**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, 2005
 
 OR
 
 o
        TRANSITION REPORT PURSUANT TO SECTION 13
        OR 15(d) OF
 THE
        SECURITIES EXCHANGE ACT OF 1934
 
 For
        the
        transition period from ___________ to ____________
 
 **Commission
        file number 000-49730**
 
 
 
 **DOV
        PHARMACEUTICAL, INC.**
 (Exact
        Name of Registrant as Specified in its Charter)
 **Delaware**
                (State
                  or Other Jurisdiction
                of
                  Incorporation or Organization)
              
              **22-3374365**
                (I.R.S.
                  Employer
                Identification
                  No.)
  **Continental
        Plaza**
 **433
        Hackensack Avenue**
 **Hackensack,
        New Jersey 07601**
 (Address
        of principal executive office)
 
 **(201) 968-0980**
 (Registrant’s
        telephone number, including area code)
 
 
 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 is a “well-known seasoned issuer” (as defined
        in Rule 12b-2 of the Act). Yes o No x
  Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act. Yes o No x
  Indicate
        by check mark whether registrant (1) has filed all reports required to be
        filed
        by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
        preceding 12 months (or for such shorter period that registrant was required
        to
        file such reports), and (2) has been subject to such filing requirements
        for the
        past 90 days. Yes x No o
  Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K. o
  Indicate
        by check mark whether registrant is a large accelerated filer, an accelerated
        filer or a non-accelerated filer. See definitions of “accelerated filer and
        large accelerated filer” in Rule 12b-2 of the Act.
 Large
        Accelerated Filer o Accelerated
        Filer x Non-accelerated Filer o
  Indicate
        by check mark whether registrant is a shell company (as defined in Rule 12b-2
        of
        the Act). Yes o No x
 The
        aggregate market value of the voting stock held by non-affiliates of registrant
        as of June 30, 2005 totaled approximately $427.8 million based on the
        then-closing stock price as reported by the Nasdaq National Market.
 
 On
        February 17, 2006,  there
        were outstanding 23,265,005 shares of registrant’s common stock, par value
        $0.0001 per share.
  
  
   **DOV
        PHARMACEUTICAL, INC.**
 
 **Form
        10-K**
 
 **For
        the Year Ended December 31, 2005**
 
 **Table
        of Contents**
  
 **Page
                  Number****PART 1**Special
                  Note Regarding Forward-Looking
                  Statements
              1ITEM
                  1.
              Business
              2ITEM 1a.
              Risk
                  Factors
              22ITEM 1b.
              Unresolved
                  Staff Comments
              34ITEM 2.
              Properties
              34ITEM 3.
              Legal
                  Proceedings
              34ITEM 4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              34**PART II**ITEM 5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities
              34ITEM 6.
              Selected
                  Financial Data
              35ITEM 7.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              36ITEM 7A.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              46ITEM 8.
              Financial
                  Statements and Supplementary
                  Data
              46ITEM 9.
              Changes
                  in and Disagreements With Accountants on Accounting
                  and Financial Disclosure
              46ITEM 9A.
              Controls
                  and Procedures
              46ITEM 9B.
              Other
                  Information
              47**PART III**ITEM 10.
              Directors
                  and Executive Officers of
                  Registrant
              49ITEM 11.
              Executive
                  Compensation
              53ITEM 12.
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters
              58ITEM 13.
              Certain
                  Relationships and Related
                  Transactions
              61ITEM 14.
              Principal
                  Accountant Fees and Services
              61**PART IV**ITEM 15.
              Exhibits
                  and Financial Statement
                  Schedules
              62Signatures
              68
 
  i
   **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. 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;·
              develop
                  an acceptable development plan under and otherwise achieve the
                  results
                  contemplated by the 2005 amendment to our license agreement with
                  Merck;·
              obtain
                  and maintain collaborations as required with pharmaceutical
                  partners;·
              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
        1A.
        Risk Factors" for
        a
        detailed discussion of some of the factors that may cause our actual results
        to
        differ materially from our forward-looking statements. We qualify all our
        forward-looking statements by these cautionary statements. There may also
        be
        other factors that may materially affect our forward-looking statements and
        our
        future results. As a result of the foregoing, readers should not place undue
        reliance on our forward-looking statements. We undertake no obligation and
        do
        not intend to update any forward-looking statement.
   1
  **ITEM
          I.  BUSINESS**
 
 **OVERVIEW**
 
 We
          are a
          biopharmaceutical company focused on the discovery, acquisition, development
          and
          commercialization of novel drug candidates for central nervous system,
          or CNS,
          disorders. We
          currently have three product candidates in various stages of clinical
          development by us, namely, bicifadine, DOV 21,947 and DOV 102,677. We have
          entered into collaborations for two additional DOV product candidates,
          indiplon
          and DOV 216,303, and are seeking a partner for a third product candidate,
          DOV
          diltiazem. Bicifadine is our lead product candidate for the treatment of
          pain.
          In April 2005 and May 2005 ,
          our
          sublicensee, Neurocrine Biosciences, Inc., or Neurocrine ,
          submitted two New Drug Applications, or NDAs, to the U.S. Food and Drug
          Administration, or FDA, with respect to indiplon, our product candidate for
          the treatment of insomnia . We
          intend
          to submit our first NDA for bicifadine to the FDA, in the first half of
          2007. Our
          discovery program remains focused on GABA A receptor
          modulators and reuptake inhibitors for the treatment of CNS disorders.
          Our
          preclinical research includes the identification of second generation compounds
          for pain, anxiety, depression and other important CNS disorders.
 
 Bicifadine
          is the subject of an extensive clinical development program with three
          ongoing
          Phase III trials in patients with chronic low back pain, or CLBP. In addition,
          two Phase II exploratory trials were recently initiated in February 2006
          for
          bicifadine in the treatment of osteoarthritis and painful diabetic neuropathy.
          Bicifadine already has demonstrated efficacy in Phase II and Phase III
          clinical
          trials involving moderate to severe pain following dental surgery and
          bunionectomy.
 
 DOV
          21,947, our lead product candidate for depression, is a triple reuptake
          inhibitor, or TRI, and is expected to enter a 300-patient Phase II clinical
          trial in the third quarter of 2006. DOV
          21,947 is related to DOV 216,303, another of our TRIs. We recently announced statistically
          significant efficacy results from a Phase II clinical trial with DOV 216,303
          for
          the treatment of depression, and currently are evaluating the drug in a
          number
          of preclinical models to determine different indications for its further
          development. DOV 102,677 is another of our TRIs, for which the next study
          will
          be a Phase Ib clinical trial in normal volunteers and is scheduled for
          2007.
 
 Our
          current capabilities enable us to take compounds from drug discovery through
          all
          stages of clinical development to NDA filing. Our core scientific expertise
          is
          in cellular and molecular pharmacology underlying neurotransmission. We
          have
          substantial clinical development expertise in our departments of clinical
          research, data management, biostatistics, medical writing, pharmaceutical
          development and regulatory affairs. Our senior management team has substantial
          experience in CNS drug discovery and development. Members of our management
          have
          participated in the discovery, development and commercialization of new
          drugs that have been successfully brought to market. We continue to work
          to
          build these capabilities and the next phase of our growth will focus on
          the
          expansion of our strategic marketing and commercialization programs and
          an
          increase in our internal laboratory capabilities. In February 2006, we
          entered
          into a ten-year operating lease for an approximately 133,000 square foot
          facility in Somerset, New Jersey, that will serve as our new global corporate
          and development headquarters. The new headquarters will contain laboratory
          and
          pilot-scale manufacturing space and we expect to take occupancy in May
          2006.
  To
          enhance our drug development and commercialization efforts we have out-licensed
          rights to certain of our product candidates. We have sublicensed indiplon
          to
          Neurocrine, which entered into a development and commercialization agreement
          for
          indiplon with Pfizer, Inc., or Pfizer, in December 2002. We sublicensed
          DOV
          21,947 and DOV 216,303 to Merck & Co., Inc. in a 2004 development and
          commercialization agreement which was amended in August 2005. The amendment
          transfers to us from Merck certain development contemplated by the license
          agreement. It also permits expansion of the parties’ relationship to include an
          additional TRI from the DOV preclinical pipeline for inclusion in the original
          license agreement with no additional upfront payment. If the DOV studies
          for DOV
          21,947 are successful, we may be reimbursed by Merck for pre-agreed expenses
          and
          may receive a success premium. Subsequently, we could receive payment for
          achievement of certain clinical development and regulatory milestones pursuant
          to the existing agreement. Both parties retain certain termination
          rights.
   2
  **OUR
          BUSINESS STRATEGY**
 
 Our
          goal
          is to become a leading biopharmaceutical company focused primarily on products
          for the treatment of CNS disorders. The key elements of our strategy are
          to:
 
 ***Pursue
          development and commercialization of our lead product
          candidates.*** We have
          five product candidates undergoing DOV-driven or collaborative clinical
          development. These product candidates address four separate and substantial
          pharmaceutical markets: insomnia, pain, depression and alcohol abuse. We
          have
          designed the clinical programs for the product candidates we are developing
          in
          an effort to provide clear and defined paths to attain regulatory approval.
          We
          intend to continue to devote substantial resources to completing clinical
          testing and commercializing these product candidates.
 
 ***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 and insomnia,
          bicifadine and indiplon, 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. 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 discovery and licensed compounds.
 
 ***Reduce*** ** ***clinical
          development and commercialization risk by building a diversified product
          portfolio*** *.* We have
          built and intend to continue to build a portfolio of diverse product candidates
          to address CNS disorders to reduce the risks associated with the clinical
          development of any one drug. We have focused our in-licensing and development
          resources on compounds in all stages of research and clinical development
          for
          which there exists a significant amount of informative clinical data. We
          believe
          this reduces the risk that these compounds will have safety concerns and
          enhances our chances of demonstrating efficacy in clinical trials. We focus
          on
          developing 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 undue dependence on any single compound or
          therapeutic application to achieve commercial success and creates multiple
          potential sources of revenue.
 
 ***Selectively
          establish collaborations with global pharmaceutical companies to assist
          in the
          development of our products, mitigate financial risk and retain significant
          commercial upside.***  We
          leverage the resources and the development, regulatory and commercialization
          expertise of our corporate collaborators to advance the development of
          our
          potential products. We
          intend
          to continue to seek to establish alliances that will enhance our product
          development and commercialization efforts, including alliances that allow
          us to
          retain significant development and commercialization rights for our product
          candidates.
 
 We
          currently have collaborations with:
 
 ·
                Neurocrine/Pfizer,
                    for indiplon for the treatment of insomnia;
                    and
 
 ·
                Merck,
                    for DOV 216,303 for the treatment of depression, anxiety and
                    addiction and
                    DOV 21,947 for all indications.
 
 In
          August
          2005, we amended our 2004 license agreement with Merck for DOV 21,947 and
          DOV
          216,303. As part of the amendment, we instead of Merck will undertake certain
          clinical development of DOV 21,947 while retaining the ability to achieve
          the
          original milestone payments and royalties on product sales, if any, in
          the event
          our development activities achieve results to be agreed upon with Merck.
          In
          addition, we also retained co-promotion rights for DOV 21,947 in the
          U.S.
 
  3
  **OUR
          PRODUCT PIPELINE**
 
 The
          following table summarizes our product candidates currently in clinical
          and
          preclinical development:
  **Product**
                  **Indication(s)**
                  **Status**
                  **Marketing
                      Rights**Indiplon
                  Insomnia
                  PDUFA
                      Dates: May 15, 2006 and June 27, 20061
                  Pfizer/NeurocrineBicifadine
                  Pain
                  Phase
                      III
                  DOVDOV
                      21,947
                  Depression
                  Phase
                      Ib/Phase II planned
                  Merck/DOVDOV
                      102,677
                  Alcohol
                      Abuse / Alcoholism
                  Phase
                      Ib Planned
                  DOVDOV
                      216,303
                  Indications
                      other than Depression,
                    Anxiety
                      and Addiction
                  Preclinical/Phase
                      II2
                  DOVDOV
                      Diltiazem
                  Angina
                      and Hypertension
                  Phase
                      I/Phase III planned for 20073
                  DOVDOV
                      216,303
                  Depression,
                      Anxiety and Addiction
                  4
                  Merck/DOV
 ___________
 1.
          The
          FDA has committed to an action by May 15, 2006 for both NDAs, according
          to
          Neurocrine’s public disclosures as of February 7, 2006.
  2.
          Although we have completed a Phase II with DOV 216,303 in depressed patients,
          we
          are currently evaluating it in preclinical models to determine
          the next retained indication, if any, other than indications licensed by
          Merck,
          that we will pursue in clinical development. Merck has licensed the rights
          to
          depression, anxiety and addiction.
 
 3.
          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; we
          are
          seeking a partner for final development and commercialization.
 
 4.
          Our
          sublicensee for DOV 216,303, Merck, has elected not to authorize disclosure
          of
          its development plans.
 
 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**
 
 **Clinical
          Development Programs**
 
 ***Indiplon:
          Our product candidate for insomnia***
  Insomnia
          is a neurological disorder with approximately 85 million adults in the
          U.S.
          reporting trouble sleeping a few nights or more per week, according to
          a 2005
          report from Mattson Jack (an epidemiological database used to determine
          the
          prevalence of a disease or disorder). Mattson Jack also reports that
          approximately 22 million adults in the U.S. experience chronic insomnia,
          having
          trouble sleeping every night or almost every night. In addition, according
          to
          the National Sleep Foundation (2003), frequent sleep problems in individuals
          that are 55 to 84 years old, if ignored, can complicate the treatment of
          other
          medical conditions, including arthritis, diabetes, heart and lung disease
          and
          depression. According to a 2005 report from IMS Health, the U.S. insomnia
          pharmaceutical market was $2.2 billion in 2004 and was expected to exceed
          $2.7
          billion in 2005.
 
 The
          most
          frequently prescribed drugs currently marketed to treat insomnia target
          the
          neurotransmitter gamma aminobutryic acid, or GABA. Neurotransmitters are
          chemicals in the CNS that either excite or inhibit neuronal function. GABA
          is
          the principal inhibitory neurotransmitter in the CNS. Benzodiazepines,
          or BDZs,
          target the GABA A receptors.
 
  4
  During
          the 1980s, BDZs were commonly used as sedatives to treat insomnia. This
          class of
          drugs produces several undesirable side effects, including negative interactions
          with other CNS depressants, such as alcohol, the development of tolerance
          upon
          repeat dosing and rebound insomnia, or the worsening of insomnia following
          discontinuation of dosing. Additional side effects, due to the long half-life,
          or the duration of action, of a compound associated with this class of
          drugs,
          include next-day residual sedation effects and impairment of coordination
          and
          memory. Memory impairment, which can include amnesia for events occurring
          prior
          to and after drug administration, is of particular concern in the elderly,
          who
          comprise approximately 18 percent of the total insomnia population, according
          to
          Mattson Jack (2005).
 
 During
          the late 1980s, the class of drugs known as non-BDZs was developed to target
          a
          specific site on the GABA A receptor.
          The non-BDZs have a reduced incidence of side effects that are believed
          to be
          attributable to binding more selectively on a GABA A receptor
          subtype than the BDZs. The most commonly prescribed of the non-BDZs in
          the U.S.
          are Ambien ® ,
          Sonata ® and
          Lunesta ® .
          Ambien
          is the current market leader, with approximately $1.8 billion in worldwide
          sales
          in 2005, according to Sanofi-Aventis.
 
 ***Indiplon*** ,
          our
          insomnia product candidate, is a non-BDZ shown to be more potent and fast-acting
          than currently marketed non-BDZs, including Ambien.
 
 In
          1998,
          we licensed indiplon from Wyeth Holdings Corporation, or Wyeth, and sublicensed
          it to Neurocrine. In December 2002, Neurocrine entered into a development
          and
          commercialization agreement with Pfizer for indiplon. We are entitled to
          a 3.5
          percent royalty on worldwide net sales of indiplon, if any.
 
 In
          April
          2005 and May 2005 Neurocrine submitted two indiplon NDAs, for an immediate
          release, or IR, capsule formulation and a modified release, or MR, tablet
          formulation for the treatment of insomnia. Neurocrine is developing indiplon
          in
          these two formulations, a short acting capsule and a longer acting tablet
          to
          address the different needs of the insomnia patient population. These
          formulations capitalize on key features of indiplon: its ability to induce
          sleep
          quickly - approximately 15 minutes after taking the pill - and its rapid
          elimination from the body, which essentially eliminates the next-day residual
          sedation effects commonly produced by other drugs of this class.
 
 In
          January 2006, the FDA requested and received submission of results from
          Neurocrine’s driving study, completed in late 2005. Based on feedback from the
          FDA, Neurocrine has stated that it anticipates labeling that includes data
          from
          this study, which showed no impairment in next-day driving performance.
          The FDA
          has stated its intent to issue a combined package insert in lieu of individual
          package inserts for the capsule and tablet NDAs. To complete review of
          the
          driving study and the combined package insert, the FDA has advised Neurocrine
          that the Prescription Drug User Fee Act, or PDUFA, dates for the capsule
          and the
          tablet NDAs have been moved to May 15, 2006 and June 27, 2006, respectively.
          However the FDA has committed to an action by May 15, 2006 for both
          NDAs.
 
 Neurocrine’s
          indiplon program has now successfully completed clinical trials demonstrating
          that indiplon capsules and tablets help patients consistently fall asleep
          faster, increase the amount of time they sleep during the night, decrease
          number
          of nighttime awakenings and improve overall sleep quality over the course
          of
          short or long-term treatment without evidence of tolerance when administered
          nightly for up to three months or withdrawal upon discontinuation of nightly
          dosing - complications often seen with extended use of older-generation
          sleep
          medications. Neurocrine also 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 and showed, in a driving
          study,
          no impairment in next-day driving performance. Neurocrine’s NDAs for indiplon
          contain data from a total of 74 clinical trials that included approximately
          8,000 adult and elderly subjects, more than 350,000 patient exposures and
          more
          than 80 preclinical studies. The data reported from these trials consistently
          have met both primary and secondary endpoints demonstrating the efficacy
          and
          safety of indiplon.
 
 The
          preceding descriptions of Neurocrine’s clinical development and clinical trial
          results of indiplon are based on Neurocrine’s public disclosures through
          February 7, 2006.
 
  5
  ***Bicifadine:
          Our Novel Analgesic***
 
 Drugs
          for
          the treatment of pain, or analgesics, have historically been placed into
          the
          following general categories:
 
 ·
                  narcotics
                      or opioids, 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 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 time periods has been problematic.
          Although prostaglandin inhibitors have been used for the treatment of pain,
          particularly pain associated with inflammation, their efficacy is limited
          to
          milder types of pain and they often display undesirable side effects relating
          to
          the gastrointestinal tract and liver. Narcotics are also used to treat
          pain, but
          tolerance develops rapidly and higher doses often lead to physical dependence
          and additional side effects, including respiratory depression.
          Ultram ® ,
          marketed by Ortho-McNeil, Inc., was originally thought to be a non-narcotic
          but
          its metabolites have been reported to act at certain opiate receptors and
          have
          the potential to cause morphine-like psychic and physical dependence. Despite
          these drawbacks, U.S. sales in 2005 of narcotic and non-narcotic analgesics
          reached nearly $7.6 billion according to IMS. Furthermore, in September
          2004,
          Merck withdrew Vioxx ® ,
          a COX-2
          inhibitor, from the market, citing increased risk of stroke and heart attack
          in
          extended use. In April 2005, Pfizer withdrew Bextra ® ,
          another
          COX-2 inhibitor, citing increased risk of rare but serious skin reactions.
          The
          withdrawal of these drugs has had a significant impact on the treatment
          of pain
          and the pain market and, we believe, opened up greater opportunities for
          bicifadine.
 
 The
          FDA
          has granted approval for two other classes of compounds for the management
          of
          specific types of chronic pain. In the first class, Neurontin ® ,
          marketed by Pfizer, is an anticonvulsant whose actions on ion channels
          in
          neuronal tissue are likely responsible for its therapeutic effects in a
          certain
          type of neuropathic pain (postherpetic neuralgia). Sharing a similar structure
          with Neurontin is Lyrica ® ,
          also
          marketed by Pfizer, which was approved in December 2004 for the management
          of
          neuropathic pain associated with diabetic peripheral neuropathy and postherpetic
          neuralgia. In the second class, Cymbalta ® ,
          marketed by Eli Lilly and Co., was granted approval in September 2004 for
          the
          management of diabetic peripheral neuropathic pain. Cymbalta’s mechanism of
          action is believed to result from the inhibition of the uptake of serotonin
          and
          norepinephrine (SNRI) in nerve cells, properties also possessed by bicifadine.
 
 ***Bicifadine,*** in a
          sustained release, or SR, formulation, is our product candidate for the
          treatment of pain. 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 the physiological actions of the
          two
          biogenic amines. 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.
 
 Bicifadine
          is not a narcotic and, in preclinical studies, has been shown not to act
          at any
          opiate receptor. In preclinical studies to date, bicifadine has not demonstrated
          abuse, addiction or dependence potential, although, in a Phase I clinical
          trial,
          the immediate release, or IR, formulation did cause mild and transient
          euphoric
          mood in some subjects. Four Phase I clinical trials and 14 Phase II clinical
          trials involving more than 1,000 patients were conducted by Wyeth or DOV
          with an
          IR formulation of bicifadine. In five exploratory double-blind,
          placebo-controlled Phase II clinical trials of the IR formulation conducted
          by
          Wyeth, bicifadine demonstrated a statistically significant reduction in
          pain
          versus placebo, in some cases with an outcome suggesting it might be comparable
          to or better than positive controls such as codeine. In addition to these
          trials
          with the IR formulation, we have conducted eight Phase I clinical trials
          using
          the SR formulation, a formulation that permits less frequent daily dosing,
          improves tolerability and for which patents have been filed. We are evaluating
          the SR formulation in our ongoing clinical development programs and this
          formulation is intended for commercial use.
 
  6
  *Chronic
          Pain Drug Development Program*
 
 In
          March
          2004 and February 2006, we reached agreement with the FDA on a plan for
          the
          balance of the Phase III bicifadine preclinical and clinical program necessary
          to submit an NDA for chronic pain. The agreed upon program must include
          positive
          results from two placebo-controlled dose-response studies of three months’
treatment duration in patients with CLBP, such as those that are currently
          ongoing. We also will need to obtain long-term safety observations from
          at least
          100 CLBP patients treated with bicifadine for one year and 300 CLBP patients
          treated with bicifadine for six months at the maximal recommended dose,
          which is
          anticipated to be 400 mg b.i.d. 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 more than 1,500 subjects received bicifadine SR. A significant
          outcome of our February 2006 meeting was the FDA’s stated receptivity to review
          an NDA for a broad label chronic pain indication for bicifadine using the
          current CLBP clinical trials package provided we would commit to study
          bicifadine in two additional models of chronic pain in Phase IV post-approval
          studies, such as osteoarthritis or neuropathic pain. We intend to make
          this
          commitment. In the event that we are not ultimately able to provide positive
          evidence of efficacy in two Phase IV studies, the bicifadine indication
          in the
          product labeling may be revised to that of chronic low back pain.
 
 Another
          outcome of the February 2006 FDA meeting was a discussion of the Phase
          I
          clinical trial package necessary for the submission of the first NDA for
          bicifadine in chronic pain. The Phase I program will include a
          QTc
          study in normal volunteers. A QTc study measures the QT portion of an
          electrocardiogram and assesses a drug's potential to produce changes in
          cardiac
          rhythm. To date, there have been no cardiac - or other - meaningful safety
          concerns in our preclinical studies or in clinical studies involving more
          than
          2,500 subjects treated with bicifadine.
 
 We
          also
          discussed with the FDA the status of its informal Special Protocol Assessment,
          or SPA, for study 020 and the potential for dose titration in study 022,
          our
          long-term safety and efficacy trial of bicifadine in CLBP patients, as
          described
          below. Because we subsequently amended the protocol for study 020 following
          study initiation and designated a single primary endpoint in that trial,
          according to FDA guidelines the informal SPA originally discussed with
          the FDA
          is no longer in effect. However, we do not feel that this will be an impediment
          to securing FDA regulatory approval for bicifadine
 
 As
          part
          of our bicifadine development program, we also are conducting our animal
          carcinogenicity study. The “In life” data has been collected and this study has
          yielded no apparent signals to date. The final analysis is expected to
          be
          completed in the second quarter of 2006. We intend to submit our first
          NDA
          submission for bicifadine in the first half of 2007. This expectation is
          based
          upon, among other things, projected rate of patient enrollment, positive
          clinical trial outcomes and continued absence of safety concerns.
 
 *Phase
          III Chronic Pain Trials of Bicifadine In Progress*
 
 In
          September 2004, we initiated a pivotal, Phase III, U.S. clinical trial
          of
          bicifadine in approximately 600 patients with moderate to severe CLBP (study
          020). 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 - 200 mg, 300 mg and 400 mg b.i.d. - over a
          three-month period. Patients who complete the study are eligible for up
          to one
          year of additional treatment in a bicifadine open-label safety and efficacy
          study (study 022). The primary efficacy endpoint is the change in pain
          severity
          rating as measured by the 100 mm Visual Analog Scale, or VAS, score between
          baseline and the end of dosing. The acceptability of this primary endpoint
          was
          affirmed by the FDA in February 2006. In December 2005, we announced a
          positive
          futility analysis for study 020, meaning an independent external statistical
          examination of interim trial data supports continuing the trial through
          to
          completion.  This analysis of data on the improvement in pain scores from
          baseline to end of treatment - the primary endpoint of the clinical trial
          -
          indicates that bicifadine has at least a 40 percent chance of being
          statistically superior to the placebo treatment.  We completed enrollment
          in this trial in January 2006 and expect to announce results in the second
          quarter of 2006.
 
  7
  We
          currently are enrolling subjects into a second Phase III clinical trial
          of
          bicifadine in patients with moderate to severe CLBP (study 021). The trial
          is
          expected to enroll approximately 475 patients and is a randomized, double-blind,
          placebo-controlled, outpatient, multi-center study assessing the efficacy
          and
          tolerability of two dose levels of bicifadine - 200 mg b.i.d. and 400 mg
          b.i.d.
          - over a three-month period. The primary efficacy endpoint is the change
          in pain
          severity rating as measured by the 100 mm VAS score between baseline and
          the end
          of dosing. We expect to report the results of the 021 study in the fourth
          quarter of 2006.  In both studies 020 and 021, secondary endpoints include
          changes in measures of functional disability, patients’ global impression of
          change, patient and physician global evaluation of bicifadine, incidence
          of
          discontinuation due to lack of efficacy, use of rescue medication and other
          analgesia-related rating scales. Safety is being measured by adverse event
          occurrences, vital signs, ECGs, clinical lab tests and other
          measures.
 
 We
          also
          are enrolling subjects into an open-label Phase III, multi-center clinical
          trial
          to evaluate the long-term safety and efficacy of bicifadine in patients
          with
          CLBP (study 022). This clinical trial will enroll approximately 1,550 total
          patients with CLBP, 1,050 of whom will be entered directly into this study
          and
          randomized to receive either 400 mg b.i.d. of bicifadine or any appropriate
          pharmacological analgesic treatment or treatments, or “standard of care” or SOC,
          selected by the investigator. If the 400 mg b.i.d. dose (800 mg total daily
          dose) is not adequately tolerated, patients can be given a lower dose (600
          mg,
          400 mg or 200 mg total daily dose) and remain in the clinical trial. To
          date,
          about 30 percent of patients have been down-titrated from 400 mg b.i.d.
          to one
          of these alternate dosing regimens. Most of these patients have down-titrated
          to
          the 600 mg or 400 mg total daily dose. This clinical trial also will enroll
          approximately 500 U.S. patients who will have completed twelve weeks of
          treatment in either study 020 or study 021. Such “rollover” patients receive 400
          mg b.i.d.of bicifadine. The primary objective of this clinical trial is
          to
          evaluate the safety of bicifadine for up to one year in patients with CLBP
          with
          the goal of accumulating an overall safety package of data in 100 patients
          with
          one year of dosing and 300 patients with at least six months of dosing
          at 400 mg
          b.i.d., the top anticipated dose. The ongoing results from study 022 suggest
          that bicifadine is at least as effective as SOC in treating CLBP and is
          safe and
          well-tolerated.  Initial data suggest that patients receiving bicifadine
“de novo” experience a decrease in pain, as measured by VAS score, from a rating
          of approximately 70 mm to 40 mm over the first four weeks. Further, patients
          who
          have “rolled over” from study 020 or 021 are entering the trial with an average
          VAS score of about 40 mm and continue to decrease their pain scores over
          the
          following weeks and months. The positive data trends are continuing, with
          dosing
          now spanning twelve months and total patients enrolled in study 022 exceeding
          700.  This study is being conducted in approximately 117 centers and we
          expect to complete in December 2006 the safety package needed to submit
          our
          first NDA for bicifadine in the first half of 2007.
 
 In
          the
          first quarter of 2006, we plan to initiate a substudy within the long-term
          safety trial. In this substudy, approximately 100 CLBP patients who are
          randomized to 400 mg b.i.d. of bicifadine will receive at the outset one
          of two
          titration regimens: 200 mg b.i.d. of bicifadine during week one and 300
          mg
          b.i.d. of bicifadine during week two followed by 400 mg b.i.d. of bicifadine
          for
          the remainder of the study; or the same titration steps given for two weeks
          for
          each dose level followed by 400 mg b.i.d. for the remainder of the trial.
          This
          substudy will thus provide information whether the tolerability of a titration
          regimen to 400 mg b.i.d. of bicifadine is superior to that seen upon starting
          treatment on day one with the top anticipated dose of 400 mg b.i.d.
 
 *Phase
          II Chronic Pain Trials In Progress*
 
 In
          February 2006, we initiated two exploratory Phase II clinical trials of
          bicifadine: one in patients with osteoarthritis and one in patients with
          painful
          diabetic neuropathy.
 
 The
          osteoarthritis trial is a multi-center, double-blind, placebo-controlled,
          four-way crossover trial designed to assess the efficacy, tolerability
          and
          pharmacokinetics of bicifadine alone and in combination with ibuprofen.
          The
          clinical trial expects to enroll 60 patients with osteoarthritis of the
          hip or
          knee. Each patient receives one week of dosing for each of the following
          four
          treatment regimens: bicifadine, ibuprofen, bicifadine plus ibuprofen and
          placebo. There is a one week washout period between each of the dosing
          arms.
          Efficacy is determined using change from baseline for pain via VAS scores,
          the
          WOMAC arthritis index, patients’ global improvement assessments and other
          recognized measures. Preclinical studies of bicifadine show the drug has
          demonstrated efficacy in models of inflammatory pain.
 
  8
  The
          painful diabetic neuropathy trial is a randomized, multiple-dose, open-label,
          two-phase overlap trial designed to assess the efficacy and safety of bicifadine
          and potential interactions of bicifadine and oxycodone used concurrently.
          The
          clinical trial will randomize 50 patients with painful diabetic neuropathy
          into
          two parallel four-week treatment groups. In this trial, patients will receive
          either bicifadine or oxycodone alone for two weeks and then both drugs
          dosed
          concurrently for the remaining two weeks. Analgesic efficacy is determined
          at
          the end of each two-week period using patient VAS scores for pain, the
          trial’s
          primary endpoint. Secondary efficacy endpoints include patient ratings
          of global
          improvement and use of rescue medication. Preclinical studies of bicifadine
          show
          the drug has substantial analgesic effects in models of neuropathic pain
          in both
          diabetic animals and in animals with sensory neuron damage near the spinal
          cord.
 
 DOV
          expects to complete dosing for both Phase II trials in the third quarter
          of
          2006.
 
 *Acute
          Pain Drug Development Program*
  In
          March
          2004 and March 2006, we received guidance from the FDA on a plan for the
          balance
          of the Phase III bicifadine program necessary to submit an NDA for acute
          pain.
          The March 2006 meeting revealed that the FDA is receptive to reviewing
          an NDA
          for a broad label acute pain indication for bicifadine based on the successful
          outcomes from two Phase III clinical trials in repeat-dose acute pain models.
          This is fewer trials than expected, and there was agreement that one of
          these
          trials may be in a non-surgical pain model. This FDA guidance marks a
          significant improvement for the bicifadine acute pain program in terms
          of the
          regulatory path, and we will have further communication with the FDA as we
          determine the optimal acute pain models to pursue as part of an acute pain
          NDA
          package. We announced in March 2006 that we discontinued the conduct of
          an
          ongoing vaginal hysterectomy Phase III trial as we believe that this more
          severe
          post-surgical pain model is unlikely to support the repeat dosing analysis
          of
          bicifadine now required for registration. We also then determined that
          although
          the recently completed positive efficacy bunionectomy Phase III trial provides
          compelling evidence that bicifadine is an effective analgesic in a severe
          post-surgical pain model, the high rate of “rescue” medication use confounds the
          repeat dosing analysis required by the FDA.
  *Completed
          Acute Pain Trials of Bicifadine*
  In
          August
          2002, we completed a Phase II clinical trial in the U.S. involving 750
          patients
          in the treatment of moderate to severe post-surgical dental pain. This
          Phase II
          trial was a single-dose, double-blind, placebo-controlled, study that evaluated
          three controlled release doses of bicifadine and one dose of codeine compared
          to
          placebo. Bicifadine produced a highly statistically significant, dose-related
          reduction in pain compared to placebo at each of the two higher doses.
          The
          efficacy of bicifadine was at least equivalent to codeine at all three
          doses.
          The trial demonstrated bicifadine to be safe and relatively well-tolerated
          without producing any serious adverse events. Both codeine and the two
          higher
          doses of bicifadine produced significantly more adverse events than placebo,
          with the bicifadine 400 mg and 600 mg doses producing 22 percent and 37
          percent,
          respectively, versus 11 percent for placebo. The most frequently reported
          adverse events were nausea and vomiting.
 
 In
          September 2003, we completed a 540-patient, double-blind, placebo-controlled
          Phase III clinical trial to compare three doses of bicifadine and one dose
          of
          tramadol to placebo in a moderate to severe post-surgical dental pain model.
          Bicifadine, in a dose-dependent fashion, produced a highly statistically
          significant reduction in pain compared to placebo, as did the single-dose
          level
          of tramadol. Statistically significant increases in analgesia were measured
          as
          early as one hour after administration and analgesia was sustained for
          the
          balance of the six-hour measurement period. The maximal efficacy of bicifadine
          was statistically indistinguishable from tramadol. Both bicifadine and
          tramadol
          were safe and relatively well-tolerated without producing any serious adverse
          events.
 
 In
          September 2005, we completed a Phase III randomized, double-blind,
          placebo-controlled, outpatient, multi-center clinical trial to assess the
          efficacy and safety of three dose levels of bicifadine in patients with
          moderate
          to severe acute pain following bunionectomy surgery for a five-day period
          incorporating tramadol as an active control. The bunionectomy Phase III
          trial
          ultimately enrolled 325 patients at five sites in the U.S. The design and
          analysis of the study compared 200 mg and 400 mg t.i.d. of bicifadine to
          placebo
          with 100 mg t.i.d. of tramadol as an active control. Statistically significant
          increases in analgesia were measured as early as 30 minutes after administration
          and these effects were sustained for the balance of the eight-hour measurement
          period. The maximal efficacy of bicifadine was statistically indistinguishable
          from tramadol. While both bicifadine and tramadol were safe and relatively
          well-tolerated without producing any serious adverse events, the high level
          of
“rescue” analgesic medication used in both the placebo and active drug groups
          confounded an assessment of the analgesic actions of bicifadine or tramadol
          under repeat dosing conditions, which are an FDA requirement.
   9
  ***DOV
          21,947 and DOV 216,303: Our Triple Reuptake Inhibitors, or TRIs, for
          Depression***
 
 Depression
          is a disorder in which the affected person experiences a mental state of
          sadness, despair, discouragement and hopelessness. Other symptoms may include
          apathy, withdrawal from social contact, an inability to experience pleasure,
          changes in appetite and sleep patterns, low energy levels, difficulty
          concentrating and thoughts of suicide. Neurotransmitters regulate numerous
          functions in the CNS, and imbalances in them have been linked to a number
          of
          psychiatric disorders, including depression. The actions of these
          neurotransmitters are terminated by specific transport proteins that remove
          them
          from synapses in the brain. Antidepressants are thought to produce their
          therapeutic effects by inhibiting the uptake activity of one or more of
          these
          transport proteins, effectively increasing the concentration and duration
          of
          action of these neurotransmitters at their receptors.
 
 The
          emergence of selective serotonin reuptake inhibitors, or SSRIs, starting
          with
          Prozac ® in
          January 1988, followed by Zoloft ® in
          February 1992 and Paxil ® in
          January 1993, has had a dramatic impact on the antidepressant market. According
          to IMS figures, sales of antidepressants in the U.S. 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
                    percent of patients do not experience an adequate therapeutic
                    response to
                    a given drug;
 ·
                three
                    or more weeks of therapy are often required before meaningful
                    improvement
                    is observed; and
 ·
                side
                    effects such as nervousness, agitation, insomnia and sexual
                    dysfunction.
 
 Dual
          uptake inhibitors, referred to as SNRIs, like Effexor ® ,
          launched in 1994, and Cymbalta, launched in August 2004, block the uptake
          of
          both serotonin and norepinephrine and are appreciably more potent on the
          serotonin system. While these drugs may be more effective than SSRIs in
          some
          patients, SNRIs still take three or more weeks of therapy before a meaningful
          improvement is observed. In addition, SNRIs have their own unique set of
          side
          effects, including nausea, headache, sleepiness, dry mouth, sexual dysfunction
          and dizziness.
 
 Both
          preclinical studies and clinical trials indicate that a drug inhibiting
          uptake
          of all three, serotonin, norepinephrine and dopamine, may produce a faster
          onset
          of action or provide greater efficacy than traditional antidepressants.
          We
          believe that such a ‘broad spectrum’ antidepressant would represent a
          breakthrough in the treatment of depression.
 
 ***DOV
          21,947 and DOV 216,303*** are
          TRIs
          affecting the neurotransmitters serotonin, norepinephrine and dopamine.
          In
          preclinical studies, DOV 21,947 and DOV 216,303 were shown to inhibit the
          uptake
          of all three neurotransmitters. In
          animal
          models highly predictive of antidepressant action, DOV 21,947 and DOV 216,303
          were more potent than Tofranil ® ,
          an
          SNRI, and the SSRIs Prozac and Celexa .
          Because
          of their ability to inhibit the uptake of all three neurotransmitters implicated
          in depression, we believe DOV 21,947 and DOV 216,303 may be more effective
          and
          have a more rapid onset than other antidepressants.
 
 We
          have
          completed several Phase I studies of DOV 21,947 and intend to initiate
          a Phase
          II clinical trial in the third quarter of 2006. DOV 21,947 is related to
          DOV
          216,303. In December 2005 we dosed the initial set of subjects in a second
          Phase
          Ib clinical trial of DOV 21,947.  At the highest dose levels explored -
          well separated from what is believed to be the therapeutic range - rashes
          were
          noted in some subjects. In the third quarter of 2006, we expect to initiate
          a
          Phase II double-blind clinical trial of DOV 21,947 vs. placebo in depressed
          outpatients.
 
 Before
          sublicensing DOV 216,303 to Merck, we completed a Phase II efficacy trial
          in
          patients with major depressive disorder. The clinical trial was a randomized,
          multi-center, double-blind, safety, efficacy and tolerability study with
          67
          patients and compared 50 mg b.i.d. of DOV 216,303 to 20 mg b.i.d. of citalopram,
          an SSRI. Patients who completed two weeks of treatment in both the DOV
          216,303
          and citalopram groups demonstrated reductions from baseline (p<0.0001) in the
          total HAM-D scores. This study also showed that DOV 216,303 was generally
          well-tolerated, with no serious adverse events occurring. Merck has licensed
          the
          rights to DOV 216,303 for depression, anxiety and addiction. We are currently
          evaluating DOV 216,303 in preclinical models to determine additional
          indications, outside of the Merck indications, to pursue in clinical
          development.
 
  10
  ***DOV
          102,677: Our TRI for Alcohol Abuse & Alcoholism***
 
 Alcoholism,
          also known as alcohol dependence, is a disease with symptoms
          including:
 
 ·
                craving:
                    a strong need or compulsion to
                    drink;
 ·
                loss
                    of control: the inability to limit one’s drinking on any given
                    occasion;
 ·
                physical
                    dependence: withdrawal symptoms, such as nausea, sweating, shakiness
                    and
                    anxiety, occur when alcohol use is stopped after a period of
                    heavy
                    drinking; and
 ·
                tolerance:
                    the need to drink greater amounts of alcohol in order to ‘get
                    high.’
 
 The
          most
          recent alcohol use and abuse study conducted by the U.S. Department of
          Health
          and Human Services (“The 2001 National Household Survey on Drug Abuse”),
          estimates that approximately 14 million Americans - 7.4 percent of the
          population - meet the diagnostic criteria for alcohol abuse or alcoholism.
          Yet,
          this level of incidence is met by a general lack of effective treatments
          for
          alcohol abuse.
 
 ***D*** ***OV
          102,677*** is a TRI
          with preferential action on the dopamine transporter protein and is related
          to
          DOV 21,947 and DOV 216,303. In a Phase Ia clinical trial, DOV 102,677 was
          shown
          to be safe and well-tolerated at doses ≤ 150 mg. At higher doses, abnormal color
          vision, which was both transient and reversible, was observed in the majority
          of
          subjects. **** Results
          of this Phase Ia trial and results from an animal model of alcohol abuse
          have
          led us to identify DOV 102,677 as a development candidate to treat alcohol
          abuse
          and alcoholism rather than depression. We intend to initiate a Phase Ib
          repeat-dose clinical trial in normal volunteers for DOV 102,677 in the
          alcohol
          abuse indication in 2007.
 
 **Preclinical
          Development Programs**
 
 Our
          discovery program remains focused on GABA A receptor
          modulators and reuptake inhibitors for the treatment of CNS disorders.
          Our
          co-founders, Dr. Bernard Beer and Dr. Arnold Lippa, conducted pioneering
          work on
          GABA A receptors. This 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.
 
 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.
 
 Our
          internal discovery effort with GABA A receptor
          modulators has yielded a series of compounds we are currently evaluating.
          These
          new chemical entities, currently in the lead optimization phase, are
          significantly more potent than ocinaplon, our previous anti-anxiety product
          candidate, and we have prioritized our preclinical pipeline and 2006 activities
          accordingly. These compounds appear to function as partial positive allosteric
          modulators at specific GABA A receptor
          subtypes that may be involved in the treatment of various anxiety disorders,
          including generalized anxiety disorder, or GAD, and panic.
 
 In
          August
          2005, we suspended further dosing in the ongoing Phase III clinical trial
          of
          ocinaplon following the occurrence of enzyme elevations in liver function
          tests,
          or LFTs, for one subject. We have since evaluated the safety findings from
          all
          subjects in the Phase III trial. During this study the overall incidence
          of an
          elevation in liver enzymes greater than three times normal was eight percent
          in
          the ocinaplon-treated subjects and zero percent in the placebo-controlled
          subjects. Based upon the data, in October 2005 we discontinued the development
          of ocinaplon for GAD.  We
          are
          evaluating ocinaplon in preclinical models to determine possible alternative
          indications for which the risk of liver damage would be reduced. We plan
          to
          select a preclinical candidate for clinical development in GAD in the third
          quarter of 2006.
 
 Our
          preclinical research and discovery activities and program also includes
          our work
          to identify second generation bicifadine compounds.
  11
  **Cardiovascular
          Disorders**
 
 Chronic
          stable angina, or angina pectoris, refers to recurring severe constricting
          pain
          in the chest due to inadequate blood supply to the heart caused by heart
          disease. Angina attacks are more likely to occur during the morning and
          afternoon hours. Likewise, hypertension is greater in the morning hours.
          According to the 2002 practice guidelines update for the management of
          patients
          with chronic stable angina, published by the American College of
          Cardiology/American Heart Association/American College of Physicians-American
          Society of Internal Medicine, the number of patients in the U.S. with stable
          angina was estimated at 16.5 million. According
          to Decision Resources, high blood pressure or hypertension was estimated
          to
          affect more than 50 million people in the U.S.
  Diltiazem
          belongs to a well-known class of drugs called calcium channel blockers.
          Calcium
          channel blockers remain a standard of care in the treatment of chronic
          stable
          angina and hypertension and continue to be highly endorsed by the medical
          community. Although comparative studies have demonstrated equivalent anti-angina
          effects for many marketed calcium channel blockers, a lower incidence of
          side
          effects with diltiazem was often reported in these studies. According to
          IMS
          figures for 2004, sales of diltiazem products in the U.S. totaled
          $799 million.
 
 In
          an
          effort to provide both therapeutic blood levels of diltiazem for longer
          periods
          of time and improved patient compliance, several slow or extended release
          preparations of diltiazem have been developed for the treatment of hypertension
          and chronic stable angina. However, these commercially available, once-daily,
          extended release formulations produce only a partial reduction of chronic
          stable
          angina. According to published studies, currently marketed diltiazem products
          such as Tiazac ® ,
          Cardizem ® and
          Dilacor XR ® only
          reduce the number of angina attacks by approximately 50-60 percent when
          given at
          FDA-approved therapeutic doses. We believe incomplete reduction in angina
          demonstrated by current treatments may be the result of inadequate blood
          levels
          of the drug in the morning hours, when approximately half of all angina
          attacks
          occur. Experts in chronic stable angina have confirmed their dissatisfaction
          with the ability of current extended release products to adequately treat
          many
          of their patients on a once-a-day basis.
 
 ***DOV
          Diltiazem*** *,* ****** our
          proprietary formulation of diltiazem, is our product candidate for the
          treatment
          of angina and hypertension. DOV diltiazem combines an immediate release
          component with a controlled release component in order to provide prompt
          and
          improved blood levels throughout the day compared to currently marketed
          diltiazem products.
 
 We
          believe that DOV diltiazem will reduce morning angina attacks to a significantly
          greater extent than commercially available products because of its combination
          of immediate and extended release components. Data from three Phase I trials
          indicate that our patented formulation produces clinically relevant blood
          levels
          within 30 minutes of administration and results in higher blood levels
          in the
          morning than Tiazac. In 2004, 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 relationships to advance DOV diltiazem into Phase
          III
          clinical development and commercialization while continuing to focus primarily
          on our CNS programs. We intend that further clinical development of DOV
          diltiazem be conducted by a licensee of this product, assuming we are able
          to
          secure attractive license terms.
 
 
 **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:
 
  12
  ***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 any patent covering
          either the compound or the marketed product, currently 2023. At the end
          of the
          term, Neurocrine will be deemed to have a fully-paid, royalty-free license
          to
          the compound and the marketed product. During the term of the agreement
          and
          after payments to our licensor, Wyeth, we are entitled to receive a royalty
          equal to 3.5 percent of net sales for the
          later
          of the expiration of the Wyeth patents in such country and a period
          of the
          first ten years post launch in a given market, if any, and additional net
          milestone payments of $1.5 million upon FDA approval. As noted below, the
          royalty term has been expanded to include Neurocrine patents covering indiplon.
          During 2004, we received $2.0 million from Neurocrine for the milestone
          due upon
          NDA filing.
 
 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 U.S., other than for reasons relating to regulatory
          constraints. Likewise, if Neurocrine halts, for six months or longer, or
          terminates the research and development program in any other country, we
          have
          the right to terminate the agreement with respect to that country. If we
          terminate the agreement due to an uncured breach by Neurocrine, it must
          transfer
          to us all information and know-how related to indiplon or the marketed
          product,
          and all governmental filings and approvals.
 
 In
          February 2004, we reorganized our sublicense agreement with Neurocrine
          in
          respect to indiplon. As part of the reorganization, Neurocrine acquired
          Wyeth’s
          interest under the license covering indiplon entered into between Wyeth
          and DOV
          in 1998. The restated sublicense agreement with Neurocrine expands the
          royalty
          term to include the life of Neurocrine patents as well as Wyeth patents
          covering
          indiplon. The revised agreement allows Neurocrine to pay to us royalty
          payments,
          that are 3.5 percent of net sales, and milestone payments net of those
          amounts
          that would be owed by DOV to Wyeth. In addition, the first milestone payment
          to
          Wyeth of $2.5 million upon an NDA was changed to $1.0 million upon an NDA
          filing
          and $1.5 million upon an NDA approval. Thus the net milestones payable
          to DOV is
          $2.0 million upon an NDA filing (which was paid in December 2004) and $1.5
          million upon an NDA approval.
 
 ***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 assumed financial responsibility for development and commercialization
          of
          a product containing at least one of the licensed compounds. The parties
          agreed
          to work together to clinically develop licensed product and we have reserved
          the
          right to co-promote the sales of product in the U.S. to psychiatrists and
          other
          specialists who treat depression.
 
 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 assumed responsibility for the development,
          manufacturing and commercialization of DOV 21,947 and agreed to pay us
          royalties
          on worldwide sales, if any, which increase based upon certain sales thresholds.
 
  13
  In
          August
          2005, we announced that our license agreement with Merck for DOV 21,947
          and DOV
          216,303 had been amended. The milestones, royalties and business terms
          originally established in the August 2004 license agreement were retained
          in
          full along with DOV’s co-promote rights. The amendment transfers to us from
          Merck certain development contemplated by the license agreement. It also
          permits
          expansion of the parties’ relationship to include an additional TRI from the DOV
          preclinical pipeline for inclusion in the original license agreement with
          no
          additional upfront payment. If the DOV studies for DOV 21,947 are successful,
          we
          may be reimbursed by Merck for pre-agreed expenses and may receive a success
          premium. Subsequently, we could receive payment for achievement of certain
          clinical development and regulatory milestones pursuant to the existing
          agreement. Both parties retain certain termination rights.
 
 ***Elan
          Corporation, plc and Elan International Services, Ltd.***
 
 In
          January 1999, Elan and we established a joint venture and formed DOV
          (Bermuda), Ltd., or DOV Bermuda, a holding company, and Nascime Limited, or
          Nascime, an operating company, to develop controlled release formulations
          of
          bicifadine for the treatment of pain and ocinaplon for the treatment of
          anxiety
          disorders and epilepsy. Pursuant to the original agreements, through
          December 31, 2002, Elan and we funded the joint venture in proportion to
          our equity interests in the venture, 19.9 percent and 80.1 percent,
          respectively.
 
 Effective
          January 1, 2003, Elan no longer funded its pro rata portion of the joint
          venture's expenses and, after funding ours and Elan’s portion of the joint
          venture's expenses for the first and second quarters of 2003, our equity
          ownership in the joint venture increased to 83.0 percent from 80.1 percent.
 
 On
          October 21, 2003, we entered into an agreement with Elan and certain of
          Elan’s affiliates to terminate the joint venture and acquire 100 percent
          ownership of Nascime, the joint venture’s operating company. In connection with
          this agreement, among other things, Elan and we agreed to eliminate all
          material
          consent rights found in the 1999 stock purchase and license agreements.
          The
          termination agreement ended Elan’s involvement in the nearly five-year joint
          venture established to develop controlled release formulations of bicifadine
          and
          ocinaplon.
  Pursuant
          to the termination agreement, we paid $5.0 million to a subsidiary of Elan
          in respect of its 17 percent equity stake in the joint venture. We agreed
          to
          indemnify Elan and its affiliates, subject to certain limitations, for
          claims
          arising from the past, present and any future activities of the joint venture
          companies, including activities related to the conduct of the joint venture's
          clinical trials. Each party waived any rights and released
          the other parties from any claims arising under certain of the principal
          joint
          venture agreements. Elan granted to Nascime, now wholly owned by us, a
          new
          non-exclusive, royalty-free, perpetual, worldwide license to make and sell
          the
          two product candidates in controlled release formulations using the Elan
          intellectual property licensed to the joint venture, including that developed
          during the venture. In connection with the license grant, Elan will be
          entitled
          to receive up to an aggregate of $3.0 million when the products are
          licensed or come to market. We recently have taken steps to transfer to
          us the
          intellectual property held by Nascime.
 
 ***Biovail
          Laboratories Incorporated and Biovail***
 
 In
          January 2001, we entered into a license, research and development agreement
          with Biovail to develop, manufacture and market DOV diltiazem. Biovail’s license
          to use DOV diltiazem was exclusive and worldwide in scope. In March 2003,
          following Biovail’s receipt of marketing authorization for Cardizem LA, we and
          Biovail agreed to terminate the license agreement. The separation agreement
          provided for the return to us of the patent license covering DOV diltiazem,
          a
          $1.0 million payment by us to Biovail and contingent payments by us to
          Biovail of $3.0 million upon issuance of marketing authorization for the
          drug and up to $7.5 million based upon sales, if any. We and Biovail have
          delivered mutual releases relating to the license agreement.
 
 
 **Market
          Exclusivity, Patent Protection and Intellectual Property**
 
 We
          believe that establishing and maintaining market exclusivity for our product
          candidates is critical to our long-term success. We utilize a number of
          methods
          to establish and maintain market exclusivity, including taking advantage
          of
          statutory market exclusivity provisions, seeking patent protection for
          our
          product candidates and otherwise protecting our intellectual property.
 
  14
  ***The
          Hatch-Waxman Act***
 
 Under
          the
          U.S. Drug Price Competition and Patent Term Restoration Act of 1984, or
          Hatch-Waxman Act, newly approved drugs and indications benefit from a statutory
          period of marketing exclusivity. Under the Hatch-Waxman Act, the FDA provides
          marketing exclusivity to the first applicant to gain approval for a particular
          new drug by prohibiting the filing of an abbreviated NDA, or ANDA, by a
          generic
          competitor for up to five years after the drug is first approved. The
          Hatch-Waxman Act also provides three years of marketing exclusivity for
          a new
          indication for an existing drug. This market exclusivity is provided even
          in the
          absence of patent protection for the approved drug. If the drug is also
          claimed
          in a patent, a third party may file an ANDA four years after the drug is
          first
          approved, provided that the third party certifies that the applicable patent
          is
          invalid or not infringed.
 
 Because
          they appear to be compounds with new active ingredients, we believe ocinaplon,
          bicifadine and DOV 216,303 will each be eligible for the five-year exclusivity
          provisions of the Hatch-Waxman Act if they are the first approved drugs
          containing their active compounds. Since certain patents relating to bicifadine
          and ocinaplon have expired, in the absence of new patent protection based
          on
          patent applications currently being pursued by DOV, these market exclusivity
          provisions may be of particular importance to the success of these compounds
          if
          they are approved by the FDA.
 
 The
          Hatch-Waxman Act also permits an extension of up to five years of the term
          of a
          patent for new approved products to compensate for patent term lost during
          the
          drug development and FDA regulatory review process if the applicant can
          show
          that research and development has been sufficiently continuous during the
          FDA
          review process. Only one patent applicable to any approved drug is eligible
          for
          extension under these provisions. In addition, this extension must be applied
          for after NDA approval of the new drug covered by the patent and before
          expiration of the patent. We will review at the time patent term extensions
          for
          some of our current patents under the Hatch-Waxman Act to add patent life
          beyond
          the expiration date. Since patent term extensions for patent term lost
          require
          prior NDA approval of the product, our prospective eligibility for extensions
          is
          subject to the expected length of clinical trials, patent life and factors
          involved in the filing and approval of an NDA.
 
 ***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 claiming
          a
          novel, three-dimensional composition of matter for bicifadine, as well
          as
          therapeutic uses and methods of manufacture for this composition. This
          application was perfected in 2003 as a regular utility patent application
          and a
          separate, international, or PCT, patent application. Also in 2002 and 2003,
          we
          filed U.S. provisional and U.S. utility and PCT patent applications claiming
          novel controlled release formulations of bicifadine. In 2004, we filed
          a U.S.
          provisional patent application directed to the use of bicifadine for controlling
          fever and menopausal symptoms, including hot flashes. This application
          was
          perfected in 2005 as regular U.S. utility and PCT patent applications.
          In 2005
          we filed a U.S. provisional application directed to therapeutic uses,
          compositions and methods employing bicifadine to treat neuropathic disorders,
          including neuropathic pain, and a second U.S. provisional application directed
          to therapeutic uses, compositions and methods employing bicifadine to treat
          urological disorders, including urinary incontinence. Each of these provisional
          applications is planned to be perfected in 2006 as U.S. regular utility
          and PCT
          patent applications. Also in 2005 we filed a U.S. provisional application
          directed to novel synthetic methods and intermediates for the production
          of
          bicifadine and related compounds, and this application was recently perfected
          as
          U.S. regular utility and PCT patent applications. In 2006, we intend to
          file
          several additional patent applications directed to novel therapeutic uses
          and
          compositions of bicifadine.
 
  15
  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 2006 directed
          to new
          compositions, formulations and methods for production of ocinaplon.
 
 A composition
          of matter patent for indiplon, patent no. 6,399,621, which falls under
          our
          license agreement and our sublicense to Neurocrine, was issued to a former
          Wyeth
          subsidiary, American Cyanamid, in June 2002 and is due to expire in August
          2020.
          A further composition of matter patent covering indiplon, patent no. 6,544,999,
          was issued to Neurocrine in April 2003 and is due to expire in October
          2020. A
          further composition of matter patent covering
          a novel polymorphic form (different crystal structure) of indiplon, patent
          no.
          6,903,106 was issued in June 2005 and is due to expire in 2023.
 
 In
          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. In 2006, we received a Notice of
          Allowance on a U.S. patent directed to methods for production of DOV 102,677,
          which patent is scheduled to issue in the near future.
 
 In
          addition to protecting our compounds described above, we intend to supplement
          our current patents with additional patent applications covering new
          compositions of matter, uses, methods of manufacture and formulations,
          as
          appropriate. Once a basic product patent expires, we may be able to derive
          additional commercial exclusivity and benefits, including from:
 
 ·
                  later-granted
                      patents on processes or intermediates related to the most economical
                      method of manufacture of the active ingredient of the product;
 
 ·
                  patents
                      directed to additional therapeutic uses; and
 
 ·
                  patents
                      directed to related compositions and improved clinical formulations.
 
 ***In-Licenses***
 
 ***Wyeth*** *.* In
          May 1998, we licensed from Wyeth, on an exclusive, worldwide basis,
          indiplon, bicifadine, ocinaplon and DOV 216,303 for any indication, including
          insomnia, pain, anxiety and depression. We have the right to develop and
          commercialize these compounds, including the right to grant sublicenses
          to third
          parties, subject to Wyeth's right of first refusal.
 
 In
          February, 2004, we reorganized our exclusive license agreement with Wyeth.
          Under
          the restated agreement, we are obligated to pay Wyeth royalties of 3.5
          percent
          of net sales for ocinaplon and DOV 216,303 and 5.0 percent of net sales
          for
          bicifadine, and milestones of $2.5 million each for ocinaplon and DOV 216,303
          and $5.0 million for bicifadine upon NDA filing, and $4.5 million each for
          bicifadine, ocinaplon and DOV 216,303 upon a NDA approval. The royalty
          rate for
          bicifadine, ocinaplon and DOV 216,303 will increase by 0.5 percent should
          we
          partner or sublicense that compound. In addition, should we partner or
          sublicense a compound, the next milestone payable to Wyeth for that compound
          will be accelerated to become due upon partnering. 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 percent 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 percent royalty payable
          by us to
          Wyeth and the $2.5 million in milestones was eliminated. Accordingly, the
          reorganization with Neurocrine allows Neurocrine to pay to us royalty and
          milestone payments net of those that would be owed by us to Wyeth, or 3.5
          percent on worldwide net sales, if any, and a $1.5 million milestone upon
          NDA
          approval.
 
 
  16
  If
          Wyeth
          terminates the license upon an uncured breach by us, and by Neurocrine
          under the
          standby license, we must transfer to Pfizer 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 for the later of the expiration of the Wyeth
          patents
          in such country and a period of ten years following the launch of each
          compound
          in each country. Upon such expiration, with respect to each country we
          will have
          a fully paid, royalty-free license with the right to make, use or sell
          the
          compounds without any further monetary obligation to Wyeth.
 
 ***Elan*** *.* On
          October 21, 2003, in connection with termination of the joint venture with
          Elan, Elan granted to Nascime Limited, 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. We recently have taken steps to transfer to us the intellectual
          property held by Nascime.
 
 
 **Manufacturing**
 
 We
          have
          and will continue to rely on third-party contract manufacturers to produce
          sufficient quantities of our product candidates for use in our preclinical
          studies and clinical trials. We also intend to rely on third-party contract
          manufacturers to produce sufficient quantities for large-scale
          commercialization. In this regard, we have and will continue to engage
          those
          contract manufacturers who have the capability to manufacture drug products
          in
          amounts required for commercialization.
 
 
 **Marketing
          and Sales**
 
 We
          have
          limited marketing and no sales or distribution capabilities. In December
          2005,
          we established an internal division of strategic marketing and
          commercialization. To augment our limited capabilities in this area, we
          will
          need to either acquire or internally develop sales and distribution
          capabilities, or make arrangements with third parties to perform these
          services
          for us, in order to commercialize any of our product candidates.
 
 
 **Government
          Regulation**
 
 Regulation
          by government authorities in the U.S. and foreign countries is a significant
          factor in the development, manufacture and marketing of our proposed products
          and in our ongoing research and product development activities. All our
          products
          will require regulatory approval by government agencies prior to
          commercialization. In particular, human therapeutic products are subject
          to
          rigorous preclinical studies and clinical trials and other approval procedures
          of the FDA and corresponding regulatory authorities in foreign countries.
          Various federal and state statutes and regulations also govern or influence
          testing, manufacturing, safety, labeling, storage and record-keeping related
          to
          such products and their marketing. The process of obtaining these approvals
          and
          the subsequent substantial compliance with appropriate federal and state
          statutes and regulations require the expenditure of substantial time and
          financial resources.
 
 Preclinical
          studies generally are conducted in laboratory animals to evaluate the potential
          safety and the efficacy of a drug product. In the U.S., drug developers
          submit
          the results of preclinical studies to the FDA as a part of an investigational
          new drug application, or IND, which must become effective before they can
          begin
          clinical trials in the U.S. An IND becomes effective 30 days after receipt
          by the FDA unless the FDA objects to it. Typically, clinical evaluation
          involves
          a time-consuming and costly three-phase process.
  17
  Phase
                      I
                  Refers
                      typically to closely-monitored clinical trials and includes
                      the initial
                      introduction of an investigational new drug into human patients
                      or normal
                      volunteer subjects. Phase I clinical trials are designed to
                      determine the
                      metabolism and pharmacologic actions of a drug in humans, the
                      side effects
                      associated with increasing drug doses and, if possible, to
                      gain early
                      evidence on effectiveness. Phase I trials also include the
                      study of
                      structure-activity relationships and mechanism of action in
                      humans, as
                      well as studies in which investigational drugs are used as
                      research tools
                      to explore biological phenomena or disease processes. During
                      Phase I
                      clinical trials, sufficient information about a drug’s pharmacokinetics
                      and pharmacological effects should be obtained to permit the
                      design of
                      well-controlled, scientifically valid, Phase II studies. The
                      total number
                      of subjects and patients included in Phase I clinical trials
                      varies, but
                      is generally in the range of 20 to 80.Phase
                      II
                  Refers
                      to controlled clinical trials conducted to evaluate the effectiveness
                      of a
                      drug for a particular indication or indications in patients
                      with the
                      disease or condition under study and to determine the common
                      short-term
                      side effects and risks associated with the drug. These clinical
                      trials are
                      typically well controlled, closely monitored and conducted
                      in a relatively
                      small number of patients, usually involving no more than several
                      hundred
                      patients.Phase
                      III
                  Refers
                      to expanded controlled and uncontrolled clinical trials, also
                      involving
                      patients with the disease or condition under study. These clinical
                      trials
                      are performed after preliminary evidence suggesting effectiveness
                      of a
                      drug has been obtained. They are intended to gather additional
                      information
                      about the effectiveness and safety that is needed to evaluate
                      the overall
                      benefit-risk relationship of the drug and to provide an adequate
                      basis for
                      physician labeling. Phase III trials usually include from several
                      hundred
                      to several thousand patients.
  The
          FDA
          closely monitors the progress of each of the three phases of clinical trials
          that are conducted in the U.S. and may, at its discretion, re-evaluate,
          alter,
          suspend or terminate the testing based upon the data accumulated to that
          point
          and the FDA’s assessment of the risk/benefit ratio to the patient. To date we
          have conducted certain of our clinical trials outside the U.S., where they
          are
          monitored by the cognizant national regulatory agencies. Currently, on-going
          clinical trials are being conducted in the U.S., Canada, Guatemala, India
          and
          Israel. All clinical trial test design and results, whether the trial is
          conducted in the U.S. or abroad, are subject to review by the FDA following
          IND
          or NDA filings.
 
 Once
          Phase III trials are completed, drug developers submit the results of
          preclinical studies and clinical trials to the FDA, in the form of a NDA,
          for
          approval to commence commercial sales. In response, the FDA may grant marketing
          approval, request additional information or deny the application if the
          FDA
          determines that the application does not meet regulatory approval criteria.
          FDA
          approval may not be granted on a timely basis, or at all. Furthermore,
          the FDA
          may prevent a drug developer from marketing a product under a label for
          its
          desired indications, which may impair commercialization of the product.
          Similar
          regulatory procedures must also be complied with in countries outside the
          U.S.
 
 If
          the
          FDA approves the NDA, the drug becomes available for physicians to prescribe
          in
          the U.S. After approval, the drug developer must submit periodic reports
          to the
          FDA, including descriptions of any adverse reactions reported. The FDA
          may
          request or require additional trials to evaluate any adverse reactions
          or
          long-term effects.
 
 In
          addition to studies requested by the FDA after approval, a drug developer
          may
          conduct other trials and studies to explore use of the approved compound
          for
          treatment of new indications. The purpose of these trials and studies and
          related publications is to broaden the application and use of the drug
          and its
          acceptance in the medical community.
 
 We
          will
          have to complete an approval process, similar to the U.S. approval process,
          in
          virtually every foreign target market for our products in order to commercialize
          our product candidates in those countries. The approval procedure and the
          time
          required for approval vary from country to country and may involve additional
          testing. Foreign approvals may not be granted on a timely basis, or at
          all. In
          addition, regulatory approval of prices is required in most countries other
          than
          the U.S. We face the risk that the resulting prices would be insufficient
          to
          generate an acceptable return to us or our collaborators.
   18
  **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
          five product candidates undergoing DOV-driven or collaborative clinical
          development addressing four different and substantial pharmaceutical markets.
          Competition in these markets includes the following drugs and pharmaceutical
          companies:
 
 ***Insomnia
          Market***
 
 Indiplon
          would compete in the sedative and hypnotic market, which, as defined by
          IMS,
          demonstrated one of the highest sales growth rates among any therapeutic
          area in
          2005. Sales for the year ending 2005 were $2.8 billion, with a one year
          growth
          rate of more than 30 percent. Prescription growth jumped into double-digit
          figures with a one year increase of almost 12 percent. Sanofi-Aventis’ Ambien
          continues to dominate the market with sales of $2.1 billion. Sepracor’s Lunesta
          was just launched in March, 2005 and captured $322 million in sales by
          year’s
          end, demonstrating the market’s sensitivity and acceptance to novel new entries.
          Sanofi-Aventis launched Ambien CR in September 2005 and captured $73 million
          of
          sales in a four-month period.
 
 ***Pain
          Market***
 
 Bicifadine
          would target the analgesic market. The two principal classes of pain treatments,
          as defined by IMS, are the antiarthritic class and the analgesic class.
          Due to
          the incidence and prevalence of pain, both classes have a very large volume
          in
          sales and in total prescriptions.
 
 Sales
          of
          antiarthritics in 2005 were $7.9 billion which represents a one year growth
          decrease of 19.1 percent in value due to the withdrawal of additional COX-2
          inhibitors (for example, Celebrex and Bextra, both marketed by Pfizer).
          This has
          led other antiarthritics, such as Mobic ® ,
          marketed by Boehringer Ingelheim, to capture a significant share of this
          class.
          In 2005, Mobic sales more than doubled with total sales of $1 billion.
 
 Sales
          of
          the analgesic class, as defined by IMS, reached $10.5 billion in 2005 which
          represented a flat annual growth rate and an increase of approximately
          five
          percent in total prescriptions. This class is dominated by narcotics. Sales
          of
          longer acting non-injectable narcotics that are actively marketed such
          as
          Actiq ® by
          Cephalon, Inc., Avinza ® by
          Ligand Pharmaceuticals, Inc., and Kadian ® by
          Alpharma, Inc., continue to show strong growth in sales and prescriptions.
          Non-narcotics, such as the synthetic non-narcotic subclass as defined by
          IMS,
          demonstrated positive growth in total prescriptions, but negative growth
          in 2005
          sales because of generic erosion in price. Branded synthetic non-narcotic
          products such as Ultram ® and
          Ultracet ® ,
          both
          marketed by Johnson & Johnson, enjoyed very strong sales when heavily
          promoted, but are now off-patent and are demonstrating significant sales
          declines. Conversely, generic tramadol has been showing continual growth
          in
          prescriptions since entering the market in 2002.
 
 ***Depression
          Market***
 
 DOV
          21,947 and 216,303 would target the antidepressant market, which is dominated
          by
          SSRIs and SNRIs that comprise nearly 80 percent of the antidepressant market.
          Significant SSRI market positions are held by Zoloft, marketed by Pfizer,
          Celexa
          and Lexapro ® ,
          marketed by Forest Laboratories, Inc., and Paxil, marketed by GlaxoSmithKline.
          SNRI market leaders include Effexor, marketed by Wyeth, and Cymbalta, marketed
          by Eli Lilly and Co., which is also co-promoted for neuropathic pain. In
          2004
          IMS estimated that the SSRI and SNRI markets combined totaled $11
          billion.
 
  19
  ***Alcohol
          Abuse***
 
 DOV
          102,677 would compete in the alcohol abuse market. Campral ® ,
          marketed by Forest, is the leading prescription pharmaceutical in this
          market.
          Alcohol abuse is an underserved space, met by a general lack of effective
          treatments. The most recent alcohol use and abuse study conducted by the
          U.S.
          Department of Health and Human Services (“The 2001 National Household Survey on
          Drug Abuse”), estimates that approximately 14 million Americans - 7.4 percent of
          the population - meet the diagnostic criteria for alcohol abuse or alcoholism.
 
 
 **Employees**
 
 As
          of
          December 31, 2005, we had 111 employees, consisting of 109 full-time employees
          and two part-time employees. Of the full-time employees, 31 hold Ph.D.,
          M.D. or
          equivalent degrees. None of our employees are represented by a collective
          bargaining arrangement, and we believe the relationship with our employees
          is
          good.
 
 
 **Our
          Scientific Advisory Board**
 
 Our
          scientific advisory board, or SAB, advises us with respect to our product
          development strategy as well as the scientific and business merits of licensing
          opportunities and acquisition of compounds and the availability of opportunities
          for collaborations with other pharmaceutical companies. The SAB consists
          of a
          group of highly regarded and experienced scientists and clinicians. A formal,
          three-day meeting is held off-site annually in the spring. We have, in
          the past,
          compensated certain SAB members with stock options pursuant to our 2000
          stock
          option and grant plan, and expenses for attendance at the annual meeting.
          Certain of the SAB members receive compensation for consulting services.
          The
          current SAB members are:
 
 **Robert
          Cancro, M.D.** is
          the
          chairman of our Scientific Advisory Board and one of our co-founders. From
          1976
          until his retirement in 2006, Dr. Cancro served as professor and chairman
          of the
          Department of Psychiatry at New York University School of Medicine, Director
          of
          Psychiatry at New York University Hospital and director of the Nathan S.
          Kline
          Institute for Psychiatric Research.  Today, he continues to serve as a
          professor in the Department of Psychiatry at New York University School
          of
          Medicine and as director of the Mental Illness Prevention Center.  Prior to
          1976, Dr. Cancro was a professor in the Department of Psychiatry at the
          University of Connecticut Health Center.  Dr. Cancro is a widely
          published, internationally recognized psychiatrist and educator, having
          received
          numerous honors and awards.  He is on the editorial board of several
          scientific journals and is an examiner for the American Board of Psychiatry
          and
          Neurology Inc. Dr. Cancro is a Fellow of the American Psychiatric
          Association, the American College of Psychiatrists and the American College
          of
          Physicians.  Dr. Cancro is president and a director of the
          International Committee Against Mental Illness and Chairman of the Section
          on
          Psychiatric Rehabilitation of the World Psychiatric Association.
 
 **Arvid
          Carlsson, M.D., Ph.D.** is a
          world-renowned neuropharmacologist and the recipient of numerous prizes
          and
          awards, including the Nobel Prize and the Legion of Honour. Dr. Carlsson
          has been Professor Emeritus at the University of Gothenburg, Sweden since
          1989.
          Prior to that, he was Professor, Pharmacology Department, University of
          Gothenburg since 1959 and served as chairman from 1959 to 1976. He has
          conducted
          groundbreaking research in the areas of depression, schizophrenia and
          Parkinson’s disease.
 
 **John
          W. Daly, Ph.D.** is
          an
          internationally known chemist/pharmacologist. Now a scientist emeritus
          in the
          National Institute of Diabetes and Digestive and Kidney Diseases, Dr. Daly
          was
          chief of NIDDK’s Laboratory of Bioorganic Chemistry, a laboratory he founded and
          headed from 1981 to 1997. Natural products discovered through the research
          of
          Dr. Daly’s lab, primarily alkaloids derived from amphibian skin, have had a
          major impact on knowledge of how the nervous system functions and how drugs
          interact with the nervous system. During Dr. Daly’s 40-year tenure at NIH, his
          numerous accomplishments have included the discovery of the “NIH Shift” — an
          unexpected molecular process involved in the conversion of the amino acids
          phenylalanine and tryptophan to the important neurotransmitters dopamine,
          norepinephrine and serotonin.
 
 20
  Author
          of
          more than 500 research papers, a book ( *Cyclic
          Nucleotides in the Nervous System* )
          and
          many book chapters, Dr. Daly was elected to the National Academy of Sciences
          in
          1997. Among his many other honors are the Hillebrand Award from the American
          Chemical Society in 1978, the Research Achievement Award from the American
          Society of Pharmacognosy in 1997, the Karl Wilhelm Scheele Award from the
          Swedish Academy of Pharmaceutical Sciences in 1999 and in 2002, the American
          Chemical Society’s Ernest Guenther Award in the Chemistry of Natural Products.
          That same year, he was also named among the most-cited pharmacologists
          in the
          world.
 
 **David
          H. Farb, Ph.D.** is
          a
          Professor and has served since 1990 as Chairman of the Department of
          Pharmacology and Experimental Therapeutics at the Boston University School
          of
          Medicine, where he also serves as Director of the Program in Biomedical
          Neuroscience.  Additionally, he is Director of the university-wide
          interdisciplinary NIGMS-funded Biomolecular Pharmacology Training Program,
          the
          interdepartmental Program in Biomedical Neuroscience and heads the Laboratory
          of
          Molecular Neurobiology.  Dr. Farb chairs the Executive Committee for the
          Medical Sciences Training Program and is a member of the Bioinformatics
          Program.
 He is currently President of New England Pharmacologists Chapter of
          ASPET.  Prior to joining BU, Dr. Farb was a full professor with tenure and
          Head of the Molecular Pharmacology Research Program at the SUNY Downstate
          Medical Center.  He also was elected Presiding Officer of the Graduate
          School at SUNY. While in New York, Dr. Farb was elected Chair of the Section
          of
          Biological Sciences at the New York Academy of Sciences, where he subsequently
          founded the Section of Neuroscience.  He received his B.A. in Chemistry
          from Long Island University and the Ph.D. in Biochemistry at Brandeis
          University.  Dr. Farb’s current research is directed toward understanding
          the mechanisms of action of abused substances and steroid hormones and
          their
          interactions with excitatory and inhibitory amino acid receptors in the
          central
          nervous system. The research also focuses on the mechanism of action and
          discovery of neuromodulators as therapeutic agents and on the structure,
          function, and cellular dynamics of ion channels and receptors in the brain
          and
          spinal cord.
 
 **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, prostate cancer and pituitary tumors (acromegaly).
          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.
 
 **Arnold
          S. Lippa, Ph.D.** is a
          co-founder of DOV and served as our Chief Executive Officer from April
          1995 to
          July 2005. Since our inception in April 1995, Dr. Lippa has served as our
          Chairman of our Board of Directors. Prior to 1985, he served as Director
          of
          Molecular Neurobiology and held other positions at American Cyanamid. In
          addition, Dr. Lippa has consulted for various pharmaceutical and biotechnology
          companies and has been a graduate faculty professor at the New York University
          School of Medicine and the City University of New York.
  Website
          Availability of Reports 
 Our
            Internet website address is http://www.dovpharm.com. Our annual report
            on Form
            10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
            amendments
            to those reports filed or furnished pursuant to Section 13(a) or 15(d)
            of the
            Securities Exchange Act of 1934 are available free of charge through
            our
            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.
 
 **Our
            Corporate Information**
 
 We
            were
            incorporated in May 1995 in New Jersey and reincorporated in Delaware
            in
            November 2000. Our principal executive offices are located at 433 Hackensack
            Avenue, Hackensack, NJ 07601. The telephone number of our principal executive
            offices is (201) 968-0980.
  21
 **ITEM
        1A. RISK FACTORS**
 
 If
        any of
        the events covered by the following risks occur, our business, results of
        operations and financial condition could be harmed. In that case, the trading
        price of our common stock could decline. Moreover,
        our actual results may differ materially from our forward-looking statements
        as
        a result of the following factors.
 
 **Risks
        Related to our Business**
 
 ***Our
        stock price is likely to be volatile and the market price of our common stock
        may decline.***
 
 Market
        prices for securities of biopharmaceutical companies have been particularly
        volatile. In
        particular, our stock price has fluctuated between a high of $21.49 and a
        low of
        $12.79 since January 1, 2005. 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, such as results in the ongoing Phase III clinical
                  trial with
                  bicifadine in patients with chronic low back pain expected early in
                  the second quarter of 2006;**·**
              delays
                  in initiating clinical trials;**·**
              business
                  or legal developments concerning our collaborators or licensees,
                  including
                  Merck, Pfizer and Neurocrine;**·**
              delays
                  or disagreements with Merck in the development of DOV 21,947 to
                  be
                  conducted by us under the August 2005 amendment to the license
                  agreement
                  with Merck;**·**
              regulatory
                  developments or enforcement in the United States and foreign countries,
                  such as the result of the projected May 15, 2006 action by the
                  FDA for the
                  indiplon NDA filings;**·**
              developments
                  or disputes concerning patents or other proprietary
                  rights;**·**
              changes
                  in estimates or recommendations by securities analysts;**·**
              public
                  concern over our drugs that treat CNS disorders, including any
                  drugs that
                  we may develop in the future;**·**
              litigation;**·**
              future
                  sales of our common stock;
   22
  
 **·**
              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 equity dilution and,
        as a
        result, our stock price may go down.***
  The
        2.5%
        subordinated convertible debentures that we issued in December 2004 and January
        2005 are convertible, at the option of the holders, into shares of our common
        stock at initial conversion rates of 43.9560 shares of common stock per $1,000
        principal amount of notes, or $22.75 per share, subject to adjustment in
        certain
        circumstances. If all the debentures were converted at their initial conversion
        rate, we would be required to issue approximately 3,516,484 shares of our
        common
        stock. We have reserved shares of our authorized common stock for issuance
        upon
        conversion of the debentures. If the debentures are converted into shares
        of our
        common stock, our existing stockholders will experience immediate equity
        dilution and our common stock price may be subject to significant downward
        pressure.
 
 ***We
        have incurred losses since our inception and expect to incur significant
        losses
        for the foreseeable future, and we may never reach
        profitability.***
 
 Since
        our
        inception in April 1995 through December 31, 2005, we have incurred significant
        operating losses and, as of December 31, 2005, we had an accumulated deficit
        of
        $153.3 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 payments;**·**
              seek
                  regulatory approvals for our product candidates;**·**
              commercialize
                  our product candidates, if approved;**·**
              hire
                  additional clinical, scientific and management
                  personnel;**·**
              add
                  operational, financial and management information systems and personnel;
                  and**·**
              identify
                  additional compounds and acquire rights from third parties to those
                  compounds through a license to us.
 
  23
  
 We
        must
        generate significant revenue to achieve and maintain profitability. We may
        not
        be able to generate sufficient revenue and we may never be able to achieve
        or
        maintain profitability.
 
 ***We
        are dependent on the successful outcome of clinical trials for
        our*** ****** ***lead
        product candidates.***
 
 None
        of
        our product candidates are currently approved for sale by the FDA or by any
        other regulatory agency in the world, and our product candidates may never
        be
        approved for sale or become commercially viable. Before obtaining regulatory
        approval for the sale of our product candidates, they must be subjected to
        extensive preclinical and clinical testing to demonstrate their safety and
        efficacy for humans and we intend to devote a significant portion of our
        resources in the upcoming year to the development of bicifadine. Our success
        will depend on the success of our currently ongoing clinical trials and clinical
        trials that have not yet begun.
 
 There
        are
        a number of difficulties and risks associated with clinical trials including,
        but not limited to, the possibilities that:
 
 **·**
              we
                  may discover that a product candidate causes or may cause harmful
                  side
                  effects;**·**
              we
                  may discover that a product candidate, even if safe when taken
                  alone, may
                  interfere with the actions of other drugs taken at the same time
                  such that
                  its marketability is materially reduced;**·**
              we
                  may discover that a product candidate does not exhibit the expected
                  therapeutic results in humans;**·**
              a
                  product candidate may lend itself to user abuse, in which case
                  labeling
                  may adversely affect its marketability;**·**
              results
                  may not be statistically significant or predictive of results that
                  will be
                  obtained from large-scale, advanced clinical trials;**·**
              we
                  or the FDA may suspend or delay initiation of further clinical
                  trials of
                  our product candidates for any of a number of reasons, including
                  safety or
                  delay in obtaining clinical trial material;**·**
              we
                  may be delayed in the FDA protocol review process;**·**
              patient
                  recruitment may be slower than expected; and**·**
              patients
                  may drop out of our clinical
                  trials.
 
 In
        October 2003, the FDA placed the start of our Phase III clinical trial of
        ocinaplon, our anti-anxiety product candidate, on hold and requested that
        we
        produce additional safety information. We supplied this information to the
        FDA
        and with FDA concurrence initiated a Phase III clinical trial in the fourth
        quarter of 2004. In August 2005, we announced that we had suspended the trial
        due to a recent occurrence of enzyme elevations in liver function tests,
        or
        LFTs, for one subject in the trial and, following our trial report to the
        FDA,
        the agency joined in the clinical hold. We have since evaluated the safety
        findings from all subjects in ocinaplon clinical trials. During this study
        the
        overall incidence of an elevation in liver enzymes greater than three times
        normal was eight percent. Based upon these data, we have discontinued the
        development of ocinaplon for generalized anxiety disorder.
 
 Given
        the
        uncertainty surrounding the regulatory and clinical trial process, we may
        not be
        able to successfully advance the development of effective or safe, commercially
        viable products.
 
 The
        August 2005 amendment to our license agreement with Merck conditions Merck’s
        obligation to reimburse us, including to reimburse us at a premium, for certain
        clinical tests on DOV 21,947 and to pay us a development milestone upon the
        successful outcome of a certain test measured by criteria to be agreed upon
        by
        the parties. We may not be able to achieve agreement with Merck on such
        criteria.
   24
  
 If
        we are
        unable to successfully develop and commercialize any one or more of our product
        candidates, this could severely harm our business, impair our ability to
        generate revenues and adversely impact our stock price.
 
 ***We
        may not receive regulatory approvals for our product candidates, approvals
        may
        be delayed or the approvals we receive may not be sufficient to fulfill our
        current goals for our product candidates.***
 
 Regulation
        by government authorities in the United States and foreign countries is a
        significant factor in the development, manufacture and commercialization
        of our
        product candidates and in our ongoing research and development activities.
        Our
        partner Neurocrine filed two NDAs for indiplon for the treatment of insomnia
        in
        April and May 2005. All
        our
        other product candidates are in various stages of research and development
        and
        we have not yet requested or received regulatory approval to commercialize
        any
        product candidate from the FDA or any other regulatory body .
 
 In
        particular, human therapeutic products are subject to rigorous preclinical
        testing, clinical trials and other approval procedures of the FDA and similar
        regulatory authorities in foreign countries. The FDA regulates, among other
        things, the development, testing, manufacture, safety, efficacy, record keeping,
        labeling, storage, approval, advertising, promotion, sale and distribution
        of
        biopharmaceutical products. Securing FDA approval requires the submission
        of
        extensive preclinical and clinical data and supporting information to the
        FDA
        for each therapeutic indication to establish the product candidate’s safety and
        efficacy. The approval process may take many years to complete and the approvals
        we receive may not allow us to pursue all the desired indications or uses
        for
        each of our product candidates. Additionally, even after receipt of FDA
        approval, the FDA may request additional clinical trials to evaluate any
        adverse
        reactions or long-term effects. The scope and expense of such post-approval
        trials could be extensive and costly to us. Any FDA or other regulatory approval
        of our product candidates, once obtained, may be withdrawn. If our product
        candidates are marketed abroad, they will also be subject to extensive
        regulation by foreign governments.
 
 Any
        failure to receive regulatory approvals necessary to commercialize our product
        candidates would have a material adverse effect on our business. The process
        of
        obtaining these approvals and the subsequent compliance with appropriate
        federal
        and state statutes and regulations require spending substantial time and
        financial resources. If we, or our collaborators or licensees, fail to obtain
        or
        maintain or encounter delays in obtaining or maintaining regulatory approvals,
        it could adversely affect the marketing of any product candidates we develop,
        our ability to receive product or royalty revenues and our liquidity and
        capital
        resources.
 
 As
        noted
        above, in
        October 2003, the FDA placed the start of our Phase III clinical trial of
        ocinaplon, on hold and requested that we produce additional safety information. We
        supplied this information to the FDA and with FDA approval initiated a Phase
        III
        clinical trial in the fourth quarter of 2004. In August 2005, we announced
        that
        we had suspended the trial following a recent occurrence of enzyme elevations
        in
        LFTs for one subject in the trial and, following our trial report to the
        FDA,
        the agency joined in the clinical hold. We have since evaluated the safety
        findings from all subjects in ocinaplon clinical trials. During this study
        the
        overall incidence of an elevation in liver enzymes greater than three times
        normal was eight percent. Based upon these data, we have discontinued the
        development of ocinaplon for GAD.
  On
        September 28, 2004, we announced that we had initiated a pivotal, Phase III,
        U.S. clinical trial in patients with moderate to severe chronic lower back
        pain.
        This clinical trial is being conducted in accordance with a protocol (revised
        as
        described below) that we originally submitted to the FDA in accordance with
        the
        FDA’s special protocol assessment, or SPA, guidelines in May 2004. Following
        submission of the protocol to the FDA, we had meetings with the agency to
        reach
        agreement on the study design. Following our meeting with the FDA in September
        2004, we revised the protocol in response to comments from the FDA, and
        initiated this clinical trial in accordance with the revised protocol. We
        received oral confirmation from the FDA that the revised protocol was
        acceptable, however did not obtain formal documentation of the agreement
        from
        the FDA regarding this revised protocol. In a letter dated February 2006,
        the
        FDA stated that there was no formal agreement for the protocol because the
        protocol had been amended subsequent to the original SPA submission. 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 a previously approved special
        protocol assessment for a particular protocol is no longer valid. This could
        have a material adverse effect on the NDA approval process, if any.
   25
  
 ***Our
        operating results are subject to fluctuations that may cause our stock price
        to
        decline.***
 
 Our
        revenue is unpredictable and has fluctuated significantly from year-to-year
        and
        quarter-to-quarter and will likely continue to be highly volatile. We believe
        that period-to-period comparisons of our past operating results are not good
        indicators of our future performance and should not be relied on to predict
        our
        future results. In the future, our operating results in a particular period
        may
        not meet the expectations of any securities analysts whose attention we may
        attract, or those of our investors, which may result in a decline in the
        market
        price of our common stock.
 
 ***We
        rely on the efforts of Neurocrine and Pfizer and ultimately Merck for the
        development, design and implementation of clinical trials, regulatory approval
        and commercialization of indiplon and our product candidates DOV 216,303
        and DOV
        21,947.***
 
 In
        1998,
        we sublicensed indiplon to Neurocrine without retaining any material rights
        other than the right to receive milestone payments and royalties on product
        sales, if any. In December 2002, Neurocrine entered into a development and
        commercialization agreement with Pfizer for indiplon. In
        August
        2004, we sublicensed DOV 216,303 for certain indications and DOV 21,947 for
        all
        indications to Merck without retaining any material rights other than our
        participation in the ongoing clinical plan collaboration, the right to receive
        milestone payments and royalties on product sales, if any, and co-promotion. The
        clinical development, design and implementation of clinical trials, the
        preparation of filings for FDA approval and, if approved, the subsequent
        commercialization of these product candidates are within the control of our
        partners. We will lack control over the process and, as a result, our ability
        to
        receive any revenue from these product candidates is dependent on the success
        of
        their efforts. Our partners may fail or otherwise decide not, or otherwise
        not
        have the ability, to devote the resources necessary to successfully develop
        and
        commercialize the product candidates, which would impair our ability to receive
        milestone or royalty payments, if any, in respect of the product
        candidates.
 
 We
        entered into an amendment of our license agreement with Merck on August 5,
        2005
        which provides for us to conduct certain development of DOV 21,947 that would
        otherwise have been the responsibility of Merck under the terms of the
        agreement. Merck has the right to choose one of our preclinical triple reuptake
        inhibitors for inclusion under the license agreement with no further up-front
        fee. In the event we are unable to produce successful results from these
        clinical trials under criteria to be agreed upon by the parties, Merck will
        not
        be obligated to reimburse our costs of such development. Merck is not presently
        performing any clinical studies with DOV 21,947 under this arrangement and
        continues to have the right to terminate the license agreement.
 
 ***Our
        success in developing our product candidates depends upon the performance
        of our
        licensees and collaborative partners.***
 
 Our
        efforts to develop, obtain regulatory approval for and commercialize our
        existing and any future product candidates depend in part upon the performance
        of our licensees and collaborative partners. Currently, we have license and
        collaborative agreements with Merck, Neurocrine, Pfizer and Wyeth. Neurocrine
        has entered into a development and commercialization agreement with Pfizer
        involving a further sublicense under our agreement with Neurocrine. In
        connection with certain of these agreements, we have granted certain rights,
        including development and marketing rights and rights to defend and enforce
        our
        intellectual property. We do not have day-to-day control over the activities
        of
        our licensees or collaborative partners and cannot assure you that they will
        fulfill their obligations to us, including their development and
        commercialization responsibilities in respect of our product candidates.
        Our
        license agreement with Merck was amended on August 5, 2005 to provide that
        we
        would assume responsibility for certain development of DOV 21,947 that Merck
        would have otherwise been responsible for under the agreement. Merck is not
        presently performing any clinical studies under this arrangement and continues
        to have the right to terminate the license agreement. We also cannot assure
        you
        that our licensees or collaborators will properly maintain or defend our
        intellectual property rights or that they will not utilize our proprietary
        information in such a way as to invite litigation that could jeopardize or
        potentially invalidate our proprietary information or expose us to potential
        liability. Further, we cannot assure you that our licensees or collaborators
        will not encounter conflicts of interest, or changes in business strategy,
        or
        that they will not acquire or develop rights to competing products, all of
        which
        could adversely affect their willingness or ability to fulfill their obligations
        to us.
   26
  
 From
        January 1999 until October 21, 2003, Elan and we were engaged in developing
        controlled release formulations of bicifadine and ocinaplon pursuant to our
        joint venture. In October 2003, we acquired from Elan 100% ownership of
        Nascime, the joint venture's operating subsidiary, and the product candidates
        bicifadine and ocinaplon. This acquisition ended our involvement with Elan
        in
        the nearly five-year joint venture. In March 2003, we and Biovail
        terminated our collaboration for DOV diltiazem.
  Any
        failure on the part of our licensees or collaborators to perform or satisfy
        their obligations to us could lead to delays in the development or
        commercialization of our product candidates and affect our ability to realize
        product revenues. Disagreements with our licensees or collaborators could
        require or result in litigation or arbitration, which could be time-consuming
        and expensive. If we or our licensees or collaborators fail to maintain our
        existing agreements or establish new agreements as necessary, we could be
        required to undertake development, manufacturing and commercialization
        activities solely at our own expense. This would significantly increase our
        capital requirements and may also delay the commercialization of our product
        candidates.
 
 ***Under
        the August 5, 2005, amendment to our license agreement with Merck, we are
        now
        responsible for designing, conducting and bearing the costs of certain clinical
        trials that Merck would have otherwise been obligated to perform under the
        terms
        of the license agreement. If the results of these clinical trials do not
        meet
        the criteria of success to be agreed upon with Merck, we may not be reimbursed
        for the costs of conducting such trials, unless Merck agrees. If Merck does
        not
        continue the license agreement, our business and results may be adversely
        affected.***
 
 On
        August
        5, 2005, we amended our license agreement with Merck such that we are now
        responsible for conducting certain development of DOV 21,947 that had been
        the
        responsibility of Merck under the agreement. Merck
        has
        the right to choose one of our preclincial triple reuptake inhibitors for
        inclusion under the agreement with no further up-front fee. In the event
        we are
        unable to produce successful results from these clinical trials under criteria
        of success to be agreed upon by the parties, Merck will not be obligated
        to
        reimburse our costs of such development. Merck is not presently performing
        any
        clinical studies with DOV 21,947 under this arrangement and continues to
        have
        the right to terminate the license agreement. If the trials are not successful,
        Merck may elect to reimburse us notwithstanding and retain DOV
        21,947. If the
        Merck agreement is terminated, we will need to pursue alternative arrangements
        for the development and commercialization of DOV 21,947, and we may be unable
        to
        reach an agreement with another party on economic terms as favorable as those
        in
        the Merck agreement.
 
 ***The
        independent clinical investigators and contract research organizations that
        we
        rely upon to assist in the conduct of our clinical trials may not be diligent,
        careful or timely, and may make mistakes, in the conduct of our
        trials.***
 
 We
        depend
        on independent clinical investigators and contract research organizations,
        or
        CROs, to assist in the conduct of our clinical trials under their agreements
        with us. The investigators are not our employees, and we cannot control the
        amount or timing of resources that they devote to our programs. If independent
        investigators fail to devote sufficient time and resources to our drug
        development programs, or if their performance is substandard, it will delay
        the
        approval of our FDA applications and our introduction of new drugs. The CROs
        we
        contract with to assist with the execution of our clinical trials play a
        significant role in the conduct of the trials and the subsequent collection
        and
        analysis of data. Failure of the CROs to meet their obligations could adversely
        affect clinical development of our products. Moreover, these independent
        investigators and CROs may also have relationships with other commercial
        entities, some of which may compete with us. If independent investigators
        and
        CROs assist our competitors at our expense, it could harm our competitive
        position.
 
 ***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.***
   27
  
 Our
        existing license and collaborative agreements contain covenants that restrict
        our product development and our ability to compete in collaborative agreements.
        In addition, certain of our agreements no longer effective have involved,
        among
        other things, restrictions on the issuance of debt and equity securities
        and
        limitations on our ability to license our product candidates to third parties.
        Because of existing restrictive covenants, if our licensees or collaborators
        fail to fulfill their obligations to us or we are otherwise not able to maintain
        these relationships, we cannot assure you that we will be able to enter into
        alternative arrangements or assume the development of these product candidates
        ourselves. This would significantly affect our ability to commercialize our
        product candidates. Further, we cannot assure you, even if alternative
        arrangements are available to us, that they will be any less restrictive
        on our
        business activities.
 
 ***If
        we are unable to create sales, marketing and distribution capabilities, or
        enter
        into agreements with third parties to perform these functions, we will not
        be
        able to commercialize our product candidates.***
 
 We
        do not
        have any sales, marketing or distribution capabilities. In order to
        commercialize our product candidates, if any are approved, we must either
        acquire or internally develop sales, marketing and distribution capabilities
        or
        make arrangements with third parties to perform these services for us. If
        we
        obtain FDA approval for our existing product candidates, we intend to rely
        on
        relationships with one or more pharmaceutical companies or other third parties
        with established distribution systems and direct sales forces to market our
        product candidates. If we decide to market any of our product candidates
        directly, we must either acquire or internally develop a marketing and sales
        force with technical expertise and supporting distribution capabilities.
        The
        acquisition or development of a sales and distribution infrastructure would
        require substantial resources, which may divert the attention of our management
        and key personnel, and negatively impact our product development efforts.
        Moreover, we may not be able to establish in-house sales and distribution
        capabilities or relationships with third parties. To the extent we enter
        into
        co-promotion or other licensing agreements, our product revenues are likely
        to
        be lower than if we directly marketed and sold our product candidates, and
        any
        revenue we receive will depend upon the efforts of third parties, which may
        not
        be successful.
 
 ***If
        we cannot raise additional funding, we may be unable to complete development
        of
        our product candidates.***
 
 At
        December 31, 2005, we had cash and cash equivalents and marketable securities
        of
        $97.6 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 March 31, 2007. We believe
        that we will require additional funding to continue our research and development
        programs, including preclinical testing and clinical trials of our product
        candidates, for operating expenses and to pursue regulatory approvals for
        our
        product candidates. We may continue to seek additional capital through public
        or
        private financing or collaborative agreements. If adequate funds are not
        available to us as we need them, we may be required to curtail significantly
        or
        eliminate at least temporarily one or more of our product development
        programs.
 
 ***Our
        indebtedness and debt service obligations may adversely affect our cash flow,
        cash position and stock price.***
  In
        December 2004 and January 2005, we sold $80.0 million aggregate principal
        amount
        of 2.5% subordinated convertible debentures due in January 2025. Our annual
        debt
        service obligation on these debentures is $2.0 million. The holders of the
        debentures may require us to purchase all or a portion of their debentures
        on
        January 15, 2012, January 15, 2015 and January 15, 2020. If we issue other
        debt
        securities prior to conversion of the debentures, our debt service obligations
        will increase further.
  We
        intend
        to fulfill our debt service obligations from our existing cash, cash equivalents
        and marketable securities. In the future, if the holders require us to purchase
        all or a portion of their debentures and we are unable to generate cash or
        raise
        additional cash through financings sufficient to meet these obligations,
        we may
        have to delay or curtail research, development and commercialization programs.
        The holders’ right to require us to purchase the debentures, prior to maturity
        in January 2025, may be exercised in January 2012, 2015 and 2020.
   28
  
 ***The
        success of our business depends upon the members of our senior management
        team,
        our scientific staff and our ability to continue to attract and retain qualified
        scientific, technical and business personnel.***
 
 We
        are
        dependent on the principal members of our management team and scientific
        staff
        for our business success. The loss of any of these people could impede the
        achievement of our development and business objectives. We do not carry key
        man
        life insurance on the lives of any of our key personnel. There is intense
        competition for human resources, including management, in the scientific
        fields
        in which we operate and there can be no assurance that we will be able to
        attract and retain qualified personnel necessary for the successful development
        of our product candidates, and any expansion into areas and activities requiring
        additional expertise. In addition, there can be no assurance that such personnel
        or resources will be available when needed. In addition, we rely on a
        significant number of consultants to assist us in formulating our research
        and
        development strategy and other business activities. All of our consultants
        may
        have commitments to, or advisory or consulting agreements with, other entities
        that may limit their availability to us.
 
 ***We
        may be subject to claims that we or our employees have wrongfully used or
        disclosed alleged trade secrets of their former
        employers.***
 
 As
        is
        commonplace in the biotechnology industry, we employ individuals who were
        previously employed at other biotechnology or pharmaceutical companies,
        including our competitors or potential competitors. Although no claims against
        us are currently pending, we may be subject to claims that these employees
        or we
        have inadvertently or otherwise used or disclosed trade secrets or other
        proprietary information of their former employers. Litigation may be necessary
        to defend against these claims. Even if we are successful in defending against
        these claims, litigation could result in substantial costs and be a distraction
        to management.
 
 ***Because
        some of our patents with respect to some of our product candidates have expired
        or will expire in the near term, we may be required to rely solely on the
        Hatch-Waxman Act for market exclusivity.***
 
 A
        number
        of patents that we licensed from Wyeth have expired, including certain patents
        that provide protection for the use of DOV 216,303 for the treatment of
        depression, the use of bicifadine for the treatment of pain and the use of
        ocinaplon for anxiety. Patents protecting intermediates useful in the
        manufacture of ocinaplon are due to expire in 2007. The numerous patent
        applications pending and others in preparation covering our compounds, even
        if
        filed and approved, may not afford us adequate protection against generic
        versions of our product candidates or other competitive products. In the
        event
        we achieve regulatory approval to market any of our product candidates,
        including bicifadine, DOV 216,303 or ocinaplon, and we are unable to obtain
        adequate patent protection for the ultimate marketed product, we will be
        required to rely to a greater extent on the Hatch-Waxman Act, and applicable
        foreign legislation, to achieve market exclusivity. The Hatch-Waxman Act
        generally provides for marketing exclusivity to the first applicant to gain
        approval for a particular drug by prohibiting filing of an abbreviated NDA,
        or
        ANDA, by a generic competitor for up to five years after the drug is first
        approved. The Hatch-Waxman Act, however, also accelerates the approval process
        for generic competitors using the same active ingredients once the period
        of
        statutory exclusivity has expired. It may also in practice encourage more
        aggressive legal challenges to the patents protecting approved drugs. In
        addition, because some of our patents have expired, third parties may develop
        competing product candidates using our product compounds and if they obtain
        regulatory approval for those products prior to us, we would be barred from
        seeking an ANDA for those products under the Hatch-Waxman Act for the applicable
        statutory exclusivity period.
 
 ***Our
        business activities require compliance with environmental laws, which if
        violated could result in significant fines and work
        stoppage.***
 
 Our
        research and development programs, and the manufacturing operations and disposal
        procedures of our contractors and collaborators, are affected by federal,
        state,
        local and foreign environmental laws. Although we intend to use reasonable
        efforts to comply with applicable environmental laws, our contractors and
        collaborators may not comply with these laws. Failure to comply with
        environmental laws could result in significant fines and work stoppage, and
        may
        harm our business.
   29
  
 ***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
        currently do not have operational laboratory facilities. The absence of such
        facilities and technical staff requires us to rely on contract parties for
        all
        preclinical, formulations and analytical work. W e
        have
        recently committed to a ten-year operating lease for 133,686 square feet
        facility in Somerset, New Jersey which is expected to serve as our corporate
        headquarters and principal place of business effective May 2006.
        This new
        facility has
        office and laboratory space. The use of such
        facilities, even if they lead to cost savings and improved control and
        turn-around time, is expected to require substantial management time, personnel
        transition and relocation costs. The facility will result in a higher level
        of
        fixed overhead.
 
 ***Our
        bylaws require us to indemnify our officers and directors to the fullest
        extent
        permitted by law, which may obligate us to make substantial payments and
        in some
        instances payments in advance of judicial resolution of
        entitlement.***
 
 Our
        bylaws require that we indemnify our directors, officers and scientific advisory
        board members, and permit us to indemnify our other employees and agents,
        to the
        fullest extent permitted by the Delaware corporate law. This could require
        us,
        with some legally prescribed exceptions, to indemnify our directors, officers
        and scientific advisory board members against any and all expenses, judgments,
        penalties, fines and amounts reasonably paid in defense or settlement in
        connection with an action, suit or proceeding relating to their association
        with
        us. For directors, our bylaws require us to pay in advance of final disposition
        all expenses including attorneys' fees incurred by them in connection with
        any
        action, suit or proceeding relating to their status or actions as directors.
        Advance payment of legal expenses is discretionary for officers, scientific
        advisory board members and other employees or agents. We may make these advance
        payments provided that they are preceded or accompanied by an undertaking
        on
        behalf of the indemnified party to repay all advances if it is ultimately
        determined that he or she is not entitled to be indemnified by us. Accordingly,
        we may incur expenses to meet these indemnification obligations, including
        expenses that in hindsight are not qualified for reimbursement and possibly
        not
        subject to recovery as a practical matter.
 
 ***Provisions
        of Delaware law, our charter and by-laws and our stockholders rights plan
        may
        make a takeover more difficult.***
 
 Provisions
        of our certificate of incorporation and by-laws and in the Delaware corporate
        law may make it difficult and expensive for a third party to pursue a tender
        offer, change in control or takeover attempt that is opposed by our management
        and board of directors. Moreover, our stockholders rights plan, adopted in
        October 2002, commonly called a poison pill, empowers our board of directors
        to
        delay or negotiate, and thereby possibly to thwart, any tender or takeover
        attempt the board of directors opposes. Public stockholders who might desire
        to
        participate in such a transaction may not have an opportunity to do so. We
        also
        have a staggered board of directors that makes it difficult for stockholders
        to
        change the composition of our board of directors in any one year. These
        anti-takeover provisions could substantially impede the ability of public
        stockholders to change our management and board of directors.
   30
  
 **Risks
        Related to our Industry**
 
 ***We
        face intense competition and if we are unable to compete effectively, the
        demand
        for our products, if any, may be reduced.***
 
 The
        pharmaceutical industry is highly competitive and marked by a number of
        established, large pharmaceutical companies, as well as smaller emerging
        companies, whose activities are directly focused on our target markets and
        areas
        of expertise. We face and will continue to face competition in the discovery,
        in-licensing, development and commercialization of our product candidates,
        which
        could severely impact our ability to generate revenue or achieve significant
        market acceptance of our product candidates. Furthermore, new developments,
        including the development of other drug technologies and methods of preventing
        the incidence of disease, occur in the pharmaceutical industry at a rapid
        pace.
        These developments may render our product candidates or technologies obsolete
        or
        noncompetitive.
 
 We
        are
        focused on developing product candidates for the treatment of central nervous
        system and other disorders that involve alterations in neuronal processing.
        We
        have a number of competitors. If one or more of their products or programs
        are
        successful, the market for our product candidates may be reduced or eliminated.
        Compared to us, many of our competitors and potential competitors have
        substantially greater:
  ·
              capital
                  resources and access to capital;·
              research
                  and development resources, including personnel and
                  technology;·
              regulatory
                  experience;·
              preclinical
                  study and clinical testing experience; and·
              manufacturing,
                  distribution and marketing
                  experience.
 
 As
        a
        result of these factors, our competitors may obtain regulatory approval of
        their
        products more rapidly than we. Our competitors may obtain patent protection
        or
        other intellectual property rights that limit our ability to develop or
        commercialize our product candidates or technologies. Our competitors may
        also
        develop drugs that are more effective or useful and less costly than ours
        and
        may also be more successful than we and our collaborators or licensees in
        manufacturing and marketing their products.
 
 ***If
        we are unable to protect our intellectual property, our competitors could
        develop and market products based on our discoveries, which may reduce demand
        for our product candidates.***
 
 To
        a
        substantial degree, our success will depend on the following intellectual
        property achievements:
 
 ·
              our
                  ability to obtain patent protection for our proprietary technologies
                  and
                  product candidates, as well as our ability to preserve our trade
                  secrets;·
              the
                  ability of our collaborators and licensees to obtain patent protection
                  for
                  their proprietary technologies and product candidates covered by
                  our
                  agreements, as well as their ability to preserve related trade
                  secrets;
                  and·
              our
                  ability to prevent third parties from infringing upon our proprietary
                  rights, as well as the ability of our collaborators and licensees
                  to
                  accomplish the same.
 
 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.
   31
  
 We
        also
        rely upon unpatented trade secrets and improvements, unpatented know-how
        and
        continuing technological innovation to develop and maintain our competitive
        position, which we seek to protect, in part, by confidentiality agreements
        with
        our collaborators, licensees, employees and consultants. We also have invention
        or patent assignment agreements with our employees and some of, but not all,
        our
        collaborators and consultants. If our employees, collaborators or consultants
        breach these agreements or common law principles, we may not have adequate
        remedies for any such breach, and our trade secrets may otherwise become
        known
        to or independently discovered by our competitors.
 
 In
        addition, although we own or otherwise have certain rights to a number of
        patents and patent applications, the issuance of a patent is not conclusive
        as
        to its validity or enforceability, and third parties may challenge the validity
        or enforceability of our patents or the patents of our collaborators or
        licensees. We cannot assure you how much protection, if any, will be given
        to
        our patents if we attempt to enforce them or if they are challenged in court
        or
        in other proceedings. It is possible that a competitor may successfully
        challenge our patents, or the patents of our collaborators or licensees,
        or that
        challenges will result in elimination of patent claims and therefore limitations
        of coverage. Moreover, competitors may infringe our patents, the patents
        of our
        collaborators or licensees, or successfully avoid them through design
        innovation. To prevent infringement or unauthorized use, we may need to file
        infringement claims, which are expensive and time-consuming. In addition,
        in an
        infringement proceeding, a court may decide that a patent of ours is not
        valid
        or is unenforceable, or may refuse to stop the other party from using the
        technology at issue on the ground that our patents do not cover its technology.
        In addition, interference proceedings brought by the U.S. Patent and Trademark
        Office may be necessary to determine the priority of inventions with respect
        to
        our patent applications or those of our collaborators or licensees. Litigation
        or interference proceedings may fail and, even if successful, may result
        in
        substantial costs and be a distraction to management. We cannot assure you
        that
        we, or our collaborators or licensees, will be able to prevent misappropriation
        of our respective proprietary rights, particularly in countries where the
        laws
        may not protect such rights as fully as in the United States.
 
 ***The
        intellectual property of our competitors or other third parties may prevent
        us
        from developing or commercializing our product
        candidates.***
 
 Our
        product candidates and the technologies we use in our research may inadvertently
        infringe the patents or violate the proprietary rights of third parties.
        In
        addition, other parties conduct their research and development efforts in
        segments where we, or our collaborators or licensees, focus research and
        development activities. We cannot assure you that third parties will not
        assert
        patent or other intellectual property infringement claims against us, or
        our
        collaborators or licensees, with respect to technologies used in potential
        product candidates. Any claims that might be brought against us relating
        to
        infringement of patents may cause us to incur significant expenses and, if
        successfully asserted against us, may cause us to pay substantial damages.
        Even
        if we were to prevail, any litigation could be costly and time-consuming
        and
        could divert the attention of our management and key personnel from our business
        operations. In addition, any patent claims brought against our collaborators
        or
        licensees could affect their ability to carry out their obligations to us.
        Furthermore, 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.***
   32
  
 Our
        royalties or profits will be heavily dependent upon the availability of
        reimbursement for the use of our products from third-party health care payors,
        both in the United States and in foreign markets. The health care industry
        and
        these third-party payors are experiencing a trend toward containing or reducing
        the costs of health care through various means, including lowering reimbursement
        rates and negotiating reduced payment schedules with service providers for
        drug
        products. These cost-containment efforts could adversely affect the market
        acceptance of our product candidates and may also harm our business. There
        can
        be no assurance that we will be able to offset any of the payment reductions
        that may occur.
 
 Reimbursement
        by a third-party payor may depend upon a number of factors, including the
        third-party payor’s determination that use of a product is:
 
 ·
              safe,
                  effective and medically necessary;·
              appropriate
                  for the specific patient;·
              cost-effective;
                  and·
              neither
                  experimental nor investigational.
 
 Reimbursement
        approval is required from each third-party payor individually, and seeking
        this
        approval is a time-consuming and costly process. Third-party payors may require
        cost-benefit analysis data from us in order to demonstrate the
        cost-effectiveness of any product we might bring to market. We cannot assure
        you
        that we will be able to provide data sufficient to gain acceptance with respect
        to reimbursement. There also exists substantial uncertainty concerning
        third-party reimbursement for the use of any drug product incorporating new
        technology. We cannot assure you that third-party reimbursement will be
        available for our product candidates utilizing new technology, or that any
        reimbursement authorization, if obtained, will be adequate. If such
        reimbursement approval is denied or delayed, the marketability of our product
        candidates could be materially impaired.
 
 ***We
        face potential product liability exposure, and if successful claims are brought
        against us, we may incur substantial liability for a product and may have
        to
        limit its commercialization.***
 
 The
        use
        of our product candidates in clinical trials and the sale of any approved
        products may expose us to a substantial risk of product liability claims
        and the
        adverse publicity resulting from such claims. These claims might be brought
        against us by study participants or once a drug has received regulatory approval
        and is marketed, by consumers, health care providers, pharmaceutical companies
        or others selling our products. If we cannot successfully defend ourselves
        against these claims, we may incur substantial losses or expenses, or be
        required to limit the commercialization of our product candidates. We have
        obtained limited product liability insurance coverage for our clinical trials
        in
        the amount of $10 million
        per occurrence and $10 million
        in the aggregate. Our insurance coverage, however, may not reimburse us or
        may
        not be sufficient to reimburse us for any expenses or losses we may suffer.
        Moreover, insurance coverage is becoming increasingly expensive, and we may
        not
        be able to maintain insurance coverage at a reasonable cost or in sufficient
        amounts to protect us against losses due to liability. We intend to expand
        our
        insurance coverage to include the sale of commercial products if we obtain
        marketing approval for our product candidates in development, but we may
        be
        unable to obtain commercially reasonable product liability insurance for
        any
        products approved for marketing. On occasion, large judgments have been awarded
        in class action lawsuits based on drugs that had unanticipated side effects.
        A
        successful product liability claim or series of claims brought against us
        would
        decrease our cash and could cause our stock price to fall.
 
 ***We
        may not be able to utilize any of or all our net operating losses to offset
        future taxable income.***
 
 As
        a
        company experiencing growth through the sale of equity, we may be limited
        under
        the tax code in the tax deductions we can take against income for net operating
        loss 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 incurred by our subsidiary Nascime Limited
        outside
        the United States.
   33
  
 **ITEM
        1B. UNRESOLVED STAFF COMMENTS**
 
 None.
  **ITEM
        2.****PROPERTIES**
 
 We
        currently lease and occupy approximately 41,137 square feet in our executive
        offices located in Hackensack, New Jersey .
        However we
        recently provided notice to our existing landlord that we would vacate the
        existing premises. As our existing lease contained a provision for early
        termination, we will only be required to pay for rent at our current facility
        through August 2006. We recently committed to a ten-year operating lease
        for a
        133,686 square foot facility in Somerset, New Jersey which is expected to
        serve
        as our corporate headquarters and principal place of business effective May
        2006. This new
        facility has
        laboratory and office space. See “Item 9B. Other Information” for a description
        of the lease for our new facility.
 
 **ITEM
        3. LEGAL PROCEEDINGS**
 
 We
        are
        not a party to any material legal proceedings.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
        HOLDERS**
 
 No
        matters were submitted to a vote of security holders, through the solicitation
        of proxies or otherwise, during the fourth quarter of the fiscal year covered
        by
        this Form 10-K.
   **PART
        II**
 
 **ITEM
        5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
        MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**
  Our
        common stock is 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.
  **High**
                
                **Low****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
                
                $
                18.40
                
                $
                12.79Second
                    Quarter
                
                
                19.37
                
                $
                13.57Third
                    Quarter
                
                
                21.49
                
                $
                14.66Fourth
                    Quarter
                
                
                17.02
                
                $
                13.63**Year
                    2006**First
                    Quarter (through March 1, 2006)
                
                $
                19.76
                
                $
                14.07
  As
        of
        December 31, 2005, there were approximately 14 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.
   34
  **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, 2001, 2002, 2003, 2004 and 2005. The statement of operations
            data for the years ended December 31, 2003, 2004 and 2005, and the balance
            sheet data at December 31, 2004 and 2005, 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, 2001, 2002 and 2003 and the statements
            of
            operations data for the year ended December 31, 2001 and 2002, have been
            derived
            from our audited financial statements not included in this Form 10-K.
  **Years
                      Ended December 31,****2001**
                  
                  **2002**
                  
                  **2003**
                  
                  **2004**
                  
                  **2005****Statement
                      of Operations Data:**
                  
                  **(in
                      thousands, except per share data)**Revenue
                  
                  $
                  5,711
                  
                  $
                  2,390
                  
                  $
                  2,969
                  
                  $
                  2,542
                  
                  $
                  8,647Operating
                      expenses:License
                      expense
                  
                  
                  1,111
                  
                  
                  —
                  
                  
                  1,000
                  
                  
                  2,500
                  
                  
                  —Research
                      and development expense
                  
                  
                  5,525
                  
                  
                  10,311
                  
                  
                  22,684
                  
                  
                  24,764
                  
                  
                  53,983General
                      and administrative expense
                  
                  
                  2,343
                  
                  
                  3,903
                  
                  
                  5,173
                  
                  
                  6,360
                  
                  
                  9,110Loss
                      from operations
                  
                  
                  (3,268
                  )
                  
                  (11,824
                  )
                  
                  (25,888
                  )
                  
                  (31,082
                  )
                  
                  (54,446
                  )Loss
                      in investment in DOV Bermuda
                  
                  
                  (1,434
                  )
                  
                  (1,017
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —Interest
                      income
                  
                  
                  366
                  
                  
                  1,067
                  
                  
                  851
                  
                  
                  934
                  
                  
                  3,712Interest
                      expense
                  
                  
                  (1,491
                  )
                  
                  (2,017
                  )
                  
                  (2,947
                  )
                  
                  (2,954
                  )
                  
                  (2,502
                  )Other
                      income (expense), net
                  
                  
                  423
                  
                  
                  (3,029
                  )
                  
                  1,104
                  
                  
                  (8
                  )
                  
                  (5
                  )Net
                      loss before tax
                  
                  
                  (5,404
                  )
                  
                  (16,820
                  )
                  
                  (26,880
                  )
                  
                  (33,110
                  )
                  
                  (53,241
                  )Income
                      tax benefit
                  
                  
                  —
                  
                  
                  —
                  
                  
                  149
                  
                  
                  189
                  
                  
                  273Net
                      loss
                  
                  
                  (5,404
                  )
                  
                  (16,820
                  )
                  
                  (26,731
                  )
                  
                  (32,921
                  )
                  
                  (52,968
                  )Deemed
                      dividend on issuance of series D preferred
                  
                  
                  (97
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Net
                      loss attributable to common stockholders
                  
                  $
                  (5,501
                  )
                  $
                  (16,820
                  )
                  $
                  (26,731
                  )
                  $
                  (32,921
                  )
                  $
                  (52,968
                  )Basic
                      and diluted net loss per share
                  
                  $
                  (1.12
                  )
                  $
                  (1.47
                  )
                  $
                  (1.73
                  )
                  $
                  (1.67
                  )
                  $
                  (2.32
                  )Weighted
                      average shares used in computing basic and
                    diluted
                      net loss per share
                  
                  
                  4,894,138
                  
                  
                  11,440,731
                  
                  
                  15,489,426
                  
                  
                  19,729,765
                  
                  
                  22,837,265
 
 **As
                      of December 31,****2001**
                  
                  **2002**
                  
                  **2003**
                  
                  **2004**
                  
                  **2005****Balance
                      Sheet Data:**
                  
                  **(in
                      thousands)**Cash
                      and cash equivalents and marketable securities
                  
                  $
                  13,652
                  
                  $
                  60,346
                  
                  $
                  52,162
                  
                  $
                  132,222
                  
                  $
                  97,552Working
                      capital(1)
                  
                  
                  11,831
                  
                  
                  54,114
                  
                  
                  46,516
                  
                  
                  91,334
                  
                  
                  78,516Total
                      assets
                  
                  
                  18,080
                  
                  
                  66,150
                  
                  
                  53,852
                  
                  
                  136,723
                  
                  
                  102,187Long-term
                      debt
                  
                  
                  12,796
                  
                  
                  13,800
                  
                  
                  14,886
                  
                  
                  65,000
                  
                  
                  80,000Redeemable
                      preferred stock
                  
                  
                  14,838
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Accumulated
                      deficit
                  
                  
                  (23,845
                  )
                  
                  (40,665
                  )
                  
                  (67,396
                  )
                  
                  (100,317
                  )
                  
                  (153,285
                  )Total
                      stockholders' (deficit) equity
                  
                  
                  (18,036
                  )
                  
                  40,759
                  
                  
                  35,905
                  
                  
                  27,936
                  
                  
                  (19,301
                  )
 (1)
            Represents current assets less current liabilities .
  
 35
 
  **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, disorders. In 1998, we licensed four of our product candidates for
            all
            indications from Wyeth: indiplon, for the treatment of insomnia, bicifadine,
            for
            the treatment of pain, ocinaplon, for the treatment among other indications
            of
            anxiety, and DOV 216,303, for the treatment of depression and other indications.
            In October 2005, we discontinued the development of ocinaplon for general
            anxiety disorder, or GAD.
 
 Since
            our
            inception, we have incurred significant operating losses and we expect
            to do so
            for the foreseeable future. As of December 31, 2005, we had an accumulated
            deficit of $153.3 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
            anticipate that our quarterly results of operations will fluctuate for
            several
            reasons, including the timing and extent of research and development
            efforts,
            the timing and extent of adding new employees and infrastructure, the
            timing of
            milestone, license fee and royalty payments and the timing and outcome
            of
            regulatory approvals.
 
 In
            pursuing our strategy, we enter into collaboration and/or license agreements
            with strategic partners from time to time. We currently have relationships
            with
            Neurocrine and Merck. In 1998, we sublicensed the worldwide
            development and commercialization of indiplon
            to Neurocrine in 1998 in exchange for the right to receive payments upon
            the
            achievement of certain clinical development milestones and royalties
            based on
            product sales, if any. Neurocrine subsequently entered into a worldwide
            development and commercialization agreement with Pfizer for indiplon. In
            2004,
            we received a $2.0 million milestone payment from Neurocrine for the
            new drug
            application, or NDA, filing for indiplon. However, because the original
            NDA
            filing was not accepted by the FDA and our agreement with Neurocrine
            indicates
            that the $2.0 million milestone is earned once an NDA has been submitted
            according to certain FDA regulations, we recognized this payment as revenue
            once
            the filing was accepted by the FDA on June 14, 2005.
 
 On
            August
            5, 2004, we entered into an agreement with Merck for the worldwide development
            and commercialization of all indications for DOV 21,947 and certain indications
            for DOV 216,303 in
            exchange for a $35.0 million up-front payment and the right to receive
            further
            payments of up to $420.0 million upon the achievement of certain milestones
            and
            royalties based on product net sales, if any. As described below this
            original
            agreement was amended in 2005. The up-front payment has been deferred
            and is
            being amortized to revenue over the estimated research and development
            period. As
            of
            June 1, 2005, we revised this estimate to 72 months from 51 months and,
            accordingly, the amortization of the remaining balance beginning June
            1, 2005
            reflects this revised time period. This adjustment to the estimate for
            the
            development period was made as a result of the need to collect and assess
            additional clinical data which has extended the total development timeline. The
            time
            period of the development period is a significant estimate used in the
            preparation of our financial statements and is subject to Merck developing
            the
            compound in accordance with the estimated development schedule. This
            development
            period estimate may fluctuate from period to period and the fluctuation
            may be
            significant . On
            August
            5, 2005, we amended our agreement with Merck such that we have
            agreed to assume responsibility for certain development work for DOV
            21,947,
            subject to reimbursement for certain of our development costs in certain
            circumstances. In addition, Merck is permitted to select an additional
            preclinical triple reuptake inhibitor product candidate for inclusion
            in the
            agreement with no further up-front fee.
  
 36
 
 
 Our
            revenue has consisted primarily of license fees and milestone payments
            from our
            collaborative partners and licensees. We record revenue on an accrual
            basis when
            amounts are considered collectible. In
            accordance with EITF 00-21, we evaluate all new agreements to determine
            if they
            are a single unit of accounting or separable. Revenue
            received in advance of performance obligations, or in cases where we
            have a
            continuing obligation to perform services, is deferred and amortized
            over the
            performance period. Revenue from milestone payments that represent the
            culmination of a separate earnings process is recorded when the milestone
            is
            achieved. Contract revenues are recorded as the services are performed.
            License
            and milestone revenue are typically not consistent or recurring in nature.
            Our
            revenue has fluctuated from year-to-year and quarter-to-quarter and this
            will
            likely continue.
 
 Our
            operating expenses consist primarily of license expense, costs associated
            with
            research and development and general and administrative costs associated
            with
            our operations. Research and development expense consists primarily of
            compensation and other related costs of our personnel dedicated to research
            and
            development activities, clinical and preclinical trial expenses, including
            toxicology studies, costs of manufacturing clinical and preclinical trial
            materials and preclinical studies, and professional fees related to clinical
            trials. 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
            are
            currently conducting three
            Phase III clinical trials for bicifadine, two Phase II clinical trials
            and four
            Phase I clinical trials .
            During
            2006, we intend to initiate for bicifadine nine additional Phase I clinical
            trials and continue with other development activities in preparation
            for an NDA
            filing in chronic pain in 2007. With the change in development responsibilities
            for DOV 21,947 from Merck to DOV, we intend to initiate a Phase II clinical
            trial in 2006 as well as continue with other development activities for
            the drug
            candidate. We intend to continue the development of DOV 216,303 for the
            indications we have retained. We also expect to continue to fortify our
            patent
            portfolio for each of our lead product and discovery candidates. As we
            expand
            our development activities, we expect to increase our personnel and related
            expenses.
 
 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
            $100 million. We are not responsible financially for the clinical program
            for indiplon, and we are unable to estimate the amount of expenditures
            necessary
            to complete its development. As of December 31, 2005, we have spent
            approximately $52.5 million on the development of bicifadine in connection
            with
            its clinical development program. As of December 31, 2005, we have incurred
            approximately $2.5 million, $3.7 million and $3.7 million in development
            expenses for DOV 21,947, DOV 102,677 and DOV 216,303, respectively. Prior
            to
            discontinuing development of ocinaplon for GAD in the fourth quarter
            of 2005, we
            incurred approximately $26.1 million in its development.
 
 We
            expect
            that the development of our product candidates in clinical development
            will
            require substantial additional time and expense. The time and cost of
            completing
            the clinical development of our product candidates will depend on a number
            of
            factors, including the disease or medical condition to be treated, clinical
            trial design and endpoints, availability of patients to participate in
            trials,
            the results of clinical trials, the number of clinical trials required
            to be
            conducted, unanticipated trials, the length of time of the regulatory
            review
            process, the relative efficacy of the product versus treatments already
            approved
            and our ability to enter into new development collaborations. In light
            of these
            many uncertainties, we are unable to estimate with absolute certainty
            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, a joint venture we had entered
            into with
            Elan. For this purpose, we issued to Elan a convertible line of credit
            promissory note bearing interest at 10% per annum compounded semi-annually
            on
            the amount outstanding. This convertible line of credit promissory note
            was sold
            to an institutional holder during 2004 and upon maturity on January 20,
            2005, was converted into 1,180,246 shares of our common stock .
 
 
 37
 
 
 During
            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 2005, 2004 and 2003, in connection
            with the
            grant of these stock options and warrants to outside consultants, we
            recorded a
            reduction in operating expenses of $195,000 and expenses totaling $315,000
            and
            $694,000, 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.
 
 **Results
            of Operations**
 
 *Years
            Ended December 31, 2005 and 2004*
 
 *Revenue.* Revenue
            increased $6.1 million to $8.6 million in 2005 from $2.5 million in 2004.
            In
            2005 and 2004, our revenue was comprised of $6.6 million and $2.4 million,
            respectively, of amortization of the $35.0 million fee we received on
            the
            signing of the license, research and development agreement for our collaboration
            with Merck. The up-front payment has been deferred and is being amortized
            to
            revenue over the estimated research and development period. As of June
            1, 2005,
            we revised this estimate to 72 months from 51 months and, accordingly,
            the
            amortization of the remaining balance beginning June 1, 2005 reflects
            this
            revised time period. This adjustment to the estimate for the development
            period
            was made as a result of the need to collect and assess additional clinical
            data,
            which has extended the total development timeline. In addition, in 2005
            we
            recorded $2.0 million  for
            the
            achievement of a milestone under the Neurocrine agreement described above.
            In
            2004, we recorded $140,000 of contract services revenue associated with
            work we
            performed under the Merck collaboration.
  *License
            Expense* .
            License
            expense for 2004 is comprised of the $2.5 million paid to Wyeth for the
            licensing of certain rights to DOV 216,303 to Merck in August 2004. As
            this
            milestone payment was made prior to FDA approval of a drug developed
            from DOV
            216,303, the entire amount was expensed in the third quarter of 2004.
  *Research
            and Development Expense.* Research
            and development expense increased $29.2 million to $54.0 million in 2005
            from
            $24.8 million in 2004. The
            increase in research and development expense was primarily associated
            with
            increased external development costs of $23.4 million, compensation and
            related
            expenses of $3.7 million and associated overhead of $2.1 million as we
            increased
            our personnel to support our expanded programs, offset by a decrease
            in non-cash
            stock compensation to outside consultants of
            $183,000. Included in the increase in external development costs is an
            increase
            of $20.1 million for bicifadine, $2.1 million for ocinaplon, $716,000
            for DOV
            dilitazem, $332,000 for DOV 102,677 and $2.3 million for our discovery
            and
            preclinical programs offset by a decrease in costs of $996,000 for DOV
            21,947,
            $856,000 for DOV 51,892 and $305,000 for DOV 216,303. We expect research
            and
            development costs for DOV 21,947 to increase in future periods as we
            have
            assumed responsibility under our relationship with Merck for certain
            development
            activities. In certain circumstances, we may be eligible for reimbursement
            from
            Merck of certain of these development costs at a premium.
  
 38
 
 
 *General
            and Administrative Expense.* General
            and administrative expense increased $2.7 million to $9.1 million in
            2005 from
            $6.4 million in 2004. The
            increase was primarily attributable to an increase in compensation expense
            of
            $2.4 million and professional fees of $365,000. The increase in compensation
            expense is due primarily to $790,000 in severance expense related to
            the
            termination of employment of our co-founder Dr. Lippa, $809,000 in non-cash
            compensation expense related
            to the amortization of the restricted stock granted to Dr. Hudson upon
            his
            appointment as Chief Executive Officer in July 2005 and to Dr. Lippa,
            our former
            Chief Executive Officer, in May 2005 (please refer to note 8 of our
            financial statements included
            under Part II, Item 8 of this Form 10-K) and
            $497,000 related to salaries
            and $323,000 related to payroll overhead expenses as we increased our
            personnel
            to support our operations. Professional fees increased primarily due to an increase in consulting
            fees of
            $237,000 and in legal fees of $295,000.
 
 *Interest
            Income.* Interest
            income increased $2.8 million to $3.7 million from $934,000 in 2004 primarily
            due to
            higher
            average cash balances and the
            increase in average interest rates over the period.
 
 *Interest
            Expense.* Interest
            expense decreased $452,000 to $2.5 million in 2005 from $3.0 million
            in 2004. We
            recorded an increase in interest expense of $2.0 million on the convertible
            debentures placed in December 2004 and January 2005 and $400,000 in amortization
            of deferred charges on this debt in 2005. This increase was offset by
            a decrease
            of $2.9 million of interest recorded on our convertible promissory note
            and
            convertible line of credit promissory note in 2004. This decrease was
            due to the
            conversion of the notes in May 2004 and January 2005.
 
 *Other
            Expense, net.* ****** Other
            expense, net was de minimis and was virtually unchanged from prior year.
 
 *Income
            Tax Benefit* . In
            2005
            and 2004 we sold a portion of our previous years’ state net operating losses as
            part of the New
            Jersey Economic Development Authority technology business tax certificate
            program, thus recognized an income tax benefit of $273,000 and $290,000,
            respectively. In 2004,
            taking into account the $35.0 million up-front fee we received on the
            closing of
            the license, research and development agreement for our collaboration
            with
            Merck, we generated taxable income for the 2004 tax year under the New
            Jersey
            alternative minimum assessment thus recognized income tax expense to
            $101,000.
 
 *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
            was recorded as deferred revenue and was being amortized to revenue over
            the
            estimated research and development period of 51 months. This estimate
            was
            revised in 2005 to 72 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.
  
 39
 
 
 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 associated with clinical and pre-clinical trial materials
            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. 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.
 
 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.
  
 40
 
 
 *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.
  *Income
            Tax Benefit* . In
            2004
            and 2003 we sold a portion of our previous years’ state net operating losses as
            part of the New
            Jersey Economic Development Authority technology business tax certificate
            program, thus recognized an income tax benefit of $290,000 and $149,000,
            respectively. In
            2004,
            taking into account the $35.0 million up-front fee we received on the
            closing of
            the license, research and development agreement for our collaboration
            with
            Merck, we generated taxable income for the 2004 tax year under the New
            Jersey
            alternative minimum assessment thus recognized income tax expense to
            $101,000 .
  **Liquidity
            and Capital Resources**
 
 For
            the
            three years ended December 31, 2005, 2004 and 2003, we funded our operations
            principally from sales of our equity and debt securities and license
            revenues.
            At December 31, 2005, our cash and cash equivalents and marketable securities
            totaled $97.6 million compared with $132.2 million at December 31, 2004.
            At
            December 31, 2005, we had working capital of $78.5 million.
 
 Net
            cash
            used in operations during the year ended December 31, 2005 amounted to
            $48.3
            million, as compared to net cash provided by operations of $7.8 million
            in 2004.
            The increase in cash used in operations resulted primarily from an increase
            in clinical development activities and increases in compensation expense.
            In
            addition, in 2004 net cash provided by operations benefited from the up-front
            licensing payment of $35.0 million received in 2004 discussed above . Net
            cash
            used in operations benefited from an increase in accounts payable and
            accrued
            liabilities of $10.4 million due to an increase in volume and timing
            of
            payments, offset by the
            realization of $2.0 million in milestone revenue received in 2004 but
            earned in
            2005 . Non-cash
            expenses related to stock-based compensation, interest expense and depreciation
            and amortization expenses were $1.7 million, $3.5 million and $4.2 million
            in
            the years ended December 31, 2005, 2004 and 2003, respectively. Non-cash
            amortization of premium paid on marketable securities and depreciation
            in the
            value of investments was $1.3 million, $909,000 and $1.4 million, net
            in the
            years ended December 31, 2005, 2004 and 2003, respectively. .
 
 Net
            cash
            provided by investing activities during the year ended December 31, 2005
            was
            $12.1 million compared to net cash used in investing activities of $61.9
            million
            for the comparable period in 2004. 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,
            2005 was
            $15.6 million as compared to $73.7 million in the comparable period in
            2004. Net
            cash
            provided by financing activities in the year ended December
            31, 2005 was primarily related to net proceeds of $14.6 million from
            the
            issuance of $15.0 million of 2.5% subordinated convertible debentures
            in January
            2005 as compared to $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.
  
 41
 
 
 In
            February 2006, we committed to a ten year operating lease for a 133,686
            sq. foot
            facility in Somerset, New Jersey which will serve as our corporate headquarters
            and principal place of business effective May 2006. In connection with
            this
            lease we have entered into a stand-by letter of credit facility for $4.2
            million
            to serve as collateral for our performance under the lease. The stand-by
            letter
            of credit is collateralized by restricted cash and, as such, this cash
            is not
            available to us through March 2016. Our new facility, which includes
            expanded
            office space and laboratory facilities will result in an increase in
            our monthly
            occupancy costs.
 
 **Factors
            That May Affect Future Financial Condition and Liquidity**
 
 We
            believe that our existing cash and cash equivalents will be sufficient
            to fund
            our anticipated operating expenses, debt obligations and capital requirements
            until at least March 31, 2007. Our
            future capital uses and requirements depend on numerous factors,
            including:
 
 ·
                  our
                      progress with research and development;·
                  our
                      ability to maintain and establish, and the scope of, collaborations
                      that
                      finance research and development of our clinical
                      candidates;·
                  the
                      progress and success of clinical trials and preclinical studies
                      of our
                      product candidates;·
                  the
                      design, and Merck’s approval thereof, and progress of the clinical studies
                      we have agreed to conduct on DOV 21,947 under the amendment
                      of our license
                      agreement with Merck;·
                  the
                      costs and timing of obtaining, enforcing and defending our
                      patent and
                      intellectual rights; and·
                  the
                      costs and timing of regulatory
                      approvals.
 
 In
            addition to the foregoing, our future capital uses and requirements are
            also
            dependent in part on the ability of our licensees and collaborative partners
            to
            meet their obligations to us, including the fulfillment of their development
            and
            commercialization responsibilities in respect of our product candidates.
            Our
            sublicensee and collaborative partners, Neurocrine, Pfizer and Merck,
            may
            encounter conflicts of interest, changes in business or clinical strategy,
            or
            they may acquire or develop rights to competing products, all of which
            could
            adversely affect their ability or willingness to fulfill their obligations
            to us
            and, consequently, require us to satisfy, through the commitment of additional
            funds or personnel or both, any shortfalls in their performance. In addition,
            our future capital uses and requirements have been impacted by our agreement
            to
            undertake certain development activities with respect to DOV 21,947 that
            Merck
            would have otherwise been responsible for under our original license
            agreement
            with Merck. We will be spending substantial funds in an amount to be
            determined
            as we conduct this development of DOV 21,947. If certain of these studies
            are
            successful when measured against criteria to be agreed upon with Merck,
            we will
            be reimbursed for our costs of conducting these development activities,
            receive
            a success premium on certain of these activities and be entitled to receive
            the
            first of the milestones under the license agreement. If the clinical
            studies are
            not successful, we may not be reimbursed for our costs and may never
            receive
            milestone payments under the license to Merck unless Merck elects to
            make such
            payments and continue the relationship under the license agreement. Moreover,
            Merck has reserved the right to terminate its license with us upon four
            months’
notice.
 
 To
            meet
            future capital requirements, we may attempt to raise additional funds
            through
            equity or debt financings, collaborative agreements with corporate partners
            or
            from other sources. If adequate funds are not available, or available
            on an
            acceptable basis, we may be required to curtail or delay significantly
            one or
            more of our product development programs. In addition, future milestone
            payments
            under some of our collaborative or license agreements are contingent
            upon our
            meeting particular research or development goals. The amount and timing
            of
            future milestone payments are contingent upon the terms of each collaborative
            or
            license agreement. Milestone performance criteria are specific to each
            agreement
            and based upon future performance. Therefore, we are subject to significant
            variation in the timing and amount of our revenues, milestone expenses
            and
            results of operations from period to period .
 
 
 42
 
  **Contractual
            Obligations**
 
 Future
            minimum payments for all contractual obligations for years subsequent
            to
            December 31, 2005, are as follows:
 
 **Payments
                      Due by Period****Less
                      than**
                    **1****Year**
                  
                  **1-
                      3**
                    **Years**
                  
                  **3-
                      5**
                    **Years**
                  
                  **More
                      Than**
                    **5
                      Years**
                  
                  **Total(2)****(in
                      thousands)**Convertible
                      subordinated debentures(1)
                  
                  $
                  2,000
                  
                  $
                  4,000
                  
                  $
                  4,000
                  
                  $
                  108,000
                  
                  $
                  118,000Operating
                      leases (3)
                  
                  
                  3,220
                  
                  
                  5,721
                  
                  
                  5,698
                  
                  
                  16,123
                  
                  
                  30,762Total
                  
                  $
                  5,220
                  
                  $
                  9,721
                  
                  $
                  9,698
                  
                  $
                  124,123
                  
                  $
                  148,762
  (1)
                  Included
                      are interest payments of approximately $2.0 million annually
                      through
                      2025.
  (2)
                  Excludes
                      our obligations to Merck to fund clinical studies called for
                      by the
                      amendment to the license agreement with Merck inasmuch as we
                      have reserved
                      the right to terminate the amendment at any
                      time.
  (3)
                  In
                      February 2006, we committed to a ten year operating lease for
                      133,686 sq.
                      feet facility in Somerset, New Jersey which is expected to serve
                      as our corporate headquarters and principal place of business
                      effective
                      May 2006. This lease commits us to annual fixed rent of $2.8
                      million for
                      the first five years of the lease and $3.1 million for the
                      next five years
                      of the lease. In addition, in February 2006, we provided notice
                      to our
                      existing landlord that we would vacate the existing premises.
                      As our
                      existing lease contained a provision for early termination,
                      we will only
                      be required to pay for rent at our current facility through
                      August 2006.
                      Although the final agreements with respect to these transactions
                      occurred
                      after December 31, 2005 we have included the net amounts of
                      these changes
                      in operating lease obligations in the table.
 
 The
            table
            above excludes future milestones and royalties that may be owed to Wyeth,
            Elan
            and Biovail under terms of existing agreements as payments are contingent
            upon
            future events. We do not expect to pay any royalties under these agreements
            in
            2006. In May 1998, we licensed from Wyeth, on an exclusive, worldwide
            basis, indiplon, bicifadine, ocinaplon and DOV 216,303. We have the right
            to
            develop and commercialize these compounds, including the right to grant
            sublicenses to third parties, subject to Wyeth's right of first refusal. In
            February 2004, we entered into agreements to reorganize our exclusive
            license
            agreement with Wyeth in respect of these four compounds and our sublicense
            agreement with Neurocrine in respect of indiplon. Under the restated
            license
            agreements, if we sell the products ourselves, we are obligated to pay
            Wyeth
            royalties of 3.5% of net sales for ocinaplon and DOV 216,303 and 5.0%
            of net
            sales for bicifadine, and milestones of $2.5 million for ocinaplon and
            $5.0 million for bicifadine upon NDA filing and $4.5 million each for
            bicifadine, ocinaplon and DOV 216,303 upon a NDA approval. The royalty
            rate for
            bicifadine, ocinaplon and DOV 216,303 will increase by 0.5% should we
            partner or
            sublicense that compound. In addition, should we partner or sublicense
            a
            compound, the next milestone payable to Wyeth for that compound will
            be
            accelerated to become due upon partnering. As we have licensed certain
            rights to
            DOV 216,303 to Merck the next milestone payable to Wyeth of $2.5 million
            was
            accelerated and paid in 2004. In addition, should Merck achieve sales
            on this
            compound, we will be obligated to pay Wyeth a royalty of 4.0% on those
            sales. As
            part of the reorganization, Neurocrine acquired Wyeth’s interest under the
            license covering indiplon. Accordingly, the reorganization with Neurocrine
            allows Neurocrine to pay to us royalty and milestone payments net of
            those
            amounts that would be owed by us to Wyeth under
            our
            1998 agreement with Wyeth . In
            connection with Elan’s license grant to us in October 2003, Elan is entitled to
            receive up to an aggregate of $3.0 million when bicifadine and ocinaplon
            are
            licensed or come to market. In connection with the Biovail separation
            agreement,
            we may be obligated to make payments
            to Biovail of $3.0 million upon issuance of marketing authorization for DOV
            diltiazem and up to $7.5 million based upon sales, if any.
  
 43
 
 
 The
            table
            also excludes any severance or termination payments that would be due
            to certain
            of our employees under their employment contracts should they be terminated
            without cause or terminate following a change of control prior to the
            expiration
            of their contract term as the amounts are not determinable at this
            time .
            We file
            our employment agreements with our current and former executive officers
            with
            the SEC and these agreements are available at “www.sec.gov.”
 
 **Off-Balance
            Sheet Arrangements**
 
 The
            $80.0
            million of outstanding convertible subordinated  debentures
            we have outstanding at December 31, 2005 are convertible into  approximately
            3.5 million shares of our common stock.  If all these debentures were
            converted, our stockholders could experience significant  dilution.
            We would not receive any additional cash proceeds upon the  conversion
            of the debentures.
 
 
 **Recent
            Accounting Pronouncements**
  In
            December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.”  SFAS
            No. 123R is a revision of FASB Statement 123, “Accounting for Stock-Based
            Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to
            Employees,” and its related implementation guidance. The Statement focuses
            primarily on accounting for transactions in which an entity obtains employee
            services in share-based payment transactions. SFAS No. 123R requires
            a public
            entity to measure the cost of employee services received in exchange
            for an
            award of equity instruments based on the grant-date fair value of the
            award
            (with limited exceptions). That cost will be recognized over the period
            during
            which an employee is required to provide service in exchange for the
            award. This
            statement is effective as of the beginning of the first annual reporting
            period
            that begins after June 15, 2005 and thus we will adopt the standard in
            the first
            quarter of 2006.
 
 As
            permitted by SFAS 123, we currently account for share-based payments
            to
            employees using APB Opinion 25’s intrinsic value method and, as such, we
            generally recognize no compensation cost for employee stock options. We will
            adopt the provisions of SFAS No. 123R on a prospective basis in the first
            quarter of 2006. As a result of the provisions of SFAS 123R, we expect
            the
            compensation charges under SFAS 123R to be in the range of $7.0 million
            to $8.0
            million for the year ended December 31, 2006 which reflects the awards
            granted through February 2006. We can not estimate compensation charges
            with
            respect to future awards as this is affected by our stock price as well
            as
            assumptions regarding a number of complex and subjective variables. These
            variables include, but are not limited to, the volatility of our stock
            price,
            forfeiture rates and the timing of future employee stock option grants.
            We will
            recognize compensation cost for stock-based awards which vest after
            December 31, 2005, on a straight-line basis over the requisite service
            period of the award. . .
 
 In
            May
            2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,”
which replaces APB Opinion No. 20, “Accounting Changes,” and supersedes FASB
            Statement No. 3, “Reporting Accounting Changes in Interim Financial
            Statements—an amendment of APB Opinion No. 28.” SFAS 154 requires retrospective
            application to prior period financial statements of changes in accounting
            principle, unless it is impracticable to determine either the period-specific
            effects or the cumulative effect of the change. When it is impracticable
            to
            determine the period-specific effects of an accounting change on one
            or more
            individual prior periods presented, SFAS 154 requires that the new accounting
            principle be applied to the balances of assets and liabilities as of
            the
            beginning of the earliest period for which retrospective application
            is
            practicable and that a corresponding adjustment be made to the opening
            balance
            of retained earnings for that period rather than being reported in an
            income
            statement. When it is impracticable to determine the cumulative effect
            of
            applying a change in accounting principle to all prior periods, SFAS
            154
            requires that the new accounting principle be applied as if it were adopted
            prospectively from the earliest date practicable. SFAS 154 is effective
            for
            accounting changes and corrections of errors made in fiscal years beginning
            after December 15, 2005.  We do not expect the implementation of SFAS 154
            to have a significant impact on our results of operations.
  
 44
 
 
 **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. As
            of
            June 1, 2005, we revised this estimate to 72 months from 51 months and,
            accordingly, the amortization of the remaining balance beginning June
            1, 2005
            reflects this revised time period. This adjustment to the estimate for
            the
            development period was made as a result of the need to collect and assess
            additional clinical data, which has extended the total development
            timeline. This
            development period estimate may fluctuate from period to period and this
            fluctuation might be significant. For example, if as of January 1, 2006
            we were
            to increase by 10% the estimated development period,
            we would record approximately $623,000 less of revenue in 2006.
 
 *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 first quarter of 2006. 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, 2005.
  
 45
 
 
 *Income
            taxes.* We have
            net deferred tax assets at December 31, 2005 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.
 
 **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 .
  
 46
 
 
 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, 2005. 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, 2005, our internal control over
            financial
            reporting is effective.
 
 Management’s
            assessment of the effectiveness of the Company’s internal control over financial
            reporting as of December 31, 2005 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, 2005 that have materially affected or are
            reasonably
            likely to materially affect our internal control over financial
            reporting.
 
 **ITEM
            9B. OTHER INFORMATION**
 
 **Somerset
            Lease**
 
 On
            December 20, 2005, we entered into a Lease Agreement with Paragon 150
            Pierce
            Street, L.L.C. for the lease of a building comprised of approximately
            133,000
            square feet located at 150 Pierce Street, Franklin Township, New Jersey.
            The
            premises are expected to serve as our corporate headquarters and principal
            place
            of business effective May 2006. The lease, which was contingent upon
            the
            landlord’s purchase of the premises, was amended by the Lease Modification
            Agreement and the Second Lease Modification Agreement, each dated as
            of February
            28, 2006.
  
 47
 
 
 As
            a
            result of the landlord’s consummation of its purchase of the premises, the term
            of the lease commenced on February 28, 2006 and will expire on the tenth
            anniversary of such date. The rent is payable in monthly installments
            amounting
            to approximately $2.85 million per year for the first five years of the
            initial
            term and $3.13 million per year for the second half of the initial term.
            The
            lease provides us with two options to extend the lease term, each for
            five-year
            periods. The rent during each extension term shall be equal to the fair
            market
            rental value for similar properties at the time of the extension.
 
 In
            addition to fixed rent, we must pay as additional rent the amount by
            which all
            costs and expenses incurred by the landlord to maintain, repair, insure,
            operate
            and manage the property during any lease year of the term exceed the
            amount of
            such costs and expenses incurred during the first twelve months of the
            initial
            term. Additionally, we are solely responsible for the costs of all utilities
            provided to the premises. As collateral for our performance under the
            lease, we
            have delivered to the landlord an unconditional, irrevocable, stand-by
            letter of
            credit in the amount of approximately $4.2 million, which is subject
            to
            reduction in certain events.
 
 We
            have
            the option to purchase the premises at a price calculated according to
            the lease
            by giving notice of our intention to exercise such option to the landlord
            on or
            before the last day of the 42 nd full
            month of the initial term. We also have a right of first offer in the
            event the
            landlord intends to sell the premises to a third party. The lease and
            its two
            amendments are attached as Exhibit 10.46 to this Annual Report on Form
            10-K.
 
 In
            connection with our anticipated move to our new headquarters in Somerset,
            we
            have notified MSNW Continental Associates, LLC, our landlord for our
            executive
            offices in Hackensack, that we intend to terminate our lease for such
            executive
            offices. The termination of such lease will be effective August 31,
            2006.
 
 **Scott
            Myers’ Employment and Stock Option Agreements**
 
 In
            connection with his employment by us in December 2005, we entered into
            an
            employment agreement with Mr. Myers dated as of December 1, 2005, which
            provides
            for his employment as Senior Vice President, Strategic Marketing and
            Commercialization until December 2008. Under the employment agreement,
            we have
            agreed to pay him base
            compensation of at least $330,000 per year . For
            2006,
            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.
            We are
            obligated to continue to pay Mr. Myers his base and incentive compensation
            and to continue his benefits for a period of nine months if he is terminated
            upon becoming disabled or for a period of 90 days upon his death. If Mr.
            Myers terminates his employment with us for good reason, or within six
            months of
            a change of control, or if we terminate Mr. Myers without cause, he is
            entitled to receive his base compensation for the balance of his employment
            agreement, namely December 2008, and all stock options granted to him
            will vest.
            The agreement also requires Mr. Myers 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.
 
 Additionally,
            upon the commencement of Mr. Myers’ employment, we granted him options to
            purchase 285,000 shares of our common stock pursuant to the employment
            agreement
            and a stock option agreement also dated as of December 1, 2005. Such
            options,
            which were issued to Mr. Myers outside of our 2000 Stock Option and Grant
            Plan,
            have an exercise price of $14.28 per share, the closing price of our
            common
            stock on the commencement date of employment, and will vest 50% on June
            1, 2007
            and will continue to vest ratably thereafter over the next six quarters.
            The
            employment agreement and the stock option agreement are attached as Exhibits
            10.42 and 10.43, respectively, to this Annual Report on Form 10-K.
  
 48
 
  **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**Leslie
                      Hudson
                  59
                  Chief
                      Executive Officer, President and DirectorPhil
                      Skolnick, Ph.D., D.Sc. (hon)
                  59
                  Senior
                      Vice President, Research and Chief Scientific OfficerBarbara
                      G. Duncan
                  41
                  Senior
                      Vice President, Finance, Chief Financial Officer and
                      TreasurerRobert
                      Horton
                  66
                  Senior
                      Vice President, General Counsel and SecretaryWarren
                      Stern, Ph.D.
                  61
                  Senior
                      Vice President, Drug Development and Assistant
                      SecretaryScott
                      Myers.
                  39
                  Senior
                      Vice President, Strategic Marketing and
                      CommercializationArnold
                      S. Lippa, Ph.D.
                  59
                  Chairman
                      of the BoardZola
                      Horovitz, Ph.D.
                  71
                  DirectorPatrick
                      Ashe
                  42
                  DirectorDaniel
                      S. Van Riper
                  65
                  DirectorTheresa
                      A. Bischoff
                  52
                  DirectorJonathan
                      Silverstein
                  37
                  Director
 
 **Leslie
            Hudson** joined
            us in July 2005 and serves as our chief executive officer and president.
            Dr. Hudson is a director of Nabi Biopharmaceuticals, Inc. and Hooper
            Holmes,
            Inc. Prior
            to
            joining us, Dr. Hudson served in executive positions at Pharmacia Corporation,
            Glaxo Inc., and Repligen Corporation. At Pharmacia, Dr. Hudson was Senior
            Vice
            President of Research and Exploratory Development, led e-business and
            commercial
            development, and ultimately was Group Vice President and General Manager
            for the
            company’s ophthalmology franchise. At Glaxo, he initially led the division of
            cell and molecular biology and had responsibility for the therapeutic
            areas of
            oncology, inflammation and metabolic diseases and was promoted to Vice
            President
            for Discovery. After the acquisition of Pharmacia by Pfizer, Dr. Hudson
            was at
            the University of Pennsylvania for two years where he led and restructured
            the
            university’s overall commercialization and economic development efforts. Prior
            to joining the pharmaceutical industry, Les spent nearly nine years at
            St.
            George’s Hospital Medical School in London as full professor of immunology and
            chairman of the department. He received a Ph.D. from the Middlesex Hospital
            Medical School, University of London in 1975, was elected associate of
            the Royal
            College of Science and received his B.S. degree, summa cum laude, from
            the
            Imperial College of Science, Technology, and Medicine, University of
            London, in
            1968.
  **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.
  
 49
 
  **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. Mr. Horton is a director of Nascime Ltd. and DOV
            Pharmaceutical Luxembourg S.a.r.l. Prior to joining us, Mr. Horton served
            with Goodwin Procter 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 is a director of
            Suven
            Life Sciences USA, LLC/Asian Clincial Trials Limited, or Suven. Previously
            he
            was senior vice president of scientific and medical Services at PAREXEL
            International Corporation, a major contract research organization, or
            CRO, where
            he had worked for the past five and one-half years. Dr. Stern has also held
            senior level positions in clinical research at Cato Research Ltd., a CRO,
            Forest Laboratories, Inc. and earlier, Burroughs Wellcome Co. Previously,
            Dr. Stern was president and CEO of Pharmatec Inc., a CNS-oriented drug
            delivery company. He has also founded two drug delivery companies, Research
            Triangle Pharmaceuticals and Nobex, Inc. Dr. Stern has over
            25 years' experience in drug development in CNS and other fields. He
            directed the successful NDA submissions of bupropion (Wellbutrin) and
            citalopram
            (Celexa). He has performed preclinical studies and clinical trials in
            psychopharmacology and published some 90 papers describing the results
            of his research in
            animal pharmacology and CNS-oriented clinical trials. Dr. Stern is the
            inventor on six patents and on three patent applications, including patents
            related to CNS products, and two drug delivery systems. He received his
            Ph.D. in
            psychopharmacology from Indiana University in 1969 and completed postdoctoral
            fellowships at Boston State Hospital and at the Worcester Foundation
            for
            Experimental Biology.
  **Scott
            Myers**  joined
            us
            in December of 2005 and serves as our senior vice president, strategic
            marketing
            and commercialization. Mr. Myers spent the last five years with Johnson
&
Johnson in several, senior functional and general management leadership
            roles.
            Prior to Johnson & Johnson, Mr. Myers was co-founder of the ISO-HealthCare
            Group, a global strategy consultancy. He has also held positions at Baxter
            Healthcare and Andersen Consulting. He earned his B.A in biology from
            Northwestern University and an M.B.A. in finance and international business
            from
            the University of Chicago.
  **Arnold
            S. Lippa, Ph.D** .
            is a
            co-founder and serves as chairman of our board of directors. Dr. Lippa
            served as
            our chief executive officer since our inception in April 1995 through
            June 2005.
            Dr. Lippa also currently serves as an officer of Aurora Capital LLC and
            Atypical BioCapital Management LLC. Prior to founding DOV in 1995,
            Dr. Lippa founded Fusion Associates, Ltd., an investment and
            management company specializing in the creation and management of biomedical
            companies. Dr. Lippa served as Fusion's managing director from 1989 to
            1995. From 1989 through 1990, Dr. Lippa served as Vega
            Biotechnologies, Inc.'s chairman and chief executive officer. In 1984,
            Dr. Lippa co-founded Praxis Pharmaceuticals, Inc. and served as
            president and chief operating officer until 1988. Prior to 1985, he served
            as
            director of molecular neurobiology and held other positions at American
            Cyanamid. In addition, Dr. Lippa has consulted for various pharmaceutical
            and biotechnology companies and has been a graduate faculty professor
            at the New
            York University School of Medicine and the City University of New York.
            He
            received his B.A. from Rutgers University in 1969 and his Ph.D. in psychobiology
            from the University of Pittsburgh in 1973.
  
 50
 
  **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 a
            director and senior vice president, business development at AGI Therapeutics
            Research, Ltd. and as a director of AGI Therapeutics PLC. From May 1994 to
            November 2001, Mr. Ashe served as vice president, commercial development at
            Elan Pharmaceutical Technologies, a division of Elan Corporation, plc
            and from
            November 2001 to May 2005 was senior vice president, business development
            of
            Athpharma Ltd. Additionally, from January 1999 to November 2001,
            Mr. Ashe served as co-manager, and until November 2005 served 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 the audit, compensation
            and
            finance committees, a director of New Brunswick Scientific Co., Inc. where
            he serves on the compensation and governance committee and a director
            of 3D
            Systems Corporation where he chairs the finance committee and serves
            on the
            compensation committee. Mr. Van Riper currently is an independent financial
            consultant and served as special advisor to Sealed Air Corporation from
            January
            2002 to June 2005. From July 1998 to January 2002 he served as senior
            vice
            president and chief financial officer of Sealed Air Corporation. 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 in December 2003. Ms. Bischoff is also
            a
            trustee of Mutual of America Capital Management and University of Connecticut
            Foundation. 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.
  **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, Insulet Corporation,
            Adiana, superDimension 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.
  
 51
 
  **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, retention and compensation
            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 results. The current members of the audit committee
            are
            Theresa Bischoff, Zola Horovitz and Daniel Van Riper (chairman). The
            audit
            committee met six times during 2005. 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.
   **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 2005.
  **Reporting
                        Requirement****Name**
                    
                    **Form**
                    
                    **Required
                        Filing Date**
                    
                    **Actual
                        Filed Date**Scott
                        Myers
                    
                    Form
                        3
                    
                    December
                        12, 2005
                    
                    December
                        16, 2005Zola
                      Horovitz
                    
                    Form
                      4
                    
                    October
                      19, 2005
                    
                    October
                      21, 2005(1)
  (1)
              Attempted timely filing rejected due to Edgar Access Code
              issues.
 
 We
            undertake to prepare Section 16 filings for our officers and directors.
 
 **Code
            of Ethics**
  We
            have
            adopted a code of ethics that applies to all our employees, including
            our chief
            executive officer and chief financial officer. This code of ethics is
            designed
            to comply with SEC requirements and 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.
 
 
 52
 
  **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, 2005, 2004 and 2003. In addition, we
            have
            included information for our former chief executive officer and president
            whose
            employment terminated effective July 28, 2005.
 
 **Long-Term
                      Compensation Awards****Annual
                      Compensation**
                  
                  **Securities**
                    **Underlying**
                  
                  **Restricted**
                  
                  **All
                      Other****Name
                      and Principal Position**
                  
                  **Year**
                  
                  **Salary**
                  
                  **Bonus(1)**
                  
                  **Options(1)**
                  
                  **Stock
                      Awards**
                  
                  **Compensation**Leslie
                      Hudson(2)
                  
                  2005
                  
                  $
                  174,904
                  
                  $
                  —
                  
                  
                  225,000
                  
                  $
                  2,120,000
                  
                  $
                  84,710Chief
                      Executive Officer and PresidentPhil
                      Skolnick, Ph.D., D.Sc. (hon)(3)
                  
                  2005
                  
                  
                  327,692
                  
                  
                  75,000
                  
                  
                  25,000
                  
                  
                  —
                  
                  
                  13,042Senior
                      Vice President, Research and
                  
                  2004
                  
                  
                  299,038
                  
                  
                  50,000
                  
                  
                  100,000
                  
                  
                  —
                  
                  
                  13,290Chief
                      Scientific Officer
                  
                  2003
                  
                  
                  273,558
                  
                  
                  30,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  8,100Barbara
                      Duncan (4)
                  
                  2005
                  
                  
                  327,692
                  
                  
                  75,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  12,242Senior
                      Vice President, Finance, Chief
                  
                  2004
                  
                  
                  298,077
                  
                  
                  50,000
                  
                  
                  125,000
                  
                  
                  —
                  
                  
                  12,300Financial
                      Officer and Treasurer
                  
                  2003
                  
                  
                  258,942
                  
                  
                  30,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  8,100Robert
                      Horton (5)
                  
                  2005
                  
                  
                  327,692
                  
                  
                  75,000
                  
                  
                  125,000
                  
                  
                  —
                  
                  
                  15,077Senior
                      Vice President, General
                  
                  2004
                  
                  
                  307,211
                  
                  
                  50,000
                  
                  
                  25,000
                  
                  
                  —
                  
                  
                  15,048Counsel
                      and Secretary
                  
                  2003
                  
                  
                  250,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  9,525Warren
                      Stern (6)
                  
                  2005
                  
                  
                  327,692
                  
                  
                  75,000
                  
                  
                  25,000
                  
                  
                  —
                  
                  
                  13,599Senior
                      Vice President, Drug
                  
                  2004
                  
                  
                  300,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  13,815Development
                      and Assistant Secretary
                  
                  2003
                  
                  
                  24,077
                  
                  
                  —
                  
                  
                  285,000
                  
                  
                  —
                  
                  
                  46,000Arnold
                      S. Lippa, Ph.D.(7)
                  
                  2005
                  
                  
                  248,991
                  
                  
                  100,000
                  
                  
                  45,000
                  
                  
                  903,000
                  
                  
                  9,726Chairman
                  
                  2004
                  
                  
                  363,212
                  
                  
                  125,000
                  
                  
                  25,000
                  
                  
                  —
                  
                  
                  33,8952003
                  
                  
                  325,769
                  
                  
                  50,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  30,408
   (1)
                    Does
                        not reflect bonuses determined and paid in 2006 and options
                        granted in
                        2006 to the five named executive officers aggregating $205,000
                        and 105,000
                        respectively.(2)
                    Dr.
                        Hudson joined us effective July 28, 2005. Dr. Hudson was
                        paid a
                        contractual bonus of $85,000 in January 2006. Other compensation
                        includes
                        $70,966 in relocation expense reimbursement, $8,000 for reimbursement
                        of
                        certain legal expenses, $5,000 for automobile allowance and
                        $744 for life
                        insurance premiums. In addition, in 2006 we granted Dr. Hudson
                        50,000
                        options.(3)
                    All
                        other compensation represents $12,000, $12,000, and $8,100
                        in 2005, 2004
                        and 2003 for automobile allowance and $1,042 and $1,290 in
                        2005 and 2004
                        for life insurance premiums. In 2006, we paid Dr. Skolnick
                        a $30,000 bonus
                        and granted him 15,000 options.(4)
                    All
                        other compensation represents $12,000 $12,000 and $8,100
                        in 2005, 2004 and
                        2003 for automobile allowance and $242 and $300 in 2005 and
                        2004 for life
                        insurance premiums. In 2006, we paid Ms. Duncan a $30,000
                        bonus and
                        granted her 15,000 options.(5)
                    All
                        other compensation represents $12,000, $12,000 and $8,100
                        in 2005, 2004
                        and 2003 for automobile allowance, $3,077 and $3,048 in 2005
                        and 2004 for
                        life insurance premiums and $1,425 in 2003 for moving expenses.
                        In 2006,
                        we paid Mr. Horton a $15,000
                        bonus.
 53
  (6)
                    All
                        other compensation represents $12,000, $12,000 and $1,000
                        in 2005, 2004
                        and 2003 for automobile allowance, $45,000 in 2003 for consulting
                        expenses
                        and $1,599 and $1,815 in 2005 and 2004 for life insurance
                        premiums. Dr.
                        Stern joined the Company effective December 2, 2003. In 2006,
                        we paid Dr.
                        Stern a $45,000 bonus and granted him 25,000 options.(7)
                    Dr.
                        Lippa’s employment as chief executive officer and president of
                        the Company
                        terminated effective July 28, 2005. In connection with this
                        termination,
                        Dr. Lippa will receive cash payments equal to his annual
                        salary of
                        $365,750 for two years of whichapproximately
                        $201,000 was paid in February 2006 and the remainder will
                        be paid
                        bi-weekly through June 2007.He
                        continues as chairman of the board. All other compensation
                        represents
                        $9,180, $16,723 and $16,668, in 2005, 2004 and 2003 for automobile
                        allowance, $546, $8,018 and $13,740, in 2005, 2004 and 2003
                        for life
                        insurance premiums and $9,154 in 2004 for advances repaid
                        in
                        2005.
 
 Option
            Grants in Last Fiscal Year
 
 The
            following table sets forth information with respect to the named executives
            and
            our former chief executive officer and president concerning the grant
            of stock
            options during 2005. 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**
                  
                  **%
                      of Total**
                    **Options**
                    **Granted**
                  
                  **Exercise or**
                    **Base
                      Price**
                    **($/Sh)**
                  
                  **Expiration**
                    **Date**
                  
                  **Grant
                      Date**
                    **PresentValue**Leslie
                      Hudson
                  
                  
                  225,000
                  
                  
                  17.6
                  %
                  $
                  21.20
                  
                  07/28/2015
                  
                  $
                  2,996,090Phil
                      Skolnick, Ph.D. D. Sc. (hon)
                  
                  
                  25,000
                  
                  
                  2.0
                  
                  
                  16.77
                  
                  02/01/2015
                  
                  
                  265,775Barbara
                      Duncan
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  —
                  
                  
                  —Robert
                      Horton (1)
                  
                  
                  125,000
                  
                  
                  9.8
                  
                  
                  20.27
                  
                  07/29/2015
                  
                  
                  1,595,597Warren
                      Stern, Ph.D.
                  
                  
                  25,000
                  
                  
                  2.0
                  
                  
                  16.77
                  
                  02/01/2015
                  
                  
                  265,775Arnold
                      S. Lippa, Ph.D.
                  
                  
                  45,000
                  
                  
                  3.5
                  
                  
                  16.77
                  
                  02/01/2015
                  
                  
                  478,395
 
 (1)
                  25,000
                      options were granted on February 1, 2005 at an exercise price
                      of $16.77
                      and 100,000 options were granted on July 29, 2005 in connection
                      with
                      renewal of employment agreement at an exercise price of
                      $21.15.
  **Option
            Exercises in Last Fiscal Year and Year-End Option Values**
 
 The
            following table sets forth certain information as of December 31, 2005,
            regarding options held by the named executives and our
            former chief executive officer and president .
 
 **Shares**
                  
                  
                  
                  **Number
                      of Securities Underlying Unexercised Options at Fiscal
                      Year-End(1)**
                  
                  **Value
                      ($) of Unexercised in-the-Money Options**
                    **at
                      Fiscal Year-End(2)****Name**
                  
                  **Acquired
                      on Exercise**
                  
                  **Value
                      ($)**
                    **Realized**
                  
                  **Number**
                    **Exercisable**
                  
                  **Number**
                    **Unexercisable**
                  
                  **Value
                      ($)**
                    **Exercisable**
                  
                  **Value
                      ($)**
                    **Unexercisable**Leslie
                      Hudson, Ph.D.
                  
                  
                  —
                  
                  $
                  —
                  
                  
                  —
                  
                  
                  225,000
                  
                  $
                  —
                  
                  $
                  —Phil
                      Skolnick, Ph.D. D. Sc. (hon)
                  
                  
                  15,000
                  
                  
                  200,900
                  
                  
                  368,333
                  
                  
                  66,667
                  
                  
                  3,753,166
                  
                  
                  45,834Barbara
                      Duncan
                  
                  
                  25,000
                  
                  
                  326,000
                  
                  
                  314,083
                  
                  
                  110,417
                  
                  
                  3,210,540
                  
                  
                  199,625Robert
                      Horton
                  
                  
                  50,000
                  
                  
                  481,000
                  
                  
                  164,583
                  
                  
                  135,417
                  
                  
                  1,556,875
                  
                  
                  10,625Warren
                      Stern, Ph.D.
                  
                  
                  —
                  
                  
                  —
                  
                  
                  189,998
                  
                  
                  120,002
                  
                  
                  —
                  
                  
                  —Arnold
                      S. Lippa, Ph.D.
                  
                  
                  —
                  
                  
                  —
                  
                  
                  225,183
                  
                  
                  55,417
                  
                  
                  2,544,181
                  
                  
                  10,625
  (1)
                    Includes
                        both in-the money and out-of-the-money options.(2)
                    Fair
                        value of DOV’s common stock at December 31, 2005 ($14.68 based on the
                        closing sales price reported on Nasdaq) less the exercise
                        price.
 54
 
 
 **Compensation
            of the Chief Executive Officer**
 
 Dr. Hudson’s
            base salary during fiscal year 2005 was $425,000. His base salary for
            2006 is
            $437,750 and he received a contractual bonus of $85,000 in January 2006.
            He also
            received an award of 50,000 stock options in February
            2006.
  **Compensation
            of Directors**
 
 Our
            independent outside directors each receive $4,000 for each quarterly
            board
            meeting and receive options to purchase 15,000 shares of our common stock
            for a
            full year of service on the annual shareholders meeting date. In May
            2005, Dr.
            Horovitz, Mr. Ashe, Ms. Bischoff and Mr. Van Riper each received options
            to
            purchase 15,000 shares of our common stock at an exercise price of $15.05
            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.
  **Compensation
            Committee Interlocks and Insider Participation**
 
 During
            2005, Dr. Horovitz, Mr. Van Riper and Mr. Ashe served on DOV’s compensation
            committee. During 2005, there were no interlocks with other companies
            within the
            meaning of the SEC’s proxy rules. None of the members of the compensation
            committee is or has been an officer or employee of DOV or any of its
            subsidiaries.
  **Employment
            Agreements**
 
 *Leslie
            Hudson, Ph.D.* In
            connection with his employment by us in July 2005, we entered into an
            employment
            agreement with Dr. Hudson which provides for his employment as Chief
            Executive
            Officer and President until July 28, 2008. Under the agreement, we will pay
            Dr. Hudson base compensation of at least $425,000 per year. For 2006, we
            will pay him $437,750 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 commencement of employment on July 28, 2005, we granted Dr. Hudson
            100,000
            shares of restricted stock and options to purchase 225,000 shares of
            our common
            stock at an exercise price of 21.20, each vesting ratably annually over
            four
            years. Dr. Hudson also received a bonus of $85,000 in January 2006, and
            the
            parties have agreed that his target bonus for fiscal year 2006 and each
            subsequent year of his employment agreement will be 40% of base compensation
            upon achievement of milestones established by the compensation committee
            of the
            board of directors. He is also eligible for other benefits, including
            relocation
            allowances of which $78,966 was paid in 2005. We are obligated to continue
            to
            pay Dr. Hudson his base and incentive compensation and to continue his
            benefits for a period of nine months if he is terminated upon becoming
            disabled
            or for a period of 90 days upon his death. For qualified events of
            severance, Dr. Hudson will be entitled to base compensation for the balance
            of
            his agreement subject to a minimum of one-year base compensation and
            an
            additional severance payment equal to his prior incentive bonus in the
            case of a
            termination following a change of control. The agreement also requires
            Dr. Hudson to refrain from competing with us and from soliciting our
            customers and clients for the duration of his employment and for a period
            following employment equal to the length of time we make severance payments
            to
            him.
  
 55
 
 
 *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 2006, we
            will pay him $344,000 in base salary. The agreement provides for benefits,
            the
            reimbursement of expenses and the payment of incentive compensation,
            which will
            be determined by our board of directors in its sole discretion. 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 vested 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 in January
            2004 will
            vest immediately .
            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 2006,
            we will pay her $344,000 in base salary. The agreement provides for benefits,
            the reimbursement of expenses and the payment of incentive compensation,
            which
            will be determined by our board of directors in its sole discretion.
            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 vested 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 options granted to her will immediately vest except
            that stock options granted to her in August 2004 will vest on
            a
            schedule of 62,500 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 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.
 
 *Robert
            Horton.* In
            connection with his employment by us in August 2002, we entered into
            an
            employment agreement with Mr. Horton (as amended in July 2005), which
            provides for his employment as Vice President and General Counsel until
            August
            16, 2008. Mr. Horton’s title was changed to Senior Vice President and General
            Counsel in February 2005. Under the agreement, we will pay Mr. Horton
            base
            compensation of at least $330,000 per year. For 2006, we will pay him
            $340,000
            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 are completely vested. In addition, in July 2005, in connection
            with
            renewal of his employment agreement, we granted him options to purchase
            100,000
            shares of our common stock at an exercise price of $21.15 per share that
            vest
            50% on January 29, 2007 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, if he terminates his
            employment with us for good reason, or if we terminate Mr. Horton without
            cause. He will also be entitled to base compensation and benefits for
            a period
            of 90 days upon his death. If Mr. Horton terminates his employment within
            six
            months of a change of control he is entitled to receive his base compensation
            for the balance of his employment agreement, namely July 29, 2007, or
            if a
            longer period, one year thereafter, and all stock options granted to
            him in July
            2005 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 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.
  
 56
 
 
 *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
            2006,
            we will pay him $345,000 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 vested 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 these initial
            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.
 
 *Scott
            Myers.* In
            connection with his employment by us in December 2005, we entered into
            an
            employment agreement with Mr. Myers which provides for his employment
            as Senior
            Vice President, Strategic Marketing and Commercialization until December
            2008.
            Under the employment agreement, we have agreed to pay him base
            compensation of at least $330,000 per year . For
            2006,
            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. Myers’ employment, we granted him
            options to purchase 285,000 shares of our common stock at an exercise
            price of
            $14.28 per share that vest 50% on June 1, 2007 and will continue to vest
            ratably
            thereafter over the next six quarters. We are obligated to continue to
            pay
            Mr. Myers his base and incentive compensation and to continue his benefits
            for a period of nine months if he is terminated upon becoming disabled
            or for a
            period of 90 days upon his death. If Mr. Myers terminates his employment
            with us for good reason, or within six months of a change of control,
            or if we
            terminate Mr. Myers without cause, he is entitled to receive his base
            compensation for balance of his employment agreement, namely through
            December
            2008, and all stock options granted to him will vest. The agreement also
            requires Mr. Myers 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.
 
 *Arnold
            Lippa, Ph.D.* On
            May
            23, 2005, we entered into a two-year employment agreement with Dr. Lippa,
            our
            then Chief Executive Officer, which continued his existing agreement,
            with
            certain changes, that was extended in January 2005. Such changes include
            severance protection in the event of a termination of employment without
            cause
            or good reason equal to payment of base compensation for the greater
            of one year
            and the balance of the term of the agreement, subject to consulting obligations.
            In addition, the agreement includes a change in control severance protection
            equal to two years’ base compensation, elimination of a 2% bonus based upon
            gross proceeds in the event of a sale of the Company and elimination
            of
            incentive compensation for licensing. He was also awarded 60,000 shares
            of
            restricted common stock, valued at $903,000, under the our 2000 stock
            option and
            grant plan, subject to ratable annual vesting over three years provided
            he
            remains as a director of the Company. As of July 28, 2005, Dr. Lippa’s
            employment terminated thus requiring us to pay the contractual severance.
            As a
            result, the Company recorded a severance obligation of $790,000 as of
            June 30,
            2005. Dr. Lippa remains as chairman of the board of directors.
 
 We
            file
            our executive officer’s employment agreements with the SEC and these agreements
            are publicly available at “www.sec.gov.”
  
 57
 
  **ITEM
            12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT AND RELATED STOCKHOLDER MATTERS**
 
  The
            following table sets forth, as of February 17, 2006, 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, 2006, 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.
  
 58
 
  **Name
                      of Beneficial Owner**
                  
                  **Number
                      of Shares**
                    **Beneficially
                      Owned**
                  
                  **Percentage
                      of**
                    **Class(1)**FMR(3)
                    82
                      Devonshire Street
                    Boston,
                      MA 02109
                  
                  
                  2,631,834
                  
                  
                  11.3
                  %OrbiMed
                      Advisors, LLC(2)
                    767
                      Third Avenue
                    30thFloor
                    New
                      York, NY 10017
                  
                  
                  2,028,028
                  
                  
                  8.6Columbia
                      Wanger Asset Management, L.P.(3)
                    227
                      West Monroe Street, Suite 3000
                    Chicago,
                      IL 60606
                  
                  
                  1,495,000
                  
                  
                  6.4Barclays
                      Bank PLC.(3)
                    45
                      Fremont Street
                    San
                      Francisco, CA 94105
                  
                  
                  1,247,845
                  
                  
                  5.4HBK
                      Investments L.P.(3)
                    300
                      Crescent Court, Suite 700
                    Dallas,
                      TX 75201
                  
                  
                  1,238,828
                  
                  
                  5.3Credit
                      Suisse Asset Management(3)
                    466
                      Lexington Avenue
                    New
                      York, NY 10017
                  
                  
                  1,173,438
                  
                  
                  5.0Arnold
                      S. Lippa(4)
                  
                  
                  687,717
                  
                  
                  2.9Phil
                      Skolnick(5)
                  
                  
                  346,249
                  
                  
                  1.5Barbara
                      G. Duncan(6)
                  
                  
                  326,167
                  
                  
                  1.4Robert
                      Horton(7)
                  
                  
                  222,917
                  
                  
                  1.0Warren
                      Stern(8)
                  
                  
                  219,997
                  
                  
                  *Zola
                      Horovitz(9)
                  
                  
                  118,150
                  
                  
                  *Leslie
                      Hudson(10)
                  
                  
                  100,000
                  
                  
                  *Patrick
                      Ashe(11)
                  
                  
                  87,450
                  
                  
                  *Daniel
                      S. Van Riper(12)
                  
                  
                  23,400
                  
                  
                  *Theresa
                      A. Bischoff(13)
                  
                  
                  12,150
                  
                  
                  *Jonathan
                      Silverstein(14)
                  
                  
                  —
                  
                  
                  *All
                      directors and executive officers as a group (11
                      persons)(15)
                  
                  
                  2,144,197
                  
                  
                  8.7
                  %
 _______________
 *Less
            than one percent.
 
 (1)
                  As
                      of February 17, 2006, the number of outstanding shares of our
                      common stock
                      and common stock equivalents was 23,265,005.(2)
                  OrbiMed
                      Advisors, LLC and OrbiMed Capital, LLC, together with Samuel
                      D. Isaly, 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 1,635,171 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.(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
                      449,200 shares of common stock and options to purchase 238,517
                      shares of
                      common stockthat are currently exercisable.Excludes options to purchase 42,083 shares of common stock
                      that are not
                      exercisable, within 60 days of February 17, 2006. Such 449,200
                      shares of common stock owned by Dr. Lippa were reported as
                      10,000 fewer in
                      prior reports.(5)
                  Includes
                      options to purchase 346,249 shares of common stock that are
                      currently
                      exercisable. Excludes options to purchase 58,751 shares of
                      common stock
                      that are not exercisable within 60 days of February 17,
                      2006.
 
 
 59
 
 
 (6)
                  Includes
                      25,000 shares of common stock and options to purchase 301,167
                      shares of
                      common stock that are currently exercisable. Excludes options
                      to purchase
                      73,333 shares of common stock that are not exercisable within
                      60 days
                      of February 17, 2006.(7)
                  Includes
                      50,000 shares of common stock and options to purchase 172,917
                      shares of
                      common stock that are currently exercisable. Excludes options
                      to purchase
                      127,083 shares of common stock that are not exercisable within
                      60 days of February 17, 2006.(8)
                  Includes
                      options to purchase 219,997 shares of common stock that are
                      currently
                      exercisable. Excludes options to purchase 115,003 shares of
                      common stock
                      that are not exercisable within 60 days of February 17,
                      2006.(9)
                  Includes
                      50,200 shares of common stock and options to purchase 67,950
                      shares of
                      common stock that are currently exercisable. Excludes options
                      to purchase
                      33,750 shares of common stock that are not exercisable within
                      60 days
                      of February 17, 2006.(10)
                  Includes
                      100,000 shares of common stock. Excludes options to purchase
                      275,000
                      shares of common stock that are not exercisable within 60 days of
                      February 17, 2006.(11)
                  Includes
                      options to purchase 87,450 shares of common stock that are
                      currently
                      exercisable. Excludes options to purchase 33,750 shares of
                      common stock
                      that are not exercisable within 60 days of February 17,
                      2006.(12)
                  Includes
                      options to purchase 23,400 shares of common stock that are
                      currently
                      exercisable. Excludes options to purchase 33,750 shares of
                      common stock
                      that are not exercisable within 60 days of February 17,
                      2006.(13)
                  Includes
                      options to purchase 12,150 shares of common stock that are
                      currently
                      exercisable. Excludes options to purchase 27,150 shares of
                      common stock
                      that are not exercisable within 60 days of February 17,
                      2006.(14)
                  Mr.
                      Silverstein is a general partner 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.(15)
                  Includes
                      options to purchase 1,469,797 shares of common stock that are
                      exercisable
                      within 60 days of February 17, 2006. Excludes options to purchase
                      1,104,654 shares of common stock that are not exercisable within
                      60 days of February 17, 2006.
 
 **Stock
            Option Plans**
  The
            following table provides information with respect to compensation plans
            under
            which equity compensation is authorized at December 31, 2005.
  **Securities
                      to be Issued Upon Exercise of Outstanding Options**
                  
                  **Weighted
                      Average Exercise Price of Outstanding Options**
                  
                  **Number
                      of Securities Remaining Available for Future
                      Issue**Equity
                      Compensation Plans Approved by Shareholders
                  
                  
                  3,255,966
                  
                  $
                  10.65
                  
                  
                  507,193Equity
                      Compensation Plan Not Approved by Shareholders
                  
                  
                  285,000
                  
                  $
                  14.28
                  
                  
                  —Total
                  
                  
                  3,540,966
                  
                  $
                  10.94
                  
                  
                  507,193
 
 ***Stock
            Option Grants to Phil Skolnick and Scott Myers Outside of the 1998 or
            2000
            Plan***
  In
            connection with the commencement of Dr. Skolnick's employment with us in
            January 2001, we granted him stock options to acquire 405,000 shares
            of our
            common stock at an exercise price of $2.78 per share (such shares and
            price as
            adjusted for our subsequent 1.62-for-1 stock split). As of December 31,
            2005,
            all the 310,000 options outstanding were vested. During 2005, Dr. Skolnick
            exercised 15,000 options.
  In
            connection with the commencement of Mr. Myer's employment with us in
            December 2005, we granted him stock options to acquire 285,000 shares
            of our
            common stock at an exercise price of $14.28 per share. None of these
            options are
            currently vested.
  
 60
 
  **ITEM
            13. CERTAIN RELATIONSHIPS AND RELATED
            TRANSACTIONS**
 
 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.
  In
            July
            2005, our chief executive officer and president, Dr. Arnold Lippa, terminated
            his employment with us. As
            a
            result, the Company recorded a severance obligation of $790,000 as of
            June 30,
            2005 of which approximately $201,000 was paid in February 2006. Dr.
            Lippa
            remains as chairman of our board of directors. Please refer to Item 11.
            Executive Compensation - Employment Agreements for details of his employment
            agreement.
  In
            2005,
            Dr. Stern received 20,000 options to purchase common stock in Suven,
            a contract
            research organization which provides services for the Company outside
            the United
            States, for services he provided to it as a consultant. Dr. Stern is
            a director
            of Suven Life Sciences USA, LLC/Asian Clinical Trials Limited.
  **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. During
            2005,
            the audit committee pre-approved all of the services provided by
            PricewaterhouseCoopers LLP.
 
 The
            aggregate fees and expenses billed for professional services rendered
            by our
            independent registered public accounting firm, PricewaterhouseCoopers
            LLP, with
            respect to fiscal years ended 2005 and 2004 were as follows:
 
 **Years
                      Ended December 31,****2005**
                  
                  **2004**(1)
                  
                  Audit
                      Fees
                  
                  $
                  323,670
                  
                  $
                  420,100(2)
                  
                  Audit
                      Related Fees
                  
                  
                  35,830
                  
                  
                  15,000(3)
                  
                  Tax
                      Fees
                  
                  
                  140,700
                  
                  
                  118,000(4)
                  
                  All
                      Other Fees
                  
                  
                  4,600
                  
                  
                  —Total
                  
                  $
                  504,800
                  
                  $
                  553,100
 
 Audit
            fees include fees for the integrated audit of our financial statements,
            management’s assessment of the effectiveness of internal control over financial
            reporting at December 31, 2005 and 2004 (Sarbanes-Oxley 404 compliance)
            and the
            effectiveness of internal control of financial reporting at December
            31, 2005
            and 2004. Audit fees also include quarterly reviews, the audit fees for
            Nascime
            Ltd., our wholly-owned subsidiary, fees for review of the registration
            statements on forms S-1, S-3 and S-8 and fees for review of our convertible
            debt
            offering. Audit fees related to the Sarbanes-Oxley Act of 2002 Section
            404
            compliance in 2005 and 2004 totaled $115,000 and $125,000, respectively.
            In 2005
            and 2004, tax related fees include fees for tax advice in relation to
            Nascime,
            an analysis of the Section 382 limitations on the utilization of net
            operating
            losses’, and tax return preparation services. In 2004, audit related fees are
            attributable to the review of the Merck agreement.
  
 61
 
 
 **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 non-audit services that may be
            performed
            by our registered independent public accounting firm.
  **PART
            IV**
   **ITEM
            15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**
 
 (a)
                  The
                      following documents are filed as part of this
                      report:
  (1)
                  List
                      of Financial Statements.The
                      following financial statements of DOV Pharmaceutical, Inc.
                      and Report of
                      PricewaterhouseCoopers LLP are included in this report:
                    Report
                      of Independent Registered Public Accounting Firm
                    Consolidated
                      Balance Sheets as of December 31, 2005 and 2004
                    Consolidated
                      Statements of Operations for the Years Ended December 31, 2005,
                      2004 and
                      2003Consolidated
                      Statements of Stockholders’ (Deficit)/ Equity for the Years Ended December
                      31, 2005, 2004 and2003
                    Consolidated
                      Statements of Cash Flows for the Years Ended December 31, 2005,
                      2004 and
                      2003
                    Notes
                      to Consolidated Financial Statements(2)
                  List
                      of all Financial Statement Schedules..All
                      the schedules called for are omitted because they are not applicable
                      or
                      the required information is included in the financial statements
                      or notes
                      thereto.(3)
                  List
                      of Exhibits.Exhibits
                      are incorporated herein by reference or are filed with this
                      report as
                      indicated in the “Index to Exhibits” in part (b) below (numbered in
                      accordance with Item 601 of Regulation
                      S-K).
 
 
 62
 
 
 (b)
                  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).4.4
                    
                    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).10.1
                    
                    Lease
                        Agreement dated as of May 24, 1999, by and between Continental
                        Investors,
                        L.P. and Registrant for commercial premises located at 433
                        Hackensack
                        Avenue, Hackensack, New Jersey (filed as Exhibit 10.1 to
                        the Registration
                        Statement on Form S-1 (File No. 333-81484) on January 28,
                        2002 and
                        incorporated herein by reference).10.2
                    
                    License
                        Agreement dated as of May 29, 1998, by and between Registrant and
                        American Cyanamid Company (filed as Exhibit 10.2 to Amendment
                        No. 1 to the
                        Registration Statement on Form S-1 (File No. 333-81484) on
                        February 6,
                        2002 and incorporated herein by reference).110.3
                    
                    Sublicense
                        and Development Agreement dated as of June 30, 1998, by and
                        between
                        Registrant and Neurocrine Biosciences, Inc. as amended by
                        that certain
                        Consent and Agreement referred to in item 10.19 (filed as
                        Exhibit 10.4 to Amendment No. 5 to the Registration Statement on
                        Form S-1 (File No. 333-81484) on April 24, 2002 and
                        incorporated herein by reference).110.4
                    
                    License,
                        Research and Development Agreement dated as of January 12, 2001, by
                        and between Registrant and Biovail Laboratories Incorporated
                        as amended by
                        that certain Confidential Patent License, Settlement, and
                        Special Mutual
                        Release Agreement (filed as Exhibit 10.4 to Amendment No. 1 to
                        the Registration Statement on Form S-1 (File No. 333-81484) on
                        February 6, 2002 and incorporated herein by reference).1****10.5
                    
                    Guaranty
                        dated as of January 12, 2001, by Biovail Corporation in favor
                        of
                        Registrant (filed as Exhibit 10.5 to the Registration Statement
                        on Form
                        S-1 (File No. 333-81484) on January 28, 2002 and incorporated
                        herein by
                        reference).****10.6
                    
                    Joint
                        Development and Operating Agreement dated as of January 21,
                        1999, by and
                        among Registrant, Elan Corporation, plc, Elan International
                        Services,
                        Ltd., DOV Bermuda, Ltd. (formerly DOV Newco, Ltd.), and Nascime
                        Limited as
                        amended by that certain Termination Agreement referred to
                        in item 10.23
                        (filed as Exhibit 10.7 to Amendment No. 1 to the Registration
                        Statement on
                        Form S-1 (File No. 333-81484) on February 6, 2002 and incorporated
                        herein
                        by reference).1****10.7
                    
                    Letter
                        Agreement dated as of January 21, 1999, by and among Registrant,
                        Elan
                        Corporation, plc, Elan International Services, Ltd., DOV
                        Bermuda, Ltd.
                        (formerly known as DOV Newco, Ltd.), and Nascime Limited
                        as amended by
                        that certain Termination Agreement referred to in item 10.23
                        signed in
                        connection with the Joint Development and Operating Agreement
                        referred to
                        in item 10.6 (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).****
 
 63
   **Exhibit**
                      **No.**
                    
                    **Description**10.8
                    
                    License
                        Agreement dated as of January 20, 1999, by and between Registrant
                        and
                        Nascime Limited as amended by that certain Termination Agreement
                        referred
                        to in item 10.23 (filed as Exhibit 10.9 to Amendment No.
                        1 to the
                        Registration Statement on Form S-1 (File No. 333-81484) on
                        February 6,
                        2002 and incorporated herein by reference).1****10.9
                    
                    License
                        Agreement dated as of January 20, 1999, by and between Nascime
                        Limited and
                        Elan Corporation, plc as amended by that certain Termination
                        Agreement
                        referred to in item 10.23 (filed as Exhibit 10.10 to Amendment
                        No. 1 to
                        the Registration Statement on Form S-1 (File No. 333-81484)
                        on February 6,
                        2002 and incorporated herein by reference).1****10.10
                    
                    Registration
                        Rights Agreement dated as of January 21, 1999, by and between
                        Registrant
                        and Elan International Services, Ltd.as
                        amended by that certain Letter Agreement and further amended
                        by that
                        certain Termination Agreement(filed
                        as Exhibit 10.13 to the Registration Statement on Form S-1
                        (File No. 333-
                        81484) on January 28, 2002 and incorporated herein by
                        reference).10.11
                    
                    Registration
                        Rights Agreement dated as of January 21, 1999, by and among
                        Registrant,
                        DOV Bermuda, Ltd. (formerly known as DOV Newco, Ltd.), and
                        Elan
                        International Services, Ltd. for shares of common stock received
                        pursuant
                        to the Joint Development and Operating Agreement referred
                        to in item 10.6
                        as amended by that certain Termination Agreement referred
                        to in item 10.23
                        (filed as Exhibit 10.14 to the Registration Statement on
                        Form S-1 (File
                        No. 333-81484) on January 28, 2002 and incorporated herein
                        by
                        reference).10.12
                    
                    Registration
                        Rights Agreement dated as of June 20, 2000, by and among
                        Registrant and
                        Series C Investors (filed as Exhibit 10.16 to the Registration
                        Statement on Form S-1 (File No. 333-81484) on January 28, 2002 and
                        incorporated herein by reference).10.13
                    
                    Amended
                        and Restated Stockholders Agreement dated as of August 30,
                        2001 by and
                        among Registrant, Arnold Lippa, Bernard Beer, Series C Investors
                        and
                        Series D Investors (filed as Exhibit 10.18 to the Registration
                        Statement
                        on Form S-1 (File No. 333-81484) on January 28, 2002 and
                        incorporated
                        herein by reference).10.14
                    
                    Registration
                        Rights Agreement dated as of August 30, 2001 by and among
                        Registrant,
                        Series C Investors and Series D Investors (filed as Exhibit
                        10.19 to the
                        Registration Statement on Form S-1 (File No. 333-81484) on
                        January 28,
                        2002 and incorporated herein by reference).10.15
                    
                    Form
                        of Warrant Agreement (filed as Exhibit 10.20 to the Registration
                        Statement
                        on Form S-1 (File No. 333-81484) on January 28, 2002 and
                        incorporated
                        herein by reference).10.16
                    
                    1998
                        Stock Option Plan (filed as Exhibit 10.21 to the Registration
                        Statement on
                        Form S-1 (File No. 333-81484) on January 28, 2002 and incorporated
                        herein
                        by reference).10.17
                    
                    2000
                        Stock Option and Grant Plan (filed as Exhibit 10.22 to the
                        Registration
                        Statement on Form S-1 (File No. 333-81484) on January 28,
                        2002 and
                        incorporated herein by reference) as amended by the Amended
                        and Restated
                        2000 Stock Option and Grant Plan and the Second Amendment
                        thereto (each
                        filed as Appendix C to the Proxy Statement dated April 26,
                        2004 and April
                        25, 2005).10.18
                    
                    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).
  
 64
  **Exhibit**
                      **No.**
                    
                    **Description**10.19
                    
                    Consent
                        and Agreement dated as of March 24, 2003, by and between
                        Registrant,
                        Neurocrine Biosciences, Inc. and ACY (filed as Exhibit 10.35
                        to the Annual
                        Report on Form 10-K on March 31, 2003 and incorporated herein
                        by
                        reference).10.20
                    
                    Securities
                        Purchase Agreement dated as of July 1, 2003 by and among
                        Registrant, PW
                        Juniper Crossover Fund, L.L.C., Caduceus Private Investment,
                        LP, and
                        OrbiMed Associates LLC (filed as Exhibit 10.1 to the Current
                        Report on
                        Form 8-K on July 8, 2003 and incorporated herein by reference).10.21
                    
                    Registration
                        Rights Agreement dated as of July 1, 2003 by and among Registrant,
                        PW
                        Juniper Crossover Fund, L.L.C., Caduceus Private Investments,
                        LP, and
                        OrbiMed Associates LLC (filed as Exhibit 10.2 to the Current Report
                        on Form 8-K on July 8, 2003 and incorporated herein by
                        reference).10.22
                    
                    Form
                        of Warrant Agreement dated as of July 1, 2003, by and among
                        Registrant, PW
                        Juniper Crossover Fund, L.L.C., Caduceus Private Investments,
                        LP, and
                        OrbiMed Associates LLC (filed as Exhibit 10.3 to the Current Report
                        on Form 8-K on July 8, 2003 and incorporated herein by
                        reference).10.23
                    
                    Termination
                        Agreement dated as of October 21, 2003 by and among Registrant, Elan
                        Corporation, plc, Elan International Services, Ltd., Elan Pharma
                        International Limited, DOV (Bermuda), Ltd., and Nascime Limited
                        (filed as Exhibit 10.1 to the Current Report on Form 8-K on
                        October 22, 2003 and incorporated herein by reference).10.24
                    
                    Restated
                        Employment Agreement dated as of January 19, 2004, by and
                        between
                        Registrant and Philip Skolnick(filed
                        as Exhibit 10.40 to the Annual Report on Form 10-K on March
                        15, 2004 and
                        incorporated herein by reference).10.25
                    
                    Employment
                        Agreement dated as of June 23, 2005, by and between Registrant
                        and Robert
                        Horton (filed as Exhibit 10.58 to the Quarterly Report on
                        Form 10-Q on
                        August 9, 2005 and incorporated herein by reference).10.26
                    
                    Employment
                        Agreement dated as of September 10, 2003, by and between
                        Registrant and
                        Warren Stern (filed as Exhibit 10.42 to the Annual Report
                        on Form 10-K on
                        March 15, 2004 and incorporated herein by reference).10.27
                    
                    Severance
                        Agreement dated as of March 12, 2004, by and between Registrant
                        and
                        Bernard Beer (filed as Exhibit 10.43 to the Annual Report
                        on Form 10-K on
                        March 15, 2004 and incorporated herein by reference).10.28
                    
                    Third
                        Amendment to Lease Agreement dated as of February 13, 2004,
                        by and between
                        Continental Investors, L.P. and Registrant for commercial
                        premises located
                        at 433 Hackensack Avenue, Hackensack, New Jersey (filed as
                        Exhibit 10.44
                        to the Annual Report on Form 10-K on March 15, 2004 and incorporated
                        herein by reference).10.29
                    
                    Audit
                        committee charter dated March 6, 2006.10.30
                    
                    Fourth
                        Amendment to Lease Agreement dated as of March 11, 2004,
                        by and between
                        Continental Investors, L.P. and Registrant for commercial
                        premises located
                        at 433 Hackensack Avenue, Hackensack, New Jersey (filed as
                        Exhibit 10.46
                        to the Annual Report on Form 10-K on March 15, 2004 and incorporated
                        herein by reference).
 
  
 65
 
 
 **Exhibit**
                      **No.**
                    
                    **Description**10.31
                    
                    Consent
                        Agreement and Amendment dated February 25, 2004 by and among
                        Wyeth
                        Holdings Corporation, Neurocrine Biosciences, Inc. and Registrant(filed
                        as Exhibit 10.49 to the Quarterly Report on Form 10-Q on
                        November 9, 2004
                        and incorporated herein by reference).10.32
                    
                    License
                        Agreement dated February 25, 2004 by and among Wyeth Holdings
                        Corporation
                        and Registrant(filed
                        as Exhibit 10.50 to the Quarterly Report on Form 10-Q on
                        November 9, 2004
                        and incorporated herein by reference).10.33
                    
                    Amended
                        and Restated License Agreement dated February 25, 2004 by
                        and among Wyeth
                        Holdings Corporation and Registrant(filed
                        as Exhibit 10.51 to the Quarterly Report on Form 10-Q on
                        November 9, 2004
                        and incorporated herein by reference).10.34
                    
                    Employment
                        Agreement dated as of August 3, 2004, by and between Registrant
                        and
                        Barbara Duncan(filed
                        as Exhibit 10.52 to the Quarterly Report on Form 10-Q on
                        November 9, 2004
                        and incorporated herein by reference).10.35
                    
                    Exclusive
                        License, Development and Commercialization Agreement, dated
                        August 5,
                        2004, by and between MSD Warwick (Manufacturing) Ltd. and
                        Registrant,
                        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).110.36
                    
                    Fifth
                        Amendment to Lease Agreement dated November 15, 2004 by and
                        among MSNW
                        Continental Associates, LLC and Registrant(filed
                        as Exhibit 10.56 to the Annual Report on Form 10-K on March
                        15, 2004 and
                        incorporated herein by reference).10.37
                    
                    Form
                        of stock option agreement for options granted under the 2000
                        Stock Option
                        and Grant Plan, as amended (filed as Exhibit 10.57 to the
                        Annual Report on
                        Form 10-K on March 15, 2004 and incorporated herein by
                        reference).10.38
                    
                    Amended
                        and Restated Employment Agreement, dated as of May 23, 2005,
                        by and
                        between DOV Pharmaceutical, Inc. and Arnold S. Lippa.(filed
                        as Exhibit 10.1 to Form 8-K on May 27, 2005 and incorporated
                        herein by
                        reference).10.39
                    
                    Restricted
                        Stock Award Agreement, dated as of May 23, 2005, by and between
                        DOV
                        Pharmaceutical, Inc. and Arnold S. Lippa.(filed
                        as Exhibit 10.1 to Form 8-K on May 27, 2005 and incorporated
                        herein by
                        reference).10.40
                    
                    Amendment
                        Agreement dated August 5, 2005, between MSD Warwick (Manufacturing)
                        Ltd.
                        and Registrant, portions of which are subject to a confidential
                        treatment
                        request (filed as Exhibit 10.1 to the Quarterly Report on
                        Form 10-Q on
                        November 9, 2005 and incorporated herein by
                        reference).110.41
                    
                    Employment
                        Agreement, dated as of June 29, 2005, by and between DOV
                        Pharmaceutical,
                        Inc. and Leslie Hudson(filed
                        as Exhibit 10.1 to Form 8-K on July 6, 2005 and incorporated
                        herein by
                        reference).10.42
                    
                    Employment
                        Agreement, dated as of December 1, 2005, by and between DOV
                        Pharmaceutical, Inc. and Scott Myers.10.43
                    
                    Stock
                        Option Agreement, dated as of December 1, 2005, by and between
                        DOV
                        Pharmaceutical, Inc. and Scott Myers.10.44
                    
                    Sixth
                        Amendment to Lease Agreement dated July 7, 2005 by and among
                        MSNW
                        Continental Associates, LLC and Registrant.10.45
                    
                    Seventh
                        Amendment to Lease Agreement dated September 7, 2005 by and
                        among MSNW
                        Continental Associates, LLC and Registrant.10.46
                    
                    Lease
                        Agreement dated December 20, 2005 by and among Paragon 150
                        Pierce Street,
                        LLC and Registrant as amended by the Lease Modification Agreement
                        dated as
                        of February 28, 2006 and the Second Lease Modification Agreement
                        dated as
                        of February 28, 2006.14.1
                    
                    Code
                        of Business Conduct and Ethics (filed as Exhibit 14.1 to
                        the Annual Report
                        on Form 10-K on March 15, 2004 and incorporated herein by
                        reference).14.2
                    
                    Audit
                        Committee Complaint Procedures (filed as Exhibit 14.2 to
                        the Annual Report
                        on Form 10-K on March 15, 2004 and incorporated herein by
                        reference).****21.1
                    
                    Subsidiaries
                        of Registrant.23.1
                    
                    Consent
                        of PricewaterhouseCoopers
                        LLP.
 
 66
 
 
 **Exhibit**
                    **No.**
                  
                  **Description**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
 
 67
 
 
 **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.By:
                  /s/Leslie
                      HudsonName:Leslie
                      Hudson
                    Title:Chief Executive Officer and President
                    Date:
                      March 15, 2006
 
 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/
                      Leslie Hudson
                  
                  Chief
                      Executive Officer, President and Director (Principal Executive
                      Officer)
                  
                  March
                      15, 2006Leslie
                      Hudson/s/
                      Barbara G. Duncan
                  
                  Senior
                      Vice President of Finance, Chief Financial Officer and
                      Treasurer
                    (Principal
                      Financial and Accounting Officer)
                  
                  March
                      15, 2006Barbara
                      G. Duncan/s/
                      Arnold S. Lippa
                  
                  Director
                  
                  March
                      15, 2006Arnold
                      S. Lippa/s/
                      Zola Horovitz
                  
                  Director
                  
                  March
                      15, 2006Zola
                      Horovitz/s/
                      Patrick Ashe
                  
                  Director
                  
                  March
                      15, 2006Patrick
                      Ashe/s/
                      Daniel S. Van Riper
                  
                  Director
                  
                  March
                      15, 2006Daniel
                      S. Van Riper/s/
                      Theresa A. Bischoff
                  
                  Director
                  
                  March
                      15, 2006Theresa
                      A. Bischoff/s/
                      Jonathan Silverstein
                  
                  Director
                  
                  March
                      15, 2006Jonathan
                      Silverstein
 
 
 68
 
  **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, 2005 and
                      2004
                  F-3Consolidated
                      Statements of Operations for the Years
                      Ended December 31, 2005, 2004 and 2003
                  F-4Consolidated
                      Statements of Stockholders' (Deficit)
                      /Equity for the Years Ended December 31, 2005, 2004 and
                      2003
                  F-5Consolidated
                      Statements of Cash Flows for the Years
                      Ended December 31, 2005, 2004 and 2003
                  F-6Notes
                      to Consolidated Financial
                      Statements
                  F-7
 
 
 F-1
  
 **REPORT
            OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
            the
            Board of Directors and Stockholders of
 DOV
            Pharmaceutical, Inc.
 
 We
            have
            completed integrated audits of DOV
            Pharmaceutical ,
            Inc.’s
            2005 and 2004 consolidated financial statements and of its internal control
            over
            financial reporting as of December
            31 ,
            2005
            and an audit of its 2003 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 ,
            2005
            and December
            31 ,
            2004,
            and the results of their operations and their cash flows for each of
            the three
            years in the period ended December
            31 , 2005
            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 ,
            2005
            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 ,
            2005,
            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.
 
 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.
 
 /s/
            PricewaterhouseCoopers LLP
 
 
 Florham
            Park, New Jersey
 March
            14,
            2006
 
 
 F-2
 
  **DOV
            PHARMACEUTICAL, INC.**
 **CONSOLIDATED
            BALANCE SHEETS**
  
 **December
                      31,****2005**
                  
                  **2004****Assets**Current
                      assets:Cash
                      and cash equivalents
                  
                  $
                  8,425,552
                  
                  $
                  28,934,473Accounts
                      receivable
                  
                  
                  —
                  
                  
                  355,969Marketable
                      securities—short-term
                  
                  
                  89,126,835
                  
                  
                  80,051,777Prepaid
                      expenses and other current assets
                  
                  
                  2,011,051
                  
                  
                  1,415,712Total
                      current assets
                  
                  
                  99,563,438
                  
                  
                  110,757,931Marketable
                      securities—long-term
                  
                  
                  —
                  
                  
                  23,235,823Property
                      and equipment, net
                  
                  
                  623,520
                  
                  
                  476,419Deferred
                      charges, net
                  
                  
                  1,999,548
                  
                  
                  2,252,380Total
                      assets
                  
                  $
                  102,186,506
                  
                  $
                  136,722,553**Liabilities
                      and Stockholders’ Equity**Current
                      liabilities:Accounts
                      payable
                  
                  $
                  8,643,356
                  
                  $
                  3,273,357Accrued
                      expenses
                  
                  
                  6,892,738
                  
                  
                  3,911,550Convertible
                      line of credit promissory note
                  
                  
                  —
                  
                  
                  4,003,275Deferred
                      revenue—current
                  
                  
                  5,511,810
                  
                  
                  8,235,294Total
                      current liabilities
                  
                  
                  21,047,904
                  
                  
                  19,423,476Deferred
                      revenue—non-current
                  
                  
                  20,439,633
                  
                  
                  24,362,745Convertible
                      subordinated debentures
                  
                  
                  80,000,000
                  
                  
                  65,000,000Commitments
                      and contingenciesStockholders'
                      equity:Preferred
                      stock—undesignated
                      preferred stock,$1.00
                      par value, 6,550,357 shares authorized, 0 shares issued and
                      outstanding at
                      December 31, 2005 and 2004
                  
                  
                  —
                  
                  
                  —Common
                      stock, $.0001 par value, 60,000,000 shares authorized, 23,090,970
                      issued
                      and outstanding at December 31, 2005 and 21,462,628 issued
                      and outstanding
                      at December 31, 2004
                  
                  
                  2,309
                  
                  
                  2,146Additional
                      paid-in capital
                  
                  
                  136,495,644
                  
                  
                  128,500,216Accumulated
                      other comprehensive loss
                  
                  
                  (298,411
                  )
                  
                  (247,553
                  )Accumulated
                      deficit
                  
                  
                  (153,284,922
                  )
                  
                  (100,317,086
                  )Unearned
                      compensation
                  
                  
                  (2,215,651
                  )
                  
                  (1,391
                  )Total
                      stockholders' equity (deficit)
                  
                  
                  (19,301,031
                  )
                  
                  27,936,332Total
                      liabilities and stockholders' equity
                  
                  $
                  102,186,506
                  
                  $
                  136,722,553
 
 The
            accompanying notes are an integral part of these consolidated financial
            statements.
  
 F-3
 
  **DOV
            PHARMACEUTICAL, INC.**
 **CONSOLIDATED
            STATEMENTS OF OPERATIONS**
 
 
 **Years
                      Ended December 31,****2005**
                  
                  **2004**
                  
                  **2003**Revenue
                  
                  $
                  8,646,596
                  
                  $
                  2,542,381
                  
                  $
                  2,968,750Operating
                      expenses:License
                      expense
                  
                  
                  —
                  
                  
                  2,500,000
                  
                  
                  1,000,000Research
                      and development expense
                  
                  
                  53,982,908
                  
                  
                  24,764,118
                  
                  
                  22,683,859General
                      and administrative expense
                  
                  
                  9,110,135
                  
                  
                  6,360,158
                  
                  
                  5,173,581Loss
                      from operations
                  
                  
                  (54,446,447
                  )
                  
                  (31,081,895
                  )
                  
                  (25,888,690
                  )Interest
                      income
                  
                  
                  3,711,747
                  
                  
                  934,360
                  
                  
                  851,104Interest
                      expense
                  
                  
                  (2,501,676
                  )
                  
                  (2,953,986
                  )
                  
                  (2,947,084
                  )Other
                      income (expense), net
                  
                  
                  (4,415
                  )
                  
                  (7,855
                  )
                  
                  1,104,323Net
                      loss before tax
                  
                  
                  (53,240,791
                  )
                  
                  (33,109,376
                  )
                  
                  (26,880,347
                  )Income
                      tax benefit
                  
                  
                  272,955
                  
                  
                  188,772
                  
                  
                  149,000Net loss
                  
                  $
                  (52,967,836
                  )
                  $
                  (32,920,604
                  )
                  $
                  (26,731,347
                  )Basic
                      and diluted net loss per share
                  
                  $
                  (2.32
                  )
                  $
                  (1.67
                  )
                  $
                  (1.73
                  )Weighted
                      average shares used in computing basic and diluted net loss
                      per
                      share
                  
                  
                  22,837,265
                  
                  
                  19,729,765
                  
                  
                  15,489,426
 
 The
            accompanying notes are an integral part of these consolidated financial
            statements.
 
 
 F-4
 
  **DOV
            PHARMACEUTICAL, INC.**
 **CONSOLIDATED
            STATEMENTS OF STOCKHOLDERS' (DEFICIT)/
            EQUITY**
 
 
 Series
                      B
                    Preferred
                      Stock
                  
                  Common
                    Stock
                  
                  Additional
                    Paid-In
                      Capital
                  
                  Accumulated
                    Deficit
                  
                  Unearned
                    Compensation
                  
                  Accumulated
                      Other Comprehensive Loss
                  
                  Total
                    Stockholders’
                    (Deficit)/
                      EquityBalance,
                      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
                  
                  
                  —
                  
                  
                  344,573Revaluation
                      of options for services
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (8,773
                  )
                  
                  —
                  
                  
                  8,773
                  
                  
                  —
                  
                  
                  —Interest
                      payable in convertible securities
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,225,679
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,225,679Comprehensive
                      loss:Net
                      loss, year ended December 31, 2004
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (32,920,604
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (32,920,604
                  )Unrealized
                      loss on marketable securities
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (219,325
                  )
                  
                  (219,325
                  )Comprehensive
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (33,139,929
                  )Balance,
                      December 31, 2004
                  
                  
                  —
                  
                  
                  2,146
                  
                  
                  128,500,216
                  
                  
                  (100,317,086
                  )
                  
                  (1,391
                  )
                  
                  (247,553
                  )
                  
                  27,936,332Issuance
                      of stock for exercise of options and warrants
                  
                  
                  —
                  
                  
                  29
                  
                  
                  1,058,644
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,058,673Issuance
                      of stock for compensation
                  
                  
                  —
                  
                  
                  16
                  
                  
                  3,022,984
                  
                  
                  —
                  
                  
                  (3,023,000
                  )
                  
                  —
                  
                  
                  —Issuance
                      of stock for conversion of debt
                  
                  
                  —
                  
                  
                  118
                  
                  
                  4,024,520
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  4,024,638Amortization
                      of unearned compensation, net
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  808,740
                  
                  
                  —
                  
                  
                  808,740Revaluation
                      of options for services
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (194,504
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (194,504
                  )Interest
                      payable in convertible securities
                  
                  
                  —
                  
                  
                  —
                  
                  
                  83,784
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  83,784Comprehensive
                      loss:Net
                      loss, year ended December 31, 2005
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (52,967,836
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (52,967,836
                  )Unrealized
                      loss on marketable securities
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (50,858
                  )
                  
                  (50,858
                  )Comprehensive
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (53,018,694
                  )Balance,
                      December 31, 2005
                  
                  
                  —
                  
                  $
                  2,309
                  
                  $
                  136,495,644
                  
                  $
                  (153,284,922
                  )
                  $
                  (2,215,651
                  )
                  $
                  (298,411
                  )
                  $
                  (19,301,031
                  )
  The
            accompanying notes are an integral part of these consolidated financial
            statements.
  
 F-5
 
  **DOV
            PHARMACEUTICAL, INC.**
 **CONSOLIDATED
            STATEMENTS OF CASH FLOWS**
  
 **Years
                      Ended December 31,****2005**
                  
                  **2004**
                  
                  **2003****Cash
                      flows from operating activities**Net
                      loss
                  
                  $
                  (52,967,836
                  )
                  $
                  (32,920,604
                  )
                  $
                  (26,731,347
                  )Adjustments
                      to reconcile net loss to net cash (used in) provided by operating
                      activities:Purchased
                      in-process research and development
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5,305,681Non-cash
                      amortization of premium paid on marketable securities
                  
                  
                  1,317,033
                  
                  
                  909,486
                  
                  
                  1,196,880Non-cash
                      litigation settlement income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (42,651
                  )Net
                      depreciation in investments
                  
                  
                  —
                  
                  
                  —
                  
                  
                  250,782Realized
                      loss in marketable securities
                  
                  
                  —
                  
                  
                  —
                  
                  
                  182,354Net
                      loss on sale of investments
                  
                  
                  —
                  
                  
                  —
                  
                  
                  8,839Non-cash
                      interest expense
                  
                  
                  105,147
                  
                  
                  2,913,361
                  
                  
                  2,943,737Depreciation
                      of assets
                  
                  
                  531,170
                  
                  
                  221,109
                  
                  
                  155,358Amortization
                      of deferred charges
                  
                  
                  401,068
                  
                  
                  58,302
                  
                  
                  94,868Non-cash
                      compensation charges
                  
                  
                  808,740
                  
                  
                  29,938
                  
                  
                  290,061Options
                      and common stock issued/revalued for services
                  
                  
                  (194,504
                  )
                  
                  314,635
                  
                  
                  694,360Changes
                      in operating assets and liabilities:Due
                      from DOV Bermuda (Elan Portion)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  193,058Accounts
                      receivable
                  
                  
                  355,969
                  
                  
                  (355,969
                  )
                  
                  47,289Prepaid
                      expenses and other current assets
                  
                  
                  (315,289
                  )
                  
                  (97,878
                  )
                  
                  (487,093
                  )Accounts
                      payable
                  
                  
                  5,369,999
                  
                  
                  1,433,702
                  
                  
                  (60,004
                  )Accrued
                      expenses
                  
                  
                  2,981,188
                  
                  
                  2,690,736
                  
                  
                  179,762Deferred
                      revenue
                  
                  
                  (6,646,596
                  )
                  
                  32,598,039
                  
                  
                  (2,968,750
                  )Net
                      cash provided by (used in) operating activities
                  
                  
                  (48,253,911
                  )
                  
                  7,794,857
                  
                  
                  (18,746,816
                  )**Cash
                      flows from investing activities**Purchase
                      of in-process research and development
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (5,305,681
                  )Purchases
                      of marketable securities
                  
                  
                  (139,579,923
                  )
                  
                  (125,039,485
                  )
                  
                  (76,237,406
                  )Sales
                      of marketable securities
                  
                  
                  152,372,796
                  
                  
                  63,494,000
                  
                  
                  73,104,160Sales
                      of investments
                  
                  
                  —
                  
                  
                  —
                  
                  
                  786,854Purchases
                      of property and equipment
                  
                  
                  (678,271
                  )
                  
                  (332,578
                  )
                  
                  (181,808
                  )Net
                      cash provided by (used in) investing activities
                  
                  
                  12,114,602
                  
                  
                  (61,878,063
                  )
                  
                  (7,833,881
                  )**Cash
                      flows from financing activities**Borrowings
                      under convertible debenture, net of issuance costs
                  
                  
                  14,571,715
                  
                  
                  62,625,949
                  
                  
                  —Proceeds
                      from issuance of stock, net of cash costs
                  
                  
                  —
                  
                  
                  9,965,005
                  
                  
                  14,753,248Proceeds
                      from options and warrants exercised
                  
                  
                  1,058,673
                  
                  
                  1,135,726
                  
                  
                  1,738,875Net
                      cash provided by financing activities
                  
                  
                  15,630,388
                  
                  
                  73,726,680
                  
                  
                  16,492,123Net
                      (decrease) increase in cash and cash equivalents
                  
                  
                  (20,508,921
                  )
                  
                  19,643,474
                  
                  
                  (10,088,574
                  )Cash
                      and cash equivalents, beginning of year
                  
                  
                  28,934,473
                  
                  
                  9,290,999
                  
                  
                  19,379,573Cash
                      and cash equivalents, end of year
                  
                  $
                  8,425,552
                  
                  $
                  28,934,473
                  
                  $
                  9,290,999**Supplemental
                      disclosures of cash flow information**Interest
                      paid
                  
                  $
                  1,127,778
                  
                  $
                  3,818
                  
                  $
                  3,346Non-cash
                      issuance of warrants
                  
                  
                  —
                  
                  
                  —
                  
                  $
                  2,391,913Issuance
                      of stock upon conversion of debt
                  
                  $
                  4,024,638
                  
                  $
                  11,570,504
                  
                  
                  —
  The
            accompanying notes are an integral part of these consolidated financial
            statements.
  
 F-6
 **DOV
              PHARMACEUTICAL, INC.**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
  
 **1.
              The Company**
 
 **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 product candidates in clinical trials,
              and one
              product candidate for which two new drug applications, or NDAs, were
              filed in
              the first half of 2005, targeting insomnia, pain and depression. The
              Company has
              established strategic alliances with select partners to access their
              unique
              technologies and their commercialization capabilities. The Company
              operates
              principally in the United States but it also conducts clinical studies
              outside
              the United States.
 
 **2.
              Significant Accounting Policies**
 
 **Basis
              of Presentation**
 
 The
              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.
 
 Certain
              prior period amounts have been reclassified to conform to current period
              presentation.
  **Use
              of Estimates**
 
 The
              preparation of financial statements in conformity with generally accepted
              accounting principles requires management to make certain estimates
              and
              assumptions that affect the reported assets, liabilities, revenues,
              earnings,
              financial position and various disclosures. Significant estimates have
              included
              accrued litigation settlement costs, the value of investments, the
              valuation
              allowance recorded for deferred tax assets and the development period
              for the
              Company’s products. Actual results could differ from those estimates and the
              differences could be material.
 
 **Segment
              and Geographic Information**
 
 The
              Company has determined it has one reportable operating segment as defined
              by
              Statement of Financial Accounting Standards No. 131, "Disclosures about
              Segments of an Enterprise and Related Information."
   F-7
  
 **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, 2005 and 2004, short-term marketable securities included
              $21.2
              million and $61.6 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.
 
 **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.
              In the
              fourth quarter of 2005, due to a change in information technology at
              the
              Company, the Company determined that certain assets with a residual
              book value
              of $167,000 would no longer be utilized and therefore the estimated
              useful life
              was adjusted to reflect the zero economic value of these assets.
 
 **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 in the case of
              the
              convertible promissory note and the convertible line of credit promissory
              note
              and over seven years, that is, to the first put date, for the convertible
              debentures. Please refer to Footnote 5.
 
 **Revenue
              Recognition**
 
 Revenue
              is recognized under collaboration or research and development agreements
              when
              services are performed or when contractual obligations and/or milestones
              are met
              and amounts are considered collectible. The Company has adopted the
              milestone
              payment method to account for milestone payments received pursuant
              to
              development agreements. Revenues from milestone payments that represent
              the
              culmination of a separate earnings process are recorded when the milestone
              is
              achieved. Cash received in advance of revenue recognition for license
              fees is
              recorded as deferred revenue and recognized when earned over the research
              and
              development period. On
              August
              5, 2004, the Company entered into an agreement with Merck (and amended
              in August
              2005) for the worldwide development and commercialization of all indications
              for
              DOV 21,947 and certain indications for DOV 216,303 in
              exchange for a $35.0 million up-front payment and the right to receive
              further
              payments of up to $420.0 million upon the achievement of certain milestones
              and
              royalties based on product net sales, if any. The up-front payment
              has been
              deferred and is being amortized to revenue over the estimated research
              and
              development period of 72 months. The time period of the development
              period is a
              significant estimate used in the preparation of the financial statements.
   F-8
  
 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.
 
 The
              following represents a detail of amounts included in research and development
              expense:
 
 **Years
                        Ended December 31,****2005**
                    
                    **2004**
                    
                    **2003**Payroll
                        related and associated overhead
                    
                    $
                    10,720,094
                    
                    $
                    5,773,704
                    
                    $
                    4,774,687Clinical
                        and preclinical trial costs
                    
                    
                    41,525,596
                    
                    
                    18,103,432
                    
                    
                    11,497,889Purchased
                        in-process research and development
                    
                    
                    —
                    
                    
                    —
                    
                    
                    5,305,681Professional
                        fees
                    
                    
                    1,128,136
                    
                    
                    503,789
                    
                    
                    836,158Travel
                    
                    
                    609,082
                    
                    
                    383,193
                    
                    
                    269,444Total
                        research and development expense
                    
                    $
                    53,982,908
                    
                    $
                    24,764,118
                    
                    $
                    22,683,859
  **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,****2005**
                    
                    **2004**
                    
                    **2003**Net
                        loss attributable to common stockholders
                    
                    $
                    (52,967,836
                    )
                    $
                    (32,920,604
                    )
                    $
                    (26,731,347
                    )Basic
                        and diluted:Weighted-average
                        shares used in computing basic and diluted net loss per
                        share
                    
                    
                    22,837,265
                    
                    
                    19,729,765
                    
                    
                    15,489,426Basic
                        and diluted net loss per share
                    
                    $
                    (2.32
                    )
                    $
                    (1.67
                    )
                    $
                    (1.73
                    )Antidilutive
                        securities not included in basic and diluted net loss per
                        share
                        calculation:Convertible
                        subordinated debentures
                    
                    
                    3,516,484
                    
                    
                    2,857,143
                    
                    
                    —Convertible
                        preferred stock
                    
                    
                    —
                    
                    
                    —
                    
                    
                    574,521Convertible
                        promissory note
                    
                    
                    —
                    
                    
                    —
                    
                    
                    2,827,780Convertible
                        line of credit promissory note
                    
                    
                    —
                    
                    
                    1,173,981
                    
                    
                    1,064,966Options
                    
                    
                    3,540,966
                    
                    
                    2,646,176
                    
                    
                    2,631,370Warrants
                    
                    
                    819,731
                    
                    
                    895,366
                    
                    
                    1,396,7667,877,181
                    
                    
                    7,572,666
                    
                    
                    8,495,403
 
  F-9
  
 **Comprehensive
              Loss**
 **Years
                        Ended December 31,****2005**
                    
                    **2004**
                    
                    **2003**Net
                        loss
                    
                    $
                    (52,967,836
                    )
                    $
                    (32,920,604
                    )
                    $
                    (26,731,347
                    )Reclassification
                        for losses included in net loss
                    
                    
                    —
                    
                    
                    —
                    
                    
                    182,354Net
                        unrealized losses on marketable securities
                    
                    
                    (50,858
                    )
                    
                    (219,325
                    )
                    
                    (31,491
                    )Comprehensive
                        loss
                    
                    $
                    (53,018,694
                    )
                    $
                    (33,139,929
                    )
                    $
                    (26,580,484
                    )
 
 **Other
              Income (Expense), net**
 **Years
                        Ended December 31,****2005**
                    
                    **2004**
                    
                    **2003**Directors’
                        and officers’ insurance recovery (Note 14)
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    1,556,000Decrease
                        in value of warrants to acquire Neurocrine stock, net (Note
                        12)
                    
                    
                    —
                    
                    
                    —
                    
                    
                    (250,759
                    )Decrease
                        in value of warrants related to shareholder class action
                        lawsuit (Note
                        14)
                    
                    
                    —
                    
                    
                    —
                    
                    
                    42,651Other
                        expense, net
                    
                    
                    (4,415
                    )
                    
                    (7,855
                    )
                    
                    (243,569
                    )Other
                        income (expense), net
                    
                    $
                    (4,415
                    )
                    $
                    (7,855
                    )
                    $
                    1,104,323
 
 **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,****2005**
                    
                    **2004**
                    
                    **2003**Net
                        loss attributed to common stockholders:As
                        reported
                    
                    $
                    (52,967,836
                    )
                    $
                    (32,920,604
                    )
                    $
                    (26,731,347
                    )Add:
                        total stock-based employee compensation expense determined
                        under APB No.
                        25
                    
                    
                    808,740
                    
                    
                    29,938
                    
                    
                    290,061Deduct:
                        total stock-based employee compensation expense determined
                        under fair
                      value
                        based method for all awards
                    
                    
                    (6,116,809
                    )
                    
                    (3,871,325
                    )
                    
                    (1,684,376
                    )Pro
                        forma
                    
                    $
                    (58,275,905
                    )
                    $
                    (36,761,991
                    )
                    $
                    (28,125,662
                    )Basic
                        and diluted net loss per share applicable to common
                        stockholders:As
                        reported
                    
                    $
                    (2.32
                    )
                    $
                    (1.67
                    )
                    $
                    (1.73
                    )Pro
                        forma
                    
                    $
                    (2.55
                    )
                    $
                    (1.86
                    )
                    $
                    (1.82
                    )
 
 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,****2005**
                    
                    **2004**
                    
                    **2003**Risk-free
                        interest rate
                    
                    3.73%-4.49%
                    
                    3.78%-4.90%
                    
                    3.46%-4.41%Expected
                        lives
                    
                    6
                        years
                    
                    6-10
                        years
                    
                    10
                        yearsExpected
                        dividends
                    
                    None
                    
                    None
                    
                    NoneExpected
                        volatility
                    
                    64.27%-67.90%
                    
                    69.74%-76.27%
                    
                    76.58%-87.41%
 
  F-10
  
 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, 2005,
              2004 and 2003 approximated $16.75, $10.97 and $10.59 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.
 
 **Liquidity**
  Since
              the
              Company’s inception, it has incurred significant operating losses and management
              expects that it will continue to do so for the foreseeable future.
              As of
              December 31, 2005, it had an accumulated deficit of $153.3 million.
              The Company
              has depended upon equity and debt financings and license fee and milestone
              payments from its collaborative partners and licensees to fund its
              operations
              and research and product development programs and expects to do so
              for the
              foreseeable future. The
              Company currently has no commitments or arrangements for any financing. Management
              believes that existing cash and cash equivalents and marketable securities will
              be
              sufficient to fund the Company’s anticipated operating expenses, debt
              obligations and capital requirements until at least March 31, 2007 .
              If at
              any time sufficient capital is not available, either through existing
              capital
              resources or through raising additional funds, the Company may be required
              to
              delay, reduce the scope of, eliminate or divest one or more of its product
              development programs.
 
 **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
              $5.6 million of the Company's cash balance was uninsured at December
              31, 2005.
 
 **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 annual reporting
              period
              that begins after June 15, 2005 and the Company will adopt the standard
              in the
              first quarter of 2006.
   F-11
  
 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. The
              Company will adopt the provisions of SFAS No. 123R on a prospective basis
              in the first quarter of 2006. As a result of the provisions of SFAS
              123R, the
              Company expects the compensation charges under SFAS 123R to be in the
              range of
              $7.0 million to $8.0 million for the year ended December 31, 2006 which
              reflects the awards granted through February 2006. Management has not
              estimated
              compensation charges with respect to future awards as this is affected
              by our
              stock price as well as assumptions regarding a number of complex and
              subjective
              variables. These variables include, but are not limited to, the volatility
              of
              our stock price, forfeiture rates and the timing of future employee
              stock option
              grants. We will recognize compensation cost for stock-based awards
              which vest
              after December 31, 2005, on a straight-line basis over the requisite
              service period of the award.
 
 In
              May
              2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,”
which replaces APB Opinion No. 20, “Accounting Changes,” and supersedes FASB
              Statement No. 3, “Reporting Accounting Changes in Interim Financial
              Statements—an amendment of APB Opinion No. 28.” SFAS 154 requires retrospective
              application to prior periods financial statements of changes in accounting
              principle, unless it is impracticable to determine either the period-specific
              effects or the cumulative effect of the change. When it is impracticable
              to
              determine the period-specific effects of an accounting change on one
              or more
              individual prior period presented, SFAS 154 requires that the new accounting
              principle be applied to the balances of assets and liabilities as of
              the
              beginning of the earliest period for which retrospective application
              is
              practicable and that a corresponding adjustment be made to the opening
              balance
              of retained earnings for that period rather than being reported in
              an income
              statement. When it is impracticable to determine the cumulative effect
              of
              applying a change in accounting principle to all prior periods, SFAS
              154
              requires that the new accounting principle be applied as if it were
              adopted
              prospectively from the earliest date practicable. SFAS 154 is effective
              for
              accounting changes and corrections of errors made in fiscal years beginning
              after December 15, 2005.  Management does not expect the implementation of
              SFAS 154 to have a significant impact on the Company's results of
              operations.
 
 **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,
              2005.
 
  **Gross
                        Unrealized Losses****Amortized
                        Cost**
                    
                    **Gross
                        Unrealized Gains**
                    
                    **Less
                        than 12 Months**
                    
                    **Greater
                        than 12 Months**
                    
                    **Estimated**
                      **Fair
                        Value**Institutional
                        money market
                    
                    $
                    2,580,748
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    2,580,748Amounts
                        included in cash and cash equivalents
                    
                    $
                    2,580,748
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    2,580,748Corporate
                        debt
                    
                    $
                    68,250,246
                    
                    $
                    —
                    
                    $
                    (299,915
                    )
                    $
                    —
                    
                    $
                    67,950,331Auction
                        rate securities
                    
                    
                    21,175,000
                    
                    
                    1,504
                    
                    
                    —
                    
                    
                    —
                    
                    
                    21,176,504Amounts
                        included in marketable securities - short-term
                    
                    $
                    89,425,246
                    
                    $
                    1,504
                    
                    $
                    (299,915
                    )
                    $
                    —
                    
                    $
                    89,126,835
    F-12
  The
                following is a summary of the amortized cost and estimated value
                of debt
                securities by contractual maturity at December 31, 2005, excluding
                securities
                classified as cash and cash equivalents.
 **Amortized
                        Cost**
                    
                    **Estimated**
                      **Fair
                        Value**Due
                        in less than one year
                    
                    $
                    89,425,246
                    
                    $
                    89,126,836Due
                        between one and two years
                    
                    
                    —
                    
                    
                    —Total
                    
                    $
                    89,425,246
                    
                    $
                    89,126,836
 
  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**
                    
                    **Gross
                        Unrealized Gains**
                    
                    **Less
                        than 12 MonthsGross Unrealized Losses**
                    
                    **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
 
  F-13
  
 **4.
              Property and Equipment**
 
 Property
              and equipment consist of the following at:
 **December
                        31,****Years**
                    
                    **2005**
                    
                    **2004**Furniture
                        and fixtures
                    
                    7
                    
                    $
                    409,454
                    
                    $
                    324,949Machinery
                        and equipment
                    
                    2-5
                    
                    
                    1,183,067
                    
                    
                    672,056Leasehold
                        improvements
                    
                    2-5
                    
                    
                    300,481
                    
                    
                    217,7261,893,002
                    
                    
                    1,214,731Less
                        accumulated depreciation
                    
                    
                    
                    
                    
                    1,269,482
                    
                    
                    738,312Property
                        and equipment, net
                    
                    
                    
                    
                    $
                    623,520
                    
                    $
                    476,419
 
 **5.** **Convertible
              Subordinated Debentures**
  In
              December 2004 and January 2005, the Company completed a private placement
              of
              $80.0 million aggregate principal amount of 2.5% convertible subordinated
              debentures due January 15, 2025. The holders of the debentures may
              require us to
              purchase all or a portion of their debentures on January 15, 2012,
              January 15,
              2015 and January 15, 2020 (the investor repurchase dates), in each
              case at a
              price equal to the principal amount of the debentures to be purchased,
              plus
              accrued and unpaid interest, if any, to the purchase date. The debentures
              are
              unsecured and subordinated in right of payment to all existing and
              future senior
              debt, as defined in the indenture governing the debentures. The Company
              will pay
              interest semi-annually of $1,000,000 on January 15 and July 15 of each
              year,
              commencing July 15, 2005.
  The
              Company has reserved 3,516,484 shares of common stock for issuance
              upon
              conversion of the debentures. The Company incurred issuance costs related
              to
              this private placement of approximately $2.8 million, which have been
              recorded
              as other assets and are being amortized to interest expense through
              the first
              investor repurchase date of the debentures. The Company has
              filed
              a shelf registration statement with the SEC covering resales of the
              debentures
              and the common stock issuable upon conversion of the debentures, which
              was
              declared effective on May 9, 2005.
  Holders
              may convert their debentures at
              any
              time at the conversion rate prior to the close of business on the business
              day
              prior to the maturity date or, if the debentures are called for redemption,
              on
              the business day prior to the redemption date. The initial conversion
              rate is
              43.9560 shares of the Company’s common stock for each $1,000 principal amount of
              debentures, or $22.75 per share. In addition, if certain corporate
              transactions
              that constitute a change of control occur on or prior to January 15,
              2012, the
              conversion rate will increase in certain circumstances, unless such
              transactions
              constitute a public acquirer change of control and the Company elects
              to satisfy
              its conversion obligation with public acquirer common stock. The Company
              may
              redeem for cash the debentures in whole or in part at any time beginning
              on
              January 15, 2008 and prior to January 15, 2012, at a redemption price
              equal to
              100% of the principal amount of the debentures to be redeemed, plus
              accrued and
              unpaid interest, including liquidated damages, if any, to but excluding
              the
              redemption date, provided the last reported sale price of the Company’s common
              stock has exceeded 140% of the conversion price for at least 20 trading
              days in
              any consecutive 30-day trading period ending on the trading day prior
              to the
              date of mailing of the notice of redemption. On or after January 20,
              2012, the
              Company may redeem for cash some of or all the debentures at any time
              at a
              redemption price equal to 100% of the principal amount of the debentures
              to be
              redeemed, plus any accrued and unpaid interest, including liquidated
              damages, if
              any, to but excluding the redemption date.
  The
              fair
              value of our subordinated convertible debentures, based on the price
              for the
              debentures at December 31, 2005 and 2004 approximated $70.6 million
              and $68.6
              million respectively.
 
 **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.
   F-14
  
 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.
 
 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 included 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, remained
              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 was amortized over the remaining term of
              the note.
              Elan converted the warrants into common stock in January 2005.
 
 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.
 
 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.
   F-15
  
 **Elan
              Notes**
 
 In
              January 1999, the Company issued a convertible promissory note in the
              amount of $8,010,000 and a convertible line of credit promissory note
              in the
              maximum initial principal amount of $7,008,750 to EIS. The fair value
              of the
              convertible line of credit promissory note outstanding was $21,190,356
              as of
              December 31, 2004. The excess fair value over the carrying amount is due to
              the increased value of the conversion feature in this note since its
              issuance.
              The estimated fair-value amount has been determined using the Black-Scholes
              methodology.
 
 **a.
              Convertible Promissory Note**
 
 On
              May
              25, 2004, EIS converted the outstanding principal and accrued interest
              totaling
              $11.6 million into 2,907,162 shares of the Company’s common stock. The
              convertible promissory note provided for interest to accrue at the
              rate of 7%
              per annum compounded on a semi-annual basis.
 
 During
              2004 and 2003, the interest feature in the convertible promissory note
              was
              determined to include a beneficial conversion feature as the interest
              is
              convertible into shares of the Company or payable in cash at the option
              of EIS.
              The Company is accounting for this feature in accordance with EITF 98-5
              "Accounting for Convertible Securities with Beneficial Conversion Features
              or
              Contingently Adjustable Conversion Ratios" and EITF 00-27 "Application
              of Issue
              98-5 to Certain Convertible Instruments." The Company recorded $893,792
              and
              $1,178,871 of additional interest expense associated with this beneficial
              conversion feature in 2004 and 2003, respectively, with a corresponding
              increase
              in additional paid-in capital.
 
 For
              the
              years ended December 31, 2004 and 2003, the accrued interest excluding the
              additional interest noted above on the note amounted to $315,939 and
              $748,309
              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 line of credit promissory note to an
              institutional investor and on January 20, 2005, the holder converted
              the entire
              balance of the note and the accrued interest into 1,180,246 shares
              of the
              Company’s common stock. The convertible line of credit promissory note provided
              for interest to accrue at the rate of 10% per annum compounded on a
              semi-annual
              basis.
 
 At
              December 31, 2005 and 2004, principal borrowings were $0 and $2,441,600,
              respectively under the convertible line of credit promissory note.
              For the years
              ended December 31, 2005, 2004 and 2003 accrued interest expense on this
              note amounted to $21,364, $371,743 and $337,468 respectively, which
              was recorded
              as interest expense and added to the principal balance of the note.
 
 Also
              during 2005, 2004 and 2003 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 $83,784, $1,331,887 and $679,089 of additional
              interest
              expense associated with this beneficial conversion feature in 2005,
              2004 and
              2003 respectively, with a corresponding increase to additional paid-in
              capital.
   F-16
  
 **7.
              Accrued Expenses**
 
 Accrued
              expenses consist of the following:
 
 **December
                        31,****2005**
                    
                    **2004**Accrued
                        milestone prepaid by Neurocrine (Note 12)
                    
                    $
                    —
                    
                    $
                    2,000,000Accrued
                        investigator fees
                    
                    
                    2,473,676
                    
                    
                    —Accrued
                        professional fees
                    
                    
                    380,950
                    
                    
                    722,777Accrued
                        bonuses
                    
                    
                    1,131,940
                    
                    
                    633,000Accrued
                        other
                    
                    
                    667,881
                    
                    
                    39,979Accrued
                        taxes
                    
                    
                    40,500
                    
                    
                    173,875Accrued
                        interest
                    
                    
                    922,222
                    
                    
                    40,625Accrued
                        payroll, vacation and other
                    
                    
                    1,275,569
                    
                    
                    301,294$
                    6,892,738
                    
                    $
                    3,911,550
 
 **8.
              Income Taxes**
 
 No
              U.S.
              Federal taxes are payable at December 31, 2005 and 2004. However, as of
              December 31, 2005 and 2004, the Company did have a $6,000 and $101,000
              state tax
              liability computed under the New Jersey  alternative
              minimum assessment regime.
 
 During
              2005 and 2004, the Company sold $3.5 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
              $273,000
              and $290,000, which are reported as a tax benefit in 2005 and 2004,
              respectively.
 
 At
              December 31, 2005, the Company had approximately $90.3 million of federal
              and
              $72.0 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 $10.8 million
              related to
              non-qualified stock option expense.
  For
              financial reporting purposes, a valuation allowance of $58.9 million
              has been
              recorded at December 31, 2005, 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-17
  
 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,****2005**
                    
                    **2004**Deferred
                        tax assets:Fixed
                        assets and intangible assets
                    
                    $
                    592,805
                    
                    $
                    500,188Capitalized
                        research and development, net
                    
                    
                    9,570,481
                    
                    
                    —Deferred
                        revenue
                    
                    
                    11,159,120
                    
                    
                    14,017,157Accrued
                        other
                    
                    
                    392,361
                    
                    
                    77,637Net
                        operating loss carryforward
                    
                    
                    37,190,602
                    
                    
                    10,806,536Total
                        gross deferred tax assets
                    
                    
                    58,905,369
                    
                    
                    25,401,518Valuation
                        allowance
                    
                    
                    (58,905,369
                    )
                    
                    (25,401,518
                    )Net
                        deferred tax assets
                    
                    $
                    —
                    
                    $
                    —
  The
              net
              change in valuation allowance for 2005 and 2004 was an increase of
              approximately
              $ 33.5 million
              and $13.9 million, respectively, which is primarily the result of additional
              net
              operating losses incurred by the Company for which a benefit has not
              been
              recorded as well as the retroactive capitalization of certain research
              and
              development expenditures previously deducted. The
              Company's subsidiary in Ireland did not incur income taxes in 2005
              based on its
              current business activities.
 
 The
              difference between the Federal statutory tax rate (34%) and the effective
              tax
              rate (0.5%) is primarily due to the increase in valuation allowance
              in all
              periods presented and the sale of the state NOL carryforwards.
 
 **9.
              Equity Transactions**
 
 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.
 
 On
              January 20, 2005, the Company’s convertible promissory line of credit note
              totaling $4.0 million of outstanding principal and accrued interest
              was
              converted into 1,180,246 shares of the Company’s common stock.
 
 **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, 2005, options to purchase 414,200
              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.
   F-18
  
 **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, May 24, 2004 and May 23, 2005.
              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, 2005, the 2000 Plan
              allowed for
              the issuance of up to 3,692,090 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
              310,000 outstanding 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, 2005, options
              to purchase 2,531,766 shares of common stock and 160,000 restricted
              stock awards
              were outstanding and 507,193 shares of common stock were available
              for future
              grants under the 2000 Plan .
 
 During
              2005, the Company awarded its then current Chief Executive Officer 60,000
              shares of restricted common stock, valued at $903,000, under the Company’s 2000
              stock option and grant plan, subject to ratable annual vesting over
              three years
              provided he remains as a director of the Company .
              In
              addition, the Company awarded its new Chief Executive Officer 100,000
              shares of restricted stock, valued at $2.1 million vesting annually
              ratably over
              four years. The Company recorded a charge to operations of $808,000
              during 2005
              in relation to these grants.
 
 **Non-Plan
              Option Grants**
 
 In
              2000,
              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, 310,000 are vested and remain outstanding
              as
              of December 31, 2005.
 
 In
              2005,
              in connection with the commencement of employment, the Company granted
              to an
              officer stock options to acquire 285,000 shares of common stock at
              an exercise
              price of $14.28 per share. As December 31, 2005, none are vested and
              all remain
              outstanding.
 
 **Employee
              and Director Grants**
 
 Prior
              to
              2003, the Company granted stock options to employees and directors
              with an
              exercise price less than fair market value. These options gave rise
              to unearned
              compensation as of the date of the grant, which amount has been amortized
              to
              operations over the vesting period. These options resulted in a charge
              to
              operations of $1,389, $29,938 and $235,631 in 2005, 2004 and 2003,
              respectively.
 
 **Non-Employee
              Options and Warrants**
 
 In
              September 2003, the Company issued 285,000 options to a non-employee
              consultant.
              50% of the options vested 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.
 
 In
              February 2002, the Company issued 8,100 options to a non-employee
              consultant. 25% of the options vest at the end of each year for the
              next four
              years. The
              options resulted in a reduction of expenses in operations of $11,504
              in 2005 and
              a charge to operations of $21,020 and $43,371 in, 2004 and 2003, respectively.
   F-19
  
 The
              Company granted 64,800 options to non-employees for the year ended
              December 31, 2001. These options were valued at fair value and resulted in
              a reduction of expenses in operations of $183,000 and a charge to operations
              of
              $293,616 and $407,726 in 2004 and 2003, respectively.
 
 Option
              activity for the years ended December 31, 2003, 2004 and 2005 was as
              follows:
 
 **Options**
                    
                    **Weighted
                        Average Options Exercise Price**Options
                        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
                    
                    $
                    7.72Granted
                    
                    
                    1,282,250
                    
                    $
                    16.75Exercised
                    
                    
                    (231,520
                    )
                    $
                    4.57Forfeited
                    
                    
                    (155,940
                    )
                    $
                    13.36Options
                        Outstanding, December 31, 2005
                    
                    
                    3,540,966
                    
                    $
                    10.94
 
 
 **Options
                        Outstanding as of**
                      **December
                        31, 2005**
                    
                    **Options
                        Exercisable as of**
                      **December
                        31, 2005****Weighted
                        Average Remaining Contractual Life**
                    
                    **Number
                        Outstanding**
                    
                    **Weighted
                        Average Exercise Price**
                    
                    **Number
                        Exercisable**
                    
                    **Weighted
                        Average Exercise Price**Price
                        range $2.27-$7.00
                    
                    
                    4.98
                        years
                    
                    
                    1,385,006
                    
                    $
                    3.52
                    
                    
                    1,335,181
                    
                    $
                    3.44Price
                        range $7.01-$11.74
                    
                    
                    6.45
                        years
                    
                    
                    34,160
                    
                    
                    8.18
                    
                    
                    19,440
                    
                    
                    8.20Price
                        range $11.75-$16.48
                    
                    
                    8.74
                        years
                    
                    
                    1,440,250
                    
                    
                    14.36
                    
                    
                    370,918
                    
                    
                    14.50Price
                        range $16.49-$21.20
                    
                    
                    9.16
                        years
                    
                    
                    681,550
                    
                    
                    18.93
                    
                    
                    45,750
                    
                    
                    16.893,540,966
                    
                    
                    10.94
                    
                    
                    1,771,289
                    
                    
                    6.16
 
 **Warrants**
 
 At
              December 31, 2005, warrants to purchase 819,731 shares of the Company's
              common
              stock were outstanding with a weighted average exercise price of $12.63.
              All
              outstanding warrants are fully vested. The details of the warrants
              for common
              stock outstanding at December 31, 2005 were as follows:
 
 **Number
                        of Shares**
                      **Underlying
                        Warrants**
                    
                    **Exercise
                        Price**
                    
                    **Expiration
                        Date**392,857
                    
                    $
                    16.00
                    
                    July
                        200648,498
                    
                    $
                    6.17
                    
                    August
                        20062,980
                    
                    $
                    6.17
                    
                    October
                        2006375,396
                    
                    $
                    10.00
                    
                    June
                        2009819,731
 
  F-20
  
 **10.
              Employment Agreements**
 
 On
              May
              23, 2005, the Company entered into a two-year employment agreement
              with Dr.
              Lippa, the Company’s then Chief Executive Officer, which continued his existing
              agreement, with certain changes, that was extended in January 2005.
              Such changes
              include severance protection in the event of a termination of employment
              without
              cause or good reason equal to payment of base compensation for the
              greater of
              one year and the balance of the term of the agreement, subject to consulting
              obligations. In addition, the agreement includes a change in control
              severance
              protection equal to two years’ base compensation, elimination of a 2% bonus
              based upon gross proceeds in the event of a sale of the Company and
              elimination
              of incentive compensation for licensing. He was also awarded 60,000
              shares of
              restricted common stock, valued at $903,000, under the Company’s 2000 stock
              option and grant plan, subject to ratable annual vesting over three
              years
              provided he remains as a director of the Company. As of July 28, 2005,
              Dr.
              Lippa’s employment terminated thus requiring the Company to pay the contractual
              severance. As a result, the Company recorded a severance obligation
              of $790,000
              as of June 30, 2005. Dr. Lippa remains as chairman of the board of
              directors.
  On
              June
              29, 2005, the Company entered into a three-year employment agreement
              with Dr.
              Hudson as Chief Executive Officer and President. Under the agreement,
              Dr. Hudson
              will receive a salary of at least $425,000 per annum and will receive,
              upon
              commencement of employment on July 28, 2005, 100,000 shares of restricted
              stock,
              valued at $2.1 million, and 225,000 stock options at an exercise price
              of
              $21.20, each vesting ratably annually over four years. Dr. Hudson will
              also
              receive a bonus of $85,000 in January 2006, and the parties have agreed
              that his
              target bonus for fiscal year 2006 and each subsequent year of his employment
              agreement will be 40% of base compensation upon achievement of milestones
              established by the compensation committee of the board of directors.
              He will
              also be eligible for other benefits, including relocation allowances.
              For
              qualified events of severance, Dr. Hudson will be entitled to base
              compensation
              for the balance of his agreement subject to a minimum of one-year base
              compensation and an additional severance payment equal to his prior
              incentive
              bonus in the case of a termination following a change of control.
  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 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 2005, 2004
              and 2003, the
              Company did not contribute to the 401(k) Plan.
 
 **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.
   F-21
  
 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 of which the Company
              owed to
              Wyeth 35%. Before distributing Wyeth’s portion of the warrants to Wyeth and
              selling its portion of the warrants in 2003, the Company adjusted the
              value of
              the warrants to their then depreciated fair value and thus recognized a
              decrease in the value of warrants to acquire Neurocrine common stock
              of
              $251,000.
 
 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 former 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.
 
 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. In 2004, the Company
              received a
              $2.0 million milestone payment from Neurocrine for the NDA filing for
              indiplon.
              However, because the original NDA filing was not accepted by the FDA
              and the
              agreement with Neurocrine indicates that the $2.0 million milestone
              is earned
              once an NDA has been submitted according to certain FDA regulations,
              the Company
              recognized this payment as revenue once the filing was accepted by
              the FDA on
              June 14, 2005.
   F-22
  
 **Merck
              Agreement**
 
 On
              August
              5, 2004, the Company entered into a license agreement with a subsidiary
              of Merck
& Co. Inc., or Merck, for the worldwide development and commercialization
              of
              DOV 21,947 for all therapeutic indications and of DOV 216,303 for the
              treatment
              of depression, anxiety and addiction. The agreement became effective
              in
              September 2004. Additionally, Merck obtained rights of first offer
              and refusal
              regarding a licensing agreement for DOV 102,677 under certain circumstances
              and
              for additional consideration. Under the original agreement, Merck assumed
              financial responsibility for development and commercialization of a
              product
              containing at least one of the licensed compounds; however this agreement
              was
              amended in August 2005 (as described below). The parties have agreed
              to work
              together to clinically develop licensed product and DOV has reserved
              the right
              to co-promote the sales of product in the United States to psychiatrists
              and
              other specialists who treat depression.
 
 Under
              the
              agreement, DOV received a $35.0 million up-front licensing payment.
              In addition,
              the Company is entitled to receive milestone payments of up to $420.0
              million,
              as well as royalties on worldwide net sales, if any. In
              accordance with the Emerging Issues Task Force (EITF) Issue No. 00-21,
“Accounting for Revenue Arrangements with Multiple Deliverables” the
              Company has evaluated the arrangement to determine if the deliverables
              are
              separable into units of accounting and then applied applicable revenue
              recognition criteria.  The Company has determined that the license and the
              collaboration are a single element for accounting purposes. As a result,
              the $35
              million up-front licensing payment and any future milestones received
              will be
              amortized and taken into revenue over the term of the collaboration.
               As  the
              Company has a continuing obligation with respect to collaboration on
              development
              of product candidates, until an NDA is filed, the up-front payment
              has been
              deferred and will be amortized and taken into revenue over the estimated
              research and development period of 72 months.
 
 On
              August
              5, 2005, Merck and DOV amended their license agreement such that the
              Company
              will initially carry out at its expense certain development work involving
              DOV
              21,947. Merck is authorized to choose one of the Company’s preclinical triple
              reuptake inhibitors for inclusion in the agreement at no additional
              up-front
              fee. Merck
              may
              reassume the financial development and commercialization under the
              agreement for
              DOV 21,947 at any time and is required to do so upon successful completion
              of a
              pivotal Phase II clinical trial as defined by Merck. Upon this occurrence,
              Merck
              will reimburse DOV for its approved development expenditures for DOV
              21,947
              incurred and pay a success premium on certain of that work. In addition,
              the
              first development milestone in the original agreement will be payable
              to DOV.
              Merck and DOV have each retained certain termination rights under the
              amendment. If
              the
              test results are not successful as defined, Merck may elect to make
              such
              payments to DOV and retain DOV 21,947 but is not required to do so .
 
 **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
              2001. In addition, as a result of the separation agreement, Biovail
              and DOV also
              agreed to release any and all claims.
 
 **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.
   F-23
  
 As
              of
              December 31, 2005, the total non-cancelable future minimum rental payments
              under
              the above-mentioned leases are as follows:
 
 Year
                        ending December 31,2006
                    
                    $
                    1,202,3762007
                    
                    
                    1,217,8302008
                    
                    
                    613,9812009
                    
                    
                    —$
                    3,034,187
 
 Rent
              expense incurred for office space and equipment leases amounted to
              $699,588,
              $406,838 and $348,347 and for the years ended December 31, 2005, 2004 and
              2003.
 
 In
              February 2006, the Company committed to a ten year operating lease
              for 133,686
              sq. feet facility in Somerset, New Jersey which will serve as its corporate
              headquarters and principal place of business effective May 2006. In
              connection
              with this lease the Company has entered into a stand-by letter of credit
              facility for $4.2 million to serve as collateral for its performance
              under the
              lease. As
              a
              result of the Landlord’s consummation of its purchase of the premises, the term
              of the lease commenced on February 28, 2006 and will expire on the
              tenth
              anniversary of such commencement date. The lease provides the Company
              with two
              options to extend the lease term, each for five year periods. The rent
              is
              payable in monthly installments and is approximately $2.9 million per
              year for
              the first five years of the initial term and $3.1 million per year
              for the
              remainder of the initial term.
 
 **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-24
  
 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 2005, 2004 and 2003. The Company believes that
              the following
              information reflects all normal recurring adjustments necessary for
              a fair
              statement 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)****2005**
                    
                    (In
                        thousands, except per share data)Revenue
                    
                    $
                    2,059
                    
                    $
                    3,832
                    
                    $
                    1,378
                    
                    $
                    1,378Net
                        loss after tax benefit
                    
                    
                    (9,108
                    )
                    
                    (11,218
                    )
                    
                    (15,710
                    )
                    
                    (16,932
                    )Net
                        loss attributable to common stockholders
                    
                    
                    (9,108
                    )
                    
                    (11,218
                    )
                    
                    (15,710
                    )
                    
                    (16,932
                    )Basic
                        and diluted net loss per share
                    
                    
                    (0.41
                    )
                    
                    (0.49
                    )
                    
                    (0.68
                    )
                    
                    (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 ) 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-25