**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  
 
 **FORM
        10-Q**
 
 **(Mark
        One)**
 **x**
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE **SECURITIES
                  EXCHANGE ACT OF 1934****
  **For
        the quarterly period ended April 2, 2006**
  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 000-50851
 
 
 NEW
        RIVER
        PHARMACEUTICALS INC.
 (Exact
        name of registrant as specified in its charter)
 
 Virginia
              
              54-1816479(State
                  or other jurisdiction of incorporation or organization)
              
              (IRS
                  employer identification no.)1881
                  Grove AvenueRadford,
                  Virginia
              
              24141(Address
                  of principal executive offices)
              
              (Zip
                  code)
 
 (540)
        633-7978
 (Registrant’s
        telephone number,
 including
        area code)
  
 Indicate
        by check mark whether the 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 the
        registrant was required to file such reports), and (2) has been subject to
        such filing requirements for the past
        90 days.     Yes þ No o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
        (Check one):
 Large
                  accelerated filero
              
              Accelerated
                  filerþ
              
              Non-accelerated
                  filero
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in
        Rule 12b-2 of the Act).
 Yes o No þ
  As
        of May
        9, 2006 there were 36,627,064 shares of the registrant’s common stock, $.001 par
        value per share, outstanding.
 
 
 
  **NEW
        RIVER PHARMACEUTICALS INC.**
 **FORM
        10-Q**
 **FOR
        THE QUARTERLY PERIOD ENDED April 2, 2006**
 
 **INDEX**
 **Page**PART
                  I FINANCIAL INFORMATIONItem
                  1.
              Consolidated
                  Financial Statements
                  (unaudited).
              1Consolidated
                  Balance Sheets April 2, 2006 and January 1, 2006Consolidated
                  Statements of Operations Three months ended April
                  2, 2006 and April 3, 2005Consolidated
                  Statements of Cash Flows Three months ended April
                  2, 2006 and April 3, 2005Notes
                  to Consolidated Financial StatementsItem
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations.
              12Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk.
              19Item
                  4.
              Controls
                  and Procedures.
              20PART
                  II OTHER INFORMATION
              21Item
                  1.
              Legal
                  Proceedings.
              21Item
                  1A.
              Risk
                  Factors.
              21Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds.
              21Item
                  3.
              Defaults
                  Upon Senior Securities.
              21Item
                  4.
              Submission
                  of Matters to a Vote of Securities
                  Holders.
              21Item
                  5.
              Other
                  Information.
              21Item
                  6.
              Exhibits.
              21SIGNATURES
              22
  i
 *Index*
 **PART
          I**
 **FINANCIAL
          INFORMATION**
 **Item
                  1.**
              **Consolidated
                  Financial Statements**
 **NEW
        RIVER PHARMACEUTICALS INC. AND SUBSIDIARY**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(Unaudited)**
 
 **Assets**
              
              **April
                  2, 2006**
              
              **January
                  1, 2006**Current
                  assets:Cash
                  and cash equivalents
              
              $
              27,839,344
              
              $
              3,515,572Short-term
                  investments
              
              
              67,175,000
              
              
              49,250,000Other
                  receivables
              
              
              152,884
              
              
              135,755Prepaid
                  expenses
              
              
              516,714
              
              
              798,090Total
                  current assets
              
              
              95,683,942
              
              
              53,699,417Property
                  and equipment:Leasehold
                  improvements
              
              
              94,609
              
              
              94,609Machinery
                  and equipment
              
              
              840,066
              
              
              819,472934,675
              
              
              914,081Less
                  accumulated depreciation and amortization
              
              
              694,427
              
              
              653,427Property
                  and equipment, net
              
              
              240,248
              
              
              260,654Total
                  assets
              
              $
              95,924,190
              
              $
              53,960,071**Liabilities
                  and Shareholders’ Equity (Deficit)**Current
                  liabilities:Capital
                  lease obligation - current
              
              $
              22,931
              
              $
              22,298Accounts
                  payable
              
              
              2,629,281
              
              
              1,548,473Unpaid
                  and accrued research and development expenses
              
              
              2,704,013
              
              
              3,201,732Accrued
                  compensation
              
              
              719,017
              
              
              2,203,898Due
                  to affiliates
              
              
              71,243
              
              
              34,138Deferred
                  revenue - current
              
              
              7,672,624
              
              
              —Accrued
                  stock - based compensation - current
              
              
              287,812
              
              
              —Total
                  current liabilities
              
              
              14,106,921
              
              
              7,010,539Capital
                  lease obligation - noncurrent
              
              
              21,172
              
              
              27,148Accrued
                  stock-based compensation
              
              
              7,947,997
              
              
              3,404,435Deferred
                  revenue
              
              
              71,000,000
              
              
              50,000,000Total
                  liabilities
              
              
              93,076,090
              
              
              60,442,122Shareholders’
                  Equity (Deficit):Preferred
                  stock, par value $0.001 per share. Authorized 25,000,000 shares;
                  none
                  issued and outstanding
              
              
              —
              
              
              —Common
                  stock, par value $0.001 per share. Authorized 150,000,000 shares;
                  issued
                  and outstanding 36,627,064 shares at April 2, 2006 and 36,367,064
                  shares
                  at January 1, 2006
              
              
              36,627
              
              
              36,367Additional
                  paid-in capital
              
              
              64,942,679
              
              
              63,326,824Accumulated
                  deficit
              
              
              (62,131,206
              )
              
              (69,845,242
              )Total
                  shareholders’ equity (deficit)
              
              
              2,848,100
              
              
              (6,482,051
              )Commitments
                  and contingenciesTotal
                  liabilities and shareholders’ equity (deficit)
              
              $
              95,924,190
              
              $
              53,960,071
  See
        accompanying notes to consolidated financial statements.
  1
 *Index*
 
 **NEW
        RIVER PHARMACEUTICALS INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **(Unaudited)**
  **Three
                  months ended****April
                  2, 2006**
              
              **April
                  3, 2005**Collaboration
                  revenues
              
              $
              21,327,376
              
              
              —Operating
                  costs and expenses:Selling,
                  general, and administrative
              
              
              8,217,505
              
              
              3,175,281Research
                  and development
              
              
              5,515,912
              
              
              3,784,215Depreciation
                  and amortization of property and equipment
              
              
              41,000
              
              
              35,180Total
                  operating expenses
              
              
              13,774,417
              
              
              6,994,676Operating
                  income (loss)
              
              
              7,552,959
              
              
              (6,994,676
              )Other
                  income (expense):Interest
                  expense
              
              
              (1,342
              )
              
              —Interest
                  income
              
              
              873,316
              
              
              322,444Total
                  other income, net
              
              
              871,974
              
              
              322,444Income
                  (loss) before cumulative effect of change in accounting
                  principle
              
              
              8,424,933
              
              
              (6,672,232
              )Cumulative
                  effect of a change in accounting principle
              
              
              (710,897
              )
              
              —Net
                  income (loss)
              
              $
              7,714,036
              
              
              (6,672,232
              )Net
                  income (loss) per share:Basic
              
              $
              0
                  .21
              
              
              (0.19
              )Diluted
              
              $
              0
                  .21
              
              
              (0.19
              )
 
 See
        accompanying notes to consolidated financial statements
  2
 *Index*
 
 **NEWRIVER
        PHARMACEUTICALS INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 
 **Three
                  months ended****April
                  2, 2006**
              
              **April
                  2, 2005**Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              7,714,036
              
              $
              (6,672,232
              )Adjustments
                  to reconcile net income (loss) to net cash provided by operating
                  activities:Depreciation
                  and amortization of property and equipment
              
              
              41,000
              
              
              35,180Stock-based
                  compensation
              
              
              963,465
              
              
              4,770Changes
                  in operating assets and liabilities:Other
                  receivables
              
              
              (17,129
              )
              
              —Prepaid
                  expenses
              
              
              281,376
              
              
              94,926Accounts
                  payable
              
              
              1,080,807
              
              
              (35,827
              )Unpaid
                  and accrued research and development expenses
              
              
              (497,719
              )
              
              (692,127
              )Accrued
                  compensation
              
              
              (1,484,880
              )
              
              (1,044,620
              )Due
                  to affiliates
              
              
              37,105
              
              
              65,002Accrued
                  stock-based compensation
              
              
              4,120,477
              
              
              14,311Deferred
                  revenue
              
              
              28,672,624
              
              
              50,000,000Cumulative
                  effect of change in accounting principle
              
              
              710,897
              
              
              —Net
                  cash provided by operating activities
              
              
              41,622,059
              
              
              41,769,383Cash
                  flows from investing activities:Proceeds
                  from sale of short-term investments
              
              
              23,375,000
              
              
              14,200,000Purchases
                  of short-term investments
              
              
              (41,300,000
              )
              
              (45,504,977
              )Purchases
                  of property and equipment
              
              
              (20,594
              )
              
              (54,620
              )Net
                  cash used in investing activities
              
              
              (17,945,594
              )
              
              (31,359,597
              )Cash
                  flows from financing activities:Principal
                  payments on capital lease obligation
              
              
              (5,343
              )
              
              —Net
                  proceeds from issuances of common stock
              
              
              652,650
              
              
              171,685Net
                  cash provided by financing activities
              
              
              647,307
              
              
              171,685Net
                  increase in cash and cash equivalents
              
              
              24,323,772
              
              
              10,581,471Cash
                  and cash equivalents at beginning of period
              
              
              3,515,572
              
              
              4,018,556Cash
                  and cash equivalents at end of period
              
              $
              27,839,344
              
              $
              14,600,027Supplemental
                  cash flow information:Interest
                  paid
              
              $
              1,342
              
              
              —
 See
        accompanying notes to consolidated financial statements
  3
 *Index*
 
 **NEWRIVER
        PHARMACEUTICALS INC.**
 **AND
        SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Three
        months ended April 2, 2006 and April 3, 2005**
 **(Unaudited)**
 
 **(1)**
              **ORGANIZATION
                  AND NATURE OF BUSINESS**
 
 **Organization**
 
 New
        River
        Pharmaceuticals Inc. (the Company), a Virginia corporation, was formed in
        1996.
        The Company has a wholly owned subsidiary, Lotus Biochemical (Bermuda) Ltd.
        (Lotus Bermuda), which exists to hold pharmaceutical intellectual property.
        While Lotus Bermuda has held such forms of intellectual property in the past,
        at
        April 2, 2006, Lotus Bermuda holds no such assets; however, Lotus Bermuda
        may be
        used again for such purpose in the future. Alternatively, the Company may
        decide
        to dissolve Lotus Bermuda at some time in the future.
 
 **Nature
        of Business**
 
 The
        Company is a specialty pharmaceutical company developing generational
        improvements of widely prescribed drugs in large and growing markets. Utilizing
        its proprietary Carrierwave TM technology, the Company is developing new molecular entities that are
        derivatives of public domain actives and attempt to address certain deficiencies
        associated with currently marketed drugs. The products in the Company’s pipeline
        that are the most advanced in their development are NRP104 and NRP290, which
        are
        conditionally bioreversible derivatives (CBDs) of amphetamine and hydrocodone
        that are designed to provide overdose protection, abuse resistance and less
        potential for addiction while affording comparable efficacy.
 
 **(2)**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES**
 
 *(a)*
              *Basis
                  of Presentation*
 
 The
        accompanying unaudited consolidated financial statements include the accounts
        of
        New River Pharmaceuticals Inc. and its wholly owned subsidiary and have been
        prepared in accordance with U.S. generally accepted accounting principles
        for
        interim financial information and pursuant to the rules and regulations of
        the
        Securities and Exchange Commission (SEC) pertaining to Quarterly Reports
        on Form
        10-Q. Certain disclosures required for complete financial statements are
        not
        included herein. All significant intercompany accounts and transactions have
        been eliminated in consolidation. The information as of April 2, 2006 and
        for
        the three months ended April 2, 2006 and April 3, 2005 is unaudited but includes
        all adjustments (consisting only of normal recurring adjustments) that, in
        the
        opinion of management, are necessary to state fairly the financial information
        set forth herein. The interim results are not necessarily indicative of results
        to be expected for the full fiscal year. These unaudited consolidated financial
        statements should be read in conjunction with the audited consolidated financial
        statements and footnotes thereto for the year ended January 1, 2006, included
        in
        the Company’s Annual Report on Form 10-K, filed with the SEC on March 15,
        2006.
 
 *(b)*
              *Fiscal
                  Periods*
 
 The
        Company maintains its books using a 52/53-week fiscal year ending on the
        Sunday
        nearest the last day of December. Quarterly periods are closed every 13 weeks
        except during years that include 53 weeks. In such years, the fourth quarter
        will include 14 weeks. Fiscal year 2005 included 52 weeks and ended on January
        1, 2006. Fiscal year 2006 includes 52 weeks and ends December 31,
        2006.
 
 *(c)*
              *Cash
                  and Cash Equivalents*
 
 For
        purposes of the consolidated statements of cash flows, the Company considers
        all
        highly liquid debt instruments purchased with an original maturity of three
        months or less to be cash equivalents. Cash equivalents consisted of money
        market accounts and commercial paper of $2,920,519 and $24,929,115,
        respectively, at April 2, 2006 and $299,264 and $3,155,253, respectively,
        at
        January 1, 2006.
  4
 *Index*
 
 *(d)*
              *Short-term
                  Investments*
 
 Short-term
        investments are classified in accordance with the provisions of Statement
        of
        Financial Accounting Standards (SFAS) No. 115, “ *Accounting
        for Certain Investments in Debt and Equity*  *Securities.”* At April
        2, 2006 and January 1, 2006, the Company’s short-term investments consisted of
        $67,175,000 and $49,250,000, respectively, of auction rate municipal bonds
        which
        are classified as available-for-sale. The Company records its investment
        in
        these securities at cost, which approximates fair market value due to (i)
        the
        securities’ variable interest rates, which typically reset every 28 to 35 days,
        and, (ii) the fact that the Company has the ability to liquidate readily
        these
        securities despite the long-term nature of their stated contractual maturities.
        As a result, the Company had no cumulative gross unrealized gains (losses)
        from
        its investments in these securities at April 2, 2006 and January 1, 2006.
        All
        income generated from these investments is recorded as interest
        income.
 
 *(e)*
              *Inventories*
 
 In
        accordance with SFAS No. 2, “ *Accounting
        for Research and Development Costs,”* the
        costs
        of producing inventory in the reporting periods prior to the receipt of
        regulatory approval or clearance are recorded as research and development
        expense. Because the Company does not currently have any products on the
        market,
        nor any products currently approved by the U.S. Food and Drug Administration
        or
        other regulatory body for production, the Company did not have any inventory
        at
        April 2, 2006 and January 1, 2006.
 
 *(f)*
              *Income
                  Taxes*
 
 Income
        taxes are accounted for under the asset and liability method. Deferred tax
        assets and liabilities are recognized for the future tax consequences
        attributable to differences between the financial statement carrying amounts
        of
        existing assets and liabilities and their respective tax bases and operating
        loss and tax credit carryforwards. Valuation allowances are established when
        necessary to reduce deferred tax assets to the amount expected to be realized.
        Deferred tax assets and liabilities are measured using enacted tax rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be recovered or settled. The effect on deferred
        tax
        assets and liabilities of a change in tax rates is recognized in income in
        the
        period that includes the enactment date.
 
 *(g)*
              *Revenue
                  Recognition, Cost of Goods Sold and Sales
                  Returns*
 
 Although
        at April 2, 2006, the Company had no products available for sale, it does
        anticipate having products available for sale in the future. The Company
        anticipates that some of its sales will be to wholesalers who have the right
        to
        return purchased product. In accordance with SFAS No. 48, “ *Revenue
        Recognition When the Right of Return Exists”* (SFAS
        No. 48), until the Company has sufficient sales history to estimate product
        returns, it will have to defer recognition of revenue on such sales until
        the
        products are dispensed through patient prescriptions. Once the Company has
        obtained sufficient sales history to estimate product returns, under SFAS
        No.
        48, it will be able to recognize revenue on product shipments, net of a
        reasonable allowance for estimated returns relating to these
        shipments.
 
 The
        Company’s strategy includes entering into collaborative agreements with
        strategic partners for the development and commercialization of its product
        candidates. Such collaboration agreements may have multiple deliverables.
        The
        Company evaluates m ultiple
        deliverable arrangements pursuant to EITF 00-21, *“Revenue
        Arrangements with Multiple Deliverables”* (EITF
        00-21). Pursuant to EITF 00-21, in arrangements with multiple deliverables
        where
        the Company has continuing performance obligations, contract, milestone and
        license fees are recognized together with any up-front payments over the
        term of
        the arrangement as performance obligations are completed, unless the deliverable
        has stand alone value and there is objective, reliable evidence of fair value
        of
        the undelivered element in the arrangement. In the case of an arrangement
        where
        it is determined there is a single unit of accounting, all cash flows from
        the
        arrangement are considered in the determination of all revenue to be recognized.
        Cash received in advance of revenue recognition is recorded as deferred revenue
        (see note 3).
  5
 *Index*
 
 *(h)*
              *Research
                  and Development*
 
 Research
        and development expenses consist of direct costs and indirect costs. Direct
        research and development costs include salaries and related costs of research
        and development personnel, and the costs of consultants, facilities, materials
        and supplies associated with research and development projects as well as
        various laboratory studies. Indirect research and development costs include
        depreciation and other indirect overhead expenses. The Company believes that
        regulatory and other uncertainties inherent in the research and development
        of
        new products preclude it from capitalizing such costs. This treatment includes
        up-front and milestone payments made to third parties in connection with
        research and development collaborations. At April 2, 2006, the Company had
        research and development commitments with third parties totaling approximately
        $14,328,000, of which approximately **$** 2,326,000
        had not yet been incurred. The commitments are cancelable by the Company
        at any
        time upon written notice **.**
 
 *(i)*
              *Stock-Based
                  Compensation*
 
 Effective
        January 2, 2006, the Company adopted the provisions of Statement of Financial
        Accounting Standards No. 123(R), *“Share-Based
        Payment,”* (SFAS
        No. 123(R)) and related interpretations, using the modified prospective
        method. SFAS No. 123(R) requires companies to expense the grant-date fair
        value
        of employee equity awards over the vesting period. Using the modified
        prospective method of adopting SFAS 123(R), the Company began recognizing
        compensation expense for the remaining unvested portions of stock option
        and
        stock appreciation rights (SARs) settled in stock granted prior to January
        2,
        2006. The Company also has outstanding SARs that are to be settled in cash.
        In
        accordance with SFAS 123(R), these instruments are measured at fair value
        and
        are recorded as a liability at the end of each reporting period throughout
        their
        vesting period and adjusted to intrinsic value upon vesting. Upon adoption
        of
        SFAS 123(R), the Company recognized a cumulative effect accounting adjustment
        related to SARs that are to be settled in cash. Prior to the adoption of
        SFAS
        123(R), such awards were accounted for as liabilities based on the intrinsic
        value of such awards, rather than the fair value, at the end of the reporting
        period.
 
 Stock-based
        compensation expense recognized under SFAS 123(R) in the consolidated statement
        of operations for the three months ended April 2, 2006 for all awards was
        $5,083,943. The estimated fair value of the Company’s stock option and SAR
        awards to be settled in common stock, less estimated forfeitures, is amortized
        over the awards’ vesting period on a straight-line basis.
 
 For
        stock
        options and SARs to be settled in stock that were granted prior to the adoption
        of SFAS 123(R), the effect on net loss and earnings per share if the Company
        had
        applied the fair value recognition provisions of SFAS 123(R) to these awards
        would have been as follows for the three months ended April 3, 2005:
 
 Net
                  loss:As
                  reported
              
              $
              (6,672,232
              )Add
                  stock-based employee compensation expense included in reported
                  net loss,
                  net of related tax effects
              
              
              4,472Deduct
                  total stock-based employee compensation expense determined under
                  fair-value-based method for all awards, net of related tax
                  effects
              
              
              (1,926,154
              )Pro
                  forma
              
              $
              (8,593,914
              )Net
                  loss per share:Basic
                  and diluted:As
                  reported
              
              $
              (0.38
              )Pro
                  forma
              
              $
              (0.48
              )
 
 The
        fair
        value of options and SARs is determined by using the Black-Scholes option
        pricing model. Expected volatility was based on a combination of historical
        volatility of the Company’s stock and comparisons to volatilities of common
        stock of peer group companies. Comparison to peer group companies was necessary
        because the Company’s common stock has only been publicly traded for a limited
        time (since August 2004). The expected term for stock options represents
        the
        period of time that the options granted are expected to be outstanding based
        on
        the simplified method provided in Staff Accounting Bulletin No. 107 (SAB
        107),
        which averages an award’s weighted average vesting period and its contractual
        term for “plain vanilla” share options. The expected term for all SARs is the
        vesting period. The per share weighted average fair value of stock options
        and
        all SARs granted during the three months ended April 2, 2006, of $20.33 and
        $14.05, was determined on the date of grant utilizing the Black-Scholes option
        pricing model with the following weighted average assumptions:
  6
 *Index*
 
 Expected
                  dividend yield
              
              
              0%Risk-free
                  interest rate
              
              
              4.08%
                  - 4.68%Expected
                  life of options
              
              
              5.5
                  - 6.5 yearsExpected
                  life of SARs
              
              
              1
                  - 5 yearsExpected
                  volatility
              
              
              70%
 
 For
        SARs
        to be settled in cash, which are classified as liabilities, the fair market
        value measurements at the end of the reporting period were calculated using
        these same assumptions.
 
 *(j)*
              *Net
                  Income (Loss) Per Share*
 
 Basic
        net
        income (loss) per share excludes dilution and is computed by dividing net
        income
        (loss) by the weighted average number of common shares outstanding for the
        period. Diluted net income per share reflects the potential dilution that
        would
        occur if securities or other contracts to issue common stock were exercised
        or
        converted into common stock or resulted in the issuance of common stock that
        then shared in the net income of the Company. Diluted net (loss) per share
        does
        not reflect the potential dilution that would occur if securities or other
        contracts to issue common stock were exercised or converted into common stock
        or
        resulted in the issuance of common stock that then shared in the net (loss)
        of
        the Company because to do so would be anti-dilutive (see
        note 7).
 
 *(k)*
              *Reclassifications*
 
 Certain
        reclassifications have been made to the consolidated financial statements
        for
        the three months ended April 3, 2005, to place them on a basis comparable
        to the
        consolidated financial statements for the three months ended April 2,
        2006.
 
 *(l)*
              *Use
                  of Estimates*
 
 The
        preparation of consolidated financial statements in conformity with U.S.
        generally accepted accounting principles requires management to make estimates
        and assumptions that affect certain reported amounts. Actual results could
        differ from management’s estimates.
 
 **(3)**
              **COLLABORATION
                  ARRANGEMENT AND OTHER
                  AGREEMENTS**
 
 On
        January 31, 2005, the Company entered into a collaboration agreement with
        Shire
        Pharmaceuticals Group plc (Shire) relating to the global commercialization
        of
        NRP104 for treatment of attention deficit hyperactivity disorder (ADHD) and
        other potential indications. On March 31, 2005, the Company and Shire split
        this
        agreement into two agreements by entering into a United States Collaboration
        Agreement and a rest of world (ROW) Territory License Agreement (collectively,
        the Agreement) to replace the initial collaboration agreement. Shire paid
        the
        Company an upfront fee of $50 million on February 11, 2005 and a milestone
        payment of $50 million on February 6, 2006 as a result of notice from the
        U.S.
        Food and Drug Administration (FDA) on January 26, 2006 of its acceptance
        of the
        Company’s new drug application (NDA) filing for NRP104.
 
 The
        Company evaluated the Agreement in accordance with EITF 00-21 and determined
        that it was an arrangement with multiple deliverables. The Agreement also
        provides for additional payments to the Company in the event that certain
        additional milestones are achieved. These potential payments include an amount
        of up to $300 million following the first commercial sale of the product,
        depending on the characteristics of the FDA approved product labeling, and
        $100
        million upon achieving a significant sales target. **** The
        maximum amount of upfront and milestone payments under the terms of the
        Agreement is $505 million. Under the Agreement, the Company will provide
        product
        development for three indications for NRP104: pediatric, adult and adolescent.
        The Company determined that the license and research and development should
        be
        combined and considered as a single unit of accounting. Accordingly, the
        upfront
        license fee and all milestone payments will be recognized over the estimated
        product development period. The Company estimated the total proportional
        effort
        required for the development of each of these three indications. This
        proportional revenue model is then applied to all upfront and milestone payments
        which are no longer subject to contingencies. The Company recognized
        approximately $21.3 million of collaboration revenue for the three months
        ended
        April 2, 2006 based on this model. The amount recognized during the three
        months
        ended April 2, 2006 includes amounts that would have otherwise been recognized
        in prior periods had such amounts not been fully refundable in certain
        circumstances at the end of those periods. Consequently, the Company anticipates
        that revenue recognized based on this model in future periods will be
        significantly less than amounts recognized during the three months ended
        April
        2, 2006 until FDA approval for NRP104 is obtained.
  7
 *Index*
 
 The
        Agreement also provides for profit sharing on U.S. product sales when and
        if the
        product is approved by the FDA. Shire will retain 75% of profits, as defined
        in
        the Agreement, for the first two years following the launch of the product
        and
        the Company and Shire will share the profits equally thereafter. For product
        sales in the rest of the world, Shire will pay the Company a royalty.
        The Agreement provides for certain termination rights. Shire may for
        instance terminate the Agreement at any time prior to receiving regulatory
        approval in the United States, or within 30 days of receiving the first such
        regulatory approval. In the latter case, Shire may under some circumstances
        be
        entitled to a termination fee of $50 million. In addition, each party may
        terminate in the event of an uncured, defined material breach by the other
        party, entitling the non-breaching party the right to purchase the interests
        of
        the breaching party. Subject to certain conditions, either party is entitled
        to
        terminate in the event that governmental action restricts or prohibits the
        transactions contemplated by the Agreement under the laws of the United
        States or European Union.
 
 On
        June
        6, 2005, the Company entered into a development and license agreement with
        Depomed, Inc. (Depomed) to create pharmaceutical products using Depomed’s
        patented oral drug delivery technology with the Company’s proprietary drug
        compounds. Under terms of the agreement, the Company may acquire worldwide
        rights to use Depomed's Gastric Retention oral drug delivery technology in
        up to
        three of the Company’s proprietary compounds. Once a compound is named and
        entered into development, Depomed will perform feasibility studies through
        an
        initial Phase I trial. In return, the Company will reimburse Depomed on a
        cost-plus basis for expenses as defined in each project budget. Once preclinical
        and Phase I testing is completed, the Company may exercise an option to license
        each product candidate and advance the product into additional clinical trials.
        At that time, the Company will make an initial milestone payment, with
        additional milestone payments for each product candidate at later stages
        of
        product development. Upon ultimate commercialization of product candidates
        developed under this agreement, the Company will pay Depomed royalties on
        net
        sales of each product. Through April 2, 2006, the Company had incurred no
        development costs under this agreement.
 
 On
        June
        29, 2005, the Company entered into a letter agreement with Optimer
        Pharmaceuticals, Inc. (Optimer) for the development of one or more proprietary
        pharmaceutical products comprising carbohydrate conjugates of iron for
        administration by injection using Optimer’s proprietary carbohydrate synthesis
        technology. Under the letter agreement, Optimer is responsible for synthesizing
        and characterizing compounds for testing.  Optimer commenced work on this
        project during the third quarter of 2005, and the Company is responsible
        for
        reimbursing Optimer for such work at a full time equivalent (FTE) consistent
        with current industry standards.  The Company incurred approximately
        $187,000 of expenses under this agreement during the three months ended April
        2,
        2006. The Company will be responsible for conducting all preclinical and
        clinical testing on any such compounds.  The parties currently are
        negotiating a more formal and detailed agreement.  Upon execution of this
        more formal and detailed agreement, the Company will pay a licensing fee
        and
        potential milestones and royalty payments.
 
 On
        July
        8, 2005, the Company entered into an exclusive licensing agreement with the
        Ernest Gallo Clinic Research Center at the University of California San
        Francisco to investigate a new approach toward improving the use of opioid
        analgesics in the treatment of pain by reducing the development of tolerance.
        Under the agreement, the Company paid a licensing fee of $100,000 and will
        pay
        an annual license maintenance fee, potential milestones and royalty payments
        in
        exchange for an exclusive license to pursue the commercial development of
        the
        technology for the treatment of pain. The Company refers to this as its NRP388
        program.
  8
 *Index*
 
 **(4)**
              **LIQUIDITY**
 
 The
        Company’s future capital requirements will depend on the progress of its
        research on and development of product candidates; the timing and outcome
        of
        regulatory approvals; the costs involved in preparing, filing, prosecuting,
        maintaining, defending and enforcing patent claims and other intellectual
        property rights; the status of competitive products; the availability of
        financing; and the Company’s and or its collaborative partner(s)’ success in
        developing markets for its product candidates (see note 3).
 
 **(5)**
              **ROYALTY
                  OBLIGATIONS**
 
 Effective
        June 30, 2004, the Company entered into an agreement (the Innovative Agreement)
        with Innovative Technologies, L.L.C. (Innovative Technologies) which effectively
        amended the Company’s obligation in its entirety under previous existing
        agreements with Innovative Technologies. The previous agreements were executed
        in connection with the Company’s acquisition of certain of its intellectual
        property from Innovative Technologies in prior years. The
        Innovative Agreement provides for an upfront fee of $200,000, which was
        paid on July 1, 2004, and a 1% royalty on net sales (as defined in the
        Innovative Agreement) for a period of 10 years for up to a total of $1,000,000,
        whichever comes first. No royalties have been paid under this agreement through
        April 2, 2006.
 
 **(6)**
              **RELATED
                  PARTY TRANSACTIONS**
 
 The
        Company has a lease agreement with Third Security, LLC, (Third Security)
        an
        entity controlled by the Company’s current Chairman, President, and Chief
        Executive Officer, Randal J. Kirk, for certain executive and administrative
        office space for an initial period of 24 months. The current monthly rental
        is
        $6,488. The Company also has an administrative services agreement with Third
        Security, pursuant to which Third Security provides certain administrative
        services for a fee. The monthly fee is based on an hourly billing rate for
        each
        individual who provides services multiplied by the number of hours of services
        performed by such individual. The initial term of the agreement is for 24
        months
        and may be terminated upon written notice at any time by the Company. The
        Company recognized $91,538 and $165,163 of expense under the administrative
        services and lease agreements for the three months ended April 2, 2006 and
        April
        3, 2005, respectively. The unpaid portion of these amounts is included in
        Due to
        Affiliates in the accompanying consolidated balance sheets as of April 2,
        2006
        and January 1, 2006.
 
 **(7)**
              **NET
                  INCOME (LOSS) PER SHARE**
 
 The
        following is a reconciliation of the numerators and denominators of the net
        income (loss) per share computations for the periods presented:
 
 **Net
                  income (loss)**
                **(numerator)**
              
              **Shares**
                **(denominator)**
              
              **Per
                  share**
                **amount**Three
                  month period ended April 3, 2005:Basic
                  net income (loss) per share
              
              $
              (6,672,232
              )
              
              35,577,882
              
              $
              (0.19
              )Effect
                  of dilutive stock options and SARs
              
              
              —
              
              
              —Diluted
                  net income (loss) per share
              
              $
              (6,672,232
              )
              
              35,577,882
              
              $
              (0.19
              )Three
                  month period ended April 2, 2006:Basic
                  net income (loss) per share
              
              $
              7,714,036
              
              
              36,460,443
              
              $
              0.21Effect
                  of dilutive stock options and SARs
              
              
              —
              
              
              928,492Diluted
                  net income (loss) per share
              
              $
              7,714,036
              
              
              37,388,935
              
              $
              0.21
 
 For
        the
        three months ended April 3, 2005, all potentially dilutive shares of common
        stock to be issued pursuant to the exercise of stock options and SARs would
        dilute net loss per share. Therefore, these potential shares were not included
        in the computation of diluted net loss per share because to do so would have
        been anti-dilutive. For the three months ended April 2, 2006, the total number
        of potential shares of common stock to be issued pursuant to the exercise
        of
        stock options and SARs that are anti-dilutive was 283,000. Therefore, these
        potential shares were not included in the computation of diluted net income
        per
        share.
  9
 *Index*
  **(8)**
              **STOCK-BASED
                  COMPENSATION**
 
 Effective
        June 25, 2004 the Board approved the 2004 Incentive Compensation Plan (the
        Plan), subject to approval by the Company’s shareholders. Effective July 2,
        2004, the Company’s shareholders approved the Plan. The Plan was effective upon
        the completion of the Company’s initial public offering on August 10, 2004. The
        Plan permits the award of options (both incentive stock options and nonqualified
        options), SARs, stock awards and incentive awards to eligible persons. Eligible
        persons include employees, employees of affiliates, any person who provides
        services to the Company or to an affiliate, members of the Board and members
        of
        the board of directors of an affiliate. The Plan amends and restates the
        Company’s prior Employee Stock Option Plan (the Prior Plan), which permitted the
        grant of options to employees, directors and consultants. The Plan also replaces
        the former Stock Appreciation Rights Plan, which permitted the grant of stock
        appreciation rights, which are awards with a value based on appreciation
        in the
        common stock of the Company. Options granted under the Prior Plan remain
        subject
        to the terms of that plan. The terms of the Prior Plan are substantially
        similar
        to the terms of the Plan, except that, under the Plan, SARs, stock awards
        and
        incentive awards (payable in cash or shares) may be granted in addition to
        options. The maximum aggregate number of shares of common stock that may
        be
        issued under the Plan, including shares issued upon the exercise of options
        granted under the Prior Plan, is 3,240,000 shares, but no more than 1,620,000
        shares of common stock may be issued as stock awards. The term of each stock
        option issued under the Plan is fixed, but no option shall be exercisable
        more
        than 10 years after the date the option is granted. Certain options granted
        under the Plan are exercisable at the date of grant. All other options vest
        in
        accordance with the vesting schedule established by the Compensation Committee
        of the Board at the time such options are granted.
 
 Stock
        option activity for the three months ended April 2, 2006, was as
        follows:
 
 **Number
                  of shares**
              
              **Weighted
                  average exercise price**Balance
                  at January 1, 2006
              
              
              1,216,836
              
              
              6.50Granted
              
              
              140,000
              
              
              31.58Exercised
              
              
              (260,000
              )
              
              2.51Balance
                  at April 2, 2006
              
              
              1,096,836
              
              
              10.65
 
 At
        April
        2, 2006, the number, weighted-average exercise price and weighted-average
        remaining contractual life of outstanding options and the number and
        weighted-average exercise price of options currently exercisable are as follows
        :
  **Options
                  outstanding**
              
              **Options
                  exercisable****Range of
                  exercise prices**
              
              **Number of
                  options**
              
              **Weighted-average
                  exercise price**
              
              **Remaining
                  contractual life (in years)**
              
              **Number of
                  options**
              
              **Weighted-average
                  exercise price**$1.25
                  - $1.29
              
              
              228,968
              
              $
              1.28
              
              
              5.87
              
              
              152,292
              
              $
              1.29$3.33- $4.00
              
              
              400,200
              
              $
              3.90
              
              
              7.84
              
              
              186,868
              
              $
              3.78$7.11-11.60
              
              
              184,668
              
              $
              11.49
              
              
              8.97
              
              
              180,000
              
              $
              11.60$22.87 - $24.53
              
              
              143,000
              
              $
              22.98
              
              
              9.52
              
              
              -
              
              $
              -$29.59
                  - $32.71
              
              
              140,000
              
              $
              31.58
              
              
              9.82
              
              
              -
              
              $
              -
 
 Aggregate
        intrinsic value of options outstanding and options exercisable at April 2,
        2006
        was $24,744,563 and $14,249,801, respectively. Aggregate intrinsic value
        represents the positive difference between the Company’s closing stock price on
        the last trading day of the fiscal period, which was $33.21 as of March 31,
        2006, and the exercise price multiplied by the number of options outstanding.
        The aggregate intrinsic value of stock options exercised during the three
        months
        ended April 2, 2006 was $7,389,591.
  10
 *Index*
  As
        of
        April 2, 2006, there was $4,550,668 of total unrecognized compensation cost
        related to unvested stock options. That cost is expected to be recognized
        over a
        weighted-average period of approximately 32 months.
 
 Effective
        March 29, 2005, the Compensation Committee of the Board granted a total of
        1,278,000 SARs to the Company’s three executive officers. Of these SARs, 600,000
        were granted under the Plan and 678,000 were granted under stand alone
        agreements not covered by the Plan. These SARs, of which 958,500 are payable
        in
        cash and 319,500 are payable in common stock, have an exercise price of $12.00,
        which was the closing price of the Company’s common stock on the date of grant,
        and vest on the third anniversary of the date of grant. On January 19,
        2006, the Compensation Committee of the Board granted a total of 639,000
        SARs to
        the same three executive officers. Of these SARs, 519,500 were granted under
        the
        Plan and 119,500 were granted under stand alone agreements not covered by
        the
        Plan. These SARs, of which 479,250 are payable in cash and 159,750 are payable
        in common stock, have an exercise price of $32.71, which was the closing
        price
        of the Company’s common stock on the date of grant, and vest over a three year
        period in equal annual installments. The common stock issued upon the vesting
        of
        all stock-based SARs will vest upon the second anniversary following the
        exercise of the SARs.
 
 The
        Company has established an objective formula that takes into consideration
        the
        Company’s financial position and historical operating cash requirements that
        must be met as a condition of exercise for the SARs payable in cash. The
        Company
        reviews the likelihood of meeting the condition established by the formula
        when
        assessing the accounting treatment for the SARs payable in cash. Currently,
        the
        Company’s assessment is that it is probable that the condition to exercise
        established by the formula will be met, and therefore, the Company has accrued
        the projected obligation for these SARs. In the event that the Company deems
        the
        likelihood of meeting the condition to exercise established by the formula
        to be
        remote, then it would no longer continue to accrue the projected obligation
        for
        the SARs payable in cash. The Company recognized total stock-based compensation
        expense of $4,120,476 and $265,221 related to the SARs to be settled in cash
        and
        in common stock, respectively, during the three months ended April 2, 2006.
 
 Aggregate
        intrinsic value of outstanding SARs to be settled in cash and in common stock
        at
        April 2, 2006 was $20,569,410 and $6,856,470, respectively. No SARs were
        vested
        as of April 2, 2006.
 
 As
        of
        April 2, 2006, there was $20,335,591 and $4,612,447 of total unrecognized
        compensation cost related to SARs to be settled in cash and in common stock,
        respectively. These costs are expected to be recognized over a weighted-average
        periods of approximately 24 and 47 months, respectively. ****
 
 In
        November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, (FSP
        123(R)), *“Transition
        Election Related to Accounting for the Tax Effects of Share-Based Payment
        Awards.”* FSP
        123(R)-3 provides an elective alternative transition method for calculating
        the
        pool of excess tax benefits available to absorb tax deficiencies recognized
        subsequent to the adoption of FAS 123(R). Companies may take up to one year
        from
        the effective date of FSP 123(R)-3 to evaluate the available transition
        alternatives and make a one-time election as to which method to adopt. The
        Company is currently in the process of evaluating the alternative
        methods.
 
 **(9)**
              **CONTINGENCIES**
 
 From
        time
        to time, the Company may become involved in other litigation in the normal
        course of business. Management believes that any costs resulting from such
        litigation will not have a material adverse effect on the Company’s consolidated
        financial condition, results of operations or liquidity.
 
 In
        the
        normal course of business, the Company may enter into agreements that
        incorporate indemnification provisions. While the maximum amount to which
        the
        Company may be exposed under such agreements cannot be reasonably estimated,
        the
        Company maintains insurance coverage that management believes will effectively
        mitigate the Company’s obligations under these indemnification provisions. No
        amounts have been recorded in the consolidated financial statements with
        respect
        to the Company’s obligations under such agreements.
  11
 *Index*
 
 **(10)**
              **STOCK
                  SPLIT**
 
 On
        December 20, 2005, the Company’s Board of Directors approved a two-for-one split
        of the Company’s common stock, to be effected in the form of a stock dividend.
        Each shareholder of record at the close of business on December 30, 2005,
        was to
        be issued one additional share of common stock for each issued and outstanding
        share owned as of that date. The distribution was made on January 12, 2006,
        and
        the common stock commenced trading on a post-split basis effective January
        13,
        2006. All references in the consolidated financial statements to common shares,
        common stock options, common share prices and per common share amounts have
        been
        adjusted retroactively for all periods presented to reflect this two-for-one
        split.
 
 **Item
                  2.**
              **Management’s
                  Discussion And Analysis Of Financial Condition And Results Of
                  Operations**
 
 *The
        following discussion of our financial condition and results of operations
        should
        be read in conjunction with the consolidated financial statements and the
        notes
        to those statements included in Part I - Item 1 of this Quarterly Report
        on Form
        10-Q and the consolidated financial statements and notes thereto in our Annual
        Report on Form 10-K filed on March 15, 2006, with the SEC. All references
        in
        this Quarterly Report on Form 10-Q to “we”, “our,” and “us” are to New River
        Pharmaceuticals Inc.*
 
 **Information
        Regarding Forward-Looking Statements**
 
 The
        following discussion contains forward-looking statements. All statements,
        other
        than statements of historical facts, included in following the discussion
        regarding our strategy, future operations, future financial position, future
        revenues, future costs, prospects, plans and objectives of management are
        forward-looking statements. These statements involve known and unknown risks,
        uncertainties and other factors that may cause our actual results, performance
        or achievements to be materially different from any future results, performances
        or achievements expressed or implied by the forward-looking statements.
        Forward-looking statements include, but are not limited to, statements
        about:
 
 ·
              the
                  ability to execute successfully the collaboration with Shire within
                  a
                  reasonable timeframe or at all;
 
 ·
              the
                  progress of our product development
                  programs;
 
 ·
              the
                  status of our preclinical and clinical development of potential
                  drugs;
 
 ·
              the
                  likely success of our drug products in clinical trials and the
                  regulatory
                  approval process, particularly whether and under what circumstances
                  any of
                  our drug products will be approved by the U.S. Food and Drug
                  Administration (FDA);
 
 ·
              our
                  estimates for future revenues and
                  profitability;
 
 ·
              our
                  estimates regarding our capital requirements and our needs for
                  additional
                  financing;
 
 ·
              the
                  likely scheduling and labeling of product
                  candidates;
 
 ·
              our
                  ability to attract partners with acceptable development, regulatory
                  and
                  commercialization expertise;
 
 ·
              the
                  likelihood of regulatory approval under the Federal Food, Drug
                  and
                  Cosmetic Act without having to conduct long and costly trials to
                  generate
                  all of the data often required in connection with a traditional
                  new
                  chemical entity;
  12
 *Index*
 
 ·
              the
                  ability to develop, manufacture, launch and market any of our drug
                  candidates;
 
 ·
              our
                  ability to develop safer and improved versions of widely-prescribed
                  drugs
                  using our Carrierwave technology;
 
 ·
              the
                  expected benefits of our Carrierwave technology such as abuse resistance
                  and decreased toxicity; and
 
 ·
              our
                  ability to obtain favorable patent
                  claims.
 
 In
        some
        cases, you can identify forward-looking statements by terms such as “may,”
“will,” “should,” “could,” “would,” “intend,” “expect,” “plan,” “anticipate,”
“believe,” “estimate,” “project,” “predict,” “potential” and similar expressions
        intended to identify forward-looking statements. These statements reflect
        our
        current views with respect to future events and are based on assumptions
        and
        subject to risks and uncertainties. Given these uncertainties, you should
        not
        place undue reliance on these forward-looking statements as our actual results
        may differ materially from those anticipated in these forward-looking
        statements. We discuss many of these risks in greater detail in Item 1A under
        the heading “Risk Factors Related to Our Business” in our Annual Report on Form
        10-K for the fiscal year ended January 1, 2006, filed on March 15, 2006,
        with
        the SEC. The forward-looking statements made in this Quarterly Report on
        Form
        10-Q are made only as of the date hereof and the Company does not intend
        to
        update any of these factors or to announce publicly the results of any revisions
        to any of its forward-looking statements, other than as required under the
        federal securities laws.
 
 You
        should read this Quarterly Report on Form 10-Q completely and with the
        understanding that our actual future results may be materially different
        from
        what we expect. We qualify all of our forward-looking statements by these
        cautionary statements.
 
 **Overview**
 
 We
        are a
        specialty pharmaceutical company developing novel pharmaceuticals that are
        generational improvements of widely prescribed drugs in large and growing
        markets. Utilizing our proprietary CarrierwaveTM technology, we are currently
        developing new molecular entities that are derivatives of public domain actives,
        and attempting to address certain deficiencies associated with currently
        marketed drugs. The products in our pipeline that are the most advanced in
        their
        development are NRP104 and NRP290, which are conditionally bioreversible
        derivatives (CBDs) of d-amphetamine and hydrocodone, respectively, and are
        designed to provide overdose protection and less potential for abuse while
        affording comparable efficacy. We believe some of our drugs may prove highly
        resistant to overdose. We believe that we are the first company with a viable
        product in the pipeline attempting to address both the potential abuse and
        the
        potential overdose risk associated with currently marketed amphetamines and
        opioids.
 
 All
        of
        our drug candidates developed by utilizing our proprietary Carrierwave
        technology to date are small molecules designed for oral delivery. Each consists
        of an active pharmaceutical ingredient, like amphetamine or an opioid, attached
        to an adjuvant. We refer to our products as CBDs because (i) they are
        derivatives of underlying active agents, (ii) our preclinical and clinical
        tests
        to date indicate that it would be impractical to use except when taken as
        directed, and (iii) our preclinical tests to date indicate that at doses
        above
        the therapeutic window there is dose attenuation. Consequently, we believe
        that
        our technology may reduce the extent of abuse and prevent
        overdosing.
 
 The
        two
        most advanced candidates in our preclinical pipeline are NRP409 and NRP388.
        Under our NRP409 program, our Carrierwave triiodothyronine (T3) hormone is
        being
        developed as a replacement or supplemental therapy in patients with primary
        hypothyroidism and other indications. Under our NRP388 program, we entered
        into
        an exclusive licensing agreement with the Ernest Gallo Clinic Research Center
        at
        the University of California San Francisco to investigate a new approach
        toward
        improving the use of opioid analgesics in the treatment of pain by reducing
        the
        development of tolerance. We anticipate filing investigational new drug
        applications (INDs) for both of these product candidates by the end of the
        second quarter of 2006.
  13
 *Index*
 
 Throughout
        our history, we have incurred significant losses. We may incur additional
        losses
        for our fiscal year ending December 31, 2006. As of April 2, 2006, we had
        an
        accumulated deficit of approximately $62 million.
 
 *Revenues.* If our
        development efforts result in clinical success, regulatory approval and
        successful commercialization of our products, we could generate revenues
        from
        sales of our products. If, as an alternative to commercializing a particular
        product, we enter into license agreements or other collaboration arrangements
        with corporate partners, such as our collaboration with Shire Pharmaceuticals
        Group plc (Shire), we could recognize revenue from license fees, milestone
        payments, profit sharing, or royalties from product sales.
 
 *Selling,
        General and Administrative Expenses.* Selling,
        general and administrative expenses consist primarily of legal costs associated
        with patent filings, board of director fees, insurance expense, personnel
        and
        benefits costs, stock-based compensation costs, costs associated with completing
        the collaboration agreements with Shire, shared marketing expenses under
        our
        collaboration agreements with Shire, and fees charged to us by an affiliate,
        Third Security, LLC (Third Security), for services provided to us under an
        administrative services agreement. Administrative services that Third Security
        is providing under the administrative services agreement include support
        for
        taxation, legal, information technology, and market research functions as
        well
        as other miscellaneous services that we may need from time to time.
 
 *Research
        and Development Expenses* .
        Our
        current research and development efforts are primarily focused on developing
        our
        lead product candidates. Our research and development expenses consist of
        direct
        and indirect costs. Our direct costs include salaries and related expenses
        for
        personnel, including stock-based compensation, costs of materials used in
        research and development, costs of facilities and external development costs
        that consist of fees paid to professional service providers for conducting
        various studies and trials. Indirect costs include various overhead costs.
        We
        believe that significant investment in product development is a competitive
        necessity, and we plan to continue these investments in order to be in a
        position to realize the potential of our product candidates and proprietary
        technologies.
 
 We
        use
        our research and development employee and infrastructure resources across
        several projects, and many of our costs are not attributable to an individually
        named project but are directed to broadly applicable research efforts.
        Accordingly, we do not account for internal research and development costs
        on a
        project-by-project basis, and we cannot state precisely the total costs incurred
        for each of our clinical and preclinical projects on a project-by-project
        basis.
 
 The
        following table summarizes, from inception and for the three months
        ended April 2, 2006, the total external development costs associated with
        (i)
        our Carrierwave technology and our earlier related iodothyronine technology,
        all
        of which costs are included in the Carrierwave line item in the table below
        as
        historically we made no efforts to separate such costs, (ii) each of our
        current
        lead product candidates and (iii) other preclinical development.
 
 **Three
                  months ended April 2, 2006**
              
              **Inception
                  to April 2, 2006**NRP104
              
              $
              2,930
              
              $
              22,709NRP290
              
              
              93
              
              
              2,033Other
                  preclinical development
              
              
              569
              
              
              1,526Carrierwave/thyroid
              
              
              —
              
              
              5,488Total
              
              $
              3,592
              
              $
              31,756
 
 We
        expect
        that the majority of our research and development expenses in the future
        will be
        incurred in support of our current and future preclinical and clinical
        development programs rather than technology development. These expenditures
        are
        subject to numerous uncertainties relating to timing and cost to completion.
        We
        test compounds in numerous preclinical studies for safety, toxicology and
        efficacy. We expect then to conduct early-stage clinical trials for each
        drug
        candidate. We anticipate funding these trials ourselves. As we obtain results
        from trials, we may elect to discontinue or delay clinical trials for certain
        products in order to focus our resources on more promising products. Completion
        of clinical trials may take several years or more, and the length of time
        generally varies substantially according to the type, complexity, novelty
        and
        intended use of a product candidate.
  14
 *Index*
 
 The
        commencement and completion of clinical trials for our products may be delayed
        by many factors, including lack of efficacy during clinical trials, unforeseen
        safety issues, slower than expected patient recruitment, or government delays.
        In addition, we may encounter regulatory delays or rejections as a result
        of
        many factors, including results that do not support the intended safety or
        efficacy of our product candidates, perceived defects in the design of clinical
        trials and changes in regulatory policy during the period of product
        development. As a result of these risks and uncertainties, we are unable
        to
        estimate accurately the specific timing and costs of our clinical development
        programs or the timing of material cash inflows, if any, from our product
        candidates. Our business, financial condition and results of operations may
        be
        materially adversely affected by any delays in, or termination of, our clinical
        trials or a determination by the FDA that the results of our trials are
        inadequate to justify regulatory approval, insofar as cash in-flows from
        the
        relevant drug or program would be delayed or would not occur.
 
 *Other
        Income (Expense)* .
        Other
        income (expense) primarily consists of interest income and interest expense.
        Interest income consists of interest earned on cash and cash equivalents
        and
        short-term investments. Interest expense consists of interest on long-term
        debt
        and capital lease obligations. We currently have no long-term debt
        obligations.
 
 *Cumulative
        Effect of Change in Accounting Principle* ***.*** As a
        result of adopting the provisions of SFAS 123(R), *“Share-Based
        Payment”* (SFAS
        123(R)) we recognized a cumulative effect accounting adjustment related to
        outstanding stock appreciation rights (SARs) that are to be settled in cash.
        These awards were previously accounted for based on their intrinsic value
        at the
        end of each reporting period. Under SFAS 123(R), these awards are re-measured
        as
        of January 2, 2006, the date of adoption of SFAS 123(R), and at the end of
        each
        reporting period based on their fair value.
 
 **Results
        of Operations**
 
 We
        anticipate that our results of operations will fluctuate for the foreseeable
        future due to several factors, such as the progress of our research and
        development efforts, the timing and outcome of regulatory submissions, and
        the
        potential receipt of milestone payments under our collaboration agreements
        with
        Shire. Due to these uncertainties, accurate predictions of future operations
        are
        difficult or impossible.
 
 **Three
        Months Ended April 2, 2006 Compared to Three Months Ended April 3,
        2005**
 
 *Revenues.* During
        the three months ended April 2, 2006, we recognized $21,327,000 of revenue
        from
        our collaboration agreements with Shire. Such amount represents the proportional
        revenue recognition of certain non-refundable payments received over the
        related
        performance period of the deliverables under the collaboration
        agreements.
 
 *Selling,
        General and Administrative Expenses.* Selling,
        general and administrative expenses increased by $5,043,000, or 159%, to
        $8,218,000 for the three months ended April 2, 2006 from $3,175,000 for the
        three months ended April 3, 2005. This increase was primarily attributed
        to
        approximately $1,769,000 of shared marketing expenses with Shire in accordance
        with the collaboration agreements and an increase in stock-based compensation
        expense of $4,142,000, primarily associated with the adoption of SFAS 123(R).
        Stock-based compensation expense for the three months ended April 2, 2006
        was
        $4,157,000 and represents the cost of stock options and SARs granted to certain
        executives and management personnel. These increases were partially offset
        by a
        $1,500,000 fee incurred and paid to an investment banking firm during the
        three
        months ended April 3, 2005 for managing the process through which we were
        able
        to evaluate various partnering alternatives prior to successful completion
        of
        our collaboration agreements with Shire.
  15
 *Index*
 
 *Research
        and Development Expenses.* Research
        and development expenses increased $1,732,000, or 46%, to $5,516,000 for
        the
        three months ended April 2, 2006 from $3,784,000 for the three months ended
        April 3, 2005. An increase in external development costs of $682,000 and
        an
        increase of $923,000 in stock-based compensation expense associated with
        the
        adoption of SFAS 123(R), primarily accounted for this increase. The increase
        in
        external development costs were primarily related to Phase 3 clinical studies
        for NRP104 and continued progress in our research and development of NRP290
        and
        NRP409. Stock-based compensation expense for the three months ended April
        2,
        2006 was $927,000 and represents the cost of SARs and options granted to
        research and development personnel.
 
 The
        following table shows the aggregate changes in our research and development
        expenses.
 
 **Three
                  Months Ended****Research
                  and development expenses**
              
              **April
                  2, 2006**
              
              **April
                  3, 2005****(in
                  thousands)**Direct
                  project costs:Personnel,
                  benefits and related costs
              
              $
              1,681
              
              $
              471Consultants,
                  supplies, materials and other direct costs
              
              
              87
              
              
              255External
                  development costs
              
              
              3,592
              
              
              2,910Total
                  direct costs
              
              
              5,360
              
              
              3,636Indirect
                  costs
              
              
              156
              
              
              148Total
              
              $
              5,516
              
              $
              3,784
 
 *Other
        Income.* For
        the
        three months ended April 2, 2006, other income included $873,000 of interest
        income earned primarily from investing the proceeds received pursuant to
        the
        collaboration agreements with Shire. Other income for the three months ended
        April 3, 2005 included $322,000 of interest income earned primarily from
        investing the proceeds from our initial public offering and the initial upfront
        payment from Shire pursuant to the collaboration agreements.
 
 **Liquidity
        and Capital Resources**
 
 Our
        operations from 2001 through April 2, 2006, have been funded primarily from
        proceeds of approximately $17.3 million raised from various private placements
        of our common stock, $33.6 million of gross proceeds from the initial public
        offering of our common stock on August 10, 2004, and $100 million received
        in
        accordance with the terms of our collaboration agreements with Shire, as
        follows:
 
 **Fiscal
                  year**
              
              **Number
                  of shares****(1)**
              
              **Price
                  per share****(1)**
              
              **Gross
                  Proceeds**2001
              
              
              300,000
              
              $
              3.33
              
              $
              1,000,0002002
              
              
              2,245,000
              
              
              1.25
              
              
              2,806,2502002
              
              
              4,077,720
              (2)
              
              1.25
              
              
              5,097,1512003
              
              
              2,823,200
              
              
              1.25
              
              
              3,529,0002004
              
              
              1,940,000
              
              
              2.50
              
              
              4,850,0002004
                  - Initial public offering
              
              
              8,400,000
              
              
              4.00
              
              
              33,600,0002005
                  - Shire collaboration
              
              
              —
              
              
              —
              
              
              50,000,0002006
                  - Shire collaboration
              
              
              —
              
              
              —
              
              
              50,000,00019,785,920
              
              
              
              
              $
              150,882,401
 
 (1)
              As
                  adjusted for a one-for-two reverse stock split effective August
                  3, 2004
                  and a two-for-one stock split effected in the form of a stock dividend
                  effective January 13, 2006.
 (2)
              Represents
                  shares issued upon the conversion of a convertible promissory note
                  by RJK,
                  L.L.C., an entity controlled by Mr. Kirk, our Chairman, President
                  and
                  Chief Executive Officer, in the original amount of $5,000,000 plus
                  accrued
                  interest of $97,151. We received the $5,000,000 of proceeds from
                  the note
                  issuance in August 2001.
 
 At
        April
        2, 2006, we had cash and cash equivalents of $27,839,000 compared to $3,516,000
        at January 1, 2006. Our cash equivalents are highly liquid investments in
        money
        market funds and commercial paper. We maintain cash balances with financial
        institutions in excess of insured limits. We also maintained short-term
        investments of $67,175,000 and $49,250,000 at April 2, 2006 and January 1,
        2006,
        respectively, in auction rate municipal bonds. We record these short-term
        investments at cost, which approximates fair market value due to (i) the
        securities’ variable interest rates, which typically reset every 28 to 35 days,
        and (ii) the fact that we have the ability to liquidate readily these
        securities, despite the long-term nature of their stated contractual maturities.
        We do not anticipate any losses with respect to such cash and cash equivalents
        and short-term investment balances.
  16
 *Index*
 
 Cash
        provided by operations was $41,622,000 for the three months ended April 2,
        2006
        compared to $41,769,000 for the three months ended April 3, 2005. We received
        an
        upfront payment of $50,000,000 in February 2005 under the terms of our
        collaboration agreements with Shire and a milestone payment of $50,000,000
        under
        the same agreements in February 2006. Cash used in investing activities was
        $17,946,000 for the three months ended April 2, 2006 compared to $31,360,000
        for
        the three months ended April 3, 2005. The decrease is due to a higher amount
        of
        our cash being in cash equivalent investments rather than short-term
        investments.
 
 The
        following table summarizes our contractual obligations at April 2, 2006 and
        the
        effects such obligations are expected to have on our liquidity and cash flows
        in
        future periods.
 
 **Total**
              
              **Due
                  within 1 year**
              
              **Thereafter****(in
                  thousands)**Operating
                  lease obligations
              
              $
              85
              
              $
              85
              
              $
              —Capital
                  lease obligations
              
              
              44
              
              
              23
              
              
              21Research
                  and development contracts
              
              
              2,326
              
              
              2,326
              
              
              —Total
                  contractual cash obligations
              
              $
              2,455
              
              $
              2,434
              
              $
              21
 
 The
        contractual commitments reflected in this table exclude royalty payments
        that we
        may be obligated to pay to Innovative Technologies L.L.C. in the future.
        Such
        future royalty payments are contingent on product sales and are based on
        1% of
        net sales (as defined in the Innovative Technologies agreement) for a period
        of
        10 years or up to a total of $1 million, whichever occurs first. Also excluded
        from the table are payments that we may be obligated to make under our
        agreements with Depomed, Inc., Optimer Pharmaceuticals, Inc., and the Ernest
        Gallo Clinic Research Center at the University of California San Francisco.
        Such
        payments are contingent upon the achievement of certain milestones, royalties
        on
        future product sales, and development costs which are reimbursed at a full-time
        equivalent rate or cost-plus basis, the total cost of which cannot reasonably
        be
        estimated.
 
 As
        of
        April 2, 2006, our long-term contractual obligations consist of a capital
        lease
        for equipment used in our research operations. Our operating leases are for
        our
        research and development facilities and our administrative offices. The lease
        for the research and development facilities expires at the end of July 2006
        and
        requires monthly payments of approximately $11,000. We may renew this lease
        for
        successive one-year periods thereafter. We maintain an operating lease agreement
        with Third Security for offices occupied by certain of our executive and
        administrative staff. The lease is for 24 months with a current monthly rental
        of approximately $6,500 and expires in August 2006. We may renew this lease
        for
        three successive one-year periods thereafter. We also have in-progress research
        and development contracts performed by third parties. As of April 2, 2006,
        we
        had commitments, which consist primarily of external development work, with
        third parties totaling approximately $14,328,000 of which approximately
        $2,326,000 had not yet been incurred.
 
 We
        may
        incur losses from operations for fiscal year 2006. We expect to incur increasing
        research and development expenses, including expenses related to additional
        clinical trials and personnel. We expect that our general and administrative
        expenses will continue to increase in the future as we continue to expand
        our
        business development, add infrastructure and incur additional costs related
        to
        being a public company.
 
 Our
        future capital requirements will depend on a number of factors, including
        milestone payments received under our collaboration agreements with Shire,
        the
        progress of our research and development of product candidates, the timing
        and
        outcome of regulatory approvals, the costs involved in preparing, filing,
        prosecuting, maintaining, defending and enforcing patent claims and other
        intellectual property rights, the status of competitive products, the
        availability of financing and our success in developing markets for our product
        candidates. We believe our existing cash and cash equivalents and short-term
        investments will be sufficient to fund our operating expenses and capital
        equipment requirements for at least the next 18 months.
  17
 *Index*
 
 To
        the
        extent our capital resources are insufficient to meet future capital
        requirements, we will need to raise additional capital or incur indebtedness
        to
        fund our operations. We cannot assure that additional debt or equity financing
        will be available on acceptable terms, if at all. If adequate funds are not
        available, we may be required to delay, reduce the scope of or eliminate
        our
        research and development programs, reduce our commercialization efforts or
        obtain funds through arrangements with collaborative partners or others that
        may
        require us to relinquish rights to certain product candidates that we might
        otherwise seek to develop or commercialize independently. Future equity
        offerings could (i) dilute the ownership of equity investors and (ii) reduce
        the
        market price for our common stock. In the event that we issue debt securities
        in
        the future, holders of these debt securities would receive distribution of
        assets prior to holders of common stock upon liquidation.
 
 **Off-Balance
        Sheet Arrangements**
 
 We
        do not
        have any off-balance sheet arrangements that have or are reasonably likely
        to
        have a current or future effect on our financial condition, revenues or
        expenses, results of operations, liquidity, capital expenditures or capital
        resources that we believe is material to investors.
 
 **Effects
        of Inflation**
 
 Our
        only
        liquid assets are cash and cash equivalents and short-term investments. Because
        of their liquidity, these assets should not be significantly affected by
        inflation. We also believe that we have intangible assets in the value of
        our
        intellectual property. In accordance with U.S. generally accepted accounting
        principles, we have not capitalized the value of this intellectual property
        on
        our consolidated balance sheet. Due to the nature of this intellectual property,
        we believe that these intangible assets should not be significantly affected
        by
        inflation. Because we intend to retain and continue to use our equipment,
        furniture and fixtures and leasehold improvements, we believe that the
        incremental inflation related to replacement costs of such items will not
        materially affect our operations. However, the rate of inflation affects
        our
        expenses, such as those for employee compensation and contract services,
        which
        could increase our level of expenses and the rate at which we use our
        resources.
 
 **Critical
        Accounting Policies and Estimates**
 
 Our
        discussion and analysis of our financial condition and results of operations
        are
        based on our consolidated financial statements, which have been prepared
        in
        accordance with U.S. generally accepted accounting principles. The preparation
        of these financial statements requires us to make estimates and judgments
        that
        affect the reported amounts of assets, liabilities and expenses. On an ongoing
        basis, we evaluate our estimates and judgments, including those related to
        revenue recognition, accrued expenses, fair valuation of stock related to
        stock-based compensation and income taxes. We base our estimates on historical
        experience and on various other assumptions that we believe to be reasonable
        under the circumstances, the results of which form the 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 these
        estimates. Our senior management has reviewed these critical accounting policies
        and estimates with our audit committee.
 
 We
        believe the following critical accounting policies affect our more significant
        judgments and estimates used in the preparation of our consolidated financial
        statements.
 
 *Revenue
        Recognition* .
        Although we currently have no products available for sale, we do anticipate
        having products in the future. We anticipate that some of our sales will
        be to
        wholesalers who have the right to return purchased product. In accordance
        with
        SFAS No. 48, “ *Revenue
        Recognition When the Right of Return Exists* ”
(SFAS
        No. 48), until we have sufficient sales history to estimate product returns,
        we
        will have to defer recognition of revenue on such sales until the products
        are
        dispensed through patient prescriptions. Once we have obtained sufficient
        sales
        history to estimate product returns, under SFAS 48, we will be able to recognize
        revenue on product shipments, net of a reasonable allowance for estimated
        returns relating to these shipments.
  18
 *Index*
 
 Our
        strategy includes entering into collaborative agreements with strategic partners
        for the development and commercialization of our product candidates. Such
        collaboration agreements may have multiple deliverables. We evaluate
        m ultiple
        deliverable arrangements pursuant to EITF 00-21, *“Revenue
        Arrangements with Multiple Deliverables”* (EITF
        00-21). Pursuant to EITF 00-21, in arrangements with multiple deliverables
        where
        we have continuing performance obligations, contract, milestone and license
        fees
        are recognized as revenue together with any up-front payments over the term
        of
        the arrangement as performance obligations are completed, unless the deliverable
        has stand alone value and there is objective, reliable evidence of fair value
        of
        the undelivered element in the arrangement. In the case of an arrangement
        where
        it is determined there is a single unit of accounting, all cash flows from
        the
        arrangement are considered in the determination of all revenue to be recognized.
        Cash received in advance of revenue recognition is recorded as deferred
        revenue.
 
 *Accrued
        Expenses* .
        As part
        of the process of preparing consolidated financial statements, we are required
        to estimate accrued expenses. This process involves identifying services
        that
        have been performed on our behalf and estimating the level of service performed
        and the associated cost incurred for such service as of each balance sheet
        date
        in our consolidated financial statements. Examples of estimated accrued expenses
        include professional service fees, such as fees of lawyers and contract service
        fees. In connection with such service fees, our estimates are most affected
        by
        our understanding of the status and timing of services provided relative
        to the
        actual levels of services incurred by such service providers. The majority
        of
        our service providers invoice us monthly in arrears for services performed.
        In
        the event that we do not identify certain costs that have begun to be incurred
        or we under- or over-estimated the level of services performed or the costs
        of
        such services, our reported expenses for such period would be too low or
        too
        high. The date on which certain services commence, the level of services
        performed on or before a given date and the cost of such services are often
        subject to management’s judgment. We make these judgments based upon the facts
        and circumstances known to us in accordance with U.S. generally accepted
        accounting principles.
 
 *Stock-Based
        Compensation* .
        Effective January 2, 2006, we adopted the provisions of SFAS No. 123(R) and
        related interpretations, using the modified prospective method. SFAS No.
        123(R)
        requires companies to expense the grant-date fair value of employee equity
        awards over the vesting period. Using the modified prospective method of
        adopting SFAS 123(R), we began recognizing compensation expense for the
        remaining unvested portions of stock option and SARs settled in stock that
        were
        granted prior to January 2, 2006. We also have outstanding SARs that are
        to be
        settled in cash. In accordance with SFAS 123(R), these instruments are measured
        at fair value and are recorded as a liability at the end of each reporting
        period throughout their vesting period and adjusted to intrinsic value upon
        vesting.
 
 *Income
        Taxes* .
        As part
        of the process of preparing our consolidated financial statements, we are
        required to estimate our income taxes in each of the jurisdictions in which
        we
        operate. We account for income taxes under the asset and liability method.
        Deferred tax assets and liabilities are recognized for the future tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax
        bases and operating loss and tax credit carryforwards. Deferred tax assets
        and
        liabilities are measured using enacted tax rates expected to apply to taxable
        income in the years in which those temporary differences are expected to
        be
        recovered or settled. The effect on deferred tax assets and liabilities of
        a
        change in tax rates is recognized in income in the period that includes the
        enactment date. Valuation allowances are provided if, based upon the weight
        of
        available evidence, it is more likely than not that some or all of the deferred
        tax assets will not be realized.
 
 We
        have
        not recorded any tax provision or benefit for the three months ended April
        2,
        2006 and April 3, 2005. We have provided a valuation allowance for the full
        amount of our net deferred tax assets since realization of any future benefit
        from deductible temporary differences and net operating loss carry forwards
        cannot be sufficiently assured. At January 1, 2006, we had federal net operating
        loss carry forwards of approximately $72.1 million available to reduce future
        taxable income, which will begin to expire in 2019.
 
 **Item
                  3.**
              **Quantitative
                  And Qualitative Disclosures About Market
                  Risk**
 
 Our
        exposure to market risk is currently confined to our cash and cash equivalents
        that have maturities of less than three months and our short-term investments
        in
        auction rate municipal bonds. We record our investment in auction rate municipal
        bonds at cost, which approximates fair market value due to (i) the securities’
variable interest rates, which typically reset every 28 to 35 days, and,
        (ii)
        the fact that the Company has the ability to liquidate readily these securities,
        despite the long-term nature of their stated contractual maturities. We
        currently do not hedge interest rate exposure. We have not used derivative
        financial instruments. Because of the short-term maturities of our cash and
        cash
        equivalents and the reset terms of our investments in auction rate municipal
        bonds, we do not believe that an increase in market rates would have any
        significant impact on their realized value.
  19
 *Index*
 
 **Item4.**
              **Controls
                  and Procedures.**
 
 Pursuant
        to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the
        Exchange Act), we carried out an evaluation, with the participation of our
        management, including our Chief Executive Officer and Chief Financial Officer,
        of the effectiveness of our disclosure controls and procedures (as defined
        under
        Rule 13a-15(e) and 15d - 15(e) under the Exchange Act) as of April 2, 2006.
        Based upon that evaluation, our Chief Executive Officer and Chief Financial
        Officer concluded that our design and operation of disclosure controls and
        procedures are effective to ensure that information required to be disclosed
        by
        us in reports that we file or submit under the Exchange Act, is accumulated
        and
        communicated to our management and is recorded, processed, summarized and
        reported as specified in SEC rules and forms.
 
 There
        has
        been no change in our internal control over financial reporting during the
        quarter ended April 2, 2006 that has materially affected, or is reasonably
        likely to materially affect, our internal control over financial
        reporting.
  20
 *Index*
  **PART
        II**
 **OTHER
        INFORMATION**
  **Item
                  1.**
              **Legal
                  Proceedings.**
 
 We
        are
        not presently involved in any legal proceedings that, in our opinion, could
        have
        a material adverse effect on our business or financial condition.
 
 **Item
                  1A.**
              **Risk
                  Factors.**
 
 While
        we
        attempt to identify, manage and mitigate risks and uncertainties associated
        with
        our business to the extent practical under the circumstances, some level
        of risk
        and uncertainty will always be present. Item 1A of Annual Report on Form
        10-K
        for the year ended January 1, 2006 (pages 23 through 35) describes some of
        the
        risks and uncertainties associated with our business. These risks and
        uncertainties have the potential to materially affect our operating results
        of
        our business and our financial condition. We do not believe that there have
        been
        any material changes to the risk factors previously disclosed in our Annual
        Report on Form 10-K for the year ended January 1, 2006.
  **Item
                  2.**
              **Unregistered
                  Sales of Equity
                  Securities.**
 
 None
 
 **Item
                  3.**
              **Defaults
                  Upon Senior Securities.**
 
 None.
 
 **Item4.**
              **Submission
                  of Matters to a Vote of Securities
                  Holders.**
 
 None
 
 **Item5.**
              **Other
                  Information.**
 
 None.
 
 **Item
                  6.**
              **Exhibits**
 
 (a)
              Exhibits.
 
 Exhibit
                  31(a) - Certification pursuant to Rule
                  13a-14(a) under the Securities Exchange Act of 1934, as adopted
                  pursuant
                  to Section 302 of the Sarbanes-Oxley Act of 2002 by Randal J.
                  Kirk
 
 Exhibit
                  31(b) - Certification pursuant to Rule
                  13a-14(a) under the Securities Exchange Act of 1934, as adopted
                  pursuant
                  to Section 302 of the Sarbanes-Oxley Act of 2002 by Krish S.
                  Krishnan
 
 Exhibit
                  32(a) - Certification pursuant to 18 U.S.C.
                  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act
                  of 2002 by Randal J. Kirk
 
 Exhibit
                  32(b) - Certification pursuant to 18 U.S.C.
                  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act
                  of 2002 by Krish S. Krishnan
  21
 *Index*
  **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 **NEW
                  RIVER PHARMACEUTICALS INC.**(Registrant)Date:
                  May 12, 2006
              
              /s/
                  Randal J. KirkRandal
                  J. KirkChairman,
                  President and Chief Executive Officer(Principal
                  executive officer)Date:
                  May 12, 2006
              
              /s/
                  Krish S. KrishnanKrish
                  S. KrishnanChief
                  Operating Officer, Chief Financial Officer and Secretary(Principal
                  financial and accounting officer)
   22