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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|(Mark One)                                                   |                                                                                         
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------
|ý                                                            | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2002                 
|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

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DOV PHARMACEUTICAL, INC.(Exact Name of Registrant as Specified in its Charter)

|Delaware                                                       |  | 22-3374365                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or Other Jurisdiction
of Incorporation or Organization) |  | (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)

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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, and Preferred Stock Purchase Rights

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 ý    No o

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

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. Yes o    No ý

The
aggregate market value of the voting stock held by non-affiliates of registrant as of June 30, 2002 totaled approximately $43.4 million based on the
then-closing stock price as reported by the Nasdaq National Market.

On
March 6, 2003, there were outstanding 14,490,635 shares of registrant's common stock, par value $0.0001 per share, and 354,643 shares of series B nonvoting preferred
stock, par value $1.00 per share, which shares are convertible at any time upon the vote of the holders of 75% or more of such shares outstanding into 574,521 shares of registrant's common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Part III of Form 10-K is incorporated by reference from our Proxy Statement for the Annual Meeting of
Stockholders to be held on May 30, 2003 (the "Proxy Statement"), which will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended
December 31, 2002.

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DOV PHARMACEUTICAL, INC.    Form 10-K    For the Year Ended December 31, 2002    Table of Contents

|               |  |                                                                                                |  | PAGE NUMBER
|-------------- |  | ---------------------------------------------------------------------------------------------- |  | -----------
|PART 1         |  |                                                                                                |  |            
|ITEM 1.        |  | Business                                                                                       |  | 4          
|ITEM 2.        |  | Properties                                                                                     |  | 35         
|ITEM 3.        |  | Legal Proceedings                                                                              |  | 35         
|ITEM 4.        |  | Submission of Matters to a Vote of Security Holders                                            |  | 37         
|PART II        |  |                                                                                                |  |            
|ITEM 5.        |  | Market for Registrant's Common Equity and Related Stockholder Matters                          |  | 38         
|ITEM 6.        |  | Selected Financial Data                                                                        |  | 38         
|ITEM 7.        |  | Management's Discussion and Analysis of Financial Condition and Results of Operations          |  | 39         
|ITEM 7A.       |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 51         
|ITEM 8.        |  | Financial Statements and Supplementary Data                                                    |  | 52         
|ITEM 9.        |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure           |  | 52         
|PART III       |  |                                                                                                |  |            
|ITEM 10.       |  | Directors and Executive Officers of Registrant                                                 |  | 53         
|ITEM 11.       |  | Executive Compensation                                                                         |  | 53         
|ITEM 12.       |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 53         
|ITEM 13.       |  | Certain Relationships and Related Transactions                                                 |  | 53         
|ITEM 14.       |  | Controls and Procedures                                                                        |  | 53         
|PART IV        |  |                                                                                                |  |            
|ITEM 15.       |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 54         
|Signatures     |  | 57                                                                                            
|Certifications |  | 58                                                                                            

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PART I        Special Note Regarding Forward-Looking Statements

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



You
should refer to the "Item 1. BusinessRisk Factors and Factors Affecting Forward-Looking Statements" for a detailed discussion of some of the factors that may cause our
actual results to differ materially from our forward-looking statements. You should also refer to the risks discussed in our other filings with the Securities and Exchange Commission. 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 do not undertake any obligation and do not intend to update any forward-looking statement.

ITEM I. BUSINESS

Overview

We are a biopharmaceutical company focused on the discovery, in-licensing, development and commercialization of novel drug candidates for central
nervous system and other disorders, including cardiovascular and urological, that involve alterations in neuronal processing. We have six product candidates undergoing clinical development that
address therapeutic indications with significant unmet needs. Our product candidate for insomnia is currently in Phase III clinical trials, our product candidate for pain is in a Phase III pivotal
clinical trial and our product candidate for the treatment of

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anxiety disorders has completed two Phase II clinical trials with a Phase III pivotal clinical trial scheduled to begin summer of 2003.

Our
product candidate for the treatment of insomnia has demonstrated efficacy in a Phase III clinical trial, and our product candidates for anxiety and pain have demonstrated efficacy in
Phase II clinical trials. Our product candidate for the treatment of angina and hypertension is expected to enter a final
Phase I clinical trial in the second quarter of 2003 and we intend to initiate a Phase III clinical trial in the third quarter of 2003. Our lead product candidate for the treatment of depression is
currently in a Phase II clinical trial, and we anticipate initiating a Phase I clinical trial with our second product candidate for depression in the second quarter of 2003. We also have compounds in
preclinical development for the treatment of Parkinson's disease, stress incontinence, restless leg syndrome, attention deficit disorder and anxiety disorders including panic.

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

To
enhance our drug development and commercialization efforts, we have sublicensed our product candidate for the treatment of insomnia to Neurocrine Biosciences, Inc., or
Neurocrine, which has recently entered into a development and commercialization agreement with Pfizer, Inc., or Pfizer. We, together with Neurocrine and Wyeth-Ayerst (formerly American Cyanamid
Company), have entered into an agreement with Pfizer giving it certain rights under our sublicense agreement with Neurocrine.

Our Business Strategy

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

Aggressively pursue development and commercialization of our lead product candidates.We have six product candidates undergoing clinical
development addressing five separate and substantial pharmaceutical markets. These markets include insomnia, anxiety, pain, depression and angina and hypertension. We have designed the clinical
programs for the product candidates we are developing to provide clear and defined paths to attain regulatory approval. We intend to focus substantial resources on completing clinical testing and
commercializing these product candidates as quickly as possible.

Expand our product 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
insomnia and anxiety, indiplon and ocinaplon, have demonstrated positive results equivalent to or better than currently marketed products without their significant side effects. We intend to continue
expanding our existing product 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 licensed compounds.

Reduce clinical development and commercialization risk by building a diversified product portfolio.We have built and intend to continue
to build a portfolio of diverse product candidates to reduce the risks associated with the clinical development of drugs. We have focused our in-licensing and development resources on
compounds in the later stages of clinical development for which there exists a significant amount of positive 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

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multiple compounds with diverse mechanisms of action to limit the risk of difficulties associated with a particular mechanism of action. Finally, a single mechanism of action may have multiple
therapeutic uses. We intend to investigate the efficacy of our compounds for these diverse uses in order to enhance the commercial potential of our product candidates. We believe that our portfolio
approach reduces our dependence on any single compound to achieve commercial success and creates multiple potential sources of revenue.

Establish alliances with industry leaders to access their unique technologies and capabilities.We have collaborative agreements with Elan
and, through Neurocrine, with Pfizer. We formed a joint venture with Elan to develop controlled release formulations of bicifadine and ocinaplon. Elan contributed rights to its controlled release
technologies and we jointly manage clinical and product development. The joint venture retains all commercialization and marketing rights for the product candidates. Our drug candidate indiplon is
under sublicense to Neurocrine and Pfizer. In the future, we will seek to establish alliances that will enhance our product development and commercialization efforts, including alliances that allow us
to retain significant development or commercialization rights for our product candidates.

Our Product Pipeline

The following table summarizes our product candidates currently in clinical and preclinical development:

|Product       |  | Indication(s)                                                              |  | Status                     |  | Marketing Rights 
|------------- |  | -------------------------------------------------------------------------- |  | -------------------------- |  | -----------------
|Indiplon      |  | Insomnia                                                                   |  | Phase III                  |  | Pfizer/Neurocrine
|Ocinaplon     |  | Generalized Anxiety Disorder                                               |  | Phase III Scheduled        |  | DOV Bermuda      
|Bicifadine    |  | Pain                                                                       |  | Phase III                  |  | DOV Bermuda      
|DOV 216,303   |  | Depression                                                                 |  | Phase II                   |  | DOV              
|DOV 21,947    |  | Depression                                                                 |  | Phase I                    |  | DOV              
|DOV Diltiazem |  | Angina and Hypertension                                                    |  | Phase I, Phase III Planned |  | DOV              
|DOV 22,047    |  | Anxiety Disorders                                                          |  | Preclinical                |  | DOV              
|DOV 51,892    |  | Anxiety Disorders                                                          |  | Preclinical                |  | DOV              
|DOV 102,677   |  | Parkinson's Disease; Restless Leg Syndrome; and Attention Deficit Disorder |  | Preclinical                |  | DOV              
|DOV 121,167   |  | Urinary Stress Incontinence                                                |  | Preclinical                |  | DOV              

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

We have core scientific expertise in the cellular and molecular pharmacology underlying central and peripheral nervous system and cardiovascular disorders, which
has allowed us to develop product candidates for the treatment of these indications. We have six product candidates in clinical development and several compounds in preclinical development to treat
disorders in one or more of these therapeutic areas.

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Central Nervous System Disorders

Insomnia and Anxiety

Most drugs currently marketed to treat insomnia and anxiety target the neurotransmitter gamma-aminobutryic acid, or GABA. Neurotransmitters are chemicals in the
central nervous system that either excite or inhibit neuronal function. GABA is one of the principal neurotransmitters in the central nervous system. As a result, drugs acting on GABA receptors can
produce a range of pharmacological actions.

Benzodiazepines,
or BDZs, such as Valium, Librium and Xanax, target a subset of GABA receptors commonly referred to as GABAa receptors. BDZs have enjoyed widespread
commercial success for over 40 years for the treatment of anxiety, insomnia and epilepsy. In addition to their desired therapeutic effects, however, BDZs are known to produce a variety of
undesired side effects. For example, when used to treat anxiety, these side effects can include sedation, muscular incoordination and memory impairment. Further, BDZs are potentially lethal when used
with alcohol. BDZs also produce tolerance and physical dependence and can be abused.

For
many years, our senior management team has conducted research on GABAa receptors. Their pioneering work classified GABAa 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 GABAa receptors, they were the first to discover non-BDZ compounds that act on specific subtypes of GABAa
receptors.

BDZs
are believed to produce their undesirable effects at therapeutic doses because they affect all GABAa receptor subtypes. We believe that compounds that act on specific
GABAa receptor subtypes will produce the desired therapeutic effects while eliminating or reducing the undesirable effects associated with BDZs. For example, compounds acting at one
GABAa receptor subtype may reduce anxiety without sedation, while compounds acting at another GABAa receptor subtype may produce sedation without memory impairment, or other
effects associated with acting at other subtypes.

Indiplon.Indiplon is our product candidate for the treatment of insomnia. In 1998, we licensed indiplon from Wyeth-Ayerst
and subsequently sublicensed it to Neurocrine, which is currently conducting multiple Phase III clinical trials on this product candidate. In December 2002, Neurocrine entered into a
development and commercialization agreement with Pfizer for indiplon. Insomnia is defined as a persistent complaint of difficulty in initiating or maintaining sleep, or of not feeling rested after an
otherwise adequate amount of sleep. According to the National Sleep Foundation, approximately one-half of the adults surveyed reported trouble sleeping at least a few nights a week in the
past year, with approximately 30% of the U.S. population reporting that they experience insomnia every night or almost every night. IMS reported total U.S. sales of prescription drugs for the
treatment of insomnia exceeded $1.2 billion in 2001.

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



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

A
small number of non-BDZs have been introduced for the treatment of insomnia. In March 1993, Ambien, the first and largest selling non-BDZ, was introduced
in the United States. It has shown a reduced side effect profile and a shorter duration of action as compared to BDZs. Ambien, however, also has undesirable side effects, including amnesia and
next-day residual sedation. Despite these undesirable side effects, Ambien is the current market leader, with approximately $1.3 billion in worldwide sales in 2002, according to
Sanofi-Synthelabo, with sales growing in excess of 20% per year.

Our
insomnia product candidate, indiplon, is a non-BDZ shown to be more potent than currently marketed non-BDZs, including Ambien, and to target more selectively
the specific GABAa receptor subtype that appears to be associated with promoting sleep. Furthermore, Neurocrine has noted that, in its Phase II and Phase III clinical studies, indiplon was
devoid of next-day residual sedation, and expects it to have a considerably reduced potential for producing amnesia compared to BDZs. We believe that indiplon's greater selectivity and
improved pharmacokinetic profile are responsible for the more favorable side effect profile compared to currently marketed products.

Neurocrine
is currently developing both an immediate release formulation (indiplon-IR capsule) and a modified release formulation of indiplon (indiplon-MR tablet)
to address the different needs of the insomnia patient population. Neurocrine's clinical studies have shown that patient blood levels of indiplon reach their highest point approximately 30 minutes
after ingestion followed by rapid removal from the blood stream to the point that it cannot be detected four hours later. This results in rapid sleep onset followed by rapid removal of the drug from
the body, reducing the risk of next-day residual sedation. Neurocrine believes that this short duration of action will permit bedtime dosing for people who have trouble falling asleep, and
dosing in the middle of the night for people who have trouble staying asleep, without causing the side effects and next-day residual sedation that occur with longer-acting drugs like
Ambien. Neurocrine has formulated the drug in a modified release form to provide two doses of the drug within one tablet, one dose released immediately for sleep induction and one dose released later
for sleep maintenance.

Neurocrine
has completed 19 Phase I and Phase II clinical trials of indiplon for efficacy and safety involving more than 1,100 subjects and is conducting eight Phase III clinical trials
with indiplon-IR and indiplon-MR in a total of approximately 3,500 patients for short-term and long-term treatment in adult and elderly patients with
primary (chronic) or transient insomnia. Neurocrine's indiplon program for the two formulations of indiplon involves over 5,000 adult, elderly male and female subjects and will include patients with
up to one year of treatment. The filing of a New Drug Application, or NDA, for both formulations is planned for late December 2003 or early 2004.

In
reported Phase II and Phase III clinical studies to date, indiplon was shown to be safe and effective in helping patients with both chronic insomnia and transient insomnia fall asleep
rapidly without adverse side effects. Neurocrine's reported results demonstrated that its immediate release formulation of indiplon does not lead to next-day residual sedation, while both
Ambien and Zopiclone exhibited statistically significant measures of next-day residual sedation. In Neurocrine's Phase II clinical trials in elderly patients, indiplon was found to be
well-tolerated and without next-day residual sedation. Neurocrine has also reported that its modified release formulation of indiplon demonstrated positive results in a number
of sleep measures with no next-day residual sedation at doses likely to be used clinically.

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The
preceding descriptions of Neurocrine's clinical development and clinical trial results of indiplon are based on its public disclosures.

Ocinaplon.Ocinaplon is our product candidate for the treatment of anxiety disorders, including generalized anxiety disorder,
or GAD, the first indication for which we intend to seek United States Food and Drug Administration, or FDA, approval. Anxiety can be defined in broad terms as a state of unwarranted or inappropriate
worry and is made up of various disorders, including GAD, panic disorder and phobias. IMS reported that in 2001 over $1.3 billion was spent in the United States on anti-anxiety
drugs, exclusive of antidepressants. In addition, IMS reported that BuSpar and generic buspirone, non-BDZs, accounted for just over 50% of total U.S. sales for anti-anxiety
drugs in 2001.

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

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

To
date, nine clinical trials on ocinaplon have been conducted, including seven double-blind, placebo-controlled Phase I trials in which over 140 healthy volunteers have participated. In
these clinical trials, ocinaplon was shown to be safe and well-tolerated at the maximum doses used, with no evidence of sedation or any other side effects typically associated with BDZs.

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



Our
first Phase II clinical trial investigated the effects of an immediate release formulation of ocinaplon on 60 GAD patients. In this clinical trial, ocinaplon demonstrated a highly
statistically significant reduction of anxiety during the four-week study period using a number of anxiety measurements, including the Hamilton Anxiety Scale. In addition, statistically
significant effects were

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measured as early as one week after treatment, a much shorter period than reported results for current treatments. The incidence of side effects did not differ significantly from placebo.

In
November 2002, we completed a second Phase II clinical trial that evaluated two controlled release formulations of ocinaplon. This multicenter trial involved 117 patients and
was a 14-day double-blind, placebo-controlled clinical trial of ocinaplon in patients with GAD. The data indicated that both formulations of ocinaplon produced statistically significant
reductions in anxiety as compared to placebo after 14 days of dosing, a more rapid response than reported results for current treatments. Both formulations were safe and
well-tolerated.

We
expect to initiate a Phase III pivotal clinical trial in the United States in the summer of 2003 with a controlled release formulation of ocinaplon subsequent to a meeting with the
FDA expected to take place in the second quarter of 2003. We anticipate that the trial will be a double-blind, placebo-controlled study involving approximately 350 patients and comparing three doses
of ocinaplon to placebo in the treatment of GAD. As part of the ongoing clinical development of ocinaplon, we plan to continue our Phase I program investigating such standard variables as gender and
drug interactions. We also intend to initiate the FDA-required two-year carcinogenicity study for ocinaplon in the second quarter of 2003.

Ocinaplon
is currently being developed through our joint venture with Elan. For a more detailed explanation of our joint venture with Elan, including Elan's July 31, 2002
announcement of its recovery plan and divestiture of certain non-core businesses, assets and products and the possible impact of this announcement on ocinaplon, please refer to the text
under "Collaborations and Licensing AgreementsElan Corporation plc and Elan International Services, Ltd."

Pain

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



While
drugs in both of these categories are regularly used in the treatment of pain, their use has been limited because of various side effect profiles. In addition, administering these
drugs for extended durations has been problematic. Although prostaglandin inhibitors have been used for the treatment of pain, particularly pain associated with inflammation, their efficacy is limited
to milder types of pain and
they often display undesirable side effects relating to the gastrointestinal tract and the liver. Narcotics are also used to treat pain, but tolerance develops rapidly and higher doses eventually lead
to physical dependence and additional side effects, including respiratory depression. Ultram, originally thought to be a non-narcotic, has been reported to act at certain opiate receptors
and has the potential to cause morphine-like psychic and physical dependence. Despite these drawbacks, according to IMS, U.S. sales in 2001 of narcotic and non-narcotic
analgesics, including Ultram, exceeded $5.7 billion.

Alternative
strategies for identifying potentially novel analgesics include altering certain neurotransmitter systems involved in mediating the sensation of pain. Preclinical studies
have implicated the neurotransmitters glutamate, norepinephrine and serotonin in pain reduction. Treatments that interfere with certain glutamate receptors or that increase the actions of
norepinephrine and serotonin have been reported to produce analgesic effects in animals.

Bicifadine
is a chemically distinct molecule with a unique profile of pharmacological activity. It has two primary pharmacological actions. First, it enhances and prolongs the actions of
norepinephrine and serotonin by inhibiting the transport proteins that terminate their physiological actions. Second, it acts

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as a functional antagonist at a subset of excitatory glutamate receptors. 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, it has been shown not to act at any opiate receptor. In animal models, bicifadine did not demonstrate abuse, addiction or
dependence potential. Four Phase I clinical trials and 14 Phase II clinical trials involving over 1,000 patients were conducted by Wyeth-Ayerst or us with an immediate release formulation of
bicifadine. In five double-blind, placebo-controlled Phase II clinical trials of the immediate release formulation, bicifadine demonstrated a statistically significant reduction in pain, in some cases
comparable to or better than positive controls such as codeine.

During
2002, we completed two Phase I pharmacokinetic clinical trials of two controlled release formulations of bicifadine allowing us to chose one of these for further clinical testing.
In addition, in August 2002, we completed a Phase II clinical trial in the United States involving 750 patients in the treatment of moderate to severe post-surgical dental pain.
This Phase II trial was a single dose, double-blind, placebo-controlled, study that evaluated three controlled release doses of bicifadine and one dose of codeine compared to placebo. Bicifadine
produced a highly statistically significant, dose-related reduction in pain with each of the two higher doses of bicifadine and was shown to be an effective analgesic as compared to
placebo. The efficacy of bicifadine was at least equivalent to codeine at all three doses. The trial demonstrated bicifadine to be safe and relatively well-tolerated without producing any
serious adverse events. The two higher doses of bicifadine did produce significantly more adverse events than placebo, with 400 mg and 600 mg producing 22% and 37%, respectively, versus placebo
producing 11%. The most frequently reported events were nausea and vomiting.

In
December 2002, we began a 500-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 dental pain model. If ultimately approved, bicifadine would not be limited to use in the pain models studied. We intend to initiate the FDA-required
two-year carcinogenicity study for bicifadine in the third quarter of 2003. As part of the ongoing clinical development of bicifadine, we plan to continue our Phase I program investigating
such standard variables as gender and drug interactions. We anticipate having to conduct two additional pivotal clinical trials in a second post-surgical pain model involving five to seven
days of dosing to support an NDA filing. In addition, we anticipate that we will be required to collect human safety data to support an NDA filing.

Bicifadine
is currently being developed through our joint venture with Elan. For a more detailed explanation of our joint venture with Elan, including Elan's July 31, 2002
announcement of its recovery plan and divestiture of certain non-core businesses, assets and products and the possible impact of this announcement on bicifadine, please refer to the text
under "Collaborations and Licensing AgreementsElan Corporation plc and Elan International Services, Ltd."

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Depression

DOV 216,303 and DOV 21,947.DOV 216,303 and DOV 21,947, our product candidates for the treatment of depression, are triple
uptake inhibitors affecting the neurotransmitters norepinephrine, serotonin and dopamine. These neurotransmitters regulate numerous functions in the central nervous system, and imbalances in them have
been linked to a number of psychiatric disorders, including depression. The actions of these neurotransmitters are terminated by specific transport proteins that remove them from synapses in the
brain. Antidepressants are thought to produce their therapeutic effects by inhibiting the uptake activity of one or more of these transport proteins, effectively increasing the concentration of these
neurotransmitters at their receptors.

The
emergence of 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 United States increased from approximately $424 million in
1987, the year prior to the introduction of Prozac, to approximately $11.7 billion in 2001. Despite this widespread commercial success, SSRIs suffer from the following limitations:



Dual
uptake inhibitors, like Effexor, block the uptake of both serotonin and norepinephrine. While more effective than SSRIs, dual uptake inhibitors still take three or more weeks of
therapy before a meaningful improvement is observed. In addition, dual uptake inhibitors have their own unique set of side effects, including nausea, headache, sleepiness, dry mouth and dizziness.

No
currently marketed antidepressants inhibit the uptake of all three neurotransmitters linked to depression. Both preclinical studies and clinical trials indicate that a drug inhibiting
uptake of serotonin, norepinephrine and dopamine would be expected to produce a faster onset of action and greater efficacy than traditional antidepressants. We believe that such a "broad spectrum"
antidepressant would represent a breakthrough in the treatment of depression.

In
preclinical studies, DOV 216,303 and DOV 21,947 were shown to potently inhibit the uptake of all three neurotransmitters, serotonin, norepinephrine and dopamine. In animal models
highly predictive of antidepressant action, DOV 216,303 and DOV 21,947 were more potent than both Tofranil, a dual uptake inhibitor, and Prozac. In one of these models designed to test the onset of
activity, DOV 216,303 produced an antidepressant-like action after one week of treatment, compared to four weeks for Tofranil. Because of their ability to inhibit the uptake of all three
neurotransmitters implicated in depression, we believe DOV 216,303 and DOV 21,947 may be more effective and have a more rapid onset than other antidepressants.

In
2002, we completed two dose-escalating, placebo-controlled, double-blind Phase Ia and Phase Ib clinical trials in France that evaluated the blood levels and side effect
profile produced by single and multiple doses of DOV 216,303. The drug was rapidly absorbed following oral administration, with blood levels proportional to the administered dose. No adverse effects
were observed after doses five to ten times higher than the projected therapeutic doses. We recently initiated a Phase II multi-centered, double-blind, safety, efficacy and tolerability clinical trial
that will compare DOV 216,303 to a leading SSRI in patients with major depressive disorder.

In
the second quarter of 2003, we plan to initiate a placebo-controlled, double-blind Phase I pharmacokinetic clinical trial to determine the safety of single doses of DOV 21,947.

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Preclinical Development

We currently have four compounds in preclinical development for the treatment of central nervous system disorders. DOV 22,047 and DOV 51,892 are believed to
function as partial positive allosteric modulators at specific GABAa receptor subtypes that may be involved in the treatment of various anxiety disorders including panic. DOV 102,677 is a
selective dopamine uptake inhibitor we believe may be used in the treatment of Parkinson's disease, restless leg syndrome and attention deficit disorder. DOV 121,167, which acts on certain monoamine
transporter proteins, has demonstrated activity in an animal model for urinary incontinence.

Cardiovascular Disorders

DOV Diltiazem.DOV diltiazem, our proprietary formulation of diltiazem, is our product candidate for the treatment of angina
and hypertension. Diltiazem belongs to a well-known class of drugs called calcium channel blockers. DOV diltiazem combines an immediate release component with a controlled release
component in order to provide prompt and improved blood levels throughout the day compared to currently marketed diltiazem products.

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

Calcium
channel blockers remain a standard-of-care in the treatment of chronic stable angina and hypertension and continue to be highly endorsed by the medical
community. Although comparative studies have demonstrated equivalent anti-angina effects for many marketed calcium channel blockers, a lower incidence of side effects with diltiazem was
often reported in these studies. According to IMS figures for 2001, total sales of diltiazem in the United States were $984 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 CD and Dilacor XR only reduce the number of angina
attacks by approximately 50%60% when given at FDA-approved therapeutic doses. We believe incomplete reduction in angina demonstrated by current treatments may be the result of
inadequate blood levels of the drug in the morning hours, when approximately half of angina attacks occur. Experts in chronic stable angina have confirmed their dissatisfaction with the ability of
current extended release products to adequately treat many of their patients on a once-a-day basis.

We
believe that DOV diltiazem will reduce morning angina attacks to a significantly greater extent than commercially available products because of its combination of immediate and
extended release components. Data from three Phase I trials indicate that our patented formulation produces clinically relevant blood levels within 30 minutes of administration and results in higher
blood levels in the morning than Tiazac. We recently completed a Phase I pharmacokinetic study in which we discovered that a high fat meal, proximate to dosing, retarded the bioavailability of the
immediate release
component of the diltiazem formulation under development. In the second quarter of 2003, we plan to conduct an additional Phase I pharmacokinetic study in order to evaluate strategies to overcome this

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food effect. Once these results have been evaluated, we plan to begin a Phase III clinical trial by the end of 2003, comparing our formulation to placebo and a currently marketed diltiazem
formulation.

Urological Disorders

We are evaluating DOV 121,167 in preclinical studies for stress incontinence. Urine leakage that occurs during exercise, coughing, laughing or lifting is referred
to as stress incontinence. This condition results from a weakness or anatomical defect in the lower urinary tract, often as a result of childbirth, weight gain or surgery. The Simon Foundation for
Continence reports that approximately 200 million people worldwide are affected by urinary incontinence and that approximately 65 million women worldwide are affected by stress
incontinence. While not life threatening, stress incontinence has a significant impact on quality of life, particularly in the aging female population. At present, there are no approved drug therapies
that specifically address stress incontinence.

The
function of the lower urinary tract is controlled by muscles that are, in turn, controlled by nerves throughout the body. Several monoamine transmitters, including serotonin and
norepinephrine, are thought to play key roles in regulating the storage and release of urine via their actions on the brain. We believe the neurochemical profile of DOV 121,167, with its actions on
monoamine transporter proteins, makes it a potential candidate for treatment of stress incontinence. DOV 121,167 shows activity in a preclinical model used to assess the potential effectiveness of
drugs for the treatment of stress incontinence.

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:

Elan Corporation, plc and Elan International Services, Ltd.

In January 1999, we formed DOV (Bermuda), Ltd., or DOV Bermuda, our joint venture with Elan to develop controlled release formulations of bicifadine
for the treatment of pain and ocinaplon for the treatment of anxiety disorders and epilepsy. We granted a non-exclusive license and sublicense to use the oral formulations of these two
product candidates and Elan granted a non-exclusive license to use its controlled release technologies. After payments to our licensor, Wyeth-Ayerst, we are entitled to
receive royalties on net sales, if any, of 8.35% for bicifadine and 4.64% for ocinaplon, and Elan is entitled to receive royalties at the same rate. Through 2002, Elan and we have jointly conducted
the research and development work. The joint venture retains the commercialization rights with respect to these two product candidates. We have an 80.1% interest, and Elan Pharmaceutical Investments
II, Ltd., an unconsolidated subsidiary of Elan, has a 19.9% interest, in the joint venture's net profits or net losses.

In
connection with the formation of the joint venture, Elan and we formed a management committee, which is responsible for, among other things, devising, implementing and reviewing
strategy for the joint venture's business. The management committee consists of an equal number of members nominated by us and Elan. Decisions of the committee are made by majority vote. Any dispute
or deadlock among the members is referred by the committee to the joint venture's directors. While we have the right to nominate four of the five members of the joint venture's board of directors,
such directors have a fiduciary duty to act in the best interest of the joint venture. Up until January 2003, action on certain matters such as amendment of the business plan and adopting a
budget required the consent of both parties. Subject to such directors' fiduciary duties, all action of the joint venture and DOV Bermuda directors (which in each case DOV appoints a majority) may now
be taken by majority vote. If the joint venture's expenditures exceed budget by more than 25% for a fiscal year, Elan's

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consent rights are reinstated until joint venture expenses for a year do not exceed budget by more than 25%.

To
form the joint venture, we initially invested cash of $8.0 million for our 80.1% interest. Elan invested $2.0 million for its 19.9% interest. Elan provided us with both
debt and equity financing to fund our investment in the joint venture and our share of the operations of the joint venture. We issued Elan a convertible exchangeable promissory note for
$8.01 million. Elan has the right to convert this note at any time, together with accrued unpaid interest, into shares of our common stock at $3.98 per share until the expiration of the note in
January 2005. Elan also purchased, for an aggregate of $3.0 million, 525,025 shares of our common stock, 354,643 shares of series B preferred stock and warrants, expiring in
January 2005, to purchase 121,500 shares of our common stock at an exercise price of $3.41 per share. As issued, Elan was entitled to exchange the principal amount of the convertible
exchangeable note for additional participation in the joint venture to make our equity interest equal. In March 2003, Elan surrendered this right and received from us, as partial consideration,
75,000 warrants exercisable at $10.00 per share until January 21, 2006.

Pursuant
to the original agreements, Elan and we have funded the joint venture in proportion to our equity ownership. For this purpose, we were allowed to draw down, subject to
preconditions, including Elan's approval, on a $7.0 million convertible line of credit provided to us by Elan. We have drawn down on the convertible line of credit in the past and at
December 31, 2002, $3.3 million of principal and accrued interest was outstanding. Our ability to borrow further under the convertible line of credit expired on March 27, 2002.
This convertible line of credit may not be prepaid without Elan's consent. The holder of the note also has the right to convert the amount outstanding under the convertible line of credit at any time,
together with any accrued unpaid interest, into shares of our common stock at $3.41 per share.

Elan
has advised us that it will no longer fund its pro rata share of the joint venture expenses. We intend to continue joint venture funding for both our share and Elan's share. The
joint venture agreement provides, in this case, that Elan's original equity interest in the joint venture will be diluted using a formula that compares respective overall funding contributions, but
giving an extra 50% dollar credit to our continued funding not matched by Elan's pro rata contribution equal to the parties' equity relationship.

Elan
and we both licensed intellectual property to the joint venture. Those licensing agreements terminate on a product-by-product basis and
country-by-country basis 15 years from the first product sale date in the applicable country, or the last to expire of the patents covering the product, whichever is
later. Elan may terminate its license agreement if a named technological competitor of Elan:



Upon
termination of the licenses granted to the joint venture or if the joint venture winds-up or becomes insolvent, then, subject to the rights of permitted third-party
sublicensees, all intellectual property rights Elan and we have licensed to the joint venture terminate. Further, the intellectual property developed by the joint venture will be transferred to Elan
and us jointly, and we each will have the right to exploit and commercialize the intellectual property developed by the joint venture that relates to our own intellectual property.

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Biovail Laboratories Incorporated and Biovail Corporation

In January 2001, we entered into a license, research and development agreement with Biovail to develop, manufacture and market DOV diltiazem. Biovail's
license to use DOV diltiazem was exclusive and worldwide in scope. We received an upfront license fee of $7.5 million, plus under the license agreement Biovail funded clinical trial costs. If
the agreement had continued we would have been entitled to further payments, if milestones were met, and royalties on sales, if any. In March 2003, following Biovail's receipt of marketing
authorization for Cardizem LA, we and Biovail agreed to terminate the license agreement.

The
separation agreement calls for a $1.0 million payment to Biovail, and establishes contingent payments 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 will deliver mutual releases relating to the license agreement. Biovail will return all confidential
information, DOV intellectual property and clinical supporting data and discoveries developed and made during the two-year collaboration. At our request, Biovail will also carry out, at
customary rates, our Phase I clinical trial of DOV diltiazem, scheduled for the second quarter of 2003. Depending on the results of this trial, we plan to begin a Phase III clinical trial by the end
of 2003 comparing our formulation to placebo and a currently marketed diltiazem formulation.

Neurocrine Biosciences, Inc and Pfizer, Inc.

In June 1998, we sublicensed indiplon to Neurocrine on an exclusive, worldwide basis for 10 years or, if later, the expiration of the patent
covering either the compound or the marketed product, currently August 2020. At the end of the term, Neurocrine will be deemed to have a fully-paid, royalty-free license
to the compound and the marketed product. During the term of the agreement and after payments to our licensor, Wyeth-Ayerst, we are entitled to receive a royalty equal to 3.5% of net sales for the
first ten years post launch in a given market and 6% thereafter, if any, and additional net milestone payments of up to approximately $3.9 million exclusive of the $845,000 already paid to us
and the share paid and payable to Wyeth-Ayerst.

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

Following
this agreement on standby licenses, in December 2002, Neurocrine and Pfizer announced a global agreement for the exclusive worldwide development and commercialization of
indiplon. Neurocrine and Pfizer are responsible for the research, development and commercialization of indiplon. We have the right to terminate our agreement with Neurocrine, with regard to the entire
territory, if Neurocrine terminates the research and development program or halts the research and development program for six months or longer within the United States, other than for reasons
relating to regulatory constraints. Likewise, if Neurocrine halts, for six months or longer, or terminates the research and development program in any other country, we have the right to terminate the
agreement with respect to that country. If we terminate the agreement due to an uncured breach by Neurocrine, they must transfer to us all information and know-how related to indiplon or
the marketed product, and all governmental filings and approvals.

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Market Exclusivity, Patent Protection and Intellectual Property

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

The Hatch-Waxman Act

Under the United States Drug Price Competition and Patent Term Restoration Act of 1984, or the 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. Because the patent that provides protection for the use of bicifadine for pain and the use of
DOV 216,303 for the treatment of depression has expired, these market exclusivity provisions will be of particular importance to the success of these compounds if they are approved by the FDA.

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

Patents and Intellectual Property Protection

We seek to protect our rights in the compounds, formulations, processes, 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 and license agreements. We have or have licensed from others eight issued U.S. patents, three of which have
expired, including the patent for the use of bicifadine for pain and the use of DOV 216,303 for the treatment of depression.

The
patent that currently provides protection for the use of bicifadine and DOV 216,303 for alcohol, cocaine addiction and addictive disorders is due to expire in December 2011.
In 2002, we filed a provisional patent claiming a novel, three-dimensional composition of matter for bicifadine, as well as therapeutic uses and methods of manufacture. A provisional patent was also
filed claiming novel controlled release formulations of bicifadine. We intend to file a provisional patent application making additional claims relating to bicifadine in 2003.

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The
patent covering ocinaplon is currently due to expire 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.

The
original patent protecting indiplon is currently due to expire in June 2003; however, a composition of matter patent for indiplon (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.

In
December 2000, a patent issued covering the compound formulation of DOV diltiazem. This patent is due to expire in April 2018. We licensed this compound and patent to
Biovail in January 2001. Additionally, in May 2001, we filed a patent application covering an additional release characteristic of DOV diltiazem. This application continues to be
prosecuted at the USPTO. A new application is expected to be filed in 2003.

In
April 2002, a patent issued covering the composition of matter, use and method of treatment and method of manufacture for DOV 21,947. It is a triple uptake inhibitor under
development for the treatment of depression. This patent is due to expire in January 2021.

In
January 2003, we received a notification of allowance from the USPTO for a patent claiming composition of matter, use and method of manufacture of DOV 102,677, our candidate
for the treatment of indications including parkinson's disease, restless leg syndrome and attention deficit disorder. If issued, this patent will expire in 2040.

Regarding
DOV 22,047, DOV 51,892 and related molecules, addressing anxiety disorders, we are preparing patent applications covering composition of matter, use and methods of manufacture
and expect a patent application regarding DOV 51,892 to be filed in 2003.

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 commercial benefits, including from:



In-Licenses

In May 1998, we licensed from Wyeth-Ayerst, 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-Ayerst's right of
first refusal.

If
we sublicense a compound to a third party, we are obligated to pay Wyeth-Ayerst 35% of all payments we receive based upon that compound. This payment drops to 25% if a new drug
application has been filed by us before the sublicense grant. These payment obligations are subject to minimum royalties of 2.5% of net sales for indiplon, ocinaplon and DOV 216,303 and 4.5% of net
sales for bicifadine, and minimum milestones of $2.5 million for indiplon, ocinaplon and DOV 216,303 and $5.0 million for bicifadine. Our sublicense agreement with Neurocrine and our
joint venture with Elan are structured so that we can satisfy these minimum milestone obligations. To the extent DOV Bermuda has not entered into arrangements with third parties, however, any amounts
owed to us from our joint venture with Elan will be effectively funded by us, since Elan has determined not to

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participate in the funding of DOV Bermuda effective January 1, 2003. If Wyeth-Ayerst terminates the license upon an uncured breach by us, and by Neurocrine under the standby license, we must
transfer all information, data and know-how relating to the products and any government authorizations, in addition to our rights derived from our sublicensees with regard to the products.
The agreement expires as to each compound 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-Ayerst.

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 bulk quantities for commercialization.

Marketing and Sales

We have no sales, marketing or distribution capabilities. In order to commercialize any of our product candidates, we must either acquire or internally develop
sales, marketing and distribution capabilities, or make arrangements with third parties to perform these services for us. For these products and other future products, we intend to rely on third
parties to perform sales, marketing and distribution services.

Government Regulation

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

Preclinical
studies generally are conducted in laboratory animals to evaluate the potential safety and the efficacy of a drug product. In the United States, drug developers submit the
results of preclinical studies to the FDA as a part of an investigational new drug application, or IND, which must become effective before we can begin clinical trials in the United States. An IND
becomes effective

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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.

|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 people.
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 subjects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|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 subjects.                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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

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

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If the FDA approves the new drug application, the drug becomes available for physicians to prescribe in the United States. After approval, the drug developer must submit periodic reports
to the FDA, including descriptions of any adverse reactions reported. The FDA may request 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 United States. We face the risk that the resulting prices would be insufficient to
generate an acceptable return to us or our collaborators.

Competition

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

We
have six product candidates in clinical development addressing five different and substantial pharmaceutical markets. These markets are insomnia, anxiety, pain, depression and angina
and
hypertension. Competition in these markets includes the following drugs and pharmaceutical companies:

Insomnia Market

Indiplon, our sleep promoting compound sublicensed to Neurocrine and Pfizer, will compete in the sedative market. This market is dominated by Ambien, marketed by
Sanofi-Synthélabo, and Sonata, marketed by Elan. Significant market positions are also held by Restoril, now marketed by Mallinckrodt Inc., and Halcion, marketed by Pfizer along
with their generic equivalents. Additionally, in early 2003, Sepracor filed an NDA for Estorra (esopiclone), another non-BDZ.

Anxiety Market

Ocinaplon, our compound for the treatment of anxiety sublicensed to the joint venture with Elan, will compete in the anxiolytic market, which includes the BDZs
Valium, Xanax, lorazepam and chlordiazepoxide. These drugs, together with BuSpar, marketed by Bristol-Myers Squibb Company, and the newer antidepressants make up the majority of drugs used to treat
anxiety.

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Pain Market

Bicifadine, our compound for the treatment of pain sublicensed to the joint venture with Elan, targets the analgesic market. A number of pharmaceutical companies
sell generic and branded narcotic and non-narcotic prescription analgesics. In the narcotic section of this market, Oxycontin, marketed by Purdue, Duragesic, marketed by Johnson &
Johnson, and Vicodin and Vicoprofen, marketed by Abbott, comprised approximately 60% of all non-injectible narcotics sold in the United States in 2001 according to IMS reports. Ultram,
marketed by Johnson & Johnson, remained the most dominant selling non-narcotic in 2001, comprising approximately 33% of the non-narcotic analgesic market in 2001 as
defined by IMS.

Depression Market

DOV 216,303 and DOV 21,947, currently under development in-house, will target the antidepressant market, which is dominated by SSRIs, including
Prozac, marketed by Eli Lilly and other companies in generic form, as well as Paxil, marketed by GlaxoSmithKline, Zoloft, marketed by Pfizer, and Celexa,
marketed by Forest Laboratories. SSRIs comprise nearly 75% of the antidepressant market. Other drugs in this market include Effexor, marketed by Wyeth-Ayerst, Wellbutrin, marketed by GlaxoSmithKline,
Serzone, marketed by Bristol-Myers Squibb, tricyclics and tetracyclics.

Angina and Hypertension Markets

DOV diltiazem will compete in the chronic stable angina and hypertension markets. Calcium channel blockers are used in the treatment of both these conditions. The
diltiazem class of calcium channel blockers has been utilized extensively in the treatment of chronic stable angina, which is the most prevalent type of angina. Leading branded diltiazem products
include Cardizem CD, marketed by Biovail, Tiazac, marketed by Forest in the United States and Biovail elsewhere in the world, and Cartia XT, a branded generic drug, marketed by Andrx. In
February 2003, Biovail announced FDA approval for Cardizem(R) LA (long acting), a diltiazem formulation intended for nighttime dosing in the treatment of hypertension, but which
holds approval potential for the treatment of angina.

Employees

As of March 6, 2003, we had 32 employees, consisting of 29 full-time employees and three part-time employees. Of the
full-time employees, nine hold Ph.D., M.D. or equivalent degrees. None of our employees is represented by a collective bargaining arrangement, and we believe our relationship with our
employees is good.

Our Scientific Advisory Board

Our scientific advisory board advises us with respect to our product development strategy as well as the scientific and business merits of licensing opportunities
or acquisition of compounds and the availability of opportunities for collaborations with other pharmaceutical companies. The board consists of a group of highly regarded and experienced scientists
and clinicians. We intend to compensate scientific advisory board members with stock options pursuant to our 2000 stock option and grant plan, and a fee for attendance at meetings. We intend to add
additional members to the scientific advisory board. The current scientific advisory board members are:

Robert Cancro, M.D.is the chairman of our scientific advisory board and one of our co-founders. Since 1976,
Dr. Cancro has been professor and chairman of the Department of Psychiatry at New York University School of Medicine, Director of Psychiatry at New York University Hospital and director of the
Nathan S. Kline Institute for Psychiatric Research. Prior to 1976, Dr. Cancro was a professor in the Department of Psychiatry at the University of Connecticut Health Center. Dr. Cancro
is a widely published, internationally recognized psychiatrist and educator, having received numerous honors and

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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. He is also a member of the Expert Advisory Panel on Mental Health for the World Health
Organization and the Research Advisory Committee of the United States Secret Service. 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.

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

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

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

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

Roger Guillemin, M.D., Ph.D.is a Nobel laureate and distinguished professor at The Salk Institute. Dr. Guillemin
received the Nobel Prize for his work on brain hormones, which brought to light an entirely new class of hormones important in regulating growth, development, reproduction and stress response. Drugs
based upon these molecules are used for the management or treatment of infertility, precocious puberty, dwarfism, diabetes and prostate cancer. He has served on several

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committees of the National Institutes of Health, as President of the Endocrine Society and is a member of the National Academy of Sciences, and of several other foreign academies.

As
noted in Part III, Item 10 of this Form 10-K, background and other information relating to our directors and officers is incorporated by reference from our
proxy statement to be filed within 120 days after the end of our fiscal year pursuant to Regulation 14Afor our annual meeting of stockholders to be held on May 30, 2003.

Available Information

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.

Risk Factors and Factors Affecting Forward-Looking Statements

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

Risks Related to our Business

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

Prior
to our April 25, 2002 initial public offering of 5,000,000 shares of our common stock, there had been no public market for our common stock and an active public market for
our common stock may cease at any time. Market prices for securities of biopharmaceutical companies have been particularly volatile. In particular, our stock price has experienced a substantial
decline since our initial public offering. Some of the factors that may cause the market price of our common stock to fluctuate include:



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If
any of the foregoing risks occur in the future, it could cause our stock price to fall and may 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 is subject to court approval, to settle these lawsuits. The settlement, to be presented to the court, includes all defendants and covers as a class all those
who purchased our common stock in or traceable to our initial public offering through December 20, 2002 and suffered damages. Pursuant to the settlement, the class members collectively will
receive $250,000 in cash and 500,000 six-year warrants with a strike price of $10 per warrant. As of December 31, 2002, we estimated the value of these warrants at
$2.3 million. We cannot assure you that the court will approve the proposed settlement agreement.

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, 2002, we have incurred significant operating losses and, as of December 31, 2002, we had an accumulated
deficit of $40.7 million. We have not yet completed the development, including obtaining regulatory approvals, of any product candidate and, consequently, have not generated any revenues from
the sale of products. Even if we succeed in developing and commercializing one or more of our product candidates, we may never achieve significant sales revenue and we expect to incur operating losses
for the foreseeable future. We also expect to continue to incur significant operating expenses and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable
future as we:



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

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

None
of our product candidates is currently approved for sale by the FDA or by any other regulatory agency in the world, and our product candidates may never be approved for sale or
become commercially viable. Before obtaining regulatory approval for the sale of our product candidates, they must be subjected to extensive preclinical and clinical testing to demonstrate their
safety and efficacy

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for humans. Our success will depend on the success of our currently ongoing clinical trials and subsequent clinical trials that have not yet begun.

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



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

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

Regulation
by government authorities in the United States and foreign countries is a significant factor in the development, manufacture and commercialization of our product candidates
and in our ongoing research and development activities. All our 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 may involve ongoing requirements for post-marketing studies.
Additionally, even after receipt of FDA approval, the FDA may request additional 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.

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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. For example, in 2000 we recorded no revenue, while in 2001 we had $5.7 million in revenue primarily as a result of an upfront license fee from Biovail and a
milestone payment from Neurocrine, and in 2002 we recorded $2.4 million in revenue primarily as a result of the amortization of the upfront license fee from Biovail. In the future, our
operating results in a particular period may not meet the expectations of any securities analysts whose attention we may attract, or those of our investors, which may result in a decline in the market
price of our common stock.

We rely entirely on the efforts of Neurocrine and Pfizer for the development, design and implementation of clinical trials, regulatory approval and commercialization of our
insomnia compound, indiplon.

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 Inc. for indiplon. The clinical development, design and implementation of clinical
trials, the preparation of filings for
FDA approval and, if approved, the subsequent commercialization of indiplon, and all other matters relating to indiplon, are entirely within the control of Neurocrine and Pfizer. We will have no
control over the process and, as a result, our ability to receive any revenue from indiplon is entirely dependent on the success of their efforts. Neurocrine and Pfizer may fail or otherwise decide
not to devote the resources necessary to successfully develop and commercialize indiplon, which would impair our ability to receive milestone or royalty payments, if any, in respect of indiplon.

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 Elan, Neurocrine, Pfizer and Wyeth-Ayerst. Neurocrine has recently entered into a development and commercialization
agreement with Pfizer involving a further sublicense under our agreement with Neurocrine. In connection with certain of these agreements, we have granted certain rights, including development and
marketing rights and rights to defend and enforce our intellectual property. We do not have day-to-day control over the activities of our licensees or collaborative partners
and cannot assure you that they will fulfill their obligations to us, including their development and commercialization responsibilities in respect of our product candidates. We also cannot assure you
that our licensees or collaborators will properly maintain or defend our intellectual property rights or that they will not utilize our proprietary information in such a way as to invite litigation
that could jeopardize or potentially invalidate our proprietary information or expose us to potential liability. Further, we cannot assure you that our licensees or collaborators will not encounter
conflicts of interest, changes in business strategy or other business issues, or that they will not acquire or develop rights to competing products, all of which could adversely affect their
willingness or ability to fulfill their obligations to us.

On
July 31, 2002, Elan, our partner in the DOV Bermuda, announced a recovery plan that includes the divestiture of its businesses, assets and products that are no longer core.
Elan has advised us that it will no longer fund its pro rata portion of the joint venture expenses, effective January 1, 2003. We intend to fund Elan's portion of the joint venture expenses,
but will also assess our options, including seeking substitute collaborative arrangements. Whatever the outcome of the foregoing, we are committed to pursuing the development of the joint venture
product candidates, bicifadine and ocinaplon, on the present schedule. In March 2003, we and Biovail terminated our collaboration for

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DOV diltiazem. Biovail has agreed to carry out, at customary rates payable by us, our next scheduled Phase I clinical trial of DOV diltiazem.

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

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

Our
existing license and collaborative agreements contain covenants that restrict our product development or future business efforts and have involved, among other things, the issuance
of debt and equity securities, limitations on our ability to license our product candidates to third parties and restrictions on our ability to compete. Because of these 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.

The business purposes of our joint venture with Elan could be frustrated by potential voting deadlocks.

We
agreed in our joint development and operating agreement with Elan that major decisions relating to our joint venture will be made through mutual consent despite our 80.1% ownership
position. While this requirement of mutual consent expired in January 2003, the requirement may revert if the joint venture exceeds its budget by 25% in any fiscal year. As a result, if the
joint venture budget is exceeded by 25%, deadlocks may occur on major business issues relating to the development of ocinaplon and bicifadine. Under these circumstances, our ability to move forward
with clinical development of these product candidates may be delayed. These contractual voting provisions with Elan could lead to delays in the development of these product candidates. For a more
detailed explanation of our joint venture with Elan please refer to the text under the subheadings "Collaborations and Licensing AgreementsElan Corporation, plc and Elan International
Services, Ltd."

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If certain technological competitors of Elan acquire at least ten percent of our voting stock or trigger other change of control clauses, Elan may, at its option, terminate its
license agreement with the joint venture, which could lead to a termination of the joint venture itself.

Under
the Elan joint venture agreements, Elan has certain change of control rights that, if triggered, would permit it to terminate the license agreement under which Elan granted the
right to use its proprietary release technologies to the joint venture. This could also lead to a termination of our license agreement with the joint venture and a termination of the joint venture.
Some of Elan's change of control termination protections are triggered if a named technological competitor of Elan:



Our flexibility to sell a material portion of our assets, in the best interest of our stockholders, may be impeded by Elan.

Under
the 1999 Stock Purchase Agreement with Elan, we covenanted not to sell all or any material portion of our assets without the consent of Elan so long as either of our notes held by
Elan is outstanding. Those notes come due in January 2005, and may not be repaid prior to that time without Elan's consent. Thus, the sale prior to January 2005 of a material asset may
require Elan's consent and lead to negotiations over consideration for Elan's consent or Elan's involvement in sale terms or Elan's declination to give its consent, which could have adverse
consequences to us.

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

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

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

At December 31, 2002, we had cash and cash equivalents and marketable securities of $60.3 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 the end of 2004. We believe that we may require additional funding after that time 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 cannot assure you that

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financing will be available when needed on terms acceptable to us, if at all. We may continue to seek additional capital through public or private financing or collaborative agreements. If adequate
funds are not available, we may be required to curtail significantly or eliminate at least temporarily one or more of our product development programs.

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

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

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-Ayerst have expired, including the patent that provides protection for the use of DOV 216,303 for the treatment of
depression and the use of bicifadine for the treatment of pain. In addition, our patent covering ocinaplon is due to expire in June 2003. Patents protecting intermediates useful in the
manufacture of ocinaplon are due to expire in 2007. The numerous patent applications pending and others in preparation covering our compounds, even if approved, may not afford us adequate protection
against generic versions of our product candidates or other competitive products. In the event we achieve regulatory approval to market any of our product candidates, including bicifadine, DOV 216,303
or ocinaplon, and we are unable to obtain adequate patent protection for the ultimate marketed product, we will be required to rely to a greater extent on the Hatch-Waxman Act, and applicable foreign
legislation, to achieve market exclusivity. The Hatch-Waxman Act generally provides for marketing exclusivity to the first applicant to gain approval for a particular drug by prohibiting filing of an
abbreviated new drug application, 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.

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Although we intend to use reasonable efforts to comply with applicable environmental laws, our contractors and collaborators may not comply with these laws. Failure to comply with environmental laws
could result in significant fines and work stoppage, and may harm our business.

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

Our company was formed in April 1995 and, consequently, we have a limited operating history. As of March 6, 2003, we employed 29
full-time employees and three part-time employees, and we have numerous product candidates in various stages of development. 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 and comply with all applicable laws, regulations and
licensing requirements that may be necessary as a result of such growth.

Certain of our officers and directors own a substantial percentage of our voting securities, enough to control or determine the outcome of any matter submitted to our
stockholders for approval.

Our
current officers and directors, who in the aggregate beneficially own 4,532,120 shares of our common stock, beneficially own 28.40% of the shares of our common stock. Accordingly,
these insider stockholders and their affiliates will have sufficient voting power to effectively control the election of our board of directors, direct the appointment of our officers and, in general,
determine the outcome of any corporate transaction or similar matters submitted to our stockholders for majority approval. For a more detailed explanation regarding the beneficial ownership of our
common stock by our officers and directors, please refer to the disclosure called for by Part III, Item 12 of this Form 10-K (incorporated by reference from our Proxy
Statement).

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. 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.

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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 2003, commonly
called a poison pill, empowers our board of directors to delay or negotiate, and thereby possibly to thwart, any tender or takeover attempt the board of directors opposes. Public stockholders who
might desire to participate in such a transaction may not have an opportunity to do so. We also have a staggered board of directors that makes it difficult for stockholders to change the composition
of our board of directors in any one year. These anti-takeover provisions could substantially impede the ability of public stockholders to change our management and board of directors.

Risks Related to our Industry

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

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

We
are focused on developing product candidates for the treatment of central nervous system, cardiovascular, urological 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:



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 and less costly than ours and
may also be more successful than we and our collaborators or licensees in manufacturing and marketing their products.

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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:



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 patent protection for our proprietary technologies and product candidates. The risk exists, however, that these patents may be unobtainable and that the
breadth of the claims in a patent, if obtained, may not provide adequate protection of our, or our collaborators' or licensees', proprietary technologies or product candidates.

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

33

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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 reimbursement for the use of our products from
third-party payors, for which we may or may not qualify.

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

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



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

34

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reimbursement will be available for our product candidates utilizing new technology, or that any reimbursement authorization, if obtained, will be adequate.

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 consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot
successfully defend ourselves against these claims, we may incur substantial losses or expenses, or be required to limit the commercialization of our product candidates. We have obtained limited
product liability insurance coverage for our clinical trials in the amount of $3.0 million per occurrence and $3.0 million in the aggregate. Our insurance coverage, however, may not
reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and we may not be able to maintain
insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if
we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On
occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us
would decrease our cash and could cause our stock price to fall.

ITEM 2. PROPERTIES

We currently lease and occupy approximately 11,284 square feet in our executive offices located in Hackensack, New Jersey. Our lease will expire if not renewed in
June 2004.

ITEM 3. LEGAL PROCEEDINGS

Securities Class Action Lawsuits

From April 30, 2002, a number of class action lawsuits were filed naming us as defendants, certain of our officers and directors and certain of the
underwriters in our April 24, 2002 initial public offering of 5,000,000 shares of our common stock. The lawsuits were filed in the United States District Court for the Southern District of New
York and the Untied States District Court for the District of New Jersey. The complaints that have been served allege violations of Sections 11, 12 and 15 of the Securities Act of 1933 as well as
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, based upon our alleged failure to
disclose the filing of a revised registration statement and prospectus for our initial public offering reflecting changes to the 1999 financial statements of our joint venture with Elan, DOV
(Bermuda), Ltd. These class actions were brought on behalf of purchasers of our common stock in or traceable to our initial public offering and seek money damages or rescission. On
August 16, 2002, Judge Sweet consolidated before him the lawsuits, previously consolidated, filed in the United States District Court for the District Court of New Jersey with the lawsuits
filed in the Southern District. On December 20, 2002, we entered into a settlement agreement, which is subject to court approval, to settle these lawsuits. The settlement, to be presented to
the court, includes all defendants and covers as a class all those who purchased common stock of DOV in or traceable to our initial public offering through December 20, 2002 and suffered
damages. If the proposed settlement is approved by the court,we will pay in the aggregate to the plaintiffs (i) $250,000 and (ii) 500,000 six-year warrants to purchase our
common stock exercisable at $10.00 per share. As of December 31, 2002, we estimated the value of these warrants at $2.3 million. On January 21, 2003, the United States District
court

35

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authorized notice of the proposed class action settlement that was sent to all putative class members. The notice informed class members of their rights including their rights to object to the
proposed settlement and to pursue their claims separately.

While
we expect that the court will approve the class action settlement terms, we cannot provide any assurance that this will occur, or that the settlement terms reached will not be
changed in response to court objections or that litigation will not resume if the settlement is not approved. If the securities
litigation resumes we believe we have meriotorious defenses to the claims alleged, and we would vigorously defend against the claims. In such event, we would incur expenses, including attorneys' fees,
in defending the securities class actions.

Related Directors and Officers Insurance Arbitration

In connection with the securities class action lawsuits described above, our providers of primary and excess liability insurance for directors and officers, D&O,
have asserted that the policy binders they issued in connection with our initial public offering are not effective because, among other reasons, the carriers claim that they never approved the
documentation provided with policy application, including the final registration statement, and the carriers claim that such approval is a prerequisite to their policy's effectiveness.

We
strongly disagree with their positions, have advised the carriers that we intend to hold them to their original binder terms as we vigorously pursue resolution of these matters, and
have initiated arbitration against the primary D&O carrier. We cannot provide any assurance that a satisfactory resolution of these matters will be achieved or that litigation will not ensue. Pending
resolution, we will incur expenses, including attorneys' fees, in attempting to resolve the coverage disputes. These expenses may be significant and, as a result, may materially and adversely affect
our results of operations. In addition, our inability to obtain coverage as provided in our original binders could adversely affect our financial condition, results of operations and liquidity, since
expenses incurred in defending the class actions may not be reimbursable by the insurers and any losses in respect of the class action lawsuits may be borne solely by us. If the arbitration results in
an award that there is no primary D&O coverage, we will be responsible for losses, if any, up to $10.3 million, normally covered by such insurance for director and officer reimbursement.

We
have reached an agreement with the excess D&O carrier that for claims other than the securities class action lawsuits described above, the excess D&O policy will remain in place,
effective for losses in excess of $10.3 million. If we and our officers and directors are not covered by primary D&O insurance, our ability to recruit and retain officers and directors may be
adversely affected. We cannot assure you that replacement primary D&O coverage will be available or, if it is, will be available on financial terms comparable to those offered by the original primary
carrier that has denied coverage. Further, if replacement coverage is secured, it will not cover previously-initiated class or related class actions arising out of our initial public offering and may
contain other exceptions and coverage restrictions not found in the primary carrier's original policy binder.

We
are not a party to any other 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.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

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

Year 2002

High

LowSecond Quarter (since April 25, 2002)

$
12.00

$
3.89Third Quarter

$
4.67

$
3.29Fourth Quarter

$
7.30

$
3.70Year 2003First Quarter (through March 21, 2003)

$
6.90

$
5.10


As
of March 6, 2003, there were approximately 43 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.

We
completed our initial public offering of our common stock pursuant to our Registration Statement on Form S-1 under the Securities Act of 1933 (File
No. 333-81484) on April 30, 2002, having priced on April 24, 2002. All 5,000,000 shares of common stock offered in the final prospectus were sold at a price per share
of $13.00. The managing underwriters of our offering were CIBC World Markets Corp., Lehman Brothers Inc., Lazard Freres & Co. LLC and Fidelity Capital Markets, a division of National
Financial Services LLC. The aggregate gross proceeds of the shares offered and sold were $65.0 million that resulted in net proceeds to us of approximately $59.0 million after deducting
underwriting discounts and commissions and other offering expenses of approximately $6.0 million. As of December 31, 2002, the majority of the net proceeds from the offering are
primarily invested in cash and cash equivalents, short-term money market accounts and investment-grade securities.

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

ITEM 6. SELECTED FINANCIAL DATA

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

The
following tables present selected financial data at and for the years ended December 31, 1998, 1999, 2000, 2001 and 2002. The statement of operations data for the years ended
December 31, 2000, 2001 and 2002, and the balance sheet data at December 31, 2001 and 2002, have been derived from our audited financial statements included in Part II, Item 8 in
this Form 10-K. The balance sheet data at December 31, 1999 and 2000, and the statements of operations data for the year ended December 31, 1999, have been derived
from our audited financial statements not included in this Form 10-K. The statement of operations data for the year ended December 31, 1998 and the balance

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sheet data at December 31, 1998 have been derived from our unaudited financial statements not included in this Form 10-K.

|                                                                               |                                    | Years Ended December 31, |          
|------------------------------------------------------------------------------ | ---------------------------------- | ------------------------ | ---------
|
|
|Statement of Operations Data:                                                  |                                    |                          |          
|Revenue                                                                        |                                    | $                        | 83       
|Operating expenses:                                                            |                                    |                          |          
|                                                                               | Royalty expense                    |                          |          
|                                                                               | General and administrative expense |                          |          
|                                                                               | Research and development expense   |                          |          
|                                                                               |                                    |                          |          
|                                                                               |                                    | Loss from operations     |          
|Loss in investment in DOV Bermuda                                              |                                    |                          |         
|Interest income                                                                |                                    |                          |         
|Interest expense                                                               |                                    |                          | (4       
|Other income (expense), net                                                    |                                    |                          | 5        
|                                                                               |                                    |                          |          
|Net loss                                                                       |                                    |                          | (707     
|Deemed dividend on conversion of series A preferred                            |                                    |                          |         
|Deemed dividend on issuance of series B preferred                              |                                    |                          |         
|Deemed dividend on issuance of series C preferred                              |                                    |                          |         
|Deemed dividend on issuance of series D preferred                              |                                    |                          |         
|Net loss attributable to common stockholders                                   |                                    | $                        | (707     
|                                                                               |                                    |                          |          
|Basic and diluted net loss per share                                           |                                    | $                        | (0.17    
|                                                                               |                                    |                          |          
|Weighted average shares used in computing basic and diluted net loss per share |                                    |                          | 4,179,600

|                                                    |  | Years Ended December 31, |     
|--------------------------------------------------- |  | ------------------------ | ----
|
|
|Balance Sheet Data:                                 |  |                          |     
|Cash and cash equivalents and marketable securities |  | $                        | 97  
|Working capital                                     |  |                          | (344
|Total assets                                        |  |                          | 210 
|Long-term debt                                      |  |                          |    
|Redeemable preferred stock                          |  |                          | 440 
|Accumulated deficit                                 |  |                          | (790
|Total stockholders' (deficit) equity                |  |                          | (674

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

Overview

We are focused on the discovery, in-licensing, development and commercialization of novel drug candidates for the treatment of central nervous system,
cardiovascular and urological disorders that involve alterations in neuronal processing. In 1998, we licensed four of our product candidates from Wyeth-Ayerst: indiplon, for the treatment of insomnia,
bicifadine, for the treatment of pain, ocinaplon, for the treatment of anxiety, and DOV 216,303, for the treatment of depression. We sublicensed 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 has recently entered into a development and
commercialization agreement with Pfizer for indiplon. We are developing bicifadine and ocinaplon through DOV Bermuda, our joint venture with Elan. Through

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January 2003, DOV diltiazem was being developed through our collaboration with Biovail, which we entered into in January 2001.

Since
our inception, we have incurred significant operating losses and we expect to do so for the foreseeable future. As of December 31, 2002, we had an accumulated deficit of
$40.7 million. We have depended upon equity and debt financings and to a lesser degree license fee, research and development and milestone payments from our collaborative partners and licensees
to fund our research and product development programs and expect to do so for the foreseeable future.

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

Our
revenue has consisted primarily of license fees and milestone payments from our collaborative partners and licensees. We record revenue on an accrual basis when amounts are
considered collectible. 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 royalty expense, costs associated with research and development and general and administrative costs associated with our operations. Royalty
expense consists of milestone payments accrued under our license agreement with Wyeth-Ayerst. Research and development expense consists primarily of compensation and other related costs of our
personnel dedicated to research and development activities, as well as outside clinical trial expenses and professional fees related to clinical trials, toxicology studies and preclinical studies.
Research and development expense also includes our expenses related to development activities of DOV Bermuda. General and administrative expense consists primarily of the costs of our senior
management, finance and administrative staff, business insurance and professional fees, and costs associated with being a public reporting entity.

We
expect research and development expense to increase substantially in the foreseeable future. We expect that a large percentage of this will be incurred in support of our clinical
trial programs and toxicology studies for bicifadine, ocinaplon, DOV diltiazem, DOV 216,303 and DOV 21,947, as well as our product candidates in our preclinical program if they progress into clinical
trials. It is not unusual for the clinical development of these types of products to each take five years or more, and for total development costs to exceed $50 million for each product. We are
not responsible for the clinical program for indiplon. We, therefore, are unable to estimate the amount of expenditures necessary to complete their development. We in-licensed bicifadine
and ocinaplon after Wyeth-Ayerst had already completed a considerable amount of development work, including major toxicology and manufacturing development programs for both compounds, as well as four
Phase I and 14 Phase II clinical trials for bicifadine and four Phase I clinical trials for ocinaplon. As of December 31, 2002, DOV Bermuda has spent approximately $9.1 million on the
development of bicifadine and $11.7 million on the development of ocinaplon in connection with their respective clinical development programs. Additionally, DOV Bermuda incurred
$10.0 million in technology license fees for the two products and the Elan technology.
As of December 31, 2002, we have incurred approximately $916,000 and $1.9 million in development expenses for DOV 21,947 and DOV 216,303, respectively.

We
expect that the development of these five product candidates will require substantial additional time and expense. This includes, for ocinaplon and bicifadine, our loss of funding
support from Elan starting with January 2003, and for DOV diltiazem, our loss of funding support from Biovail starting

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with February 2003, until other collaborative relationships can be found. The time and cost of completing the clinical development of our product candidates will depend on a number of factors,
including the disease or medical condition to be treated, clinical trial design and endpoints, availability of patients to participate in trials, the results of clinical trials, the number of clinical
trials required to be conducted, unanticipated trials, the length of time of the regulatory review process, the relative efficacy of the product versus treatments already approved and our ability to
enter into new development collaborations. In light of these many uncertainties, we are unable to estimate the length of time or the costs that will be required to complete the development of these
product candidates.

In
January 1999, we entered into a joint venture with Elan. As part of the transaction, we formed DOV Bermuda to develop controlled release formulations of ocinaplon and
bicifadine. We own 80.1% of the outstanding common stock of DOV Bermuda. However, Elan has retained significant minority investor rights that are treated as "participating rights" as defined in
Emerging Issues Task Force Consensus, or EITF, No. 96-16 "Investor's Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder
or Shareholders Have Certain Approval or Veto Rights." Therefore, we do not consolidate the financial statements of DOV Bermuda, but instead account for our investment in DOV Bermuda under the equity
method of accounting. We record our 80.1% interest in the loss in DOV Bermuda as research and development expense for the portion of the research and development expense incurred by us on behalf of
DOV Bermuda and as Loss in Investment in DOV Bermuda for our 80.1% interest in the remaining loss of DOV Bermuda, including that attributable to research and development expense of Elan. As Elan's
participating rights expired as of January 2003, we will begin to consolidate the results of DOV Bermuda as of January 1, 2003.

Elan
loaned us $8.0 million in the form of a convertible exchangeable promissory note to fund our investment in DOV Bermuda. Elan has the right to convert the outstanding
principal amount of this note at any time, together with accrued unpaid interest, into shares of our common stock at $3.98 per share. Alternatively, as of December 31, 2002, Elan could exchange
the principal portion of the note for an additional equity interest in DOV Bermuda such that our equity interests would be equal. We expect this would have resulted in our transferring a portion of
the shares we hold to Elan. We are accounting for this exchange feature in accordance with EITF 86-28 "Accounting Implications of Indexed Debt Instruments." This requires us to record an
additional liability for this feature if the value of the interest Elan can obtain in the joint venture is more than the principal amount of the note. Since we issued this note to Elan, this feature
has not resulted in any interest expense and in March 2003, the exchange feature of the note was eliminated. To the extent Elan has not converted the note, the unpaid principal and accrued
interest are due and payable on January 20, 2005.

Elan
agreed to lend us up to $7.0 million to fund our pro rata share of research and development funding in DOV Bermuda. For this purpose, we issued to Elan a convertible
promissory note, which we refer to as the convertible line of credit, that bears interest at 10% per annum compounded semi-annually on the amount outstanding. This convertible line of
credit matures on January 20, 2005, at which time the principal amount and accrued unpaid interest become due and payable. The convertible line of credit may not be prepaid by us without Elan's
prior written consent. At any time prior to the date the convertible line of credit is repaid in full, Elan has the right to convert the outstanding principal and accrued unpaid interest of the
convertible line of credit into shares of our common stock at $3.41 per share. As of December 31, 2002, we have drawn down $2.4 million on the convertible line of credit and, with
interest at 10% per annum compounded semi-annually, the note is carried at $3.3 million at December 31, 2002. Our ability to borrow further under the convertible promissory
note expired on March 27, 2002. Please refer to note 5 of our financial statements under Part II, Item 8 of this Form 10-K and the text of subheading
"Collaborations and Licensing AgreementsElan Corporation, plc and Elan International Service, Ltd." under Part I, Item 1 of this Form 10-K.

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On
July 31, 2002, Elan announced a recovery plan that includes the divestiture of its businesses, assets and products that are no longer core. Elan has advised us that it will no
longer fund its pro rata portion of the joint venture expenses effective January 1, 2003. We intend to fund Elan's portion of the joint venture expenses but will also assess our options,
including seeking substitute collaborative arrangements. The joint venture agreement, in this case, provides that Elan's original equity interest in the joint venture will be diluted using a formula
that compares respective overall funding contributions, but giving an extra 50% dollar credit to our continued funding not matched by Elan's pro rata contribution equal to the parties' equity
relationship. We are committed to pursuing the development of the joint venture product candidates, ocinaplon and bicifadine, on the present schedule. DOV Bermuda's loss is primarily related to the
research and development expenses incurred to conduct clinical trials for ocinaplon and bicifadine. These expenses include payments to Elan and us for contract research services that include a
mark-up.

During
2002, 2001 and 2000, in connection with the grant of stock options to employees, we incurred compensation expense totaling $73,000, $1.1 million, and $118,000,
respectively. These amounts represent the difference between the fair value of our common stock on the date the options were granted and the applicable exercise prices for those options granted during
the time period, and are amortized using an accelerated vesting method over the vesting period for the options. This method results in increased compensation expense in earlier years than
straight-line vesting. During 2002, 2001 and 2000, we recorded amortization of stock compensation expense of $605,000, $332,000, and $148,000, respectively and in 2002 we recorded a non
cash stock compensation expense of $136,000 for the acceleration of certain options for certain severed employees. At December 31, 2002, 2001 and 2000, $276,000, $808,000, and $21,000 remained
to be amortized over the vesting periods of the stock options, of which $233,000 will be amortized in 2003 and the remainder through 2005. Please refer to note 2 of our financial statements
included under Part II, Item 8 of this Form 10-K.

Additionally,
during 2002, 2001 and 2000, we granted options and warrants to outside consultants at fair value on the date of grant in exchange for future services. These options and
warrants are required to be accounted for in accordance with Statement of Financial Accounting Standards, or SFAS 123
"Accounting for Stock Based Compensation" and EITF 96-18 "Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or
Services" and at the fair value of the consideration received, or the fair value of the equity instrument issued, whichever may be more readily measured. As the performance of services is completed,
we revalue the options and warrants that have been earned during the period. We valued these securities at the fair value using a Black-Scholes methodology. During 2002, 2001 and 2000, in connection
with the grant of these stock options and warrants to outside consultants, we recorded stock compensation expense totaling $233,000, $293,000 and $246,000 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 8 of our financial statements included under Part II, Item 8 of
this Form 10-K.

In
May and June 2000, we sold series C preferred stock for net cash proceeds of $6.4 million and in August and October of 2001, we sold series D preferred
stock for net cash proceeds of $9.0 million. Our series C and series D preferred stock included beneficial conversion features to be calculated 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
No. 98-5 to Certain Convertible Instruments". This resulted in a deemed dividend of $49,000 in 2000 in connection with the issuance of our series C preferred stock and
$97,000 in 2001 in connection with the issuance of our series D preferred stock. These amounts increased the net loss attributable to common stockholders.

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Results of Operations

Years Ended December 31, 2002 and 2001

Revenue.Our revenue was $2.4 million for 2002 as compared to $5.7 million for 2001. In 2002 our revenue was
comprised of $2.2 million of amortization of the $7.5 million fee we received on signing of the license, research and development agreement for our collaboration with Biovail in
January 2001 and $150,000 in revenue from contract research services performed under our collaboration with Biovail. The upfront payment has been deferred and is being amortized to revenue over
the estimated research and development period. During 2001 this period was estimated to be 36 months. As of July 1, 2002, we revised this estimate to be approximately 41 months
and, accordingly, the amortization of the remaining balance beginning July 1, 2002 reflects this revised time period. This adjustment to the estimate for the development period was made as a
result of unexpected results obtained in a Phase I pharmacokinetic study in which we discovered that a high fat meal, proximate to dosing, retarded the bioavailability of the immediate release
component of the diltiazem formulation under development. We intend to conduct an additional Phase I pharmacokinetic study in order to evaluate strategies to overcome this
food effect. This additional study has delayed the initiation of the Phase III clinical trial by several months and thereby extended our total development timeline. In 2001, our revenue was comprised
of $2.3 million in license fees from Biovail, a $3.2 million milestone payment from Neurocrine, which included $1.3 million in cash and warrants to purchase shares of Neurocrine's
common stock valued at $1.9 million, and $245,000 in revenue from contract research services performed under our collaboration with Biovail.

Royalty Expense.We did not incur royalty expense in 2002. The royalty expense of $1.1 million for 2001reflected
Wyeth-Ayerst's share of the milestone payment and warrants we received under our sublicense agreement with Neurocrine.

Research and Development Expense.Research and development expense increased $4.8 million to $10.3 million for
2002 from $5.5 million in 2001. Approximately $2.6 million of the increase in research and development expense was attributable to increased costs associated with the Phase II clinical
trials and toxicology studies for ocinaplon and bicifadine, including allocated payroll and overhead of $354,000, and $2.2 million was primarily attributable to increased costs for clinical
trials and toxicology studies for our other compounds. Research and development expense included increased costs associated with personnel of approximately $650,000 and severance for two employees of
$311,000, which includes $136,000 of a charge taken for the acceleration of certain options for the severed employees. Research and development expense included non-cash, stock-based
compensation expense of $452,000 in 2002 and $288,000 in 2001.

General and Administrative Expense.General and administrative expense increased $1.6 million to $3.9 million
in 2002 from $2.3 million in 2001. The increase was primarily attributable to increased payroll costs of $941,000, increased office and related expenses of $510,000 and increased professional
fees of $108,000. The increase in payroll costs was primarily attributable to increased non-cash compensation expense of $378,000, and increased salaries and bonuses of $503,000 as we
expanded our operations. The increase in office and related expenses was primarily related to an increase in directors and officers' liability insurance premiums of $322,000, an increase in
advertising expense of $77,000, an increase in corporate taxes of $51,000 and an increase in data processing and online services of $50,000. The increase in professional fees is primarily related to
an increase in accounting related expenses of $123,000, offset by a net decrease in various other professional fees of $15,000. General and administrative expense included non-cash,
stock-based compensation expense of $522,000 in 2002 and $337,000 in 2001.

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Loss in Investment in DOV Bermuda.Loss in investment in DOV Bermuda decreased $417,000 to $1.0 million in 2002 from
$1.4 million in 2001. The decrease resulted primarily from decreased costs associated with formulation development work for ocinaplon and bicifadine performed by Elan.

Interest Income.Interest income increased $700,000 to $1.1 million in 2002 from $366,000 in 2001. The increase was
due to higher balances of cash and cash equivalents in 2002 resulting from the $59.0 million of net proceeds received from our initial public offering, offset by lower average interest rate
yields in 2002.

Interest Expense.Interest expense increased $526,000 to $2.0 million in 2002 from $1.5 million in 2001,
primarily attributable to our convertible exchangeable promissory note and convertible line of credit with Elan. Approximately $75,000 of the increase was due to the impact of higher outstanding
balances on the convertible exchangeable promissory note and the convertible line of credit. Both the Elan convertible exchangeable promissory note and convertible line of credit contain interest that
will, at Elan's option, be paid either in cash or our common stock. In accordance with EITF 00-27, we evaluate this conversion feature each time interest is accrued on the notes. This
feature resulted in additional interest expense of $1.0 million for 2002, an increase of $452,000 from 2001. To the extent the value of our common stock is at or above $3.98 per share with
respect to the convertible exchangeable promissory note or $3.41 per share with respect to the convertible line of credit, we will continue to incur additional interest expense each time interest is
accrued on the particular note.

Other Income (Expense), net.Other income and expense (net) decreased $3.4 million from a net income of $423,000 in
2001 to a net expense of $3.0 million in 2002. In 2002, other income (expense), net consisted primarily of $2.5 million in a reserve for, pending court approval, settlement of a
securities class action lawsuit discussed below and $501,000 of expense associated with the net decrease in the value of the warrants to acquire Neurocrine common stock, which we earned in 2001 upon
the achievement of a certain milestone offset by the corresponding decrease in the liability to Wyeth-Ayerst. In 2001, other income, net consisted primarily of a net increase of $423,000 in value of
the Neurocrine warrants.

On
December 20, 2002, we entered into a settlement agreement, which is subject to court approval, to settle class action lawsuits that had been filed against us on behalf of
purchasers of our common stock in or traceable to our initial public offering described in Part I, Item III of this Form 10-K. If the proposed settlement is approved by the
court we will pay in the aggregate to the plaintiffs (i) $250,000 and (ii) 500,000 six-year warrants to purchase our common stock exercisable at $10.00 per share. Based on
the terms of the settlement agreement, we determined that a liability related to these actions was probable and that the value was reasonably estimable. Accordingly, as of December 31, 2002, we
established an estimate for the cost of the litigation settlement of $2.5 million, with $2.3 million representing our estimate of the liability for the fair value of the warrants. We
estimated the fair value of the warrants using a Black-Scholes methodology. Significant assumptions included our closing stock price as of December 31, 2002 of $6.80 per share and a volatility
factor of 82.242% based on the 90-day volatility as reported by Bloomberg for the 90 days ended December 31, 2002. The fair value of the warrants will fluctuate based on many
factors, including, but not limited to, the fair value of our common stock and the volatility in our common stock. The majority of the value in the liability at December 31, 2002, relates to
our current stock price, the term of the warrants and the fact that our common stock is volatile. The final value of the overall settlement may differ significantly from the estimates currently
recorded depending on the variety of factors affecting the valuation of the warrants. Accordingly, we will revalue the estimate of the settlement on a quarterly basis and at the time the warrants are
issued. Upon approval of the court, the warrants will be considered issued and we will revalue the warrants at that time and record such amounts as stockholders' equity in accordance with EITF
00-19, "Accounting for Derivative Financial Instruments

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Indexed to, and Potentially Settled in, a Company's Own Stock". After issuance, we will no longer be required to revalue the liability for the warrants.

In
connection with the securities class action lawsuits described above, our providers of primary and excess liability insurance for directors and officers, D&O, have asserted that the
policy binders they issued in connection with our initial public offering are not effective because, among other reasons, the carriers claim that they never approved the documentation provided with
policy application, including the Final Registration Statement, and the carriers claim that such approval is a prerequisite to their policy's effectiveness.

We
strongly disagree with their positions, have advised the carriers that we intend to hold them to their original binder terms as we vigorously pursues resolution of these matters, and
have initiated arbitration against the primary D&O carrier. We cannot provide any assurance that a satisfactory resolution of these matters will be achieved or that litigation will not ensue. As a
result of this uncertainty, we have not recorded any reduction in the cost of the class action settlement described above for insurance proceeds. To the extent we prevail in the arbitration, any
insurance recovery will be recorded in the period when the recovery is realized.

Years Ended December 31, 2001 and 2000

Revenue.Our revenue was $5.7 million for 2001, as compared to no revenue for 2000. In 2001, our revenue was comprised
of $2.3 million in license fees from Biovail, a $3.2 million milestone payment from Neurocrine, which included $1.3 million in cash and warrants to purchase shares of Neurocrine's
common stock valued at $1.9 million, and $245,000 in revenue from contract research services performed under our collaboration with Biovail. In connection with the Biovail license agreement, we
received a $7,500,000 fee on signing. The upfront payment has been deferred and is being amortized to revenue when earned over the estimated research and development period.

Royalty Expense.Royalty expense was $1.1 million for 2001, as compared to no such expense in 2000. The expense in
2001 reflected Wyeth-Ayerst's share of the milestone payment and warrants we received under our sublicense agreement with Neurocrine.

Research and Development Expense.Research and development expense increased $2.9 million to $5.5 million in
2001 from $2.6 million in 2000. This expense included $3.3 million in 2001 and $1.6 million in 2000 of research and development expense related to DOV Bermuda. The increase in
research and development expense for DOV Bermuda of $1.7 million resulted primarily from increased costs
associated with the initiation of Phase II clinical trials for ocinaplon and bicifadine in late 2000. The remaining increase of $1.2 million resulted primarily from increased costs for our
personnel dedicated to research and development activities, including overhead allocations of $748,000, clinical trials for DOV 216,303 of $213,000 and professional fees of $150,000. Research and
development expense also included non-cash, stock-based compensation expense of $288,000 in 2001 and $111,000 in 2000.

General and Administrative Expense.General and administrative expense increased $1.0 million to $2.3 million
in 2001 from $1.3 million in 2000. The increase was primarily attributable to increased costs for additional personnel of $393,000 and increased professional fees of $477,000 as we expanded our
operations. General and administrative expense included non-cash, stock-based compensation expense of $337,000 in 2001 and $283,000 in 2000.

Loss in Investment in DOV Bermuda.Loss in investment in DOV Bermuda increased $116,000 to $1.4 million in 2001 from
$1.3 million in 2000. The increase resulted primarily from increased costs associated with the formulation development work for ocinaplon and bicifadine performed by Elan.

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Interest Income.Interest income increased $143,000 to $366,000 in 2001 from $223,000 in 2000. The increase was due to higher
balances of cash and cash equivalents resulting from the $7.5 million license fee received from Biovail in January 2001 and the $9.0 million in net cash proceeds received from our
sale of series D preferred stock in August and October 2001.

Interest Expense.Interest expense increased $639,000 to $1.5 million in 2001 from $852,000 in 2000. We recorded
interest expense of $930,000 on our convertible exchangeable promissory note and convertible line of credit with Elan in 2001, and $845,000 in 2000. This increase was due to higher outstanding
balances on both notes attributable to accrued interest. Both the Elan convertible exchangeable promissory note and convertible line of credit contain interest that will be paid either in cash or
common stock at Elan's option. In accordance with EITF00-27, we evaluate this conversion feature each time interest is accrued to the notes. During 2001, this resulted in additional
interest expense of $560,000. To the extent the value of our common stock is at or above $3.98 per share with respect to the convertible exchangeable promissory note or $3.41 per share with respect to
the convertible line of credit, we will continue to incur this additional interest expense each time interest is accrued on the notes. The convertible exchangeable promissory note and the convertible
line of credit are described in further detail in note 5 of our financial statements.

Other Income, net.We had $423,000 of other income, net in 2001. We did not record any other income, net in 2000. In 2001,
other income, net consisted of a $600,000 increase in value of the warrants issued by Neurocrine to us, which we earned in 2001 upon the achievement of a certain milestone, offset by the increase in
our liability to Wyeth-Ayerst associated with the warrants.

Liquidity and Capital Resources

For the three years ended December 31, 2000, 2001 and 2002, we funded our operations principally from sales of our equity securities and loans from our
collaborative partners, which provided cash in the aggregate amount of approximately $75.6 million, and license and cash milestone revenues in the aggregate amount of $8.8 million. Sales
of our equity securities have resulted in the receipt of net cash proceeds of $59.0 million from the sale of our common stock in April 2002, $9.0 million for the sale of our
series D preferred stock in August and October 2001, and $6.4 million from the sale of our series C preferred stock in May and June 2000. At December 31,
2002, our cash and cash equivalents and marketable securities totaled $60.3 million compared with $13.7 million at December 31, 2001. At December 31, 2002, we had working
capital of $54.1 million.

Net
cash used in operations during the year ended December 31, 2002 amounted to $10.9 million, as compared with cash provided by operations of $1.7 million in 2001.
The increase in cash used in operations resulted primarily from the increase in clinical development activities and the addition of personnel. Cash used in operations during the year ended
December 30, 2001, was offset by the receipt of the $7.5 million license fee from Biovail, net of amortization. Non-cash expenses related to stock-based compensation,
interest expense and depreciation and amortization expenses were $3.1 million and $2.2 million in the years ended December 31, 2002 and 2001, respectively. Non-cash
depreciation in the value of investments was $501,000 and non-cash appreciation in the value of investments was $423,000, net in the years ended December 31, 2002 and 2001,
respectively.

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 the end of
2004. Our future capital uses and requirements depend on numerous factors, including:



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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 licensees and collaborative partners, Elan, Neurocrine and Pfizer,
may encounter conflicts of interest, changes in business strategy or other business issues, or they may acquire or develop rights to competing products, all of which could adversely affect their
ability or willingness to fulfill their obligations to us and, consequently, require us to satisfy, through the commitment of
additional funds or personnel or both, any shortfalls in their performance. On July 31, 2002, Elan announced a recovery plan that includes the divestiture of its businesses, assets and products
that are no longer core. Elan has advised us that it will no longer fund its pro rata portion of the joint venture expenses effective January 1, 2003. We intend to fund Elan's portion of the
joint venture expenses but will also assess our options, including seeking substitute collaborative arrangements. The joint venture agreement provides, in this case, that Elan's original equity
interest in the joint venture will be diluted using a formula that compares respective overall funding contributions, but giving an extra 50% dollar credit to our continued funding not matched by
Elan's pro rata contribution equal to the parties' equity relationship. We are committed to pursuing the development of the joint venture product candidates, ocinaplon and bicifadine, on the present
schedule. In March 2003, we and Biovail terminated our collaborative agreement, under terms, among others, that Biovail's funding will cease effective February 2003. See "Collaborations and Licensing
Agreements" under Part I, Item 1 of this Form 10-K.

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, we may be required to curtail or delay significantly one or more of our product development programs. In addition, the remaining milestone payments under our
sublicense agreement with Neurocrine and Pfizer are contingent upon the filing of an NDA and the receipt of marketing authorization for indiplon. We are subject to significant variation in the timing
and amount of our revenues, milestone expenses and results of operations from period to period.

In
connection with the securities class action lawsuits described above under Part I, Item 3 of this Form 10-K, our providers of primary and excess liability
insurance for directors and officers, D&O, have asserted that the policy binders they issued in connection with our initial public offering are not effective. We strongly disagree with their
positions, have advised the carriers that we intend to hold them to their original binder terms as we vigorously pursue resolution of these matters, and have initiated arbitration against the primary
D&O carrier. We cannot provide assurance that a satisfactory resolution of these matters will be achieved. Pending resolution, we will incur expenses, including attorneys' fees in attempting to
resolve the coverage disputes. These expenses may be significant and, as a result, may materially and adversely affect our results of operations. In addition, our inability to obtain primary coverage
as provided in our original binder could adversely affect our financial condition, results of operations and liquidity, since expenses incurred in defending or settling actions, if any against us or
our officers and directors and would be borne solely by us if covered by director and officer indemnification agreements. On December 20, 2002, we entered into a settlement agreement, which is
subject to court approval, to settle the class action lawsuits. If the proposed settlement is approved by the court we will pay plaintiffs (i) $250,000 and (ii) 500,000
six-year warrants to purchase common stock exercisable at $10.00 per share.

We
have reached agreement with the excess D&O carrier that for claims other than the existing securities class action lawsuits, now under settlement pending court approval, the excess
D&O policy will remain in place, effective for losses in excess of $10.3 million. If the arbitration results in an award

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that there is no primary D&O coverage, we will be responsible for losses, if any, up to $10.3 million, normally covered by such insurance for director and officer (but not company)
reimbursement. We cannot assure you that replacement primary D&O coverage will be available or, if it is, will be available on financial terms comparable to those offered by the original carrier that
has denied coverage.
Further, if replacement coverage is secured, it will not cover the class actions or any related actions arising out of our initial public offering and may contain other exceptions and coverage
restrictions not found in the primary carrier's original policy binder.

Contractual Obligations and Commercial Commitments

Future minimum payments for all contractual obligations for years subsequent to December 31, 2002, are as follows:

|                                         |  | Years Ended December 31, |     |  |   |    
|---------------------------------------- |  | ------------------------ | --- |  | - | ---
|
|
|Convertible exchangeable promissory note |  | $                        |    |  | $ |   
|Convertible note                         |  |                          |    |  |   |   
|Operating leases                         |  |                          | 357 |  |   | 180
|                                         |  |                          |     |  |   |    
|Total                                    |  | $                        | 357 |  | $ | 180
|                                         |  |                          |     |  |   |    

In
May 1998, we licensed from Wyeth-Ayerst, 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-Ayerst's right of first refusal. If we sublicense a compound to a third party, we are obligated to pay Wyeth-Ayerst 35% of all payments we receive based upon that
compound. This payment drops to 25% if a new drug application has been filed by us before the sublicense grant. These payment obligations are subject to minimum royalties of 2.5% of net sales for
indiplon, ocinaplon and DOV 216,303 and 4.5% of net sales for bicifadine, and minimum milestones of $2.5 million for indiplon, ocinaplon and DOV 216,303 and $5.0 million for bicifadine.
Our sublicense agreement with Neurocrine and our joint venture with Elan are structured so that we can satisfy these minimum milestone obligations. To the extent DOV Bermuda has not entered into
arrangements with third parties, however, any amounts owed to us from our joint venture with Elan will be effectively funded by us, since Elan has determined not to participate in the funding of DOV
Bermuda effective January 1, 2003.

A
standby letter of credit held by our landlord remains in affect through 2005. This letter is collateralized by a certificate of deposit included in cash and cash equivalents.

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other
parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. As Elan's participating rights expired as of January 2003, we will
begin to consolidate the results of DOV Bermuda as of January 1, 2003.    As a result, the adoption of FIN 46 is not expected to have a material effect on our financial position or
results of operations.

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In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. This Statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. This Statement
also amends the disclosure provision of SFAS No. 123 and APB No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects
of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The adoption of SFAS
No. 148 did not have a material effect on our financial position or results of operations.

In
November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue
No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. We will be
required to adopt this provision for revenue arrangements entered into on or after June 15, 2003. Management is currently evaluating the effect that the adoption of EITF 00-21 will
have on our results of operations and financial condition.

In
November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others," which expands previously issued accounting guidance and disclosure requirements for certain guarantees. The Interpretation requires an entity to recognize an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified
after December 31, 2002. We do not expect this Interpretation to have a material impact on our financial position or results of operations.

In
June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activitiesrequires that a
liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. This Statement nullifies Emerging Issues Task
Force (EITF) 94-3, Liability Recognition for Certain Employees Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in an Restructuring), which
permitted recognition of a liability for an exit cost at the date of an entity's commitment to an exit plan. The Statement is effective as of January 1, 2003. If we record restructuring charges
subsequent to January 1, 2003, such charges will be recorded in accordance with SFAS No. 146.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121. SFAS
No. 144 further refines the provisions of SFAS No. 121 that require companies to recognize an impairment loss if the carrying amount of a long-lived asset is not recoverable
based on its undiscounted future cash flows and measure an impairment loss as the difference between the carrying amount and fair value of the asset. In addition, SFAS No. 144 provides guidance
on accounting and disclosure issues surrounding long-lived assets to be disposed of by sale. We adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144
did not have any impact on our financial statements.

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.

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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, the recognition of revenue for such an up front payment included an estimate by management as to the development period that such
up front payments were associated.

Stock-based compensation.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. We 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 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" 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.

Marketable Securities and Investments.In general our investments are diversified among high-credit quality debt
and equity securities in accordance with our investment policy. We classify our investments as available-for-sale, which are reported at fair market value with the related
unrealized gains and losses included as a component of stockholders' equity (deficit). Realized gains and losses and declines in value of investments judged to be other than temporary are included in
other income (expense). Declines in the fair market value of our investments judged to be other than temporary could adversely affect our future operating results. The fair market value of our
investments is subject to volatility. We also have an investment in Neurocrine warrants we received from Neurocrine under our sublicense agreement. We have a corresponding accrued royalty, included in
accrued expenses related to the portion of the Neurocrine warrants we must remit to Wyeth-Ayerst under our license agreement. As the warrants represent a derivative financial instrument under
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," both the asset and the liability to Wyeth-Ayerst are reflected in our financial statements at fair value and we record
an adjustment to those fair values at the end of each reporting period with the corresponding gain or loss reflected in other income or other expense.

Liabilities.Having reached a settlement agreement with plaintiffs in the securities class action lawsuits as described above
under Part I, Item 3 of this Form 10-K, we determined that a liability related to these actions was probable and that the value was reasonably estimable. The settlement,
which is subject to court approval, calls for a payment by us of $250,000 and the issuance of 500,000 six-year warrants
exercisable at $10.00 per share. Accordingly, as of December 31, 2002, we established an estimate for the cost of the litigation settlement of $2.5 million, with $2.3 million
representing our estimate of the liability for the fair value of the warrants. The warrants are not considered issued or outstanding, and as a result an estimated liability for the settlement has been
recorded in our financial statements at fair value. We estimated the fair value of the warrants using a Black-Scholes methodology. Upon approval of the court, the warrants will be considered issued
and we will record the fair value of the warrants at that time as stockholders' equity in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock". After this point, we will no longer be required to revalue the liability for the warrants.

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Income taxes.We have net deferred tax assets at December 31, 2002 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 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.

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
auditor, PricewaterhouseCoopers LLP, including 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 new charter adopted in March 2003, continues these pre-approval requirements. We are monitoring
developments including new regulations and pronouncements from the SEC and Nasdaq as a result of the Sarbanes-Oxley Act, and will comply with any new requirements.

ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risks

To date, we have invested our cash balances with significant 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.

In
addition to our investment portfolio of our cash balances, we also have an investment in Neurocrine warrants. The investment balance of $1.6 million and $2.4 million at
December 31, 2002 and 2001, respectively, includes warrants we received from Neurocrine under our sublicense agreement. We have a corresponding accrued royalty of $563,000 and $833,000 for 2002
and 2001 respectively, included in accrued expenses related to the portion of the Neurocrine warrants we must remit to Wyeth-Ayerst under our license agreement. As the warrants represent a derivative
financial instrument under SFAS 133 "Accounting for Derivative Instruments and Hedging Activities," both the asset and the liability to Wyeth-Ayerst are reflected in our financial statements at
fair value and we record an adjustment to those fair values at the end of each reporting period with the corresponding gain or loss reflected in other income or other expense. Included in other
expense, net for 2002, was $501,000 for the net result of the decrease in the value of the warrants offset by the decrease in the liability. We calculated these values using a Black-Scholes
methodology. The fair value of the warrants will fluctuate based on many factors including but not limited to overall stock market conditions, the fair value of Neurocrine's common stock, the
volatility in Neurocrine's common stock and length of time left on our warrants, currently four years. The majority of the value in the asset at December 31, 2002, relates to

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the term of the warrants and the fact that Neurocrine's common stock is volatile. As long as we continue to own these warrants, we expect these factors and the corresponding value of the asset and
liability to continue to fluctuate perhaps significantly from quarter-to-quarter and from year-to-year.

On
December 20, 2002, we entered into a settlement agreement, which is subject to court approval, to settle class action lawsuits that had been filed against us on behalf of
purchasers of our common stock in or traceable to our initial public offering described in Part I, Item III of this Form 10-K. If the proposed settlement is approved by the
court we will pay in the aggregate to the plaintiffs (i) $250,000 and (ii) 500,000 six-year warrants to purchase our common stock exercisable at $10.00 per share. Based on
the terms of the settlement agreement, we determined that a liability related to these actions was probable and that the value was reasonably estimable. Accordingly, as of December 31, 2002, we
established an estimate for the cost of the litigation settlement of $2.5 million, with $2.3 million representing our estimate of the liability for the fair value of the warrants. We
estimated the fair value of the warrants using a Black-Scholes methodology. Significant assumptions included our closing stock price as of December 31, 2002 of $6.80 per share and a volatility
factor of 82.242% based on the 90-day volatility as reported by Bloomberg for the 90 days ended December 31, 2002. The fair value of the warrants will fluctuate based on many
factors including but not limited to the fair value of our common stock and the volatility in our common stock. The majority of the value in the liability at December 31, 2002, relates to our
current stock price, the term of the warrants and the fact that our common stock is volatile. The final value of the overall settlement may differ significantly from the estimates currently recorded
depending on the variety of factors affecting the valuation of the warrants. Accordingly, we
will revalue the estimate of the settlement on a quarterly basis and at the time the warrants are issued. Upon approval of the court, the warrants will be considered issued and we will revalue the
warrants at that time and record such amounts as stockholders' equity in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Company's Own Stock". After issuance, we will no longer be required to revalue the liability for the warrants.

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.

52

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

The information required by this item is incorporated herein by reference from our definitive proxy statement to be filed within 120 days after the end of
our 2002 fiscal year, pursuant to Regulation 14A for our annual meeting of stockholders to be held May 30, 2003.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference from our definitive proxy statement to be filed within 120 days after the end of
our 2002 fiscal year, pursuant to Regulation 14A for our annual meeting of stockholders to be held May 30, 2003.

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

The information required by this item is incorporated herein by reference from our definitive proxy statement to be filed within 120 days after the end of
our 2002 fiscal year pursuant, to Regulation 14A for our annual meeting of stockholders to be held May 30, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference from our definitive proxy statement to be filed within 120 days after the end of
our 2002 fiscal year, pursuant to Regulation 14A for our annual meeting of stockholders to be held May 30, 2003.

ITEM 14. CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Exchange Act, within 90 days prior to filing this report, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our
chief executive officer and our chief financial officer. Based upon that evaluation these officers concluded that our disclosure controls and procedures are effective. There have been no significant
changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out our evaluation.

Disclosure
controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations. Disclosure controls and procedures include controls and procedures designed to ensure
that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer
as appropriate, to allow timely decisions regarding disclosure.

53

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The
following financial statements of DOV (Bermuda), Ltd. (A Development Stage Company) and
Report of PricewaterhouseCoopers LLP are included in this report:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 2001 and 2002
Consolidated Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002 and
the Period from Inception (January 21, 1999) through December 31, 2002
Consolidated Statements of Stockholders' Deficit for the Periods from Inception (January 21, 1999)
through December 31, 2002
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002 and
the Period from Inception (January 21, 1999) through December 31, 2002
Notes to Consolidated Financial Statements





54

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|Exhibit
No. |  | Description                                                                                                                                                                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Second Amended and Restated Certificate of Incorporation of Registrant.#                                                                                                                                                                                                                                  
|3.2         |  | Form of Third Amended and Restated Certificate of Incorporation of Registrant.#                                                                                                                                                                                                                           
|3.3         |  | Form of Fourth Amended and Restated Certificate of Incorporation.#                                                                                                                                                                                                                                        
|3.4         |  | By-Laws of Registrant.#                                                                                                                                                                                                                                                                                   
|3.5         |  | Form of Amended and Restated By-laws of Registrant.#                                                                                                                                                                                                                                                      
|3.6         |  | Shareholder Rights Plan.#                                                                                                                                                                                                                                                                                 
|3.7         |  | Audit Committee Charter                                                                                                                                                                                                                                                                                   
|4.1         |  | See Exhibits 3.1 and 3.4 for provisions of Second Amended and Restated Certificate of Incorporation and By-laws of the Registrant defining rights of the holders of Common Stock of Registrant.                                                                                                           
|4.2         |  | Specimen certificate for shares of Common Stock, $0.0001 par value, of Registrant.#                                                                                                                                                                                                                       
|10.1        |  | Lease Agreement dated as of May 24, 1999, by and between Continental Investors, L.P. and Registrant for commercial premises located at 433 Hackensack Avenue, Hackensack, New Jersey.#                                                                                                                    
|10.2        |  | Preferred Stock Purchase Agreement dated as of June 30, 1998, by and between Registrant and Neurocrine Biosciences, Inc.#                                                                                                                                                                                 
|10.3        |  | License Agreement dated as of May 29, 1998, by and between Registrant and American Cyanamid Company.##                                                                                                                                                                                                    
|10.4        |  | Sublicense and Development Agreement dated as of June 30, 1998, by and between Registrant and Neurocrine Biosciences, Inc.##                                                                                                                                                                              
|10.5        |  | License, Research and Development Agreement dated as of January 12, 2001, by and between Registrant and Biovail Laboratories Incorporated.##                                                                                                                                                              
|10.6        |  | Guaranty dated as of January 12, 2001, by Biovail Corporation in favor of Registrant.#                                                                                                                                                                                                                    
|10.7        |  | Securities Purchase Agreement dated as of January 21, 1999, by and between Registrant and Elan International Services.#                                                                                                                                                                                   
|10.8        |  | Joint Development and Operating Agreement dated as of January 21, 1999, by and among Registrant, Elan Corporation, plc, Elan International Services, Ltd., DOV Bermuda, Ltd. (formerly known as DOV Newco, Ltd.), and Nascime
Limited.##                                                                  
|10.9        |  | 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 signed in connection with the Joint
Development and Operating Agreement referred to in 10.8.#
|10.10       |  | License Agreement dated as of January 20, 1999, by and between Registrant and Nascime Limited.##                                                                                                                                                                                                          
|10.11       |  | License Agreement dated as of January 20, 1999, by and between Nascime Limited and Elan Corporation, plc.##                                                                                                                                                                                               
|10.12       |  | Convertible Exchangeable Promissory Note of Registrant issued to Elan International Services, Ltd.#                                                                                                                                                                                                       
|10.13       |  | Convertible Promissory Note of Registrant issued to Elan International Services, Ltd.#                                                                                                                                                                                                                    
|10.14       |  | Registration Rights Agreement dated as of January 21, 1999, by and between Registrant and Elan International Services, Ltd. for shares of common stock received pursuant to the Securities Purchase Agreement referred to in 10.7.#                                                                       
|10.15       |  | Letter Agreement dated as of June 20, 2000 by and between Registrant and Elan International Services, Ltd. which amends the Registration Rights Agreement referred to in 10.14.#                                                                                                                          
|10.16       |  | Registration Rights Agreement dated as of January 21, 1999, by and among Registrant, DOV Bermuda, Ltd. (formerly known as DOV Newco, Ltd.), and Elan International Services, Ltd. for shares of common stock received pursuant to the Joint Development
and Operating Agreement referred to in 10.8.#     
|            |  |                                                                                                                                                                                                                                                                                                           

55

---

|10.17 |  | Preferred Stock Purchase Agreement dated as of June 20, 2000, by and among Registrant and Series C Investors.#                                                                   
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.18 |  | Registration Rights Agreement dated as of June 20, 2000, by and between Registrant and Series C Investors.#                                                                      
|10.19 |  | Stock Purchase Agreement dated as of August 30, 2001, by and among Registrant and Series D Investors.#                                                                           
|10.20 |  | Amended and Restated Stockholders Agreement dated as of August 30, 2001 by and among Registrant, Arnold Lippa, Bernard Beer, Series C Investors and Series D Investors.#         
|10.21 |  | Registration Rights Agreement dated as of August 30, 2001 by and among Registrant, Series C Investors and Series D Investors.#                                                   
|10.22 |  | Form of Warrant Agreement.#                                                                                                                                                      
|10.23 |  | 1998 Stock Option Plan.#                                                                                                                                                         
|10.24 |  | 2000 Stock Option and Grant Plan.#                                                                                                                                               
|10.25 |  | Stock Option Agreement dated as of July 10, 2000 between Registrant and Philip Skolnick for the grant of 250,000 stock options.#                                                 
|10.26 |  | Employment Agreement dated as of December 10, 1998, between Registrant and Arnold Lippa.#                                                                                        
|10.27 |  | Extension of Employment Agreement dated as of December 10, 2001, between Registrant and Arnold Lippa.#                                                                           
|10.28 |  | Employment Agreement dated as of December 10, 1998, between Registrant and Bernard Beer.#                                                                                        
|10.29 |  | Extension of Employment Agreement dated as of December 10, 2001, between Registrant and Bernard Beer.#                                                                           
|10.30 |  | Employment Agreement dated as of July 10, 2000, between Registrant and Philip Skolnick.#                                                                                         
|10.31 |  | Employment Agreement dated as of July 1, 1999, and amended by that certain Letter Agreement dated January 23, 2002, between Registrant and Stephen Petti.#                       
|10.32 |  | Employment Agreement dated as of July 12, 1999, and amended by that certain Letter Agreement dated January 23, 2002, between Registrant and Paul Schiffrin.#                     
|10.33 |  | Employment Agreement dated as of July 30, 2001 between Registrant and Barbara Duncan.                                                                                            
|10.34 |  | Letter Agreement dated as of May 15, 2002 between Registrant and Paul Schiffrin.                                                                                                 
|10.35 |  | Consent and Agreement dated December 13, 2002 between Registrant, Neurocrine Biosciences and ACY.                                                                                
|10.36 |  | Amendment Agreement dated as of March 24, 2003 between Registrant and Elan International Services which amends the convertible exchangeable promissory note referred to in 10.12.
|10.37 |  | Confidential Patent License, Settlement, and Special Mutual Release Agreement among Registrant, Biovail Laboratories Incorporated and Biovail Corporation.                       
|21.1  |  | Subsidiaries of Registrant.#                                                                                                                                                     
|23.1  |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                           
|23.2  |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                           
|24.1  |  | Power of Attorney.#                                                                                                                                                              
|24.2  |  | Power of Attorney of Daniel S. Van Riper.#                                                                                                                                       

56

---



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.

| |  | DOV PHARMACEUTICAL, INC.
| |  | ------------------------
| |  | By:                     

Pursuant
to the requirements of the Securities Act of 1933, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.

|Signature                                 |  | Capacity                                                                                           |  | Date          
|----------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | --------------
|                                          |  |                                                                                                    |  |               
|/s/ARNOLD S. LIPPAArnold S. Lippa         |  | Chief Executive Officer and Director (Principal Executive Officer)                                 |  | March 31, 2003
|/s/BERNARD BEERBernard Beer               |  | President and Director                                                                             |  | March 31, 2003
|/s/BARBARA G. DUNCANBarbara G. Duncan     |  | Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 31, 2003
|/s/PATRICK ASHEPatrick Ashe               |  | Director                                                                                           |  | March 31, 2003
|/s/ZOLA HOROVITZZola Horovitz             |  | Director                                                                                           |  | March 31, 2003
|/s/DANIEL S. VAN RIPERDaniel S. Van Riper |  | Director                                                                                           |  | March 31, 2003

57

---

CERTIFICATIONS

Arnold Lippa, Chief Executive Officer of the Company, and Barbara Duncan, Chief Financial Officer of the Company, each certifies as follows:





|Date: March 31, 2003 |  | By: | /s/ARNOLD S. LIPPAArnold S. Lippa
Chief Executive Officer and Secretary                    
|-------------------- |  | --- | -------------------------------------------------------------------------------------------
|Date: March 31, 2003 |  | By: | /s/BARBARA G. DUNCANBarbara G. Duncan
Vice President of Finance and Chief Financial Officer

58

---

FURTHER CERTIFICATIONS

The undersigned officers of DOV Pharmaceutical, Inc. (the "Company") hereby certifies that the Company's annual report on Form 10-K for
the period ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

|Date: March 31, 2003 |  | By: | /s/ARNOLD S. LIPPAArnold S. Lippa
Chief Executive Officer and Secretary                    
|-------------------- |  | --- | -------------------------------------------------------------------------------------------
|Date: March 31, 2003 |  | By: | /s/BARBARA G. DUNCANBarbara G. Duncan
Vice President of Finance and Chief Financial Officer

59

---

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                                                          |  | Page
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|DOV Pharmaceutical, Inc.                                                                                                                                                  |  |     
|Report of Independent Accountants                                                                                                                                         |  | F-2 
|Balance Sheets as of December 31, 2001 and 2002                                                                                                                           |  | F-3 
|Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002                                                                                             |  | F-4 
|Statements of Stockholders' (Deficit) /Equity for the Years Ended December 31, 2000, 2001 and 2002                                                                        |  | F-5 
|Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002                                                                                             |  | F-6 
|Notes to Financial Statements                                                                                                                                             |  | F-7 
|DOV (Bermuda), Ltd. (A Development Stage Company)                                                                                                                         |  |     
|Report of Independent Accountants                                                                                                                                         |  | F-30
|Consolidated Balance Sheets as of December 31, 2001 and 2002                                                                                                              |  | F-31
|Consolidated Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002 and for the Period from Inception (January 21, 1999) through December 31, 2002 |  | F-32
|Consolidated Statements of Changes in Stockholders' Deficit for the Periods from Inception (January 21, 1999) Through December 31, 2002                                   |  | F-33
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002 and the Period from Inception (January 21, 1999) through December 31, 2002     |  | F-34
|Notes to Consolidated Financial Statements                                                                                                                                |  | F-35

F-1

---

REPORT OF INDEPENDENT ACCOUNTANTS

To
the Board of Directors and Stockholders of
DOV Pharmaceutical, Inc.

In
our opinion, the accompanying balance sheets and the related statements of operations, stockholders' deficit and cash flows present fairly, in all material respects, the financial
position of DOV Pharmaceutical, Inc. at December 31, 2001 and 2002, and the results of its operations and its cash flows for each of the three years ended December 31, 2002 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 auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers
LLP

Florham
Park, NJ
March 7, 2003, except for Note 15 as to which the date is March 28, 2003

F-2

---

DOV PHARMACEUTICAL, INC.
BALANCE SHEETS

|                                                                            |                                                                                                                                                                                                                                                          | December 31,                                                                                                                                                                   |                                      
|--------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------
|
|Assets                                                                      |                                                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      
|                                                                            | Current assets:                                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Cash and cash equivalents                                                                                                                                                      |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Accounts receivable                                                                                                                                                            |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Marketable securities- short term                                                                                                                                              |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Investments                                                                                                                                                                    |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Receivable from DOV Bermuda                                                                                                                                                    |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Prepaid expenses and other current assets                                                                                                                                      |                                      
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                | Total current assets                 
|                                                                            | Marketable securities  long term                                                                                                                                                                                                                        |                                                                                                                                                                                |                                      
|                                                                            | Property and equipment, net                                                                                                                                                                                                                              |                                                                                                                                                                                |                                      
|                                                                            | Deferred charges, net                                                                                                                                                                                                                                    |                                                                                                                                                                                |                                      
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                | Total assets                         
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      
|Liabilities, Redeemable Preferred Stock and Stockholders' (Deficit)/ Equity |                                                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      
|                                                                            | Current liabilities:                                                                                                                                                                                                                                     |                                                                                                                                                                                |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Accounts payable                                                                                                                                                               |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Accrued expenses                                                                                                                                                               |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Deferred revenue  current                                                                                                                                                     |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Accumulated loss in excess of investment in DOV Bermuda                                                                                                                        |                                      
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                | Total current liabilities            
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      
|                                                                            | Deferred revenuenoncurrent                                                                                                                                                                                                                              |                                                                                                                                                                                |                                      
|                                                                            | Convertible exchangeable promissory note                                                                                                                                                                                                                 |                                                                                                                                                                                |                                      
|                                                                            | Convertible promissory note                                                                                                                                                                                                                              |                                                                                                                                                                                |                                      
|                                                                            | Commitments and contingencies                                                                                                                                                                                                                            |                                                                                                                                                                                |                                      
|                                                                            | Redeemable preferred stock  series C, $1.00 par value, 1,750,000 shares authorized, 1,750,000 issued and outstanding at December 31, 2001 and none issued and outstanding at December 31, 2002; liquidation preference at
December 31, 2001 $7,070,000  |                                                                                                                                                                                |                                      
|                                                                            | Redeemable preferred stock  series D, $1.00 par value, 1,400,000 shares authorized, 1,040,000 issued and outstanding at December 31, 2001 and none issued and outstanding at December 31, 2002; liquidation preference at
December 31, 2001 $10,400,000 |                                                                                                                                                                                |                                      
|                                                                            | Stockholders' (deficit) equity:                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Preferred stock  series B, $1.00 par value, 354,643 shares authorized, 354,643 shares issued and outstanding at December 31, 2001 and 2002                                    |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Common stock, $.0001 par value, 60,000,000 shares authorized, 4,894,238 issued and outstanding at December 31, 2001 and 14,414,038 issued and outstanding at December 31, 2002 |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Additional paid-in capital                                                                                                                                                     |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Accumulated other comprehensive loss                                                                                                                                           |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Accumulated deficit                                                                                                                                                            |                                      
|                                                                            |                                                                                                                                                                                                                                                          | Unearned compensation                                                                                                                                                          |                                      
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                | Total stockholders' (deficit)/ equity
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      
|                                                                            |                                                                                                                                                                                                                                                          |                                                                                                                                                                                |                                      

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

F-3

---

DOV PHARMACEUTICAL, INC.
STATEMENTS OF OPERATIONS

|                                                                               |                                    | Years Ended December 31, |                     
|------------------------------------------------------------------------------ | ---------------------------------- | ------------------------ | --------------------
|
|Revenue                                                                        |                                    | $                        |                    
|Operating expenses:                                                            |                                    |                          |                     
|                                                                               | Royalty expense                    |                          |                     
|                                                                               | General and administrative expense |                          |                     
|                                                                               | Research and development expense   |                          |                     
|                                                                               |                                    |                          |                     
|                                                                               |                                    |                          | Loss from operations
|Loss in investment in DOV Bermuda                                              |                                    |                          | (1,318,340          
|Interest income                                                                |                                    |                          | 223,413             
|Interest expense                                                               |                                    |                          | (852,004            
|Other income (expense), net                                                    |                                    |                          |                    
|                                                                               |                                    |                          |                     
|                                                                               |                                    |                          | Net loss            
|Deemed dividend on issuance of series C preferred                              |                                    |                          | (49,000             
|Deemed dividend on issuance of series D preferred                              |                                    |                          |                    
|                                                                               |                                    |                          |                     
|Net loss attributable to common stockholders                                   |                                    | $                        | (5,983,409          
|                                                                               |                                    |                          |                     
|Basic and diluted net loss per share                                           |                                    | $                        | (1.23               
|                                                                               |                                    |                          |                     
|Weighted average shares used in computing basic and diluted net loss per share |                                    |                          | 4,877,496           

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

F-4

---

DOV PHARMACEUTICAL, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT)/ EQUITY

|                                                              |  | Series B
Preferred
Stock |         | Common
Stock |   | Additional
Paid-In |  | Accumulated
Deficit |            | Unearned
Compensation |   | Accumulated
Other
Comprehensive
Loss |   | Total
Stockholders
(Deficit)/ Equity |           
|------------------------------------------------------------- |  | ------------------------ | ------- | ------------ | - | ------------------ |  | ------------------- | ---------- | --------------------- | - | ------------------------------------ | - | ------------------------------------ | ----------
|Balance, December 31, 1999                                    |  | $                        | 354,643 |              | $ | 487                |  | $                   | 3,308,536  |                       | $ | (12,506,057                          | ) | $                                    | (51,571   
|Warrants issued for offering costs for issuance of series C   |  |                          |        |              |   |                   |  |                     | 412,125    |                       |   |                                     |   |                                      |          
|Beneficial conversion feature on issuance of series C         |  |                          |        |              |   |                   |  |                     | 49,000     |                       |   |                                     |   |                                      |          
|Deemed dividend on issuance of series C                       |  |                          |        |              |   |                   |  |                     | (49,000    | )                     |   |                                     |   |                                      |          
|Issuance of common stock for services                         |  |                          |        |              |   | 1                  |  |                     | 37,739     |                       |   |                                     |   |                                      |          
|Issuance of options to employees                              |  |                          |        |              |   |                   |  |                     | 117,800    |                       |   |                                     |   |                                      | (117,800  
|Amortization of unearned compensation                         |  |                          |        |              |   |                   |  |                     |           |                       |   |                                     |   |                                      | 148,050   
|Issuance of warrants and options for services                 |  |                          |        |              |   |                   |  |                     | 208,734    |                       |   |                                     |   |                                      |          
|Net loss, year ended December 31, 2000                        |  |                          |        |              |   |                   |  |                     |           |                       |   | (5,934,409                           | ) |                                      |          
|                                                              |  |                          |         |              |   |                    |  |                     |            |                       |   |                                      |   |                                      |           
|Balance, December 31, 2000                                    |  |                          | 354,643 |              |   | 488                |  |                     | 4,084,934  |                       |   | (18,440,466                          | ) |                                      | (21,321   
|Warrants issued for offering costs for issuance of series D   |  |                          |        |              |   |                   |  |                     | 173,784    |                       |   |                                     |   |                                      |          
|Beneficial conversion feature on issuance of series D         |  |                          |        |              |   |                   |  |                     | 97,400     |                       |   |                                     |   |                                      |          
|Deemed dividend on issuance of series D                       |  |                          |        |              |   |                   |  |                     | (97,400    | )                     |   |                                     |   |                                      |          
|Options exercised                                             |  |                          |        |              |   | 1                  |  |                     | 31,249     |                       |   |                                     |   |                                      |          
|Issuance of options to employees                              |  |                          |        |              |   |                   |  |                     | 1,118,705  |                       |   |                                     |   |                                      | (1,118,705
|Amortization of unearned compensation                         |  |                          |        |              |   |                   |  |                     |           |                       |   |                                     |   |                                      | 332,127   
|Issuance of options for services                              |  |                          |        |              |   |                   |  |                     | 293,099    |                       |   |                                     |   |                                      |          
|Interest payable in convertible securities                    |  |                          |        |              |   |                   |  |                     | 559,500    |                       |   |                                     |   |                                      |          
|Net loss, year ended December 31, 2001                        |  |                          |        |              |   |                   |  |                     |           |                       |   | (5,404,197                           | ) |                                      |          
|                                                              |  |                          |         |              |   |                    |  |                     |            |                       |   |                                      |   |                                      |           
|Balance, December 31, 2001                                    |  |                          | 354,643 |              |   | 489                |  |                     | 6,261,271  |                       |   | (23,844,663                          | ) |                                      | (807,899  
|Issuance of common stock                                      |  |                          |        |              |   | 500                |  |                     | 58,970,530 |                       |   |                                     |   |                                      |          
|Conversion of preferred stock, series C and D to common stock |  |                          |        |              |   | 452                |  |                     | 14,837,707 |                       |   |                                     |   |                                      |          
|Issuance of options to employees                              |  |                          |        |              |   |                   |  |                     | 72,573     |                       |   |                                     |   |                                      | (72,573   
|Amortization of unearned compensation                         |  |                          |        |              |   |                   |  |                     | 136,166    |                       |   |                                     |   |                                      | 604,739   
|Issuance of options for services                              |  |                          |        |              |   |                   |  |                     | 233,371    |                       |   |                                     |   |                                      |          
|Interest payable in convertible securities                    |  |                          |        |              |   |                   |  |                     | 1,011,616  |                       |   |                                     |   |                                      |          
|Comprehensive loss:                                           |  |                          |         |              |   |                    |  |                     |            |                       |   |                                      |   |                                      |           
|Net loss, year ended December 31, 2002                        |  |                          |        |              |   |                   |  |                     |           |                       |   | (16,820,472                          | ) |                                      |          
|Unrealized loss on marketable securities                      |  |                          |        |              |   |                   |  |                     |           |                       |   |                                     |   |                                      |          
|                                                              |  |                          |         |              |   |                    |  |                     |            |                       |   |                                      |   |                                      |           
|Comprehensive loss                                            |  |                          |        |              |   |                   |  |                     |           |                       |   |                                     |   |                                      |          
|                                                              |  |                          |         |              |   |                    |  |                     |            |                       |   |                                      |   |                                      |           
|Balance, December 31, 2002                                    |  | $                        | 354,643 |              | $ | 1,441              |  | $                   | 81,523,234 |                       | $ | (40,665,135                          | ) | $                                    | (275,733  
|                                                              |  |                          |         |              |   |                    |  |                     |            |                       |   |                                      |   |                                      |           

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

F-5

---

DOV PHARMACEUTICAL, INC.
STATEMENTS OF CASH FLOWS

|                                                                            |                                                        | Years Ended December 31,                  |           
|--------------------------------------------------------------------------- | ------------------------------------------------------ | ----------------------------------------- | ----------
|
|Cash flows from operating activities                                        |                                                        |                                           |           
|Net loss                                                                    |                                                        | $                                         | (5,934,409
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                        |                                           |           
|                                                                            | Loss in investment in DOV Bermuda                      |                                           |           
|                                                                            | Milestone revenue                                      |                                           |           
|                                                                            | Noncash royalty and litigation settlement expense      |                                           |           
|                                                                            | Net (appreciation) depreciation in investments         |                                           |           
|                                                                            | Non cash interest expense                              |                                           |           
|                                                                            | Depreciation                                           |                                           |           
|                                                                            | Amortization of deferred charges                       |                                           |           
|                                                                            | Noncash compensation charges                           |                                           |           
|                                                                            | Warrants, options and common stock issued for services |                                           |           
|                                                                            | Changes in operating assets and liabilities:           |                                           |           
|                                                                            |                                                        | Due from DOV Bermuda (Elan Portion)       |           
|                                                                            |                                                        | Accounts receivable                       |           
|                                                                            |                                                        | Prepaid expenses and other current assets |           
|                                                                            |                                                        | Accounts payable                          |           
|                                                                            |                                                        | Accrued expenses                          |           
|                                                                            |                                                        | Deferred revenue                          |           
|                                                                            |                                                        |                                           |           
|                                                                            | Net cash (used in) provided by operating activities    |                                           |           
|                                                                            |                                                        |                                           |           
|Cash flows from investing activities                                        |                                                        |                                           |           
|Investments in DOV Bermuda, net of cash received                            |                                                        |                                           | (1,059,823
|Purchases of marketable securities                                          |                                                        |                                           |          
|Sales of marketable securities                                              |                                                        |                                           |          
|Purchases of property and equipment                                         |                                                        |                                           | (125,604  
|Proceeds from maturity of certificates of deposit                           |                                                        |                                           | 101,536   
|                                                                            |                                                        |                                           |           
|                                                                            | Net cash used in investing activities                  |                                           |           
|                                                                            |                                                        |                                           |           
|Cash flows from financing activities                                        |                                                        |                                           |           
|Proceeds from issuance of stock, net of cash costs                          |                                                        |                                           | 6,433,695 
|Proceeds from convertible promissory note                                   |                                                        |                                           | 1,160,000 
|Proceeds from options exercised                                             |                                                        |                                           |          
|                                                                            |                                                        |                                           |           
|                                                                            | Net cash provided by financing activities              |                                           |           
|                                                                            |                                                        |                                           |           
|                                                                            |                                                        | Net increase in cash and cash equivalents |           
|Cash and cash equivalents, beginning of year                                |                                                        |                                           | 1,129,314 
|                                                                            |                                                        |                                           |           
|Cash and cash equivalents, end of year                                      |                                                        | $                                         | 4,337,757 
|                                                                            |                                                        |                                           |           
|Supplemental disclosures of cash flow information                           |                                                        |                                           |           
|Interest paid                                                               |                                                        | $                                         | 7,536     
|                                                                            |                                                        |                                           |           

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

F-6

---

DOV PHARMACEUTICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS

1.    The Company

Organization

DOV Pharmaceutical, Inc. (the "Company") was incorporated in May 1995 under the laws of the State 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,
cardiovascular and urological disorders. The Company has six product candidates in clinical trials targeting insomnia, anxiety disorders, pain, depression and angina and hypertension. The Company has
established strategic alliances with select partners to access their unique technologies and their commercialization capabilities. The Company operates principally in the United States but it also
conducts clinical studies in Europe.

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
Company and Elan Corporation, plc ("Elan") entered into a transaction to form DOV (Bermuda), Ltd. f/k/a DOV Newco, Ltd. a Bermuda exempted limited company ("DOV
Bermuda"). While the Company owns 80.1% of the outstanding capital stock of DOV Bermuda and Elan owns 19.9%, through its wholly-owned subsidiary Elan Pharmaceuticals Investments II, Ltd., Elan
has retained significant minority rights that are considered "participating rights" as defined in the Emerging Issues Task Force Consensus No. 96-16 "Investor's Accounting for an
Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights." Accordingly, the Company does not consolidate the
financial statements of DOV Bermuda, but instead accounts for its investment in DOV Bermuda under the equity method of accounting. As Elan's participating rights expired as of January 2003, the
Company will begin to consolidate the results of DOV Bermuda as of January 1, 2003. (See Note 5).

The
Company records its 80.1% interest in the loss in DOV Bermuda as research and development expense for the portion of the research and development expense incurred by the Company on
behalf of DOV Bermuda and as Loss in Investment in DOV Bermuda for the Company's 80.1% interest in the remaining loss of DOV Bermuda.

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

Reclassifications

Certain prior-year amounts have been reclassified to conform to the 2002 financial statement presentation.

F-7

---

Segment and Geographic Information

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

Cash, Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents. The Company has evaluated its
investment policies consistent with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and has determined that all
of 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.

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.

Impairment of Long-Lived Assets

During 2002, the Company adopted SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 144 requires that long-lived assets, to be held and used by an entity, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. Under SFAS 144, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than
the carrying amount of such assets, an impairment loss would be recognized, and the assets are written down to their estimated fair values. The adoption of SFAS 144 did not have any material
impact on the financial position and results of operations of the Company.

Deferred Charges

Deferred charges are issuance costs for the convertible exchangeable promissory note and the convertible promissory note and are being amortized over the
six-year term of the instruments. Costs of $150,000 in connection with the Company's initial public offering were deferred at December 31, 2001. These costs were charged to
additional paid-in capital upon the successful completion of the initial public offering in 2002.

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

F-8

---

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.

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. Certain research and
development expenses incurred on behalf of DOV Bermuda are billed to DOV Bermuda under a joint development and operating agreement. Payments received from DOV Bermuda that reflect Elan's 19.9%
interest in the work performed by the Company for DOV Bermuda are recorded as a reduction in research and development expense. Research and development expenses include $1,568,652, $3,303,617 and
$5,924,785 for the years ended December 31, 2000, 2001 and 2002 related to work performed for DOV Bermuda.

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

|                                                         |                                        | Years Ended December 31,
|-------------------------------------------------------- | -------------------------------------- | ------------------------
|
|Payroll related and associated overhead                  |                                        | $                       
|Clinical and preclinical trial costs                     |                                        |                         
|Professional fees                                        |                                        |                         
|Travel                                                   |                                        |                         
|                                                         |                                        |                         
|                                                         | Total research and development expense |                         
|                                                         |                                        |                         
|Research and development attributable to DOV Bermuda     |                                        | $                       
|Research and development attributable to other compounds |                                        |                         
|                                                         |                                        |                         
|                                                         | Total research and development expense |                         
|                                                         |                                        |                         

The
following represents a reconciliation of the total loss of DOV Bermuda included in our statement of operations:

|                                                               |                                                                | Years Ended December 31,
|-------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------
|
|DOV Pharmaceutical, Inc.'s 80.1% portion of DOV Bermuda losses |                                                                | $                       
|Elimination of Intercompany profits                            |                                                                |                         
|                                                               |                                                                |                         
|                                                               | Total loss in DOV Bermuda recorded by DOV Pharmaceutical, Inc. |                         
|                                                               |                                                                |                         
|Loss in investment in DOV Bermuda                              |                                                                | $                       
|Research and development expense                               |                                                                |                         
|                                                               |                                                                |                         
|                                                               | Total loss in DOV Bermuda recorded by DOV Pharmaceutical, Inc. |                         
|                                                               |                                                                |                         

F-9

---

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.

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. The Company has
excluded the shares issuable on
conversion of the convertible exchangeable promissory note, the convertible 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 for all periods presented.

|                                                                                          |                                                                                | Years Ended December 31, |           
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------ | ----------
|
|Net loss attributable to common stockholders                                              |                                                                                | $                        | (5,983,409
|                                                                                          |                                                                                |                          |           
|Basic and diluted:                                                                        |                                                                                |                          |           
|                                                                                          | Weighted-average shares used in computing basic and diluted net loss per share |                          |           
|                                                                                          |                                                                                |                          |           
|Basic and diluted net loss per share                                                      |                                                                                | $                        | (1.23     
|                                                                                          |                                                                                |                          |           
|Antidilutive securities not included in basic and diluted net loss per share calculation: |                                                                                |                          |           
|                                                                                          | Convertible preferred stock                                                    |                          |           
|                                                                                          | Convertible exchangeable promissory note                                       |                          |           
|                                                                                          | Convertible promissory note                                                    |                          |           
|                                                                                          | Options                                                                        |                          |           
|                                                                                          | Warrants                                                                       |                          |           
|                                                                                          |                                                                                |                          |           
|                                                                                          |                                                                                |                          | 8,577,002 
|                                                                                          |                                                                                |                          |           

Comprehensive Loss

|                                               |                    | Years Ended December 31, |           
|---------------------------------------------- | ------------------ | ------------------------ | ----------
|
|Net loss                                       |                    | $                        | (5,934,409
|Net unrealized losses on marketable securities |                    |                          |          
|                                               |                    |                          |           
|                                               | Comprehensive loss |                          | $         
|                                               |                    |                          |           

Stock-Based Compensation

The Company accounts for stock-based compensation expense for options granted to employees using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the disclosure only alternative of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). The expense for options granted to non-employees has been determined in accordance with FAS 123 and EITF 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than

F-10

---

Employees for Acquiring, or in Conjunction with Selling, Goods or Services." Unearned compensation expense is being amortized in accordance with Financial Accounting Standards Board Interpretation
No. 28 on an accelerated basis over the vesting period.

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, |  
|----------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | -------------------------------- | -
|
|Net loss attributed to common stockholders:                             |                                                                                                                 |                                  |  
|                                                                        | As reported                                                                                                     |                                  | $
|                                                                        | Add: total stock-based employee compensation expense determined under APB No. 25                                |                                  |  
|                                                                        | Deduct: total stock-based employee compensation expense determined under fair value based method for all awards |                                  |  
|                                                                        |                                                                                                                 |                                  |  
|                                                                        | Pro forma                                                                                                       |                                  |  
|                                                                        |                                                                                                                 |                                  |  
|Basic and diluted net loss per share applicable to common stockholders: |                                                                                                                 |                                  |  
|                                                                        | As reported                                                                                                     |                                  | $
|                                                                        |                                                                                                                 |                                  |  
|                                                                        | Pro forma                                                                                                       |                                  | $
|                                                                        |                                                                                                                 |                                  |  

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, 
|----------------------- |  | -------------
|
|Risk-free interest rate |  | 5.37% - 6.97%
|Expected lives          |  | 10 years     
|Expected dividends      |  | None         
|Expected volatility     |  | 0%           

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, 2000, 2001 and 2002
approximated $3.92, $4.11 and $2.14, respectively.

Risks and Uncertainties

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

Concentration of Credit Risk

Cash and cash equivalents are invested in deposits with significant financial institutions. The Company has not experienced any losses on its deposits of cash and
cash equivalents. Management believes that the financial institutions are financially sound and, accordingly, minimal credit risk exists. Approximately $9.4 million of the Company's cash
balance was uncollateralized at December 31, 2002.

F-11

---

Derivatives

In accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133"),
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.

Investments

Investments represent the warrants to purchase shares of common stock received from Neurocrine. The warrants are derivative financial instruments under SFAS
No. 133 and thus are carried at fair value. Changes in fair value are recorded as other income or other expense. (See Note 11).

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other
parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. As the Elan's participating rights expired as of January 2003 (see
Note 5), the Company will begin to consolidate DOV Bermuda as of January 1, 2003. As a result, the adoption of FIN 46 is not expected to have a material effect on the Company's financial
position or results of operations.

In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. This Statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. This Statement
also amends the disclosure provision of SFAS No. 123 and APB No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects
of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial
statements. The adoption of SFAS No. 148 did not have a material effect on the Company's financial position or results of operations.

In
November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue
No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The Company will
be required to adopt this provision for revenue arrangements entered into on or after June 15, 2003. Management is currently evaluating the effect that the adoption of EITF 00-21
will have on the Company's results of operations and financial condition.

In
November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others," which expands previously issued accounting guidance and disclosure requirements for certain guarantees. The Interpretation requires an entity to recognize an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified
after December 31, 2002. Currently, there are no disclosures required under FIN 45.

F-12

---

In June 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activitiesrequires that a
liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. This Statement nullifies Emerging Issues Task
Force (EITF) 94-3,Liability Recognition for Certain Employees Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in an
Restructuring)which permitted recognition of a liability for an exit cost at the date of an entity's commitment to an exit plan. The Statement is effective as of
January 1, 2003. If the Company is to record restructuring charges subsequent to January 1, 2003, such charges will be recorded in accordance with SFAS No. 146.

3.    Marketable Securities

The following is a summary of marketable securities classified as "available-for-sale" securities as required by SFAS 115 as of
December 31, 2002.

|                           |                                                        | Amortized Cost |            | Gross Unrealized Gains |   | Gross Unrealized Losses |       | Estimated Fair Value
|-------------------------- | ------------------------------------------------------ | -------------- | ---------- | ---------------------- | - | ----------------------- | ----- | --------------------
|Institutional money market |                                                        | $              | 9,691,127  |                        | $ |                        |       | $                   
|Auction rate securities    |                                                        |                | 18,480,152 |                        |   |                        |       |                     
|                           |                                                        |                |            |                        |   |                         |       |                     
|                           | Amounts included in cash and cash equivalents          |                |            | 28,171,279             |   | $                       |      |                     
|                           |                                                        |                |            |                        |   |                         |       |                     
|Government debt            |                                                        | $              | 2,125,899  |                        | $ | 1,610                   |       | $                   
|Corporate debt             |                                                        |                | 19,496,921 |                        |   |                        |       |                     
|                           |                                                        |                |            |                        |   |                         |       |                     
|                           | Amounts included in marketable securities  short-term |                | $          | 21,622,820             |   | $                       | 1,610 |                     
|                           |                                                        |                |            |                        |   |                         |       |                     
|Corporate debt             |                                                        | $              | 1,042,170  |                        | $ |                        |       | $                   
|                           |                                                        |                |            |                        |   |                         |       |                     
|                           | Amounts included in marketable securities  long-term  |                | $          | 1,042,170              |   | $                       |      |                     
|                           |                                                        |                |            |                        |   |                         |       |                     

The
following is a summary of the amortized cost and estimated value of debt securities by contractual maturity at December 31, 2002, excluding securities classified as cash and
cash equivalents.

Amortized Cost

Estimated Fair ValueDue in less than one year

$
21,622,820

$
21,446,821Due between one and two years


1,042,170


1,039,230Total

$
22,664,990

$
22,486,051


F-13

---

4.    Property and Equipment

Property and equipment consist of the following at:

December 31,Years

2001

2002Furniture and fixtures

7

$
155,994

$
215,519Machinery and equipment

2-5


265,075


339,223Leasehold improvements

2-5


80,539


145,603Less accumulated depreciation




259,231


361,845Property and equipment, net



$
242,377

$
338,500


5.    Transaction with Elan

In January 1999, the Company and Elan International Services, Ltd. ("EIS"), a wholly-owned subsidiary of Elan, formed DOV Bermuda, which owns 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 shares to a wholly-owned
non-consolidated subsidiary, EPIL II.

The
Company owns 100% of the class A common stock of DOV Bermuda, which represents 80.1% of the total outstanding capital stock of DOV Bermuda. EIS, through its wholly-owned
subsidiary EPIL II, owns the remaining 19.9% of the outstanding capital stock of DOV Bermuda through its ownership of 100% of the class B common stock. The class A and class B
common stock of DOV Bermuda rankpari passuin all respects, except that the class B shares do not carry voting or dividend rights. EIS, however,
has the right to redesignate and convert the class B shares at any time such that the shares would have rights to either vote but not receive dividends, to receive dividends but not vote or
both vote and receive dividends. Both the class A and class B stock in DOV Bermuda are subject to certain transfer restrictions, which prevent the Company or EIS from transferring their
interest in DOV Bermuda, other than to an affiliate. Additionally, neither the Company nor EIS can pledge or create a lien against their shares in DOV Bermuda without the consent of the other party
except in certain instances.

In
connection with the transaction, the Company issued equity securities to EIS consisting of: 525,025 shares of common stock, 354,643 shares of series B preferred stock, and
warrants to purchase 121,500 shares of the Company's common stock at an exercise price of $3.41 a share for an aggregate purchase price of $3,000,000. The Company also issued a convertible
exchangeable promissory note with a principal amount of $8,010,000 to EIS. In return, EIS paid the Company $11,010,000 of which $3,000,000 was retained by the Company and $8,010,000 was used by the
Company to fund its investment in the class A common stock of DOV Bermuda.

Additionally,
the Company sublicensed and licensed rights to two compounds, ocinaplon and bicifadine, to Nascime for a $5,000 license fee. The Company may earn milestone payments of up
to $7,500,000 and royalties on net sales from Nascime and remains responsible for payments under its agreement with American Cyanamid, now Wyeth-Ayerst. (See Note 11). The licenses expire on a

F-14

---

product by product and country by country basis on the later of 15 years from the launch of the product or the last patent expiration.

EIS
contributed $1,990,000 to DOV Bermuda to fund its investment in the class B common stock of DOV Bermuda. Elan also licensed its controlled release formulation technologies to
Nascime for $10,000,000. Under the license agreement with Elan, Nascime will pay Elan a royalty on net sales. Elan may terminate its license agreement if a named competitor acquires a ten percent
interest in the Company or DOV Bermuda, or becomes materially engaged in the business or development of the Company or DOV Bermuda. The license expires on a product by product and country by country
basis on the later of 15 years from the launch of the product or the last patent expiration.

At
EIS's election through exchanging the principal portion of the convertible exchangeable promissory note issued by the Company to EIS, EIS's ownership interest in DOV Bermuda can
become equal to the Company's. The exchange would result in the Company transferring shares it holds in DOV Bermuda to EIS. Both the Company and EIS have certain preemptive rights, which allow them to
maintain their respective ownership interests in future fundings of DOV Bermuda, and both are subject
to dilution if they choose not to participate in future equity offerings. Although the Company is the majority shareholder, the joint development agreement gives management participation to both the
Company and EIS. Because the minority shareholder, EIS, has substantive participating rights through management participation, the Company accounts 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, on a going
forward basis the Company will consolidate the results of DOV Bermuda.

Ongoing Accounting and Funding of DOV Bermuda

As discussed above, the primary purpose of the joint venture is to develop two of the Company's compounds utilizing the Elan technology. DOV Bermuda has no
operations or employees and currently contracts 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 reimburses the Company and Elan for the work performed on behalf of DOV Bermuda. The Company records its 80.1% interest in the
loss in DOV Bermuda as research and development expense for the portion of the research and development incurred by the Company and as Loss in investment in DOV Bermuda for the Company's interest in
the remaining loss of DOV Bermuda, which includes the work performed by Elan on behalf of DOV Bermuda. (See Note 2).

On
July 31, 2002, Elan announced a recovery plan that includes the divestiture of its businesses, assets and products that are no longer core. Elan has advised the Company that it
will no longer fund its pro rata portion of the joint venture expenses, effective January 1, 2003. The Company intends to fund Elan's portion of the joint venture expenses but will also assess
its options, including seeking substitute collaborative arrangements. Whatever the outcome of the foregoing, the Company is committed to pursuing the development of the joint venture product
candidates on the present schedule.

The
Company had the ability until March 27, 2002 to borrow upon a convertible promissory note with EIS to borrow up to a maximum of $7,008,750 to meet its funding obligations
under this agreement. At December 31, 2002, the Company has borrowed $2,441,600 under the convertible promissory note. The accumulated loss in excess of investment in DOV Bermuda of $2,875,763
as of

F-15

---

December 31, 2002, reflects the Company's commitment to fund the losses in DOV Bermuda that have already been incurred.

From
the inception of DOV Bermuda through December 31, 2002 the Company's loss in its investment in DOV Bermuda was $12,212,671. DOV Bermuda is a development stage company with no
revenues. For the period from inception through December 31, 2002, excluding the write-off of the technology licensed from Elan and the Company, DOV Bermuda had operating expenses
of $20,890,457, which included $15,635,344 for research and development expenses invoiced to DOV Bermuda by the Company.

Elan Notes

In January 1999, the Company issued a convertible exchangeable promissory note in the amount of $8,010,000 and a convertible promissory note in the maximum
initial principal amount of $7,008,750 to EIS. At December 31, 2001, the Company had available $4,567,150 for borrowing under the convertible promissory note. The Company's ability to borrow
under the convertible promissory note expired on March 27, 2002.

Under
the 1999 Stock Purchase Agreement with Elan, the Company covenanted not to sell all or any material portion of its assets without the consent of Elan so long as either of the notes
held by Elan is outstanding. Those notes come due in January 2005 but may not be repaid prior to that time without Elan's consent.

a.    Convertible Exchangeable Promissory Note

The convertible exchangeable promissory note provides for interest to accrue at the rate of 7% per annum compounded on a semi-annual basis. The note
requires no payments until maturity on January 20, 2005, at which time the principal amount and unpaid accrued interest become due and payable. The note may not be prepaid by the Company
without the prior written consent of EIS.

At
anytime prior to the date the note is paid in full, EIS has the right to convert the outstanding principal and unpaid accrued interest amount of the note into shares of common stock
of the Company at $3.98 per share. If no portion of the original principal has been converted and DOV and EIS maintain their current respective ownership, the principal amount of the note is
exchangeable at any time during the term of the note for common stock of DOV Bermuda, currently held by the Company, such that EIS' interest in DOV Bermuda is equal to that of the Company.

The
Company is accounting for the exchange feature of the note in accordance with EITF 86-28 "Accounting Implications of Indexed Debt Instruments." As such, the Company will
record an adjustment to the carrying value of the note if the fair value of the additional interest in the joint venture exceeds the face value of the note. As of December 31, 2002 there has
been no incremental interest expense recorded related to this feature. If EIS chooses to exchange the note for an additional interest in the joint venture, the accrued interest will remain convertible
into common stock of the Company at $3.98 per share. If EIS chooses to exchange the note they are required to reimburse the Company for a portion of the research expense incurred by DOV Bermuda since
inception, such that the Company and EIS have funded the research and development expense equally.

During
2001 and 2002, the interest feature in the convertible exchangeable 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

F-16

---

or Contingently Adjustable Conversion Ratios" and EITF 00-27 "Application of Issue 98-5 to Certain Convertible Instruments." The Company recorded $342,115 and $636,734 of
additional interest expense associated with this beneficial conversion feature in 2001 and 2002, respectively, with a corresponding increase in additional paid-in capital.

For
the years ended December 31, 2000, 2001 and 2002, the accrued interest excluding the additional interest noted above on the note amounted to $610,465, $650,106 and $698,553,
respectively and has been recorded as interest expense and added to the principal balance of the note.

b.    Convertible Promissory Note

The convertible promissory note provides for interest to accrue at the rate of 10% per annum compounded on a semi-annual basis. The note requires no
payments until maturity on January 20, 2005, at which time the principal and unpaid accrued interest becomes due and payable. The note may not be prepaid by the Company without the prior
written consent of EIS.

EIS
has the right to convert the outstanding principal and unpaid accrued interest amount of the note into shares of common stock of the Company at $3.41 per share.

For
the years ended December 31, 2000, 2001 and 2002, the Company has borrowed $1,160,000, $0, and $0 respectively, under this note. For the years ended December 31, 2000,
2001 and 2002 accrued interest on this note amounted to $234,036, $279,329,and $306,093 respectively, which has been recorded as interest expense and added to the principal balance of the note.

Also
during 2001 and 2002, 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 and EITF 00-27. The Company recorded $217,385 and
$374,881 of additional interest expense associated with this beneficial conversion feature in 2001 and 2002, respectively, with a corresponding increase to additional paid-in capital.

6.    Accrued Expenses

Accrued expenses consist of the following:

December 31,2001

2002Accrued litigation settlement expenses

$


$
2,520,497Accrued royalties


833,203


563,486Accrued professional fees


368,227


269,430Accrued bonuses





250,000Accrued research expenses


111,585


24,930Accrued payroll, vacation and other


97,208


210,988$
1,410,223

$
3,839,331


7.    Income Taxes

No U.S. Federal taxes are payable at December 31, 2001 and 2002. Due to the recent New Jersey corporate income tax law change, the Company does have a
$5,000 current state tax liability computed under the alternative minimum assessment regime.

F-17

---

At
December 31, 2002, the Company had approximately $18,000,000 of Federal and $9,200,000 of state net operating loss ("NOL") carryforwards available to offset
future taxable income. The federal and state NOL carryforwards will begin expiring in 2010 and 2009, respectively, if not utilized.

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. As a result of the Company's initial public offering, the Company may have
experienced such ownership changes. Accordingly, the Company's net operating loss carryforwards available to offset future federal taxable income arising before such ownership changes may be limited.

For
financial reporting purposes, a valuation allowance of $9,671,368 has been recorded at December 31, 2002, to fully offset the deferred tax asset related to these
carryforwards. A valuation allowance is provided when it is more likely than not that some portion of or all of the deferred tax assets will not be realized. The principal components of the deferred
tax asset, assuming a 34% federal tax rate, are as follows:

December 31,2001

2002Deferred tax assets:Fixed assets

$
17,329

$
12,810Accrued legal expenses


67,178


100,506Deferred other





1,276,562Accrued other


436,879


1,306,892Net operating loss carryforward


3,976,828


6,974,598Total gross deferred tax assets


4,498,214


9,671,368Valuation allowance


(4,498,214
)

(9,671,368
)Net deferred tax assets

$


$



The
net change in valuation allowance for 2002 was an increase of $5,173,154, primarily related to additional net operating losses incurred by the Company for which a benefit has not
been recorded. The difference between the federal statutory tax rate (34%) and the effective tax rate (0%) is due to the increase in valuation allowance in all periods presented.

8.    Equity Transactions

During 1999, in connection with the Elan transaction (see Note 5) the Company issued to EIS 525,025 shares of common stock, 354,643 shares of
series B preferred stock, and 121,500 warrants to purchase shares of the Company's common stock at an exercise price of $3.41 a share for an aggregate price of $3,000,000. The $3,000,000 was
allocated to the various instruments based on their relative market values as follows: $1,485,000 for the preferred stock, $1,350,000 for the common stock and $165,000 for the warrants. The
series B preferred stock are non-voting shares issued from available "blank check" preferred stock with no preference as to liquidation or dividends. Each share of the
series B preferred stock is convertible, without additional consideration and subject to further adjustments into 1.62 shares of the Company's common stock. In connection with the issuance of
the series B preferred, the Company recorded a deemed dividend of $125,079 as the conversion price at issuance was less than the fair market value of the stock. The term of the warrants expires
January 15, 2005.

F-18

---

In
May and June 2000, the Company issued 1,750,000 shares of series C redeemable convertible preferred stock for a total of $7,070,000 and incurred offering costs of
$1,048,430. The series C redeemable convertible preferred stock was issued at $4.04 per share. The Company recorded a deemed dividend of $49,000 on issuance of the series C redeemable
convertible preferred related to costs paid on behalf of the investors.

In
August and October 2001, the Company issued 1,040,000 shares of series D redeemable convertible preferred stock to outside investors for a total of $10,400,000 and
incurred offering costs of $1,583,411. The series D redeemable convertible preferred stock was issued at $10.00 per share. The series D redeemable convertible preferred has a 7% dividend
payable at the discretion of the Company's board of directors prior and in preference to the holders of common stock and to other series of preferred stock, other than series C redeemable
convertible preferred. The Company recorded a deemed dividend of $97,400 on issuance of the series D redeemable convertible preferred related to costs paid on behalf of the investors.

On
March 8, 2002, the Company's board of directors declared a 1.62 for 1 stock split of the Company's common stock paid in the form of a dividend. In order to effect the split
with regard to the series B preferred stock, the Company's board of directors approved an amendment to the Company's certificate of incorporation to provide for an adjustment in the conversion
ratio of the series B preferred stock to reflect the split. The amendment was approved by the stockholders of the Company, including the holders of the series B preferred stock voting as
a separate class. The split was effective on April 5, 2002. All share data give effect to such split as if the split had occurred on January 1, 2000.

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

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

As
of December 31, 2002, the Company has 6,550,357 shares of undesignated preferred stock authorized with a par value of $1.00.

F-19

---

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, 2002, options to purchase 1,130,760 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 vest 50% on the six month anniversary
and 50% on the eighteen month anniversary.

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. 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 10 years. Options issued
generally vest either 25% on the first anniversary of grant and 1/36 ratably over the next 36 months or 25% on the first anniversary of grant and 1/3 ratably over
the next three years. The 2000 Plan also provides the Company's board of directors with the discretion to accelerate exercisability of any award. As of December 31, 2002, the 2000 Plan allowed
for the issuance of up to 1,692,090 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 405,000 options granted under the non-plan option grant 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, 2002 there were 277,251 options available for awards.

Non-Plan Option Grant

In connection with the commencement of employment, the Company granted an employee stock options to acquire 405,000 shares of common stock at an exercise price of
$2.78 per share. These options vest as follows: 50% on July 19, 2002 and the remaining 50% ratably thereafter over the next six quarters. Although these 405,000 options were neither granted
under the 1998 Plan nor the 2000 Plan, the options were charged against the total number of options available for future grants under the 2000 Plan.

During
2000, 2001 and 2002, the Company granted stock options to employees with an exercise price less than fair market value. These options gave rise to unearned compensation in the
amount $117,800, $1,118,705 and $72,573, respectively, as of the date of the grant, which amount is being amortized to operations over the vesting period. In April 2002, the Company issued
24,300 options to a director at an
exercise price below the fair market value of the common stock. 25% of the options vest at the end of each year for the next four years. The options resulted in a charge to operations of $10,733 in
2002.

F-20

---

Non-Employee Options and Warrants

In February 2002, the Company issued 8,100 options to a non-employee consultant. 25% of the options vest at the end of each year for the next
four years. The options resulted in a charge to operations of $20,149 in 2002.

In
August 2001, the Company issued 16,200 warrants to a non-employee consultant. 50% of the warrants vested immediately and the remaining 50% vested on
February 1, 2002. The warrants resulted in a charge to operations of $77,522 and $30,283 in 2001 and 2002 respectively.

The
Company granted 64,800 options to non-employees for the year ended December 31, 2001. These options were valued at fair value and resulted in a charge to
operations of $215,577 and $182,939 in 2001 and 2002 respectively.

Option
activity for the years ended December 31, 2000, 2001 and 2002 was as follows:

Options

Weighted Average Options Exercise PriceBalance at December 31, 1999

623,700

$
2.58Granted

583,200

$
2.69Exercised



$
Forfeited

(11,340
)
$
7.41Balance at December 31, 2000

1,195,560

$
2.55Granted

1,253,880

$
3.74Exercised

(12,150
)
$
2.57Forfeited

(4,050
)
$
2.78Balance at December 31, 2001

2,433,240

$
3.18Granted

687,240

$
5.20Exercised



$
Forfeited

(169,881
)
$
4.74Balance at December 31, 2002

2,950,599

$
3.56


F-21

---

The weighted average exercise price, by price range, for all outstanding options as of December 31, 2002 is:

|                         |  | Weighted
Average
Remaining
Contractual
Life |  | Outstanding
Options |  | Options
Exercisable |  | Weighted
Average Exercise
Price
|------------------------ |  | ------------------------------------------- |  | ------------------- |  | ------------------- |  | -------------------------------
|Price range $2.27-$4.00  |  | 6.27 years                                  |  | 1,604,360           |  | 1,393,335           |  | $                              
|Price range $4.01-$6.99  |  | 8.36 years                                  |  | 1,211,099           |  | 194,717             |  | $                              
|Price range $7.00-$10.19 |  | 9.03 years                                  |  | 135,140             |  | 4,600               |  | $                              

Warrants

At December 31, 2002, warrants to purchase 551,312 shares of the Company's common stock were outstanding. All outstanding warrants are fully vested. The
details of the warrants for common stock outstanding at December 31, 2002 were as follows:

Number of Shares
Underlying Warrants

Exercise Price

Expiration Date109,952

$
2.73

January 2004121,500

$
3.41

January 200540,500

$
2.47

January 2005212,622

$
2.49

June 200560,909

$
6.17

August 20065,829

$
6.17

October 2006


9. Employment Agreements

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

The
Company has also entered into employment agreements with several other key employees which 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.

F-22

---

10. Savings and Investment Plan

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

The
401(k) Plan is employee funded up to an elective annual deferral and also provides an option for the Company to contribute to the 401(k) Plan at the discretion of the 401(k) Plan's
trustees. During fiscal 2002, the Company did not elect to contribute to the 401(k) Plan.

11. Significant Agreements

Wyeth-Ayerst Agreement

In May 1997, the Company entered into an option agreement with American Cyanamid, now Wyeth-Ayerst, 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-Ayerst pursuant to which the Company paid $300,000 to Wyeth-Ayerst for certain
rights to four compounds, indiplon, ocinaplon, bicifadine and DOV 216,303. As each of the four compounds licensed in from Wyeth-Ayerst 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-Ayerst as research and development expense. If the Company sublicenses
a compound to a third party, it is obligated to pay Wyeth-Ayerst 35% of all payments it receives based upon that compound. This payment drops to 25% if a new drug application has been filed by the
Company before the sublicense grant. These payment obligations are subject to minimum royalties of 2.5% of net sales for indiplon, ocinaplon and DOV 216,303 and 4.5% of net sales for bicifadine, and
minimum milestones of $2.5 million for indiplon, ocinaplon and DOV 216,303 and $5.0 million for bicifadine. In June 1998, the Company entered into a sublicense and development
agreement for indiplon with Neurocrine Biosciences, Inc. ("Neurocrine"). The Company's sublicense agreement with Neurocrine and its joint venture with Elan are structured so that it can satisfy
these minimum milestone obligations. To the extent DOV Bermuda has not entered into arrangements with third parties, however, any amounts owed to the Company from its joint venture with Elan will be
effectively funded by the Company to the extent of its interest in DOV Bermuda unless Elan elects not to participate in the funding of DOV Bermuda after December 31, 2002 in which case the
Company will effectively fund all of the amounts owed to it. If Wyeth-Ayerst 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 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-Ayerst.

In
2001, Neurocrine made a milestone payment to the Company of $1,300,000 in cash and warrants to purchase 75,000 shares of Neurocrine common stock. Royalty expense for the year ended
December 31, 2001, of $1,111,122 represents amounts due under the Wyeth agreement, which includes 35% of the cash and 35% of the fair value of the warrants at the date received from Neurocrine.
Included in accrued expenses at December 31, 2002 is $563,486 related to the 35% of the amounts payable to Wyeth-Ayerst. This liability is adjusted to fair value and resulted in $269,718 of
other income which has been netted against other expense during 2002 due to the decline in value of the warrants.

F-23

---

Biovail Agreement

In January 2001, the Company entered into a license and research and development agreement regarding DOV diltiazem with Biovail under which Biovail
obtained an exclusive, worldwide license to
certain DOV intellectual property. The parties agreed to work together to formulate, research and clinically develop the product. Biovail has the exclusive right to manufacture and market the product
and Biovail is responsible for marketing and commercialization decisions. The Company retains a co-promotion right subject to a separate co-promotion agreement to be negotiated
with Biovail. Biovail is responsible for the first $6,000,000 of research and development costs to develop the product. Costs above $6,000,000 are shared equally by the parties. In connection with
this agreement, the Company received a $7,500,000 fee on signing and the Company is entitled to receive milestone payments of up to $10,000,000 upon the occurrence of certain events and a royalty of
net sales, if any. The upfront payment has been deferred and is being amortized to revenue when earned over the estimated research and development period. Through July 1, 2002, the Company
estimated the development period for this product to be three years. This estimate was revised to a total of 41 months as of July 1, 002, due to the need for an additional clinical
trial. Biovail will also pay the Company to perform research and development under this agreement. Revenue and research and development expense includes $245,000 and $150,050 for the years ended
December 31, 2001 and 2002, respectively, for such services.

Under
the Biovail license agreement, Biovail is required to enforce the DOV diltiazem patent and the related intellectual property, including to sue for infringement, and the Company may
be required to reimburse Biovail for legal fees and disbursements in connection with such enforcement up to $1,500,000. (See Note 14).

Neurocrine Agreement

In June 1998, the Company entered into a sublicense and development agreement for one of the Company's compounds (indiplon) with Neurocrine. 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 our respective agreements. The Company received a sublicensing
fee of $5,000. In addition, the Company is entitled to receive milestone payments on certain development events and royalties on net sales, if any. In the fourth quarter of 2001, Neurocrine commenced
the first pivotal trial and made a milestone payment to the Company of $1,300,000 in cash and warrants to purchase 75,000 shares of Neurocrine common stock. The $1,300,000 in cash and fair value of
the warrants of $1,874,633 were recorded as milestone revenue in the fourth quarter of 2001. A portion of these warrants with a fair value of $93,732 were used to pay transaction fees. The warrants
qualify as a derivative under SFAS No. 133 and are carried on the balance sheet at their fair market value. Any change in fair market value will be recorded as other income or expense. During
2002, the Company recorded $501,000 in other expense related to the reduction in fair value of these warrants offset by the decrease in the liability to Wyeth.

F-24

---

The fair value of the warrants as of December 31, 2001 and 2002, respectively, is estimated using the Black-Scholes option pricing model and using the following significant assumptions:

December 31,2001

2002Remaining term

4.875 years

3.875 yearsExpected dividends

None

NoneExpected volatility

59.4%

40.3%


In
connection with this agreement, the Chief Executive Officer and 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.

Operating Leases

The Company leases office space under a long-term operating lease expiring in the year 2004. The Company also leases various office and transportation
equipment under operating leases with terms ranging from one to three years.

As
of December 31, 2002, the total non-cancelable future minimum rental payments under the above-mentioned leases are as follows:

Year ending December 31,2003

$
356,9302004


179,6822005


5,5612006


$
542,173


Rent
expense incurred for office space and equipment leases amounted to $207,967, $247,966 and $274,767 for the years ended December 31, 2000, 2001 and 2002.

Upon
entering into the office lease agreement, a letter of credit of $67,000 was issued for the buildout of the office space, which expires May 31, 2005. A certificate of deposit
is being held as collateral for the letter of credit, which is included in cash and cash equivalents.

12. Fair Value of Financial Instruments

The fair value of the convertible exchangeable promissory note outstanding was $24,556,000 and $18,200,000 as of December 31, 2001 and 2002, respectively.
The fair value of the convertible promissory note outstanding was $10,157,000 and $6,935,000 as of December 31, 2001 and 2002, respectively. The excess fair value over the carrying amount is
related to the increased value of the conversion features in these notes since their issuance. The estimated fair-value amounts have been determined using the Black-Scholes methodology.
The carrying amount of cash and cash equivalents approximates the fair value of these instruments due to their short-term nature.

F-25

---

13. Recent Litigation Developments

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. The lawsuits were filed in the United States District Court for the
Southern District of New York and the United States District
Court for the District of New Jersey. The complaints that have been served allege violations of Sections 11, 12 and 15 of the Securities Act of 1933 as well as Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, based upon the Company's alleged failure to disclose the filing of a
revised registration statement and prospectus for the Company's initial public offering reflecting changes to the 1999 financial statements of the Company's joint venture with Elan, DOV
(Bermuda), Ltd. These class actions were brought on behalf of purchasers of the Company's common stock in or traceable to the Company's initial public offering and sought money damages or
rescission. On August 16, 2002 Judge Sweet consolidated before him the lawsuits, previously consolidated, filed in the United States District Court for the District Court of New Jersey with the
lawsuits filed in the Southern District. On December 20, 2002, the Company entered into a settlement agreement, which is subject to court approval, to settle these lawsuits. The settlement, to
be presented to the court, 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. If the proposed settlement is approved by the court the Company will pay in the aggregate to the plaintiffs (i) $250,000 and (ii) 500,000
six-year warrants to purchase common stock exercisable at $10.00 per share. As of December 31, 2002, the Company estimated the value of these warrants at $2.3 million. On
January 21, 2003, the United States District Court authorized notice of the proposed class action settlement that was sent to all putative class members. The notice informed class members of
their rights including their rights to object to the proposed settlement and to pursue their claims separately.

Based
on the terms of the proposed settlement agreement, the Company determined that a liability related to these actions was probable and that the value was reasonably estimable.
Accordingly, as of December 31, 2002, the Company established an estimate for the cost of the litigation settlement of $2.5 million, with $2.3 million representing the Company's
estimate of the liability for the fair value of the warrants. As the proposed settlement agreement has yet to be approved by the court, the warrants are not considered issued or outstanding, and as a
result an estimated liability for the settlement has been recorded in the Company's financial statements at fair value. The Company estimated the fair value of the warrants using a Black-Scholes
methodology. Significant assumptions included the Company's closing stock price as of December 31, 2002 of $6.80 per share and a volatility factor of 82.242% based on the 90-day
volatility as reported by Bloomberg for the 90 days ended December 31, 2002. The fair value of the warrants will fluctuate based on many factors including but not limited to the fair
value of the Company's common stock and the volatility in the Company's common stock. The majority of the value in the liability at December 31, 2002, relates to the Company's current stock
price, the term of the warrants and the fact that the Company's common stock is volatile. The final value of the overall settlement may differ significantly from the estimates currently recorded
depending on the variety of factors affecting the valuation of the warrants. Accordingly, the Company will revalue the estimate of the settlement on a quarterly basis and at the time the warrants are
issued. Upon approval of the court, the warrants will be considered issued and, the Company will record such amounts as stockholders' equity in accordance with EITF 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" and the Company will no longer be required to revalue the liability for the warrants.

While
the Company expects that the court will approve the class action settlement terms, it cannot provide any assurance that this will occur, or that the settlement terms reached will
not be changed in

F-26

---

response to court objections or that litigation will not resume if the settlement is not approved. If the securities litigation resumes the Company believes it has meritorious defenses to the claims
alleged, and
the Company would vigorously defend against the claims. In such event, the Company would incur expenses, including attorneys' fees, in defending the securities class actions.

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, have asserted
that the policy binders they issued in connection with the Company's initial public offering are not effective because, among other reasons, the carriers claim that they never approved the
documentation provided with policy application, including the Final Registration Statement, and the carriers claim that such approval is a prerequisite to their policy's effectiveness.

The
Company strongly disagrees with their positions, has advised the carriers that the Company intends to hold them to their original binder terms as the Company vigorously pursues
resolution of these matters, and has initiated arbitration against the primary D&O carrier. The Company cannot provide any assurance that a satisfactory resolution of these matters will be achieved or
that litigation will not ensue. Pending resolution, the Company will incur expenses, including attorneys' fees, in attempting to resolve the coverage disputes. These expenses may be significant and,
as a result, may materially and adversely affect the Company's results of operations. In addition, the Company's inability to obtain coverage as provided in the Company's original binders could
adversely affect the Company's financial condition, results of operations and liquidity, since expenses incurred in defending the class actions may not be reimbursable by the insurers and any losses
in respect of the class action lawsuits may be borne solely by the Company. The Company has reached an agreement with the excess D&O carrier that for claims other than the securities class action
lawsuits described above, the excess D&O policy will remain in place, effective for losses in excess of $10.3 million. If the arbitration results in an award that there is no primary D&O
coverage, the Company will be responsible for losses, if any, up to $10.3 million, normally covered by such insurance for director and officer (but not company) reimbursement. If the Company
and its officers and directors are not covered by primary D&O insurance, the Company's ability to recruit and retain officers and directors may be adversely affected. The Company cannot assure you
that replacement primary D&O coverage will be available or, if it is, will be available on financial terms comparable to those offered by the original primary carrier that has denied coverage.
Further, if replacement coverage is secured, it will not cover previously-initiated class or related class actions arising out of the Company's initial public offering and may contain other exceptions
and coverage restrictions not found in the primary carrier's original policy binder. As a result of the uncertainty described above, the Company has not recorded any reduction in the cost of the class
action settlement described above for insurance proceeds. To the extent the Company prevails in the arbitration, any insurance recovery will be recorded in the period when the recovery is realized.

14. Contingencies

Biovail Matters

Until April 2002, Andrx Pharmaceuticals, Inc., Andrx, and Biovail Corporation were involved in litigation relating to the DOV diltiazem patent in
the United Stated District Court for the Southern District of Florida. At that time, Biovail dismissed with prejudice its claim that Andrx's generic version of Tiazac would infringe the DOV diltiazem
patent, thereby barring Biovail from reasserting the same claim in the future. The federal court in Florida also ordered that Andrx's claims of non-infringement and invalidity were moot.
Subsequently, as part of an overall settlement with Biovail, Andrx dropped its claims that the patent and license agreement with Biovail are invalid. As reported, pursuant to the Biovail-Andrx
settlement, Biovail and Andrx agreed (a) to file a stipulation of dismissal with prejudice

F-27

---

of all pending claims, (b) to enter into mutual releases of any unasserted claims relating to Biovail's Cardizem CD and Tiazac and Andrx's generic versions of those products and
(c) that Biovail will permit Andrx to manufacture and market, Taztia, Andrx's generic version of Tiazac, free of any patent infringement claims Biovail may have or acquire.

The
Company's license agreement with Biovail gives Biovail the exclusive right to enforce the DOV diltiazem patent against others, including the exclusive right to sue others for past,
present and future infringements of the DOV diltiazem patent. The Company is contractually obligated under certain circumstances to reimburse Biovail for legal fees and disbursements incurred in
connection with such patent enforcement, up to a maximum of $1.5 million. Biovail, citing this contractual provision, has asserted that the Company is responsible for the reimbursement of
aggregate legal expenses of approximately $1.5 million that Biovail allegedly incurred to enforce the DOV diltiazem patent against Andrx. The Company believes that it is not obligated to
reimburse Biovail for these expenses. Among other reasons, the Company believes that Biovail's actions in listing the DOV diltiazem patent in the Orange Book were taken in major part to secure a stay
of FDA approval of Andrx's generic drug, rather than to enforce the DOV diltiazem patent. Further, Biovail's litigation with Andrx involved many issues, including violation of antitrust laws,
unrelated to the DOV diltiazem patent or its validity. Biovail withdrew its Orange Book listing, Andrx and Biovail filed a stipulation of dismissal of the patent infringement action against Andrx with
respect to the DOV diltiazem patent and, the FTC announced a complaint against Biovail founded on the alleged illegality of the Orange Book filing. The Company responded to Biovail's claim, rejecting
it on both procedural and substantive grounds. The Company also responded to Biovail's subsequent assertion that failure to pay its legal fees will constitute a material breach of the license
agreement entitling Biovail to legal remedies including rescission. The Company believes that any such dispute is subject to mandatory arbitration and that the sole remedy for any award of legal fees
is an offset against royalties, if any. The Company has also submitted its own contractual claim for legal fees and disbursements of approximately $423,000 against Biovail resulting from license
agreement misrepresentations and the Orange Book filing. Nonetheless, the Company may be responsible for a portion of Biovail's legal expenses with regard to litigating Biovail's claim that Andrx's
generic drug infringes the DOV diltiazem patent and may fail to recover the Company's legal expenses. As of December 31, 2002, no provision for the reimbursement of these costs is included in
the Company's financial statements.

Elan Matter

Under the terms of the Company's joint venture agreements with Elan, Elan's consent is required with respect to certain transactions entered into by the Company.
In the event that the Company does not obtain Elan's consent when it is required, Elan has the right to terminate the license agreement with Nascime Limited, a 100% owned subsidiary of DOV Bermuda. In
January 2001, the Company entered into a license, research and development agreement with Biovail, which is a named technological competitor of Elan under Elan's license agreement with Nascime.
The Company does not believe that Elan's consent to the Biovail agreement was required. Nonetheless, the Company sought consent from Elan, which Elan refused to grant. While Elan has neither asserted
that its consent was required, nor objected to the Company entering into the Biovail license agreement or threatened to terminate its license agreement with Nascime, it has stated that it reserves its
rights with respect to this issue. It is not feasible to predict what the outcome would be if Elan were to seek to terminate its agreement based on the Company's failure to obtain its consent. The
Elan license with Nascime is material to the Company and if the license were to be terminated, it could have a material adverse impact on the Company's financial position and results of operations.

F-28

---

15. Subsequent Events

On March 24, 2003, the Company and Elan agreed to amend the convertible exchangeable note issued to Elan in January 1999 such that the exchange
right feature of the note has been eliminated. The exchange right had previously given Elan the ability to exchange, at any time during the term of the note, the principal portion of the note into an
equal ownership position of DOV Bermuda. The Company and Elan also exchanged releases for claims under the JDOA or related license agreements. All other significant terms of the note will remain the
same. In connection with this amendment to the note, Elan will receive 75,000 warrants to purchase DOV Common Stock, par value of $0.0001, with a strike price of $10.00 per warrant and an expiration
date of January 21, 2006. As of March 24, 2003, the fair value of the warrants was estimated to be $164,000.

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 has agreed to a $1.0 million payment to Biovail upon signing, as well as, contingent payments to Biovail of
$3.0 million upon receipt of marketing authorization for the drug and up to $7.5 million based upon sales. The Company will record a charge of $1.0 million in the first quarter of
2003 in respect of the signing payment. As the separation agreement ends DOV's performance obligations, the agreement will result in the recognition in the first quarter of the remaining deferred
revenue, totaling $3.0 million as of December 31, 2002. As a result of the separation agreement, Biovail and DOV also agreed to release any and all claims.

16. Quarterly Financial Data (Unaudited)

The following table contains selected unaudited statement of operations information for each quarter of 2002 and 2001. The Company believes that the following
information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily
indicative of results of any future period.

|     |                                              | Quarters Ended |  
|---- | -------------------------------------------- | -------------- | -
|
|
|2002 |                                              |                |  
|     | Revenue                                      |                | $
|     | Net loss                                     |                |  
|     | Net loss attributable to common stockholders |                |  
|     | Basic and diluted net loss per share         |                |  
|2001 |                                              |                |  
|     | Revenue                                      |                | $
|     | Net loss                                     |                |  
|     | Net loss attributable to common stockholders |                |  
|     | Basic and diluted net loss per share         |                |  

---

F-29

---

REPORT OF INDEPENDENT ACCOUNTANTS

To
the Board of Directors of
DOV (Bermuda), Ltd.

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, consolidated statements of changes in stockholders' deficit and
consolidated statements of cash flows present fairly, in all material respects, the financial position of DOV (Bermuda), Ltd. (a development stage company) and subsidiary (the "Company") as of
December 31, 2001 and 2002, and the results of their operations and their cash flows for the years ended December 31, 2000, 2001 and 2002, and the period from inception
(January 21, 1999) through December 31, 2002, 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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers
LLP
Florham Park, NJ

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

F-30

---

DOV (BERMUDA), LTD.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS

|                                      |                               | As of December 31,                                                                                             |                            
|------------------------------------- | ----------------------------- | -------------------------------------------------------------------------------------------------------------- | ---------------------------
|
|Assets                                |                               |                                                                                                                |                            
|                                      | Current assets                |                                                                                                                |                            
|                                      |                               | Cash and cash equivalents                                                                                      |                            
|                                      |                               |                                                                                                                |                            
|                                      |                               |                                                                                                                | Total current assets       
|                                      |                               |                                                                                                                |                            
|Liabilities and Stockholders' Deficit |                               |                                                                                                                |                            
|                                      | Current liabilities           |                                                                                                                |                            
|                                      |                               | Accrued liabilities                                                                                            |                            
|                                      |                               | Due to related parties                                                                                         |                            
|                                      |                               |                                                                                                                |                            
|                                      |                               |                                                                                                                | Total current liabilities  
|                                      |                               |                                                                                                                |                            
|                                      | Commitments and contingencies |                                                                                                                |                            
|                                      | Stockholders' deficit         |                                                                                                                |                            
|                                      |                               | Class A voting common stock, $1.00 par value; 16,020 shares authorized; 16,020 shares issued and outstanding   |                            
|                                      |                               | Class B non-voting common stock, $1.00 par value; 3,980 shares authorized; 3,980 shares issued and outstanding |                            
|                                      |                               | Additional paid-in capital                                                                                     |                            
|                                      |                               | Deficit accumulated during development stage                                                                   |                            
|                                      |                               |                                                                                                                |                            
|                                      |                               |                                                                                                                | Total stockholders' deficit
|                                      |                               |                                                                                                                |                            
|                                      |                               |                                                                                                                |                            
|                                      |                               |                                                                                                                |                            

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

F-31

---

DOV (BERMUDA), LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS

|                   |                                                        |                          |          |           |           |            |           | Period from
January 21,
1999
(Date of
Inception)
Through
December 31,
2002 |           
|------------------ | ------------------------------------------------------ | ------------------------ | -------- | --------- | --------- | ---------- | --------- | -------------------------------------------------------------------------- | ----------
|
|
|Operating expenses |                                                        |                          |          |           |           |            |           |                                                                            |           
|                   | Purchased in-process research and development (Note 5) |                          | $        |          |           | $          |          |                                                                            | $         
|                   | Research and development expenses (Note 4)             |                          |          | 3,580,421 |           |            | 5,891,632 |                                                                            |           
|                   | General and administrative expenses                    |                          |          | 31,461    |           |            | 23,351    |                                                                            |           
|                   |                                                        |                          |          |           |           |            |           |                                                                            |           
|                   |                                                        | Total operating expenses |          |           | 3,611,882 |            |           | 5,914,983                                                                  |           
|                   |                                                        | Interest income          |          |           | 7,647     |            |           | 477                                                                        |           
|                   |                                                        |                          |          |           |           |            |           |                                                                            |           
|                   |                                                        |                          | Net loss |           | $         | (3,604,235 | )         | $                                                                          | (5,914,506
|                   |                                                        |                          |          |           |           |            |           |                                                                            |           

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

F-32

---



DOV (BERMUDA), LTD.        (A Development Stage Company)        CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT        For the Periods from Inception (January 21, 1999) through
December 31, 2002

|                                            |  | Common Stock
Class A |  | Common Stock
Class B |        |  |       |  |   |       | 
|------------------------------------------- |  | -------------------- |  | -------------------- | ------ |  | ----- |  | - | ----- | 
|
|
|
|Contributed at inception (January 21, 1999) |  | 16,020               |  | $                    | 16,020 |  | 3,980 |  | $ | 3,980 | 
|Capital contribution                        |  |                     |  |                      |       |  |      |  |   |      | 
|Net loss                                    |  |                     |  |                      |       |  |      |  |   |      | 
|                                            |  |                      |  |                      |        |  |       |  |   |       | 
|Balance at December 31, 1999                |  | 16,020               |  |                      | 16,020 |  | 3,980 |  |   | 3,980 | 
|Capital contribution                        |  |                     |  |                      |       |  |      |  |   |      | 
|Net loss                                    |  |                     |  |                      |       |  |      |  |   |      | 
|                                            |  |                      |  |                      |        |  |       |  |   |       | 
|Balance at December 31, 2000                |  | 16,020               |  |                      | 16,020 |  | 3,980 |  |   | 3,980 | 
|Capital contribution                        |  |                     |  |                      |       |  |      |  |   |      | 
|Net loss                                    |  |                     |  |                      |       |  |      |  |   |      | 
|                                            |  |                      |  |                      |        |  |       |  |   |       | 
|Balance at December 31, 2001                |  | 16,020               |  |                      | 16,020 |  | 3,980 |  |   | 3,980 | 
|Capital Contribution                        |  |                     |  |                      |       |  |      |  |   |      | 
|Net Loss                                    |  |                     |  |                      |        |  |       |  |   |       | 
|                                            |  |                      |  |                      |        |  |       |  |   |       | 
|Balance at December 31, 2002                |  | 16,020               |  | $                    | 16,020 |  | 3,980 |  | $ | 3,980 | 
|                                            |  |                      |  |                      |        |  |       |  |   |       | 

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

F-33

---

DOV (BERMUDA), LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                         |                                             |                                           |            |            |           |            |            | Period from
January 21,
1999
(Date of
Inception)
Through
December 31,
2002 |           
|------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------- | ----------------------------------------- | ---------- | ---------- | --------- | ---------- | ---------- | -------------------------------------------------------------------------- | ----------
|
|
|Cash flow from operating activities                                                                                      |                                             |                                           |            |            |           |            |            |                                                                            |           
|Net loss                                                                                                                 |                                             | $                                         | (3,604,235 | )          | $         | (5,914,506 | )          | $                                                                          | (9,463,646
|Adjustments to reconcile net loss to net cash used in operating activities Purchased in-process research and development |                                             |                                           |           |            |           |           |            |                                                                            |          
|                                                                                                                         | Changes in operating assets and liabilities |                                           |            |            |           |            |            |                                                                            |           
|                                                                                                                         |                                             | Other current assets                      |            |            | (3,980    | )          |            | 3,980                                                                      |           
|                                                                                                                         |                                             | Accrued liabilities                       |            |            | 1,407     |            |            | 8,456                                                                      |           
|                                                                                                                         |                                             | Due to related parties                    |            |            | 712,654   |            |            | 857,092                                                                    |           
|                                                                                                                         |                                             |                                           |            |            |           |            |            |                                                                            |           
|                                                                                                                         | Net cash used in operating activities       |                                           |            | (2,894,154 | )         |            | (5,044,978 | )                                                                          |           
|Cash flow from investing activity                                                                                        |                                             |                                           |            |            |           |            |            |                                                                            |           
|                                                                                                                         | Purchase of license agreements              |                                           |            |           |           |            |           |                                                                            |           
|                                                                                                                         |                                             |                                           |            |            |           |            |            |                                                                            |           
|                                                                                                                         |                                             | Net cash used by investing activity       |            |            |          |            |            |                                                                           |           
|                                                                                                                         |                                             |                                           |            |            |           |            |            |                                                                            |           
|Cash flow from financing activity                                                                                        |                                             |                                           |            |            |           |            |            |                                                                            |           
|                                                                                                                         | Capital contributions                       |                                           |            | 2,911,822  |           |            | 5,034,415  |                                                                            |           
|                                                                                                                         | Proceeds from sale of shares                |                                           |            |           |           |            |           |                                                                            |           
|                                                                                                                         |                                             |                                           |            |            |           |            |            |                                                                            |           
|                                                                                                                         |                                             | Net cash provided by financing activities |            |            | 2,911,822 |            |            | 5,034,415                                                                  |           
|                                                                                                                         |                                             |                                           |            |            |           |            |            |                                                                            |           
|Increase (decrease) in cash and cash equivalents                                                                         |                                             |                                           | 17,668     |            |           | (10,563    | )          |                                                                            | 1,313     
|Cash and cash equivalents-beginning of period                                                                            |                                             |                                           | 518        |            |           | 18,186     |            |                                                                            | 7,623     
|                                                                                                                         |                                             |                                           |            |            |           |            |            |                                                                            |           
|                                                                                                                         |                                             | Cash and cash equivalents-end of period   |            | $          | 18,186    |            | $          | 7,623                                                                      |           
|                                                                                                                         |                                             |                                           |            |            |           |            |            |                                                                            |           

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

F-34

---

DOV (BERMUDA), LTD.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Organization and Basis of Presentation

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

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

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

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

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Licenses

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

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

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

2.    Significant Accounting Policies

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles
require that the financial statements be prepared on a going concern basis. The Company's ability to continue as a going concern is entirely dependent upon the funds it receives from its stockholders
in connection with the stockholders' respective obligations to fund the Company's operations. (See Note 1). DOV has committed to provide funding to the Company through at least
December 31, 2003.

Consolidation

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

Cash and Cash Equivalents

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

Research and Development Expense

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

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the

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date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Exchange

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

Segment and Geographic Information

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

Risks and Uncertainties

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

3.    Comprehensive Income (Loss)

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

4.    Related Party Transactions

At the end of the period, the amount due to related parties represents costs for research and development that are subcontracted to DOV and Elan. For the periods
ended December 31, 2000, 2001 and 2002, respectively, research and development expenses of $1,958,367, $4,124,366 and $8,194,235, were charged by DOV and $1,622,054, $1,767,266 and $1,241,671
were charged by Elan, which represent costs charged by DOV and Elan for research and development services performed, as agreed to by the parties under the agreements. At the end of 2001 and 2002,
respectively, the Company owed $1,330,821 and $3,040,379 to DOV and $523,224 and $517,975 to Elan.

5.    In-Process Research and Development

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

6.    Taxes

Bermuda

Under current Bermuda law the Company is not required to pay any taxes in Bermuda on either income or capital gains. The Company has received an undertaking from
the Minister of Finance in

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Bermuda that in the event of such taxes being imposed, the Company will be exempted from taxation until the year 2016.

Ireland

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

7.    Contingencies

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

8.    Subsequent Events

On March 24, 2003, DOV Pharmaceutical and Elan agreed to amend the convertible exchangeable note issued to Elan in January 1999 such that the
exchange right feature of the note has been eliminated. The exchange right had previously given Elan the ability to exchange, at any time during the term of the note, the principal portion of the note
into an ownership position of DOV Bermuda equal to DOV's. All other significant terms of the note will remain the same. In connection with this amendment to the note, Elan will receive 75,000 warrants
to purchase DOV Common Stock, par value of $0.0001, with a strike price of $10.00 per warrant and an expiration date of January 21, 2006. DOV and Elan also exchanged releases for claims under
the JDOA or related license agreements.

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