizedGains**
    
    **Less
      than 12 Months**
    
    **Greater
      than 12 Months**
    
    **Estimated
      Fair Value**Institutional
      money market
    
    $
    23,045,858
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    23,045,858Amounts
      included in cash and cash equivalents
    
    $
    23,045,858
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    23,045,858Corporate
      debt
    
    $
    16,994,099
    
    $
    —
    
    $
    (77,222
    )
    $
    —
    
    $
    16,916,877Asset-backed
      securities
    
    
    1,514,605
    
    
    —
    
    
    (4,705
    )
    
    —
    
    
    1,509,900Auction
      rate securities
    
    
    61,624,790
    
    
    210
    
    
    —
    
    
    —
    
    
    61,625,000Amounts
      included in marketable securities - short-term
    
    $
    80,133,494
    
    $
    210
    
    $
    (81,927
    )
    $
    —
    
    $
    80,051,777Corporate
      debt
    
    $
    23,401,659
    
    $
    —
    
    $
    (165,836
    )
    $
    —
    
    $
    23,235,823Amounts
      included in marketable securities - long-term
    
    $
    23,401,659
    
    $
    —
    
    $
    (165,836
    )
    $
    —
    
    $
    23,235,823




The
following is a summary of the amortized cost and estimated value of debt
securities by contractual maturity at December 31, 2004, excluding securities
classified as cash and cash equivalents.




**Amortized
      Cost**
    
    **Estimated**
      **Fair
      Value**Due
      in less than one year
    
    $
    80,133,494
    
    $
    80,051,777Due
      between one and two years
    
    
    23,401,659
    
    
    23,235,823Total
    
    $
    103,535,153
    
    $
    103,287,600








F-15





**4.
Property and Equipment**





Property
and equipment consist of the following at:


**December
      31,****Years**
    
    **2003**
    
    **2004**Furniture
      and fixtures
    
    
    7
    
    $
    239,046
    
    $
    324,949Machinery
      and equipment
    
    
    2-5
    
    
    482,904
    
    
    672,056Leasehold
      improvements
    
    
    2-5
    
    
    160,203
    
    
    217,726882,153
    
    
    1,214,731Less
      accumulated depreciation
    
    
    
    
    
    517,203
    
    
    738,312Property
      and equipment, net
    
    
    
    
    $
    364,950
    
    $
    476,419





**5.** **Convertible
Subordinated Debentures**





In
December 2004, the Company completed a private placement of $65.0 million
aggregate principal amount of 2.5% convertible subordinated debentures due
January 15, 2025. The holders of the debentures may require us to purchase all
or a portion of their debentures on January 15, 2012, January 15, 2015 and
January 15, 2020, in each case at a price equal to the principal amount of the
debentures to be purchased, plus accrued and unpaid interest, if any, to the
purchase date. The debentures are unsecured and subordinated in right of payment
to all existing and future senior debt, as defined in the indenture governing
the debentures. The Company will pay interest semi-annually of $812,500 on
January 15 and July 15 of each year, commencing July 15, 2005.




The
Company has reserved 2,857,143 shares of common stock for issuance upon
conversion of the debentures. The Company incurred issuance costs related to
this private placement of approximately $2.4 million, which have been recorded
as other assets and are being amortized to interest expense over the life of the
debentures. The Company has
agreed to file a shelf registration statement with the Securities and Exchange
Commission covering resales of the debentures and the common stock issuable upon
conversion of the debentures within 100 days of December 16, 2004, or March 28,
2005, and use reasonable best efforts to cause the registration statement to
become effective within 240 days of December 16, 2004, or August 15,
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. In addition, if certain corporate transactions that constitute a
change of control occur on or prior to January 15, 2012, the Company will
increase the conversion rate in certain circumstances, unless such transactions
constitute a public acquirer change of control and the Company elects to satisfy
our 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, if 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 or all of 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.




The fair
value of our subordinated convertible debentures, based on the price for the
debentures at December 31, 2004, approximated $68,575,000.




In
January 2005, the
Company completed the issuance of an additional $15.0 million aggregate
principal amount of the Company's 2.50% convertible subordinated debentures due
2025. The terms of the additional debentures are equal to the description in
Note 5 above. The Company has reserved for issuance an additional 659,340 shares
of common stock for issuance upon conversion of the debentures. Interest
payments of $375,000 each year will be due for these debentures.


****


F-16


**6.
Transaction with Elan**





In
January 1999, the Company and Elan International Services, Ltd.
("EIS"), a wholly-owned subsidiary of Elan, formed DOV Bermuda, which then owned
100% of the issued and outstanding share capital of Nascime Limited, an Irish
private limited company ("Nascime"). DOV Bermuda was formed for the special and
limited purpose of holding all the issued and outstanding shares of Nascime. The
principal business of Nascime is to carry on the business of development,
testing, exploitation, registration, manufacture, commercial realization and
licensing of two of the Company's compounds, ocinaplon and bicifadine, utilizing
certain Elan technology. In June 2000, EIS transferred its DOV Bermuda shares to
a wholly-owned non-consolidated subsidiary, EPIL II.




Historically,
both the Company and EIS had certain preemptive rights, which allowed them to
maintain their respective ownership interests in future fundings of DOV Bermuda,
and both were subject to dilution if they choose not to participate in future
equity offerings. Although the Company was the majority shareholder, the joint
development agreement gave management participation to both the Company and EIS.
Because the minority shareholder, EIS, had substantive participating rights
through management participation, the Company accounted for its investment in
the joint venture using the equity method of accounting, in accordance with EITF
96-16. Effective
January 2003, Elan's participating rights expired.  As a result, as of
January 1, 2003, the Company consolidates the results of DOV Bermuda. Elan has
not funded its pro rata portion of the joint venture expenses, effective January
1, 2003. During 2003, the Company funded Elan’s portion of the expenses that
resulted in Elan’s ownership in the joint venture declining to 17% as of June
30, 2003.




As
discussed above, the primary purpose of the joint venture was to develop two of
the Company's compounds utilizing the Elan technology. DOV Bermuda has no
operations or employees and historically contracted out the research and
development of the compounds to either the Company or Elan. EIS and the Company
have historically funded the expenses of DOV Bermuda based on their respective
ownership interests. DOV Bermuda then reimbursed the Company and Elan for the
work performed on behalf of DOV Bermuda. Prior to December 31, 2002, the Company
recorded its interest in the loss in DOV Bermuda as research and development
expense for the portion of the research and development incurred by the Company
and as Loss in investment in DOV Bermuda for the Company's interest in the
remaining loss of DOV Bermuda, which included the work performed by Elan on
behalf of DOV Bermuda. (See Note 2).




On March
24, 2003, the Company and Elan agreed to eliminate the exchange feature of the
instrument previously referred to as the convertible exchangeable promissory
note discussed below. The
exchange right had previously given Elan the ability to exchange, at any time
during the term of the note, the principal portion of the note into an equal
ownership position with the Company in DOV Bermuda.  All other
significant terms of the note, which include the right to convert the principal
and accrued interest at any time into shares of the Company’s common stock at
$3.98 per share until the expiration of the note in January 2005, remain the
same. In connection with this amendment to the note, the Company issued to Elan
International Services, Ltd. ("EIS"), a wholly-owned subsidiary of
Elan ,
warrants to purchase 75,000 shares of DOV common stock with a strike price of
$10.00 per share and with an expiration date of January 21, 2006. As of March
24, 2003, the Company determined the fair value of the warrants at $164,000,
which was capitalized and will be amortized over the remaining term of the
note.




On
October 21, 2003, the Company entered into an agreement with Elan to
acquire 100% ownership of Nascime from DOV Bermuda. In connection with the
acquisition, the Company paid $5.0 million to a subsidiary of Elan in respect of
its 17% equity stake in the joint venture. Elan granted to the operating company
a 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, the Company is
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 it does 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.. This acquisition ends Elan's involvement in the nearly five-year
joint venture established to develop controlled release formulations of
bicifadine and ocinaplon. In
accordance with FASB 141, “Business Combinations”, the transaction was accounted
for as an acquisition of assets.




F-17


The
acquisition by the Company of Nascime and the product candidates, bicifadine and
ocinaplon, relate to early stage technology that, in the opinion of the
Company's management, has not yet reached technological feasibility, as the
products will ultimately require regulatory approval prior to commercialization.
In that regard, the $5.0 million purchase price was expensed as in-process
research and development in the fourth quarter of 2003. In connection with the
acquisition, costs of $306,000 were incurred related to stamp transfer taxes
paid to Ireland. These costs are also included in research and development
expense as they relate to costs of acquired assets.





**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 Company’s ability to
borrow under the convertible line of credit promissory note expired on March 27,
2002.  The fair
value of the convertible promissory note outstanding was $37,852,000 as of
December 31, 2003. The fair value of the convertible line of credit
promissory note outstanding was $14,249,000 and $21,190,356 as of
December 31, 2003 and 2004, respectively. The excess fair value over the
carrying amount is due to the increased value of the conversion features in
these notes since their issuance. The estimated fair-value amounts have 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
2002, 2003 and 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 $636,734,
$1,178,871 and $893,792 of additional interest expense associated with this
beneficial conversion feature in 2002, 2003 and 2004, respectively, with a
corresponding increase in additional paid-in capital.




For the
years ended December 31, 2002, 2003 and 2004, the accrued interest
excluding the additional interest noted above on the note amounted to $698,553,
$748,309 and $315,939 respectively was recorded as interest expense and added to
the principal balance of the note.





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








During
2004, EIS sold the convertible 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. The note required
no payments until maturity on January 20, 2005. The note could not be
prepaid by the Company without the prior written consent of the holder.




At
December 31, 2003 and 2004, principal borrowings were $2,441,600 under the
convertible line of credit promissory note. For the years ended
December 31, 2002, 2003 and 2004 accrued interest expense on this note
amounted to $306,093, $337,468 and $371,743 respectively, which has been
recorded as interest expense and added to the principal balance of the note.




F-18


Also
during 2002, 2003 and 2004 the interest feature in the 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 and EITF 00-27.
The Company recorded $374,881, $679,089 and $1,331,887 of additional interest
expense associated with this beneficial conversion feature in 2001, 2002, 2003
and 2004 respectively, with a corresponding increase to additional paid-in
capital.





**7.
Accrued Expenses**





Accrued
expenses consist of the following:





**December
      31,****2003**
    
    **2004**Accrued
      milestone prepaid by Neurocrine (Note 12)
    
    $
    —
    
    $
    2,000,000Accrued
      professional fees
    
    
    314,801
    
    
    722,777Accrued
      bonuses
    
    
    425,000
    
    
    633,000Accrued
      other
    
    
    311,620
    
    
    80,604Accrued
      taxes
    
    
    —
    
    
    173,875Accrued
      payroll, vacation and other
    
    
    169,393
    
    
    301,294$
    1,220,814
    
    $
    3,911,550





**8.
Income Taxes**





No U.S.
Federal taxes are payable at December 31, 2003 and 2004. However, the
Company does have a $101,000 current state tax liability computed under the New
Jersey  alternative
minimum assessment regime.




During
2003 and 2004, the Company sold $1.8 million and $3.7 million, respectively, of
state net operating loss (“NOL”) carryforwards under the New Jersey Tax Benefit
Transfer Program. The proceeds from the sale of the NOLs amounted to $149,000
and $290,000, which are reported as a tax benefit in 2003 and 2004,
respectively.




At
December 31, 2004, the Company had approximately $28.1 million of federal and
$13.6 million of state NOL carryforwards available to offset future taxable
income. The federal and state NOL carryforwards will begin expiring in 2010 if
not utilized. 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 $9.0 million related to
non-qualified stock option expense.





For
financial reporting purposes, a valuation allowance of $25.4 million has been
recorded at December 31, 2004, 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. The
Company has completed its evaluation of its changes in ownerships pursuant to
the definition in Section 382 of the Internal Revenue Code of 1986, as amended,
which limits the annual utilization of a company’s NOLs if a company experiences
a change of ownership. 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. While the Company has
determined that such ownership changes have occurred, the overall NOL limitation
imposed by Section 382 will not materially impact the Company's ability to
utilize its NOLs.




F-19




In the
third quarter of 2004, the Company revised its full year 2004 estimate of its
taxable income. Taking into account the $35.0 million up-front fee it received
upon the closing of the license, research and development agreement for its
collaboration with Merck, the Company estimated
in the third quarter of 2004 that it would generate taxable income for the 2004
tax year. Therefore, the Company concluded that it was more likely than not that
a portion of its deferred tax assets would be realized. In addition, the
Company’s evaluation of the Section 382 limitation noted above concluded that
sufficient losses were available to offset a substantial portion of the
estimated taxable income for 2004. As a result, in accordance with SFAS No. 109,
the Company reversed in the third quarter of 2004 approximately $4.0 million of
valuation allowance associated with its federal and state NOLs. This benefit was
offset by the estimated federal and state income tax expense. In addition, New
Jersey state tax law limited the use of NOLs to 50% of state taxable income for
2004. As a result, the Company recorded state tax expense in the third quarter
of 2004 of $679,000. The Company has since completed its review of taxable
income for the year ended December 31, 2004 and has determined that although it
has generated taxable income in 2004, as a result of a change in tax
strategy it is much less than had been estimated as of September 30, 2004.
Thus, the Company has revised its income tax expense for the fourth quarter that
resulted in a tax benefit of $578,000 for the fourth quarter of
2004.






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,****2003**
    
    **2004**Deferred
      tax assets:Fixed
      assets and intangible assets
    
    $
    430,003
    
    $
    500,188Accrued
      legal expenses
    
    
    71,306
    
    
    —Deferred
      other
    
    
    —
    
    
    14,017,157Accrued
      other
    
    
    1,116,946
    
    
    77,637Net
      operating loss carryforward
    
    
    9,900,131
    
    
    10,806,536Total
      gross deferred tax assets
    
    
    11,518,386
    
    
    25,401,518Valuation
      allowance
    
    
    (11,518,386
    )
    
    (25,401,518
    )Net
      deferred tax assets
    
    $
    —
    
    $
    —







The net
change in valuation allowance for 2004 was an increase of approximately $13.9
million which is primarily the resulting net effect of additional net operating
losses incurred by the Company for which a benefit has not been recorded as well
as the deferred revenue with respect to the $35.0 million up-front fee it
received after the closing of the license, research and development agreement
for its collaboration with Merck and the reversal of the deferred tax asset for
deferred revenue from Biovail. The
Company's subsidiaries operating in Bermuda and Ireland did not incur income
taxes in 2004 based on current tax laws and their current business activities.
Therefore, the cumulative to date losses at December 31, 2004 of these
subsidiaries, which approximated $30.9 million, have not generated an NOL in the
schedule above.






The
difference between the Federal statutory tax rate (34%) and the effective tax
rate (0%) is primarily due to the increase in valuation allowance in all periods
presented, the sale of the state NOL carryforwards and the impact of the losses
in foreign jurisdictions as described above.





**9.
Equity Transactions**




During
1999, in connection with the Elan transaction (see Note 6) the Company
issued to EIS 525,025 shares of common stock, 354,643 shares of series B
preferred stock, and 121,500 warrants to purchase shares of the Company's common
stock at an exercise price of $3.41 a share for an aggregate price of $3.0
million. The $3.0 million was allocated to the various instruments based on
their relative market values as follows: $1,485,000 for the preferred stock,
$1,350,000 for the common stock and $165,000 for the warrants. The series B
preferred stock are non-voting shares issued from available "blank check"
preferred stock with no preference as to liquidation or dividends. Each share of
the series B preferred stock is convertible, without additional consideration
and subject to further adjustments into 1.62 shares of the Company's common
stock. In connection with the issuance of the series B preferred, the
Company recorded a deemed dividend of $125,079 as the conversion price at
issuance was less than the fair market value of the stock. On March
31, 2004, the holder of all the Company’s outstanding series B preferred stock
converted all 354,643 shares of series B preferred stock into 574,521 shares of
the Company’s common stock.




F-20


On March
8, 2002, the Company's board of directors declared a 1.62 for 1 stock split of
the Company’s common stock paid in the form of a dividend. In order to effect
the split with regard to the series B preferred stock, the Company's board
of directors approved an amendment to the Company's certificate of incorporation
to provide for an adjustment in the conversion ratio of the series B
preferred stock to reflect the split. The amendment was approved by the
stockholders of the Company, including the holders of the series B preferred
stock voting as a separate class. The split was effective on April 5, 2002.
All share data give effect to such split as if the split had occurred on
January 1, 2001.




On April
30, 2002, the Company completed an initial public offering of
5,000,000 shares of common stock at $13.00 per share, raising proceeds for the
Company of approximately $59.0 million, net of underwriting discounts and
offering expenses. Upon completion of the initial public offering, all
outstanding shares of the Company’s series C and series D redeemable convertible
preferred stock automatically converted on a 1.62 for 1 basis into an aggregate
of 4,519,800 shares of common stock.




On
October 8, 2002, the Company implemented a stockholder rights plan under which
the board of
directors declared a dividend distribution of one preferred stock purchase right
for each outstanding share of common stock and 1.62 preferred stock purchase
rights for each outstanding share of DOV series B preferred stock to
stockholders of record as of the close of business on October 9, 2002.
Initially, these rights will not be exercisable and will trade with the shares
of the Company’s common stock and series B preferred stock. Under the
Stockholder Rights Plan, the rights generally will become exercisable if a
person becomes an “acquiring person” by acquiring 15% or more of the common
stock of the Company or if a person commences a tender offer that could result
in that person owning 15% or more of the common stock of the Company. If a
person becomes an “acquiring person,” each holder of a right (other than the
acquiring person) would be entitled to purchase, at the then-current exercise
price, such number of shares of preferred stock that are equivalent to shares of
the Company’s common stock having a value of twice the exercise price of the
right. If the Company is acquired in a merger or other business combination
transaction after any such event, each holder of a right would then be entitled
to purchase, at the then-current exercise price, shares of the acquiring
company’s common stock having a value of twice the exercise price of the
right.




On July
2, 2003, the Company concluded a private placement of 1,428,571 shares of its
common stock and three-year warrants to purchase an aggregate of 392,857 shares
of the Company’s common stock at an exercise price of $16.00 per share to a
group of funds managed by OrbiMed Advisors, LLC, for gross proceeds of $15.0
million. The investors also received the right to nominate a director to the
Company’s board of directors.




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.








F-21





**Stock
Option Plans**





**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, 2004, options to purchase 471,100 shares of
common stock were outstanding under the 1998 Plan. As of October 15, 2000
all new option grants are issued under the 2000 stock option 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 and amended on March 20,
2002, May 30, 2003, December 19, 2003 and May 24, 2004. 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 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 36 months or 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. As of December 31, 2004, the 2000 Plan allowed for
the issuance of up to 2,942,090 shares of common stock plus that number of
shares of common stock underlying any future termination, cancellation or
reacquisition options granted under the 1998 Plan. Additionally, if any of the
365,000 options granted under the non-plan option grant (as described below) are
terminated, canceled or otherwise reacquired by the Company, that number of
reacquired shares will also become available for issuance under the 2000 Plan.
As of December 31, 2004, options
to purchase 1,850,076 shares of common stock were outstanding and 758,503 shares
of common stock were
available for future grants under the 2000 Plan.





**Non-Plan
Option Grant**





In
connection with the commencement of employment, the Company granted to an
officer stock options to acquire 405,000 shares of common stock at an exercise
price of $2.78 per share. Of these, 325,000 were vested and remain outstanding
as of December 31, 2004. Although these 405,000 options were neither granted
under the 1998 Plan nor the 2000 Plan, the options were charged against the
total number of options available for grants under the 2000 Plan.





**Employee
and Director Grants**





During
2002, 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 in the amount $72,573 as of the date of the grant, which amount is
being amortized to operations over the vesting period. These options as well as
options granted with an exercise price less than fair market value prior to 2002
resulted in a charge to operations of $604,739, $235,631, and $29,938 in 2002,
2003 and 2004, respectively.





**Non-Employee
Options and Warrants**





In
September 2003, the Company issued 285,000 options to a non-employee consultant.
50% of the options vest on June 3, 2005 (18 months after the consultant became a
full-time employee), with the remainder vesting ratably quarterly over the next
18 months. The options resulted in a charge to operations of $243,263 in
2003. The non-employee consultant became an employee in December
2003.




F-22


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 charge to operations of $20,149, $43,371 and $21,020 in
2002, 2003 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 charge to operations of $182,939, $407,726 and $293,616 in 2002, 2003 and
2004, respectively.




Option
activity for the years ended December 31, 2002, 2003 and 2004 was as
follows:





**Options**
    
    **Weighted
      AverageOptions Exercise Price**Options
      Outstanding, December 31, 2001
    
    
    2,433,240
    
    $
    3.18Granted
    
    
    687,240
    
    $
    5.20Exercised
    
    
    —
    
    $
    —Forfeited
    
    
    (169,881
    )
    $
    4.74Options
      Outstanding, December 31, 2002
    
    
    2,950,599
    
    $
    3.56Granted
    
    
    592,300
    
    $
    12.82Exercised
    
    
    (560,954
    )
    $
    3.13Forfeited
    
    
    (350,575
    )
    $
    5.28Options
      Outstanding, December 31, 2003
    
    
    2,631,370
    
    $
    5.51Granted
    
    
    610,750
    
    $
    13.86Exercised
    
    
    (519,507
    )
    $
    3.27Forfeited
    
    
    (76,437
    )
    $
    10.97Options
      Outstanding, December 31, 2004
    
    
    2,646,176
    
    $
    7.72








**Options
      Outstanding as of**
      **December
      31, 2004**
    
    **Options
      Exercisable as of**
      **December
      31, 2004****Weighted
      Average Remaining Contractual Life**
    
    **Number
      Outstanding**
    
    **Weighted
      Average Exercise Price**
    
    **Number
      Exercisable**
    
    **Weighted
      Average Exercise Price**Price
      range $2.27-$4.00
    
    
    5.09
      years
    
    
    829,316
    
    $
    2.69
    
    
    819,316
    
    $
    2.68Price
      range $4.01-$6.99
    
    
    7.10
      years
    
    
    765,280
    
    
    4.50
    
    
    599,760
    
    
    4.35Price
      range $7.00-$12.80
    
    
    8.81
      years
    
    
    222,030
    
    
    11.20
    
    
    29,560
    
    
    8.95Price
      range $12.81-$17.38
    
    
    8.98
      years
    
    
    829,550
    
    
    14.77
    
    
    24,825
    
    
    15.722,646,176
    
    
    
    
    
    1,473,461








F-23





**Warrants**





At
December 31, 2004, warrants to purchase 895,366 shares of the Company's common
stock were outstanding with a weighted average exercise price of $11.94. All
outstanding warrants are fully vested. The details of the warrants for common
stock outstanding at December 31, 2004 were as follows:





**Number
      of Shares**
      **Underlying
      Warrants**
    
    **Exercise
      Price**
    
    **Expiration
      Date**52,810
    
    
    $2.49
    
    
    June
      2005392,857
    
    
    $16.00
    
    
    July
      200655,430
    
    
    $6.17
    
    
    August
      20062,980
    
    
    $6.17
    
    
    October
      2006391,289
    
    
    $10.00
    
    
    June
      2009895,366





**10.
Employment Agreements**





The
Company has entered into an employment agreement with the Chief Executive
Officer that originally expired on December 10, 2004 but was extended on
January 21, 2005. The agreement provides for base compensation with annual
increases of 10%, benefits, the reimbursement of expenses and the payment of
incentive compensation, which will be determined by the Company's board of
directors in its sole discretion. Additionally, if the Company should merge or
consolidate with or into an unrelated entity, sell all or substantially all of
its assets, or enter into a transaction or series of transactions the result of
which 51% or more of its capital stock is transferred to one or more unrelated
third parties, the Chief Executive Officer is entitled to receive a bonus equal
to 2% of the gross proceeds of such sale (as defined in the agreement). The
agreement also provides for benefits upon termination, disability or death. In
addition, the agreements provide for severance and acceleration of vesting of
stock options in the event of a termination after a change in control. The
agreement also contains non-competition provisions that are in effect during the
severance period.




On March
15, 2004, the Company’s co-founder and president retired. Prior to his
retirement his employment agreement was the same as for the Chief Executive
Officer. In connection with his retirement, the Company entered into a severance
agreement with him which provided for the termination of his employment
agreement, a year’s salary of $365,750, payment of his health insurance premiums
over the next twelve months of approximately $11,000 and non-competition
provisions. Dr. Beer has resigned from the board of directors effective March
15, 2005.




The
Company has also entered into employment agreements with several other key
employees that range in term from one to three years. The agreements provide for
a base salary subject to annual increases and incentive compensation if the
Company achieves certain milestones as defined in the agreements plus a
performance bonus as determined by the Company's board of directors. Certain of
these agreements provide for compensation and incentive compensation if the
employee is terminated without cause or if the employee terminates because of
the Company's failure to pay amounts due, demotion of title or responsibilities,
or certain changes of control.





**11.** **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 completed one year of service with the Company and 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 fiscal 2002, 2003 and 2004, the
Company did not contribute to the 401(k) Plan.





F-24


**12.
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.




In 2001, Neurocrine
made a milestone payment to the Company of $1,300,000 in cash and warrants to
purchase 75,000 shares of Neurocrine common stock. Royalty expense for the year
ended December 31, 2001, of $1,111,122, represents amounts due under the
Wyeth agreement, which includes 35% of the cash and 35% of the fair value of the
warrants at the date received from Neurocrine. Included in accrued expenses at
December 31, 2002 is $563,486 related to the 35% of the amounts payable to
Wyeth. This liability was adjusted to fair value and resulted in $269,718 of
other income that has been netted against other expense during 2002 due to the
decline in value of the warrants in 2002 and $74,176 of other expense that has
been netted against other income during 2003 due to the increase in the value of
the warrants. In 2003, the Company distributed the warrants to Wyeth and as such
are no longer required to record a change in the fair market value.




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.





**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
connection with this agreement, the Chief Executive Officer and former President
of the Company, respectively, entered into consulting agreements with Neurocrine
in which they agreed to provide certain consulting services for an annual
service fee of $50,000 each. Subsequently, these original consulting agreements
were terminated and new consulting agreements with entities in which the Chief
Executive Officer and President retain beneficial ownership were implemented. To
date, services under these agreements have not been requested. This portion of
the Neurocrine agreement is not reflected in the financial statements of the
Company.




F-25


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.




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. The Company has received $2.0
million from Neurocrine for the initial filing of the NDA for indiplon, however
Neurocrine has reported that the NDA was not accepted by the FDA and that they
intend to refile the NDA in the first half of 2005. The Company’s agreement with
Neurocrine indicates that the $2.0 million milestone is earned once an NDA has
been submitted according to certain FDA regulations, thus the Company will
record this as revenue once the revised NDAs are submitted and accepted by the
FDA.





**Merck
Agreement**





On August
5, 2004, the Company entered into an 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. 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 has assumed financial
responsibility for development and commercialization of a product containing at
least one of the licensed compounds. The parties have agreed to work together to
clinically develop licensed product and DOV has reserved the right to co-promote
the sales of product in the United States to psychiatrists and other specialists
who treat depression.




Under the
agreement, the Company received a $35.0 million up-front licensing payment. In
addition, the Company is entitled to receive milestone payments of up to $420.0
million, as well as royalties on worldwide net sales, if any. In
accordance with the Emerging Issues Task Force (EITF) Issue No. 00-21,
“Accounting for Revenue Arrangements with Multiple Deliverables” the
Company has evaluated the arrangement to determine if the deliverables are
separable into units of accounting and then applied applicable revenue
recognition criteria.  The Company has determined that the license and the
collaboration are a single element for accounting purposes. As a result, the
$35.0 million up-front licensing payment and any future milestones received will
be recorded over the term of the collaboration.  As  the
Company has a continuing obligation with respect to collaboration on development
of product candidates, until an NDA is filed, the up-front payment has been
deferred and will be amortized to revenue over the estimated research and
development period of 51 months.





**Biovail
Agreement**





On
March 28, 2003, the Company entered into a separation agreement with
Biovail that provided for the return of the Company's December 2000 patent
for the immediate and controlled release of diltiazem and termination of the
2001 exclusive license agreement with Biovail for development of the DOV
compound for the treatment of angina and hypertension. In consideration of the
termination of the 2001 agreement and the return of the patent, DOV agreed to a
$1.0 million payment to Biovail upon signing, contingent payments to
Biovail of $3.0 million upon receipt of marketing authorization for the
drug and up to a maximum of $7.5 million based upon sales. The Company
recorded a charge for the $1.0 million signing payment in the first quarter
of 2003. This payment was to obtain the patent and related clinical data from
Biovail. As this product will require FDA approval prior to marketing and the
patent has no alternative future use, the Company expensed the entire license
fee. As the separation agreement ends DOV's performance obligations, the
agreement also resulted in the recognition in the first quarter of 2003 the
remaining deferred revenue, totaling approximately $3.0 million as of
December 31, 2002, of the original $7.5 million license fee paid to DOV. In
addition, as a result of the separation agreement, Biovail and DOV also agreed
to release any and all claims.





F-26


**Operating
Leases**





The
Company leases office space under a long-term operating lease expiring in the
year 2008. The Company also leases various office and transportation equipment
under operating leases with terms ranging from one to three years.




As of
December 31, 2004, the total non-cancelable future minimum rental payments under
the above-mentioned leases are as follows:





Year
      ending December 31,2005
    
    $
    546,8792006
    
    
    569,3942007
    
    
    574,2382008
    
    
    306,2682009
    
    
    —$
    1,996,779





Rent
expense incurred for office space and equipment leases amounted to $274,767,
$348,347 and $406,838 for the years ended December 31, 2002, 2003 and 2004.




**13.
Contingencies**





From
April 30, 2002, a number of class action lawsuits were filed naming as
defendants the Company, certain of the Company’s officers and directors and
certain of the underwriters in the Company’s April 24, 2002 initial public
offering of 5,000,000 shares of its common stock. On
December 20, 2002, the Company entered into an agreement, which was approved by
the court on April 16, 2003, to settle these lawsuits. The settlement includes
all defendants and covers as a class all those who purchased common stock of the
Company in or traceable to the Company’s initial public offering through
December 20, 2002 and suffered damages. T he
Company paid in the aggregate to the class members (inclusive of their
attorneys’ fees and costs) $250,000 and issued 500,000 six-year warrants to
purchase common stock exercisable at $10.00 per share. As of
June 2, 2003 (the issuance date), the Company determined the value of these
warrants at $2,227,846 and recorded the warrants as stockholders’ equity.




In
connection with the securities class action lawsuits described above, the
Company’s providers of primary and excess liability insurance for directors and
officers, D&O, asserted that the policy binders they issued in connection
with the Company’s initial public offering were not effective because, among
other reasons, they never approved the documentation provided with the policy
application, including the final registration statement, and that such approval
is a prerequisite to their policies’ effectiveness. The Company strongly
disagreed with their positions, advised the carriers that the Company intended
to hold them to their original binder terms as the Company vigorously pursued
resolution of these matters, and initiated arbitration against the primary
D&O carrier. The Company reached agreement with the excess D&O carrier
that, for claims other than the securities class action lawsuits described
above, the excess D&O policy would remain in place, effective for losses in
excess of $10,300,000. In April 2003, prior to commencement of arbitration, the
Company and the primary carrier reached a settlement. Under the settlement
terms, the carrier paid the Company approximately $1,556,000.




The
primary carrier also issued a D&O policy, including entity coverage, for
three years at a fixed rate that the Company believes is competitive. While the
carrier retains the right to reprice the policy premium upon the second policy
anniversary if there is further claim experience, any repricing not acceptable
to the Company will relieve it of its obligation to keep the policy in force.
The Company has also been issued D&O insurance by the original excess
carrier for excess insurance. The insurance recovery was recorded in the second
quarter of 2003 as other income.




F-27


From time
to time and in the ordinary course of business, the Company may be subject to
various claims, charges and litigation. In the opinion of management, final
judgments from such pending claims, charges, and litigation, if any, against the
Company, would not have a material adverse effect on its financial position,
result of operations, or cash flows.


****


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





The
following table contains selected unaudited statement of operations information
for each quarter of 2002, 2003 and 2004. 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**
    
    **Dec
      31(a)****2002**
    
    (In
      thousands, except per share data)Revenue
    
    $
    708
    
    $
    635
    
    $
    504
    
    $
    542Net
      loss
    
    
    (3,882
    )
    
    (3,785
    )
    
    (2,604
    )
    
    (6,550
    )Net
      loss attributable to common stockholders
    
    
    (3,882
    )
    
    (3,785
    )
    
    (2,604
    )
    
    (6,550
    )Basic
      and diluted net loss per share
    
    
    (0.79
    )
    
    (0.32
    )
    
    (0.18
    )
    
    (0.45
    )**2003**Revenue
    
    $
    2,969
    
    $
    —
    
    $
    —
    
    $
    —Net
      loss after tax benefit
    
    
    (2,610
    )
    
    (4,736
    )
    
    (7,399
    )
    
    (11,986
    )Net
      loss attributable to common stockholders
    
    
    (2,610
    )
    
    (4,736
    )
    
    (7,399
    )
    
    (11,986
    )Basic
      and diluted net loss per share
    
    
    (0.18
    )
    
    (0.32
    )
    
    (0.45
    )
    
    (0.73
    )**2004**Revenue
    
    $
    —
    
    $
    —
    
    $
    343
    
    $
    2,199Net
      loss after tax benefit
    
    
    (7,690
    )
    
    (8,342
    )
    
    (12,008
    )
    
    (4,881
    )Net
      loss attributable to common stockholders
    
    
    (7,690
    )
    
    (8,342
    )
    
    (12,008
    )
    
    (4,881
    )Basic
      and diluted net loss per share
    
    
    (0.46
    )
    
    (0.43
    )
    
    (0.56
    )
    
    (0.23
    )





(a) Includes
a non-cash charge of $2.5 million relating to shareholder litigation settlement
in 2002. In the
fourth quarter of 2003 the Company paid $5.0 million for the purchase of Nascime
and the product candidates, bicifadine and ocinaplon, and $306,000 for transfer
taxes associated with the acquisition. The $5.3 million is included as research
and development expense.













F-28








**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**







To the
Board of Directors of


DOV
(Bermuda), Ltd.





In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, consolidated statements of changes in
stockholders' deficit and consolidated statements of cash flows present fairly,
in all material respects, the financial position of DOV (Bermuda), Ltd. (a
development stage company) and subsidiary (the "Company") as of
December 31, 2001 and 2002, and the results of their operations and their
cash flows for the years ended December 31, 2001 and 2002, and the period
from inception (January 21, 1999) through December 31, 2002, in conformity with
the Standards of the Public Accounting Oversight Board (United States). 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 Accounting Oversight Board (United States). These
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.





PricewaterhouseCoopers
LLP




Florham
Park, New Jersey




March 7,
2003 except for Note 8 as to which the date is March 24, 2003





F-29








**DOV
(BERMUDA), LTD.**


**(A
Development Stage Company)**


**CONSOLIDATED
BALANCE SHEETS**








**As
      of December 31,****2001**
    
    **2002****Assets**Current
      assetsCash
      and cash equivalents
    
    $
    7,623
    
    $
    8,936Total
      current assets
    
    $
    7,623
    
    $
    8,936**Liabilities
      and Stockholders’ Deficit**Current
      liabilitiesAccrued
      liabilities
    
    $
    29,863
    
    $
    35,708Due
      to related parties
    
    
    1,854,045
    
    
    3,558,354Total
      current liabilities
    
    
    1,883,908
    
    
    3,594,062Commitments
      and contingenciesStockholders'
      deficitClass
      A voting common stock, $1.00 par value; 16,020 shares authorized; 16,020
      shares issued and outstanding
    
    
    16,020
    
    
    16,020Class
      B non-voting common stock, $1.00 par value; 3,980 shares authorized; 3,980
      shares issued and outstanding
    
    
    3,980
    
    
    3,980Additional
      paid-in capital
    
    
    19,527,194
    
    
    27,281,999Deficit
      accumulated during development stage
    
    
    (21,423,479
    )
    
    (30,887,125
    )Total
      stockholders' deficit
    
    
    (1,876,285
    )
    
    (3,585,126
    )Total
      liabilities and stockholders' deficit
    
    $
    7,623
    
    $
    8,936





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








F-30





**DOV
(BERMUDA), LTD.**


**(A
Development Stage Company)**


**CONSOLIDATED
STATEMENTS OF OPERATIONS**











**Years
      Ended December 31,**
    
    **Period
      from**
      **January
      21,**
      **1999**
      **(Date
      of**
      **Inception)**
      **Through**
      **December
      31,****2001**
    
    **2002**
    
    **2002****Operating
      expenses**Purchased
      in-process research and development (Note 5)
    
    $
    —
    
    $
    —
    
    $
    10,005,000Research
      and development expenses (Note 4)
    
    
    5,891,632
    
    
    9,435,906
    
    
    20,775,814General
      and administrative expenses
    
    
    23,351
    
    
    27,764
    
    
    114,643Total
      operating expenses
    
    
    5,914,983
    
    
    9,463,670
    
    
    30,895,457Interest
      income
    
    
    477
    
    
    24
    
    
    8,332Net
      loss
    
    $
    (5,914,506
    )
    $
    (9,463,646
    )
    $
    (30,887,125
    )








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








F-31





**DOV
(BERMUDA), LTD.**


**(A
Development Stage Company)**


**CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT**


**For
the Periods from Inception (January 21, 1999) through December 31,
2002**




****Common
      Stock**
      **Class
      A****
    
    
    **Common
      Stock**
      **Class
      B**
    
    
    **AdditionalPaid-In**
    
    
    **Deficit**
      **Accumulated**
      **During**
      **Development****Shares**
    
    
    **Amount**
    
    
    **Shares**
    
    
    **Amount**
    
    
    **Capital**
    
    
    ******Stage**
    
    
    **Total**Contributed
      at inception (January 21, 1999)
    
    
    16,020
    
    $
    16,020
    
    
    3,980
    
    $
    3,980
    
    $
    9,980,000
    
    $
    —
    
    $
    10,000,000Capital
      contribution
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    1,600,957
    
    
    —
    
    
    1,600,957Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (11,904,738
    )
    
    (11,904,738
    )Balance
      at December 31, 1999
    
    
    16,020
    
    
    16,020
    
    
    3,980
    
    
    3,980
    
    
    11,580,957
    
    
    (11,904,738
    )
    
    (303,781
    )Capital
      contribution
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    2,911,822
    
    
    —
    
    
    2,911,822Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (3,604,235
    )
    
    (3,604,235
    )Balance
      at December 31, 2000
    
    
    16,020
    
    
    16,020
    
    
    3,980
    
    
    3,980
    
    
    14,492,779
    
    
    (15,508,973
    )
    
    (996,194
    )Capital
      contribution
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    5,034,415
    
    
    —
    
    
    5,034,415Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (5,914,506
    )
    
    (5,914,506
    )Balance
      at December 31, 2001
    
    
    16,020
    
    
    16,020
    
    
    3,980
    
    
    3,980
    
    
    19,527,194
    
    
    (21,423,479
    )
    
    (1,876,285
    )Capital
      contribution
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    7,754,805
    
    
    —
    
    
    7,754,805Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (9,463,646
    )
    
    (9,463,646
    )Balance
      at December 31, 2002
    
    
    16,020
    
    $
    16,020
    
    
    3,980
    
    $
    3,980
    
    $
    27,281,999
    
    $
    (30,887,125
    )
    $
    (3,585,126
    )








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








F-32





**DOV
(BERMUDA), LTD.**


**(A
Development Stage Company)**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS**











**Period
      from**
      **January
      21,**
      **1999**
      **(Date
      of**
      **Inception)**
      **Through**
      **December
      31,**
      **2002****Years
      Ended December 31,****2001**
    
    **2002****Cash
      flow from operating activities**Net
      loss
    
    $
    (5,914,506
    )
    $
    (9,463,646
    )
    $
    (30,887,125
    )Adjustments
      to reconcile net loss to netcash
      used in operating activitiesPurchased
      in-process research anddevelopment
    
    
    —
    
    
    —
    
    
    10,005,000Changes
      in operating assets and liabilitiesOther
      current assets
    
    
    3,980
    
    
    —
    
    
    —Accrued
      liabilities
    
    
    8,456
    
    
    5,845
    
    
    35,708Due
      to related parties
    
    
    857,092
    
    
    1,704,309
    
    
    3,553,354Net
      cash used in operating activities
    
    
    (5,044,978
    )
    
    (7,753,492
    )
    
    (17,293,063
    )**Cash
      flow from investing activity**Purchase
      of license agreements
    
    
    —
    
    
    —
    
    
    (10,000,000
    )Net
      cash used by investing activity
    
    
    —
    
    
    —
    
    
    (10,000,000
    )**Cash
      flow from financing activity**Capital
      contributions
    
    
    5,034,415
    
    
    7,754,805
    
    
    17,301,999Proceeds
      from sale of shares
    
    
    —
    
    
    —
    
    
    10,000,000Net
      cash provided by financingactivities
    
    
    5,034,415
    
    
    7,754,805
    
    
    27,301,999Increase
      (decrease) in cash and cashequivalents
    
    
    (10,563
    )
    
    1,313
    
    
    8,936Cash
      and cash equivalents-beginning ofperiod
    
    
    18,186
    
    
    7,623
    
    
    —Cash
      and cash equivalents-end ofperiod
    
    $
    7,623
    
    $
    8,936
    
    $
    8,936








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








F-33





**DOV
(BERMUDA), LTD.**


**(A
Development Stage Company)**


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**





**1.
Organization and Basis of Presentation**





DOV
(Bermuda), Ltd. (the "Company") was incorporated on January 21, 1999
in Bermuda. The Company is owned jointly by Elan International
Services, Ltd. ("EIS"), a wholly-owned subsidiary of Elan Corporation, plc
("Elan") through its wholly-owned subsidiary Elan Pharmaceutical Investment
Limited II (“EPIL II”), and DOV Pharmaceutical, Inc. ("DOV"). The primary
objective of the Company is to carry on the business of the development,
testing, registration, manufacturing, commercialization, and licensing of two
pharmaceutical products (as defined in the Joint Development and Operating
Agreement ("JDOA") dated January 21, 1999 between DOV, EIS, the Company and
its wholly-owned subsidiary Nascime, Ltd. ("Nascime"). The focus of the
collaborative venture is to develop the products using the intellectual property
of Elan and DOV pursuant to the JDOA.





DOV owns
100% of the class A capital stock of the Company, which represents 80.1% of
the total capital stock outstanding. EPIL II owns 100% of the class B
capital stock of the Company, which represents 19.9% of the total capital stock
outstanding. The class A and class B common stock rank *pari
passu* in all
respects, expect that the class A stock has rights to both vote and receive
dividends and the class B stock is non-voting and has no rights to
dividends. EPIL II, however, has the option at any time to redesignate and
convert the class B non-voting shares such that they would have rights
equal to the class A shares to either vote but not receive dividends, to
receive dividends but not vote, or both vote and receive dividends. DOV and EPIL
II have preemptive rights to participate in any equity offering by the Company
in order to maintain their respective equity positions. The Company shares are
subject to certain transfer restrictions, which prevent DOV or EPIL II from
transferring their ownership interests in the Company other than to an
affiliate. Additionally, neither DOV nor EPIL II can pledge or create a lien
against their shares of the Company without the prior consent of the other party
except in certain instances.





Under the
terms of the JDOA, DOV and EIS have agreed and intend to fund the operations of
DOV Bermuda on a pro rata basis based on their respective ownership interests
with DOV funding 80.1% and EIS funding 19.9%. Neither party is obligated to fund
expenses in excess of these amounts at this time. Although DOV maintains a
majority ownership interest in the Company, the JDOA gives management
participation to both DOV and EIS, therefore, the Company is considered a joint
venture for financial reporting purposes. Effective
January 2003, EIS’ participating rights expired.  As a result, as of
January 1, 2003, on a going forward basis DOV will consolidate the financial
statements of DOV Bermuda into its financial statements. Additionally,
effective, January 1, 2003, Elan has indicated that it no longer will fund its
pro rata portion of the Company’s expenses. DOV intends to fund Elan’s pro rata
portion. The joint
venture agreement provides, in this case, that Elan’s original equity interest
in the joint venture will be diluted using a formula that compares respective
overall funding contributions, but giving an extra 50% dollar credit to DOV’s
continued funding not matched by Elan’s pro rata contribution equal to the
original 80.1% to 19.9% equity relationship.





The
venture was formed with DOV contributing $8,010,000 to purchase 16,020 shares of
class A common stock and EIS contributing $1,990,000 to purchase 3,980
shares of class B common stock. In connection with the formation of the
venture, DOV issued a convertible promissory note to EIS with a principal amount
of $8,010,000 that was used to fund DOV's initial investment in the venture.
Elan and DOV also licensed technology to the venture. The entire initial cash
investment by both DOV of $8,010,000 and EIS of $1,990,000 was immediately used
to pay a license fee to Elan.








F-34





**Licenses**





Pursuant
to the formation of DOV Bermuda and Nascime, Elan granted Nascime a license for
$10,000,000 to use its proprietary controlled release formulations in connection
with the development and commercialization of the products. For its part, DOV
has granted Nascime a sublicense and license for $5,000 to use the oral
formulations of bicifadine (analgesic) and ocinaplon (anxiolytic). DOV has
retained the rights to intravenous formulations of these products.





Under the
licenses with DOV and Elan, Nascime will be required to make royalty payments to
DOV and Elan based on net sales, if any. In addition, Nascime will be required
to pay DOV up to $7,500,000 if Nascime achieves certain developmental milestones
in connection with the development of the products.





The
license agreements terminate on a product-by-product and country-by-country
basis 15 years from the first product sale date or the last to expire of
the patents covering the product, whichever is later. Elan has the right to
terminate its license if a named technological competitor of Elan acquires a ten
percent interest in DOV or the Company, or becomes materially engaged in the
business or development of DOV or the Company. Upon termination of the joint
venture or the licenses to the joint venture, all intellectual property rights
Elan and DOV have licensed to the joint venture terminate.





**2.
Significant Accounting Policies**





These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. These principles require
that the financial statements be prepared on a going concern basis. The
Company's ability to continue as a going concern is entirely dependent upon the
funds it receives from its stockholders in connection with the stockholders'
respective obligations to fund the Company's operations (See Note 1). DOV
has committed to provide funding to the Company through at least December 31,
2004.





**Consolidation**





The
consolidated financial statements include the accounts of the Company and its
subsidiary, Nascime. All significant intercompany transactions and balances have
been eliminated in consolidation.





**Cash
and Cash Equivalents**





The
Company considers all highly liquid investments with a maturity of 90 days
or less when purchased to be cash equivalents.





**Research
and Development Expense**





Research
and development costs are charged as an expense of the period in which they are
incurred. Research and development expense includes costs for clinical trials,
toxicology studies and as formulation development work for ocinaplon and
bicifadine.








F-35





**Use
of Estimates**





The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.





**Foreign
Exchange**





Both the
Company and Nascime use the United States dollar as their functional currency
and substantially all of their transactions are in United States dollars.





**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."





**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, reliance on stockholders to
fund operations, and compliance with FDA regulations.





**3.
Comprehensive Income (Loss)**





Comprehensive
income (loss) equals net loss for all periods.





**4.
Related Party Transactions**





At the
end of the period, the amount due to related parties represents costs for
research and development that are subcontracted to DOV and Elan. For the periods
ended December 31, 2001 and 2002, respectively, research and development
expenses of $4,124,366 and $8,194,235, were charged by DOV and $1,767,266 and
$1,241,671 were charged by Elan, which represent costs charged by DOV and Elan
for research and development services performed, as agreed to by the parties
under the agreements. At the end of 2001 and 2002, respectively, the Company
owed $1,330,821 and $3,040,379 to DOV and $523,224 and $517,975 to Elan.





**5.
In-Process Research and Development**





During
January 1999, the Company entered into license arrangements with Elan and
DOV to acquire rights to certain intellectual property (as described in
Note 1). The license acquired from DOV related to early stage technology
that, in the opinion of management, had not reached technological feasibility as
it will ultimately require regulatory approval prior to commercialization. In
addition, management concluded that the license from Elan was only to be used in
conjunction with DOV's compounds and had no alternative future uses. Therefore,
all the license fees were deemed to be research and development expense and were
charged to expense when incurred (See Note 2).








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**6.
Taxes**





**Bermuda**





Under
current Bermuda law the Company is not required to pay any taxes in Bermuda on
either income or capital gains. The Company has received an undertaking from the
Minister of Finance in Bermuda that in the event of such taxes being imposed,
the Company will be exempted from taxation until the year 2016.





**Ireland**





Nascime
is not subject to Irish corporation tax based on its current business
activities. As such, no amounts have been provided for any such tax.





**7.
Contingencies**





As
described in Note 1, Elan has certain termination rights under the license
agreement with Nascime. In January 2001, DOV entered into a license,
research and development agreement with Biovail Laboratories Incorporated
("Biovail"), which is a named technological competitor of Elan under the license
agreement with Nascime. DOV does not believe that Elan's consent to the Biovail
agreement was required and neither DOV nor the Company believes that Elan is
entitled to terminate its license agreement with Nascime as a result of DOV
entering into the Biovail license agreement without Elan's consent. Nonetheless,
DOV sought consent from Elan, which Elan refused to grant. While Elan has
neither asserted that its consent was required, nor objected to DOV entering
into the Biovail license agreement or threatened to terminate its license
agreement with Nascime, it has stated that it reserves its rights with respect
to this issue. It is not feasible to predict what the outcome would be if Elan
were to seek to terminate its agreement based on DOV's failure to receive its
consent. The Elan license with Nascime is material to the Company and if the
license were to be terminated, it would have a material adverse impact on the
Company's financial position and results of operations.





**8.
Subsequent Events**





On March
24, 2003, DOV Pharmaceutical and Elan amended the convertible note issued to
Elan in January 1999 such that the exchange right feature of the note has been
eliminated. The
exchange right had previously given Elan the ability to exchange, at any time
during the term of the note, the principal portion of the note into an equal
ownership position of DOV Bermuda. All other significant terms of the note
remain the same. In connection with this amendment to the note, Elan received
75,000 warrants to purchase DOV Common Stock, par value of $0.0001, with a
strike price of $10.00 per warrant and an expiration date of January 21, 2006.





**9.
Subsequent Events (Unaudited)**





On
October 21, 2003, DOV Pharmaceutical, Elan and DOV Bermuda entered into a
transaction which resulted in DOV Pharmaceutical acquiring 100% of Nascime and
the product candidates, bicifadine and ocinaplon.  Elan received $5,000,000
and the right to receive certain milestones when the products are licensed or
come to market in return for their ownership interest.  Elan granted
Nascime a 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 Nascime, including any intellectual
property developed by Nascime.


****


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