**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 
 x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 **For
        the quarterly period ended September 30, 2007**
 
 **OR**
 
  ̈
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 **For
        the transition period from

        to**
 
 **Commission
        File Number 000-31719**
 
 
 **POZEN
        Inc.**
 **(Exact
        name of registrant as specified in its charter)**
 
 
 **Delaware**
              **62-1657552****(State
                  or other jurisdiction of**
                **incorporation
                  or organization)**
              **(I.R.S.
                  Employer**
                **Identification
                  No.)**
 
 **1414
        Raleigh Road**
 **Suite
        400**
 **Chapel
        Hill, North Carolina 27517**
 **(Address
        of principal executive offices, including zip code)**
 
 **(919)
        913-1030**
 **(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. x  Yes     ̈  No
 
 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 Securities Exchange
        Act of 1934. (Check one):
  ̈  Large
        Accelerated Filer     x  Accelerated
        Filer      ̈  Non-Accelerated
        Filer
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act):     ̈  Yes    x  No
 
 The
        number of shares outstanding of the registrant’s common stock as of October 31,
        2007 was 29,704,760.
 
 
  
  **POZEN
        Inc.**
 **(A
        Development Stage Company)**
 **FORM
        10-Q**
 
 
 **INDEX**
 
 **Page**PART
                  I.
              FINANCIAL
                  INFORMATIONItem
                  1.
              Financial
                  Statements
                  (unaudited)Balance
                  Sheets as of September 30, 2007 and December 31,
                  2006
              1Statements
                  of Operations for the Three and Nine Months
                  Ended September 30, 2007 and 2006 and Period From Inception (September
                  26,
                  1996) Through September 30, 2007
              2Statements
                  of Cash Flows for the Nine Months Ended
                  September 30, 2007 and 2006 and Period From Inception (September
                  26, 1996)
                  Through September 30, 2007
              3Notes
                  to Financial Statements
              4Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              12Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              25Item
                  4.
              Controls
                  and Procedures
              25PART II.
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              25Item
                  1A.
              Risk
                  Factors
              26Item 6.
              Exhibits
              40Signature
                  and Certifications
              41Exhibit
                  Page
              42
 
 
  -
            i -
 
 Index
  **PART
        I. FINANCIAL INFORMATION**
 
 **Item
        1. Financial Statements**
 
 **POZEN
        Inc.**
 **(A
        Development Stage Company)**
 **BALANCE
        SHEETS**
 **(Unaudited)**
 
 
 **September
                  30,**
                **2007**
              
              
              **December
                  31,**
                **2006****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              47,560,632
              
              
              $
              26,296,884Short-term
                  investments
              
              
              31,199,522
              
              
              
              36,285,102Accounts
                  receivable
              
              
              4,339,607
              
              
              
              3,267,153Prepaid
                  expenses and other current assets
              
              
              419,024
              
              
              
              1,108,506Total
                  current assets
              
              
              83,518,785
              
              
              
              66,957,645Property
                  and equipment, net of accumulated depreciation
              
              
              139,349
              
              
              
              183,468Total
                  assets
              
              $
              83,658,134
              
              
              $
              67,141,113**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              1,957,069
              
              
              $
              965,563Accrued
                  compensation
              
              
              1,223,231
              
              
              
              1,434,591Accrued
                  expenses
              
              
              4,121,605
              
              
              
              1,756,300Deferred
                  revenue
              
              
              16,092,191
              
              
              
              14,870,200Total
                  current liabilities
              
              
              23,394,096
              
              
              
              19,026,654Long-term
                  liabilities:Deferred
                  revenue
              
              
              22,170,089
              
              
              
              24,000,000Total
                  liabilities
              
              
              45,564,185
              
              
              
              43,026,654Preferred
                  stock, $0.001 par value, 10,000,000 shares authorized, issuable
                  in series,
                  of which 90,000 shares are designated Series A Junior Participating
                  Preferred Stock, none outstanding
              
              
              —
              
              
              
              —Common
                  stock, $0.001 par value, 90,000,000 shares authorized; 29,703,529,
                  and
                  29,447,913 shares issued and outstanding at September 30, 2007
                  and
                  December 31, 2006, respectively
              
              
              29,704
              
              
              
              29,448Additional
                  paid-in capital
              
              
              160,995,115
              
              
              
              155,920,068Accumulated
                  other comprehensive loss
              
              
              (313
              )
              
              
              (4,092
              )Deficit
                  accumulated during the development stage
              
              
              (122,930,557
              )
              
              
              (131,830,965
              )Total
                  stockholders’ equity
              
              
              38,093,949
              
              
              
              24,114,459Total
                  liabilities and stockholders’ equity
              
              $
              83,658,134
              
              
              $
              67,141,113
 
 
 *See
        accompanying Notes to Financial Statements.*
  -
            1
            -
 Index
  **POZEN
        Inc.**
 **(A
        Development Stage Company)**
 **STATEMENTS
        OF OPERATIONS**
 **(Unaudited)**
 
 **Three
                  Months Ended September 30,**
              
              
              **Nine
                  Months Ended September 30,**
              
              
              **Period
                  From**
                **Inception**
                **(September
                  26,**
                **1996)
                  Through**
                **September
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**
              
              
              **2007****Revenue**
              
              $
              27,629,476
              
              
              $
              3,424,819
              
              
              $
              47,219,863
              
              
              $
              6,548,619
              
              
              $
              116,188,917**Operating
                  expenses:**General
                  and
                  administrative
              
              
              2,248,897
              
              
              
              3,662,984
              
              
              
              8,404,001
              
              
              
              10,393,998
              
              
              
              71,299,002Research
                  and
                  development
              
              
              9,679,872
              
              
              
              4,275,168
              
              
              
              30,587,889
              
              
              
              16,422,811
              
              
              
              178,955,804Total
                  operating expenses
              
              
              11,928,769
              
              
              
              7,938,152
              
              
              
              38,991,890
              
              
              
              26,816,809
              
              
              
              250,254,806**Other
                  income:**Interest
                  and other income
              
              
              781,516
              
              
              
              447,127
              
              
              
              2,317,536
              
              
              
              1,336,420
              
              
              
              13,714,910Income
                  (loss) before provision for income tax
              
              
              16,482,223
              
              
              
              (4,066,206
              )
              
              
              10,545,509
              
              
              
              (18,931,770
              )
              
              
              (120,350,979
              )Provision
                  for income tax
              
              
              (1,645,099
              )
              
              
              —
              
              
              
              (1,645,099
              )
              
              
              —
              
              
              
              (1,645,099
              )**Income/(loss)**
              
              
              14,837,124
              
              
              
              (4,066,206
              )
              
              
              8,900,410
              
              
              
              (18,931,770
              )
              
              
              (121,996,078
              )Non-cash
                  preferred stock charge
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              27,617,105Preferred
                  stock dividends
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              934,478Net
                  income/(loss) attributable to common stockholders
              
              $
              14,837,124
              
              
              $
              (4,066,206
              )
              
              $
              8,900,410
              
              
              $
              (18,931,770
              )
              
              $
              (150,547,661
              )Basic
                  net income/(loss) per common share
              
              $
              0.50
              
              
              $
              (0.14
              )
              
              $
              0.30
              
              
              $
              (0.65
              )Shares
                  used in computing
                basic
                  net income/(loss)
                per
                  common share
              
              
              29,695,596
              
              
              
              29,240,696
              
              
              
              29,555,787
              
              
              
              29,173,200Diluted
                  net income/(loss) per common share
              
              $
              0.48
              
              
              $
              (0.14
              )
              
              $
              0.29
              
              
              $
              (0.65
              )Shares
                  used in computing
                diluted
                  net income/(loss)
                per
                  common share
              
              
              30,598,807
              
              
              
              29,240,696
              
              
              
              30,627,282
              
              
              
              29,173,200
 
 *See
        accompanying Notes to Financial Statements.*
  -
            2
            -
 Index
  **POZEN
        Inc.**
 **(A
        Development Stage Company)**
 **STATEMENTS
        OF CASH FLOWS**
 **(Unaudited)**
 
 **Nine
                  Months Ended September 30,**
              **Period
                  from**
                **September
                  26, 1996**
                **(inception)
                  through**
                **September
                  30, 2007****2007**
              
              
              **2006****Operating
                  activities**Net
                  income/(loss)
              
              $
              8,900,410
              
              
              $
              (18,931,770
              )
              
              $
              (120,763,478
              )Adjustments
                  to reconcile net income/(loss)to net cash
                  used in operating activities:Depreciation
              
              
              67,814
              
              
              
              70,282
              
              
              
              1,005,612Write-down
                  of impaired assets
              
              
              —
              
              
              
              —
              
              
              
              155,576Bond
                  amortization income
              
              
              (1,443,534
              )
              
              
              (636,165
              )
              
              
              (1,642,778
              )Noncash
                  compensation expense
              
              
              2,937,873
              
              
              
              4,742,155
              
              
              
              20,675,329Noncash
                  financing charge
              
              
              —
              
              
              
              —
              
              
              
              450,000Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (1,072,454
              )
              
              
              (1,567,819
              )
              
              
              (4,339,607
              )Prepaid
                  expenses and other current assets
              
              
              689,481
              
              
              
              495,455
              
              
              
              (419,025
              )Accounts
                  payable and accrued expenses
              
              
              3,145,451
              
              
              
              (1,042,211
              )
              
              
              6,069,306Deferred
                  revenue
              
              
              (607,920
              )
              
              
              35,019,200
              
              
              
              38,262,280Net
                  cash provided by (used in) operating activities
              
              
              12,617,121
              
              
              
              18,149,127
              
              
              
              (60,546,785
              )**Investment
                  activities**Purchase
                  of equipment
              
              
              (23,695
              )
              
              
              (41,181
              )
              
              
              (1,300,536
              )Purchase
                  of investments
              
              
              (45,193,716
              )
              
              
              (46,735,365
              )
              
              
              (146,339,682
              )Sale
                  of investments
              
              
              51,726,609
              
              
              
              32,300,000
              
              
              
              116,782,624Net
                  cash provided by (used in) investing activities
              
              
              6,509,198
              
              
              
              (14,476,546
              )
              
              
              (30,857,594
              )**Financing
                  activities**Proceeds
                  from issuance of preferred stock
              
              
              —
              
              
              
              —
              
              
              
              48,651,850Proceeds
                  from issuance of common stock
              
              
              2,137,429
              
              
              
              2,023,219
              
              
              
              86,471,146Proceeds
                  from collections of stockholders’ receivables
              
              
              —
              
              
              
              —
              
              
              
              1,004,310Proceeds
                  from notes payable
              
              
              —
              
              
              
              —
              
              
              
              3,000,000Payment
                  of dividend
              
              
              —
              
              
              
              —
              
              
              
              (162,295
              )Net
                  cash provided by financing activities
              
              
              2,137,429
              
              
              
              2,023,219
              
              
              
              138,965,011Net
                  increase in cash and cash equivalents
              
              
              21,263,748
              
              
              
              5,695,800
              
              
              
              47,560,632Cash
                  and cash equivalents at beginning of period
              
              
              26,296,884
              
              
              
              27,467,789
              
              
              
              —Cash
                  and cash equivalents at end of period
              
              $
              47,560,632
              
              
              $
              33,163,589
              
              
              $
              47,560,632**Supplemental
                  schedule of cash flow information**Cash
                  paid for interest
              
              $
              —
              
              
              $
              —
              
              
              $
              191,328**Supplemental
                  schedule of noncash investing and financing
                  activities**Conversion
                  of notes payable to preferred stock
              
              $
              —
              
              
              $
              —
              
              
              $
              3,000,000Preferred
                  stock dividend
              
              $
              —
              
              
              $
              —
              
              
              $
              772,183Forfeiture
                  of common stock options and warrants
              
              $
              —
              
              
              $
              —
              
              
              $
              314,179Conversion
                  of common stock warrants to common stock
              
              $
              —
              
              
              $
              —
              
              
              $
              1,080,001
 
 *See
        accompanying Notes to Financial Statements.*
  -
            3
            -
 Index
  **POZEN
        Inc.**
 **(A
        Development Stage Company)**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **(Unaudited)**
   **1.
        Development Stage Company**
  POZEN
        Inc. (“we” or “POZEN” or the “Company”) was incorporated in the State of
        Delaware on September 25, 1996 and is operating in a single reportable segment.
        The Company is a pharmaceutical company focused primarily on products for
        the
        treatment of acute and chronic pain and other pain-related conditions. The
        Company’s product development emphasis is on diseases with unmet medical needs
        where the Company can improve efficacy, safety and/or patient convenience.
        Since
        inception, the Company has focused its efforts primarily on the development
        and
        regulatory approval of pharmaceutical products for the treatment of migraine.
        The Company is also exploring the development of product candidates in other
        pain-related therapeutic areas. The Company intends to enter into collaboration
        agreements to commercialize its product candidates, and has entered into,
        and
        expects to continue to enter into such collaborations. The Company has not
        obtained regulatory approval to market any of its product candidates in the
        United States (U.S.).
  Statement
        of Financial Accounting Standards Board (“SFAS”) No. 7, “Accounting and
        Reporting by Development Stage Enterprises,” states that an enterprise shall be
        considered to be in the development stage if either planned principal operations
        have not commenced or planned principal operations have commenced, but there
        has
        been no significant revenue therefrom. The Company will remain a development
        stage company until such time as significant revenues have been generated
        from
        the marketing and sale of the Company’s product candidates. As of September 30,
        2007, the Company had $47.6 million in cash and cash equivalents and $31.2
        million in short-term investments. Our operating expenses for the remainder
        of
        2007 and 2008 are expected to parallel or increase from the level of our
        operating expenses in the first nine months of 2007. However, we believe
        that we
        will have sufficient cash reserves to maintain our current level of business
        activities through 2008 provided that certain development expenses are paid
        by
        AstraZeneca AB (AstraZeneca), as outlined in the collaboration and license
        agreement dated August 1, 2006 between the Company and AstraZeneca, as amended
        by an amendment effective as of September 6, 2007. The Company’s expenses might
        increase additionally in the remainder of 2007 and 2008 if any regulatory
        agency
        requires the Company to conduct additional clinical trials,
        studies****or investigations in connection with such agency’s
        consideration, or reconsideration, of the Company’s regulatory filings for any
        of its product candidates. The Company is not currently obligated to make
        any
        milestone payments to third parties and does not currently have any other
        required material payment obligations during this period. However, regulatory
        delays, such as the delay the Company is experiencing related to the approvable
        letters the Company received from the U.S. Food and Drug Administration (FDA)
        in
        June 2006 and in August 2007 in connection with to the Company’s New Drug
        Application (NDA) for TreximaTM, or unforeseen situations or unforeseen
        developments in the progress of the Company’s existing and future product
        candidates, may increase the Company’s cash requirements beyond its currently
        assumed needs.
  **2.
        Summary of Significant Accounting Policies**
  *Unaudited
        Interim Financial Statements*—The accompanying unaudited interim financial
        statements have been prepared in accordance with accounting principles generally
        accepted in the United States and applicable Securities and Exchange Commission
        (“SEC”) regulations for interim financial information. These financial
        statements are unaudited and, in the opinion of management, include all
        adjustments (consisting of normal recurring accruals) necessary to present
        fairly the balance sheets, statements of operations and statements of cash
        flows
        for the periods presented in accordance with accounting principles generally
        accepted in the United States. Certain information and footnote disclosures
        normally included in financial statements prepared in accordance with accounting
        principles generally accepted in the United States have been condensed or
        omitted pursuant to SEC rules and regulations. It is presumed that users
        of this
        interim financial information have read or have access to the audited financial
        statements and footnote disclosure for the preceding fiscal year contained
        in
        the Company’s Annual Report on Form 10-K, filed on March 8, 2007. Operating
        results for the interim periods presented are not necessarily indicative
        of the
        results that may be expected for the year ending December 31, 2007.
  *Revenue
        Recognition*— The Company’s licensing agreements have terms that include
        upfront payments upon contract signing, additional payments if and when certain
        milestones in the product’s development or commercialization are reached, and
        royalty payments based on future product sales. These agreements are accounted
        for in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue
        Recognition”, as amended by SAB 104, “Revenue Recognition” (“SAB 104”), and
        Emerging Issues Task Force 00-21 (“EITF 00-21”), “Revenue Arrangements with
        Multiple Deliverables.” The non-refundable portion of upfront payments received
        under the Company’s existing agreements is deferred by the Company upon receipt
        and recognized on a straightline basis over the period ending on the anticipated
        date of regulatory approvals, as specified in the agreements relating to
        the
        product candidates,or the
        conclusion of any obligation on the part of the Company. For the Company’s
        current agreements, these periods are estimated to be as
        follows:
  -
            4
            -
 Index
 
 ·
              The
                  September 2006 $40.0 million licensing fee received from AstraZeneca
                  related to the August 2006 Collaboration and License Agreement
                  with
                  AstraZeneca has been deferred and was being amortized over 40 months.
                  As a
                  result of the revised development timeline agreed upon in the September
                  2007 amendment, we have extended the amortization period to 43
                  months.
                  This is a change in accounting estimate and will be a prospective
                  adjustment beginning in July 2007. The AstraZeneca licensing fee
                  relates
                  to the Company’s proprietary fixed dose combinations of the proton pump
                  inhibitor (PPI) esomeprazole magnesium with the non-steroidal
                  anti-inflammatory drug (NSAID) naproxen, in a single tablet. We
                  recognized
                  $2.7 million and $8.7 million of revenue from the amortization
                  of the
                  AstraZeneca licensing fee for the three and nine month period ended
                  September 30, 2007, respectively. The September 2007 amendment to the
                  AstraZeneca agreement included a $10 million payment in connection
                  with
                  execution of the amendment. This payment has been deferred and
                  will be
                  amortized over 31 months. We recognized $0.3 million of revenue
                  from this
                  amortization in September 2007.
  ·
              The
                  June 2003 initial licensing and patent-issuance milestone payments
                  totaling $25.0 million for MT 400 received from GSK have been deferred
                  and
                  were originally being amortized over 42 months. During the third
                  quarter
                  of 2005 the amortization period was decreased to 39 months based
                  upon the
                  August 2005 submission to the FDA of the Trexima NDA which was
                  earlier
                  than anticipated. Although the amortization rate in the first quarter
                  of
                  2005 would have resulted in 2005 revenue recognition of $7.2 million,
                  the
                  third quarter change in the amortization period resulted in a $0.7
                  million
                  increase in the full-year amortization and 2005 revenue recognition
                  of
                  $7.9 million. During the second quarter of 2006 the remaining amortization
                  period of 6 months was increased to 15 months based upon the June
                  2006
                  receipt of an approvable letter from the FDA related to the Trexima
                  NDA
                  and an estimated extension of 9 months, which represented what
                  the Company
                  believed to be the conclusion of any obligation on its part under
                  the
                  agreement. During the fourth quarter of 2006 the remaining amortization
                  period of 9 months was increased to 11 months based upon the December
                  2006
                  receipt of a notice from the FDA that it had completed its initial
                  review
                  of POZEN's response to the approvable letter related to the Trexima
                  NDA
                  and had requested additional analyses and supporting information
                  relating
                  to submitted data. Although the amortization rate in the first
                  quarter of
                  2006 would have resulted in 2006 revenue recognition of $6.4 million,
                  the
                  second and fourth quarter changes in the amortization period resulted
                  in
                  2006 revenue recognition of $4.5 million. As a result of the 2006
                  changes in the estimated amortization period, $1.9 million of the
                  $25
                  million initial licensing and patent-issuance milestone payments
                  was
                  deferred to 2007 and, with the receipt of a second approvable letter
                  in
                  August 2007, unamortized deferred revenue of $0.3 million will
                  be
                  amortized through March 2008. We recognized $0.2 million and $1.6
                  million
                  of revenue from the amortization of GSK milestone payments for
                  the three
                  and nine month period ended September 30, 2007,
                  respectively.
  ·
              The
                  September 2003 $1.0 million licensing fee for MT 300 ($2.0 million
                  non-refundable upfront licensing fee net of a potential termination
                  fee of
                  $1.0 million) received from Valeant Pharmaceuticals North America
                  (Valeant
                  NA), a subsidiary of Valeant Pharmaceuticals International (formerly
                  Xcel
                  Pharmaceuticals Inc.), has been amortized over 32 months. As the
                  result of
                  the receipt in October 2003 of a not-approvable letter from the
                  FDA
                  relating to the NDA for MT 300, after three months of amortization,
                  this
                  estimated deferral period was increased from an original estimate
                  of 20
                  months to 32 months ending in April
                  2006.
  Milestone
        payments are recognized as revenue upon the achievement of specified milestones
        if (i) the milestone is substantive in nature and the achievement of the
        milestone was not reasonably assured at the inception of the agreement; and
        (ii)
        the fees are non-refundable. Any milestone payments received prior to satisfying
        these revenue recognition criteria are recorded as deferred
        revenue.
  Additionally,
        the Company’s licensing agreements may include payment for services provided by
        the Company on an hourly rate and direct expense basis. The Company records
        such
        revenue in accordance with the agreements which would generally be based
        upon
        time spent and materials used on the project. In accordance with EITF 99-19,
        “Reporting Revenue Gross as a Principal versus Net as an Agent”, under the
        collaboration agreement with AstraZeneca, the Company recognizes as revenue
        the
        billings for the direct costs and certain personnel-related time incurred
        in
        performing additional development activities described within the AstraZeneca
        agreement. We recognized $4.3 million and $16.5 million of revenue for
        development activities performed pursuant to the AstraZeneca agreement for
        the
        three and nine month periods ended September 30, 2007,
        respectively.
  Royalty
        revenue will be recognized if and when earned in future periods with respect
        to
        the manufacture, sale or use of the Company’s products or technology. For those
        arrangements where royalties are reasonably estimable, the Company will
        recognize revenue based on estimates of royalties earned during the applicable
        period and reflect in future revenue any differences between the estimated
        and
        actual royalties.
   -
            5
            -
 Index
  *Investments*—Investments
        consist primarily of United States government and government agency obligations,
        and corporate fixed income securities. The Company invests in high-credit
        quality investments in accordance with its investment policy, which minimizes
        the possibility of loss. Under the Company’s investment policy, investments that
        have a maturity of greater than three months and less than one year are
        classified as short-term, are considered to be available-for-sale and are
        carried at fair value with unrealized gains and losses recognized in other
        comprehensive income (loss). Realized gains and losses are determined using
        the
        specific identification method and transactions are recorded on a settlement
        date basis. Generally, investments with maturities beyond twelve months are
        classified as long-term. Marketable and non-marketable equity investments
        are
        evaluated periodically for impairment. If it is determined that a decline
        of any
        investment is other than temporary, the investment would be written down
        to fair
        value and the write-down would be permanent. For the three and nine month
        periods ended September 30, 2007, the Company had $0.2 million and $0.9 million,
        respectively, of interest income included in other income for the period.
        For
        the three and nine month periods ended September 30, 2007, the Company had
        $0.6
        million and $1.4 million, respectively, of bond amortization income included
        in
        other income for the period.
  *Accumulated
        Other Comprehensive Income*—The Company follows the provisions of SFAS 130,
“Comprehensive Income.” SFAS 130 establishes standards for the reporting and
        display of comprehensive income and its components for general purpose financial
        statements. Accumulated other comprehensive income is comprised of unrealized
        gains and losses on marketable securities and is disclosed as a component
        of
        stockholders’ equity. The Company had $313 of unrealized losses on its
        investments that are classified on the balance sheet as accumulated other
        comprehensive income (loss) at September 30, 2007 and $566 gain for the same
        period of 2006.
  **Three
                  Months Ended September 30,**
              
              
              **Nine
                  Months Ended September 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Income
                  (loss) before taxes
              
              $
              16,482,223
              
              
              $
              (4,066,206
              )
              
              $
              10,545,509
              
              
              $
              (18,931,770
              )Unrealized
                  gain (loss) on marketable securities
              
              
              (3,948
              )
              
              
              10,856
              
              
              
              (313
              )
              
              
              566Total
                  comprehensive income (loss) before taxes
              
              $
              16,478,275
              
              
              $
              (4,055,350
              )
              
              $
              (10,545,196
              )
              
              $
              (18,931,204
              )
  *Stock-based
        Compensation*— On January 1, 2006, we adopted Statement of Financial
        Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” which requires
        us to account for share-based payment transactions using a fair value-based
        method and recognize the related expense in our results of operations. Our
        compensation cost recognized includes compensation costs for all share-based
        payments granted prior to, but not yet vested as of, January 1, 2006 based
        on
        the grant date fair value estimated in accordance with the original provisions
        of SFAS No. 123, and compensation cost for all share-based payments granted
        subsequent to January 1, 2006 based on the grant date fair value estimated
        in
        accordance with the provisions of SFAS No. 123(R). Accordingly, we have not
        restated our financial results for prior periods.
  Under
        the
        fair value recognition provisions of SFAS No. 123(R), stock-based compensation
        cost is estimated at the grant date based on the fair value of the award
        and is
        recognized as expense over the requisite service period of the award. The
        fair
        value of restricted stock awards is determined by reference to the fair market
        value of our common stock on the date of grant. Consistent with the valuation
        method we used for disclosure-only purposes under the provisions of SFAS
        No.
        123, we use the Black-Scholes model to value service condition and performance
        condition option awards under SFAS No. 123(R). For awards with only service
        conditions and graded-vesting features, we recognize compensation cost on
        a
        straight-line basis over the requisite service period. For awards with
        performance or market conditions granted subsequent to our adoption of SFAS
        No.
        123(R), we intend to recognize compensation cost over the expected period
        to
        achieve the performance or market conditions. Additionally, performance
        condition accounting is based on a probability assessment of achieving the
        performance condition.
 
 The
        adoption of SFAS No. 123(R) had a significant impact on our results of
        operations. Our consolidated statements of operations for the three and nine
        months ended September 30, 2007 and September 30, 2006 includes the following
        stock-based compensation expense:
 
 **Three
                  Months Ended September 30,**
              
              
              **Nine
                  Months Ended September 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Research
                  and development
              
              $
              9,295
              
              
              $
              468,700
              
              
              $
              798,922
              
              
              $
              1,582,400General
                  and administrative
              
              
              378,733
              
              
              
              1,005,300
              
              
              
              2,138,951
              
              
              
              3,159,800Operating
                  expense
              
              
              388,028
              
              
              
              1,474,000
              
              
              
              2,937,873
              
              
              
              4,742,200Tax
                  benefit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
                  expense
              
              $
              388,028
              
              
              $
              1,474,000
              
              
              $
              2,937,873
              
              
              $
              4,742,200
 
  -
            6
            -
 Index
  Unrecognized
        stock-based compensation expense, including time-based options,
        performance-based options and restricted stock awards, expected to be recognized
        over an estimated weighted-average amortization period of 1.8 years was $9.1
        million at September 30, 2007 and, over an estimated weighted-average
        amortization period of 2.0 years was $10.7 million at September 30, 2006.
        Unrecognized stock-based compensation expense expected to be recognized over
        the
        remaining period ending December 31, 2007 was $1.3 million at September 30,
        2007
        and was $1.6 million at September 30, 2006 for the remaining period ending
        December 31, 2006. The stock-based compensation expense for the nine months
        ended September 30, 2006 included a one-time adjustment of $308,000 resulting
        from the performance-based option expensing method conversion to SFAS No.
        123(R)
        for the options granted under the Trexima incentive program.
 
 Based
        on
        the receipt of the second approvable letter for Trexima, we have determined
        that
        it is no longer probable (defined as>70% probability) that Trexima will be
        approved by the FDA by December 31, 2007. Accordingly, we have reversed all
        previously expensed stock-based compensation related to the Trexima
        approval-date incentives in the third quarter of 2007. The reversals reduce
        research and development expenses by $0.4 million and general and administrative
        expenses by $0.6 million in this quarter.
 
 Stock
        Plans
  On
        November 20, 1996, the Company
        established a Stock Option Plan (the “Option Plan”) and authorized the issuance
        of options for the purchase of up to 1,605,310 shares of common stock to
        attract
        and retain quality employees and to allow such employees to participate in
        the
        growth of the Company. In May 2000, the Board of Directors adopted, and in
        June
        2000 the stockholders approved, the POZEN Inc. 2000 Equity Compensation Plan
        (the “Plan”). The Plan became effective upon the completion of the Company’s
        initial public offering in October 2000, after which time no further grants
        were
        made under the Option Plan. At adoption, the Plan authorized up to 3,000,000
        shares of common stock for issuance under the terms of the Plan. In 2004,
        the
        Board of Directors adopted and the stockholders approved an amendment to
        and
        restatement of the Plan. The amendment to the Plan provided for an increase
        in
        the number of shares of common stock authorized for issuance under the Plan,
        from 3,000,000 to 5,500,000, or an increase of 2,500,000 shares. On June
        13,
        2007, the stockholders approved the amendment and restatement of the Plan
        to,
        among other things, increase the number of shares authorized for issuance
        under
        the 2000 Plan from 5,500,000 to 6,500,000 shares and continue the various
        performance criteria for use in establishing specific vesting targets for
        certain awards under the Plan so as to qualify the compensation attributable
        to
        any such awards as performance-based compensation under Section 162(m) of
        the
        Internal Revenue Code.
  In
        May
        2004 and February 2007 awards of 98,135 and 6,200 restricted stock units,
        respectively, were made to the Company’s chief executive officer under the Plan.
        The May 2004 award of 98,135 restricted stock units were fully vested at
        March
        31, 2007. The February 2007 award of 6,200 restricted stock units vest in
        four
        equal amounts on January 1st of the
        four
        calendar years subsequent to the respective grant date of the awards. Both
        the
        May 2004 and February 2007 awards are payable in shares of common stock upon
        cessation of employment or the provision of service to the Company or, as
        provided in and in accordance with the plan, upon a change of control. The
        vesting of 25% of the 6,200 restricted stock unit awarded in February 2007
        is
        contingent upon the Company’s receiving approval of the Trexima NDA from the FDA
        on or before December 31, 2007. Based upon receipt of the second approvable
        letter for Trexima, we have determined that it is no longer probable (defined
        as>70% probability) that Trexima will be approved by the FDA by December 31,
        2007. Therefore we have reversed, in the third quarter of 2007, previously
        expensed stock-based compensation expense for 1,550 restricted stock units.
        On
        June 13, 2007 awards of 14,000 restricted stock units were made to the Company’s
        independent directors. These June 2007 awards vest on the earlier of June
        13,
        2008 or the date of the Company’s next annual stockholders meeting.
  On
        January 3, 2005, pursuant to an incentive program (the “Trexima incentive
        program”) approved by the Compensation Committee of the Board of Directors of
        the Company, stock options were granted to all of the Company’s employees,
        including its executive officers, to purchase an aggregate of 506,772 shares
        of
        common stock. These performance-based options, which were granted under the
        Plan, as amended and restated, have a ten-year term and an exercise price
        of
        $7.06, which was equal to the NASDAQ reported market closing price of the
        common
        stock on January 3, 2005, the date of grant. Each performance-based option
        vests
        in full upon the later to occur of (i) January 3, 2007 or (ii) the receipt
        by
        the Company of an action letter from the FDA indicating approval of the NDA
        for
        the product candidate Trexima,which
        is being
        developed pursuant to the Company’s collaboration agreement with GSK; provided,
        however that 25% of each such option was previously forfeited because receipt
        of
        the FDA approval letter for the Trexima NDA did not occur prior to June 30,
        2007, and 100% of each such option will be forfeited if receipt of the FDA
        approval letter for the Trexima NDA does not occur on or before December
        31,
        2007. Based upon receipt of the second approvable letter for Trexima, we
        have
        determined that it is no longer probable (defined as>70% probability) that
        Trexima will be approved by the FDA by December 31, 2007. Therefore we have
        reversed all previously expensed stock-based compensation expense for the
        Trexima incentive program in the third quarter of 2007. As of September 30,
        2007, due to the June 30, 2007 forfeiture of 25% of the outstanding options,
        as
        described under the terms of the initial grant, and forfeitures resulting
        from
        employee terminations, options to purchase an aggregate of 239,541 shares
        of
        common stock remain outstanding under the Trexima incentive program, the
        expense
        for which has been reversed, but which will not be forfeited until December
        31,
        2007 if Trexima is not approved by the FDA by that date.
  -
            7
            -
 Index
 Time-Based
        Stock Awards
  The
        fair value of each time-based award
        is estimated on the date of grant using the Black-Scholes option valuation
        model, which uses the assumptions described below. Our weighted-average
        assumptions used in the Black-Scholes valuation model for equity awards with
        time-based vesting provisions granted during the three and nine month periods
        ended September 30, 2007 and 2006 are shown in the following
        tables:
 
 **Three
                  Months Ended September 30,**
              
              
              **Nine
                  Months Ended September 30,****(In
                  thousands)**
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Expected
                  volatility
              
              
              78.4
              %
              
              
              83.0
              %
              
              
              76.0–79.2
              %
              
              
              76.0–83.0
              %Expected
                  dividends
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Expected
                  terms
              
              6.25
                  Years
              
              
              6.25
                  Years
              
              
              6.25
                  Years
              
              
              6.25
                  YearsRisk-free
                  interest rate
              
              
              4.4
              %
              
              
              4.9
              %
              
              
              4.4–5.1
              %
              
              
              4.3–5.1
              %
 
 The
        expected volatility rates were
        estimated based on an equal weighting of the historical volatility of POZEN
        common stock over the preceding six-year period. The expected terms were
        estimated based on a simplified method, as allowed under SEC Staff Accounting
        Bulletin No. 107, averaging the vesting term and original contractual term.
        The
        risk-free interest rates for periods within the contractual life of the option
        were based on seven year U.S. Treasury securities. The pre-vesting forfeiture
        rates used for the nine months ended September 30, 2007 and 2006 were based
        on
        historical rates. As required under SFAS No. 123(R), we will adjust the
        estimated forfeiture rate to our actual experience.
 
 A
        summary of the time-based stock
        awards as of September 30, 2007, and changes during the three and nine months
        ended September 30, 2007, is as follows:
 
 **Underlying**
                **Shares**
                **(000s)**
              
              
              **Weighted-Average
                  Exercise Price**
              
              
              **Weighted-**
                **Average
                  Remaining Contractual Term**
                **(years)**
              
              
              **Aggregate
                  Intrinsic Value**
                **(000s)****Stock
                  Awards**Outstanding
                  at January 1, 2007
              
              
              3,416
              
              
              $
              8.50Granted
              
              
              572
              
              
              
              16.86Exercised
              
              
              37
              
              
              
              3.33Forfeited
                  or expired
              
              
              -
              
              
              
              -Outstanding
                  at March 31, 2007
              
              
              3,951
              
              
              $
              9.76
              
              
              
              7.2
              
              
              $
              20,973Exercisable
                  at March 31, 2007
              
              
              2,145
              
              
              $
              7.91
              
              
              
              5.9
              
              
              $
              14,696Granted
              
              
              45
              
              
              
              16.77Exercised
              
              
              198
              
              
              
              9.58Forfeited
                  or expired
              
              
              273
              
              
              
              12.97Outstanding
                  at June 30, 2007
              
              
              3,525
              
              
              $
              9.61
              
              
              
              6.9
              
              
              $
              29,841Exercisable
                  at June 30, 2007
              
              
              1,956
              
              
              $
              7.78
              
              
              
              5.6
              
              
              $
              20,212Granted
              
              
              2
              
              
              
              10.20Exercised
              
              
              20
              
              
              
              5.70Forfeited
                  or expired
              
              
              73
              
              
              
              12.24Outstanding
                  at September 30, 2007
              
              
              3,434
              
              
              $
              9.57
              
              
              
              6.6
              
              
              $
              8,567Exercisable
                  at September 30, 2007
              
              
              1,944
              
              
              $
              7.66
              
              
              
              5.4
              
              
              $
              6,837
 
 The
        vesting of 46,135 time-based stock
        awards granted in the nine months ended September 30, 2007 are contingent
        upon
        the Company’s receiving approval of the Trexima NDA from the FDA on or before
        December 31, 2007. Based upon receipt of the second approvable letter for
        Trexima, we have determined that it is no longer probable (defined as>70%
        probability) that Trexima will be approved by the FDA by December 31, 2007.
        Therefore we have reversed, in the third quarter of 2007, previously expensed
        stock-based compensation expense for these time-based stock awards.
 
 A
        summary
        of the time-based stock awards as of September 30, 2006, and changes during
        the
        nine months ended September 30, 2006, is as follows:
  -
            8
            -
 Index
  
 **Underlying**
                **Shares**
                **(000s)**
              
              
              **Weighted-Average
                  Exercise Price**
              
              
              **Average
                  Remaining Contractual Term**
                **(years)**
              
              
              **Aggregate
                  Intrinsic Value**
                **(000s)****Stock
                  Awards**Outstanding
                  at January 1, 2006
              
              
              3,317
              
              
              $
              7.67Granted
              
              
              826
              
              
              
              10.91Exercised
              
              
              157
              
              
              
              5.34Forfeited
                  or expired
              
              
              49
              
              
              
              9.28Outstanding
                  at March 31, 2006
              
              
              3,937
              
              
              $
              8.42
              
              
              
              7.6
              
              
              $
              32,663Exercisable
                  at March 31, 2006
              
              
              1,927
              
              
              $
              7.38
              
              
              
              6.2
              
              
              $
              17,968Granted
              
              
              57
              
              
              
              12.81Exercised
              
              
              18
              
              
              
              2.10Forfeited
                  or expired
              
              
              288
              
              
              
              10.41Outstanding
                  at June 30, 2006
              
              
              3,688
              
              
              $
              8.36
              
              
              
              7.3
              
              
              $
              2,445Exercisable
                  at June 30, 2006
              
              
              1,816
              
              
              $
              7.31
              
              
              
              5.9
              
              
              $
              2,168Granted
              
              
              81
              
              
              
              10.31Exercised
              
              
              154
              
              
              
              7.46Forfeited
                  or expired
              
              
              69
              
              
              
              10.39Outstanding
                  at September 30, 2006
              
              
              3,546
              
              
              $
              7.19
              
              
              
              7.1
              
              
              $
              16,134Exercisable
                  at September 30, 2006
              
              
              1,730
              
              
              $
              7.38
              
              
              
              5.7
              
              
              $
              9,590
 
 The
        aggregate intrinsic value represents the pretax value (the period’s closing
        market price, less the exercise price, times the number of in-the-money options)
        that would have been received by all option holders had they exercised their
        options at the end of the period. The exercise price of stock options granted
        during the nine months ended September 30, 2007 and 2006 was equal to the
        market
        price of the underlying common stock on the grant date. The total intrinsic
        value of stock options exercised during the three and nine months ended
        September 30, 2007 was $0.2 million and $2.3 million, respectively. The total
        intrinsic value of stock options exercised during the three and nine months
        ended September 30, 2006 was $0.4 million and $1.2 million,
        respectively.
 
 Restricted
        Stock and Restricted Stock Units
  As
        of
        September 30, 2007, there was $0.3 million of unrecognized compensation expense
        related to unvested restricted stock units under the 2007 award of 20,200
        restricted stock units and no unrecognized compensation expense related to
        the
        May 2004 award of 98,135 restricted stock units. The grant-date per-share
        fair
        value of the February 2007 and June 2007 restricted stock units were $16.89
        and
        $16.19, respectively. The grant-date per-share fair value of the May 2004
        restricted stock units were $12.24. There were 20,200 unvested restricted
        stock
        units outstanding at September 30, 2007. A total of 6,200 time-based restricted
        stock units were granted of which 1,550 were contingent upon the Company’s
        receiving FDA approval of the Trexima NDA on or before December 31, 2007.
        Based
        upon receipt of the second approvable letter for Trexima, we have determined
        that it is no longer probable (defined as>70% probability) that Trexima will
        be approved by the FDA by December 31, 2007. Therefore we have reversed all
        previously expensed stock-based compensation expense for the 1,550 time-based
        restricted stock units, although the units will not be forfeited until December
        31, 2007.
  Performance-Based
        Awards
  The
        fair
        value of each performance-based option granted under the Plan, including
        those
        granted under the Trexima incentive program, was estimated as of the grant
        date
        using the Black-Scholes option valuation model without consideration of the
        performance measures. The inputs for expected volatility, expected term,
        expected dividends, and risk-free interest rate used in estimating fair value
        of
        performance-based awards for the nine months ended September 30, 2007, were
        the
        same as those noted above under Time-Based Stock Awards.
   -
            9
            -
 Index
  Determining
        the appropriate amount to expense based on the achievement of stated goals
        in a
        performance-based award requires judgment, including forecasting future
        performance results. The estimate of expense is revised periodically based
        on
        the probability of achieving the required performance targets and adjustments
        are made as appropriate. The cumulative impact of any revisions is reflected
        in
        the period of change. If any applicable financial performance goals are not
        met,
        no compensation cost is ultimately recognized and any previously recognized
        compensation cost is reversed. Under the Trexima incentive program, 25% of
        each
        option grant has been forfeited because receipt of the FDA approval letter
        for
        the Trexima NDA did not occur prior to June 30, 2007 (the “25% portion”). Since
        the Company believed it was unlikely that this performance goal would be
        met at
        the end of 2006, no compensation cost was recognized for the 25% portion
        of the
        Trexima incentive program and previously recognized compensation cost, related
        to this portion of the awards, was reversed in the fourth quarter of
        2006.
  Based
        on
        the receipt of the second approvable letter for Trexima, we have determined
        that
        it is no longer probable (defined as>70% probability) that Trexima will be
        approved by the FDA by December 31, 2007. Accordingly, we have reversed all
        previously expensed stock-based compensation for the Trexima incentive option
        in
        the third quarter of 2007, although the shares will not be forfeited until
        December 31, 2007. The reversal reduces research and development expenses
        by
        $0.3 million and general and administrative expenses by $0.6 million in this
        quarter. The grant-date fair value of these performance-based options was
        $3.77
        per share. There were 239,541 and 375,251 unvested performance-based options
        outstanding at September 30, 2007 and 2006, respectively. There were 6,019
        and
        135,710 awards forfeited during the three and nine months ended September
        30,
        2007. During the three and nine months ended September 30, 2006, 13,342 and
        68,160 awards were forfeited. At September 30, 2007, the performance-based
        options had an intrinsic value of $0.9 million and a remaining contractual
        life
        of 7.2 years, while at September 30, 2006 the performance-based options had
        no
        intrinsic value and a remaining contractual life of 8.2 years.
 
 *Net**Income and Net Loss Per Share*—Basic and diluted net income and net loss per
        common share amounts are presented in conformity with SFAS 128, “Earnings per
        Share,” for all periods presented. In accordance with SFAS 128, basic and
        diluted net income or loss per common share amounts have been computed using
        the
        weighted-average number of shares of common stock outstanding for the nine
        months ended September 30, 2006. During the nine months ended September 30,
        2006
        and 2007, the Company had potential common stock equivalents related to its
        outstanding stock options. These potential common stock equivalents were
        not
        included in diluted loss per share because the effect would have been
        antidilutive. Accordingly, basic and diluted net loss per share is the same
        for
        the nine months ended September 30, 2006. In accordance with SFAS 128, the
        Company has excluded the impact of any shares which might be issued under
        the
        Rights Plan, detailed below, from the EPS calculation because the Rights
        are not
        exercisable since the specified contingent future event has not
        occurred.
 
 The
        following table reconciles the numerator and denominator used to calculate
        diluted net income per share (in thousands):
  **Three
                  months ended**
                **September
                  30, 2007**
              
              
              **Nine
                  months ended**
                **September
                  30, 2007**Numerator:Net
                  income
              
              $
              14,837,124
              
              
              $
              8,900,410Denominator:Weighted
                  average common shares, basic
              
              
              29,695,596
              
              
              
              29,555,787Dilutive
                  effect of stock options
              
              
              903,211
              
              
              
              1,071,495Weighted
                  average common shares, diluted
              
              
              30,598,807
              
              
              
              30,627,282
 
   -
            10
            -
 Index
  *Rights
        Plan/Series A Junior Participating Preferred Stock*—In January 2005, the
        Company approved a stockholder rights plan (the “Rights Plan”), pursuant to
        which the Company entered into a Rights Agreement dated January 12, 2005
        with
        StockTrans, Inc., as Rights Agent, and the Company declared a dividend of
        a
        right to acquire one preferred share purchase right (a “Right”) for each
        outstanding share of the Company’s Common Stock, $0.001 par value per share, to
        stockholders of record at the close of business on January 28, 2005. Generally,
        the Rights only are triggered and become exercisable if a person or group
        acquires beneficial ownership of 15 percent or more of the Company’s common
        stock or announces a tender offer for 15 percent or more of the Company’s common
        stock. The Rights Plan is similar to plans adopted by many other publicly-traded
        companies. The effect of the Rights Plan is to discourage any potential acquirer
        from triggering the Rights without first convincing the Company’s Board of
        Directors that the proposed acquisition is fair to, and in the best interest
        of,
        the shareholders and the Company. The provisions of the Plan will substantially
        dilute the equity and voting interest of any potential acquirer unless the
        Board
        of Directors determines that the proposed acquisition is in the best interest
        of
        the shareholders. In connection with the Plan, the Company designated 90,000
        shares of its authorized Preferred Stock as Series A Junior Participating
        Preferred Stock. Each Right, if and when exercisable, will entitle the
        registered holder to purchase from the Company one one-thousandth of a share
        of
        Series A Junior Participating Preferred Stock, $0.001 par value per share,
        at a
        purchase price of $80.00, subject to adjustment. Each holder of a Right (except
        for the Acquiring Person (as defined in the Rights Plan), whose Rights will
        be
        null and void upon such event) shall thereafter have the right to receive,
        upon
        exercise, that number of shares of Common Stock of the Company (or, in certain
        circumstances, cash, property or other securities of the Company) which equals
        the exercise price of the Right divided by 50% of the current market price
        (as
        defined in the Rights Agreement) per share of Common Stock at the date of
        the
        occurrence of such event. The Rights can be terminated by POZEN’s Board of
        Directors and are subject to optional redemption by the Company at $0.001
        per
        Right. The Rights Plan has a 10-year term and contains provisions requiring
        a
        periodic review and evaluation by the Board of Directors.
  *New
        Accounting Pronouncements*—In July 2006, the Financial
        Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
*“Accounting for Uncertainty in Income Taxes”* (“FIN 48”). FIN 48 is an
        interpretation of FASB Statement No. 109, *“Accounting for Income
        Taxes,”* and seeks to reduce the diversity in practice associated with
        certain aspects of measurement and recognition in accounting for income taxes.
        In addition, FIN 48 provides guidance on derecognition, classification, interest
        and penalties, and accounting in interim periods and requires expanded
        disclosure with respect to the uncertainty in income taxes. FIN 48 is effective
        as of the beginning of the Company’s 2007 fiscal year. The cumulative effect, if
        any, of applying FIN 48 is to be reported as an adjustment to the opening
        balance of retained earnings in the year of adoption. The January 1, 2007
        adoption of FIN 48 did not have a material effect on the Company’s financial
        statements.
  *Contingencies*—
        Five purported class action lawsuits were filed during 2004 by holders of
        the
        Company's securities against the Company and certain of its current and former
        officers, in the U.S. District Court for the Middle District of North Carolina,
        alleging violations of securities laws. These actions were consolidated for
        pre-trial purposes. Lead plaintiffs were appointed by the court and a
        consolidated amended complaint was filed on December 20, 2004. The amended
        complaint alleged, among other claims, violations of federal securities laws,
        including Section 10(b) of the Securities Exchange Act of 1934, as amended
        (the
        "Exchange Act"), and Rule 10b-5 and Section 20(a) of the Exchange Act against
        the Company and the Company’s chairman and chief executive officer, arising out
        of allegedly false and misleading statements made by the Company concerning
        its
        product candidates, MT 100 and MT 300, during the class period. On July 10,
        2007
        the Company announced that is has reached an agreement to amicably settle
        the
        consolidated class action lawsuit. All claims against the Company and Dr.
        Plachetka will be dismissed in their entirety without admission of liability
        or
        wrongdoing by any party. The settlement agreement, which was granted preliminary
        approval by the court on October 2, 2007, will be funded entirely with proceeds
        from the Company’s directors and officers’ liability insurance and it is the
        current judgment of management that it is unlikely that this settlement will
        have a material adverse effect on the Company's results of operations, financial
        condition or cash flows.
  A purported
        class action lawsuit claiming violations of securities
        laws  was filed  on August 10,  2007 in the
        U.S. District Court for the Middle District of North Carolina by  a
 holder of our securities against us, our chairman and chief executive
        officer and one of our directors. The complaint alleges, among other claims,
        violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange
        Act
        arising out of allegedly false and misleading statements made by the Company
        concerning its migraine drug candidate, Trexima, during the purported class
        period, July 31, 2006 through August 1, 2007. The Company and the individual
        defendants believe that the plaintiff's allegations are without merit, and
        intend to defend these claims vigorously.
  As
        with
        any litigation proceeding, we cannot predict with certainty the eventual
        outcome
        of the pending class action lawsuit described above. Furthermore, we will
        have
        to incur expenses in connection with this lawsuit, which may be substantial.
        In
        the event of an adverse outcome, our business could be materially harmed.
        Moreover, responding to and defending the pending litigation will result
        in a
        significant diversion of management’s attention and resources and an increase in
        professional fees.
   -
            11
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 Index
  Under
        its
        commercialization collaboration with Valeant NA, related to MT 300, if the
        Company chooses to withdraw the MT 300 NDA for commercial or financial reasons
        under the conditions specified in the agreement, it could be required to
        pay a
        withdrawal fee of $1.0 million. As a result of this contingency, $1.0 million
        of
        the $2.0 million upfront payment received by the Company from Valeant NA
        pursuant to the agreement has not been recognized as revenue and will not
        be
        recognized as revenue until the conditions in the agreement have been satisfied
        or resolved.
  On
        July
        21, 2005, the Company received a letter from Valeant NA seeking payment of
        the
        $1.0 million withdrawal fee. The Company does not believe the withdrawal
        fee is
        payable. The agreement requires that unresolved disputes by the parties be
        referred to the respective chief executive officers for resolution. If still
        unresolved, the agreement provides for binding arbitration. Valeant NA has
        indicated its intention to pursue the dispute resolution provisions provided
        for
        in the agreement. The Company intends to vigorously defend its position under
        the agreement. At this time, it is not possible to determine if any withdrawal
        fee will be required to be paid to Valeant NA when the ultimate resolution
        of
        this dispute is reached, however, it is the current judgment of management
        that
        no reserve is required.
  **3.
        Subsequent Events**
 
 On
        October 15, 2007 we announced that we had submitted a response to the August
        1,
        2007 approvable letter for Trexima after meeting with the FDA to discuss
        the
        proposed plan for responding to the letter. This response includes, in addition
        to a required safety update and revised labeling, the results of three
        non-clinical (*in vitro*) studies that provide clarifying information
        about the Chinese Hamster Ovary (CHO) assay. The FDA has notified us that
        it
        considers the response to be a complete, Class II response (six months) which
        could result in a new decision date of April 15, 2008.
 
 In
        addition, POZEN is conducting a seven day clinical evaluation of the genotoxic
        potential of *Trexima* in human volunteers in the event the FDA requires
        this information. Results from this evaluation are expected to be available
        during the first quarter of 2008. If these data are submitted to the FDA,
        the
        review period, and the time to approval, may be extended.
  **Item
        2. Management’s Discussion and Analysis of Financial Condition
        and Results of Operations**
  This
        discussion of our financial condition and the results of operations should
        be
        read together with the financial statements, including the notes contained
        elsewhere in this Form 10-Q, and the financial statements, including the
        notes
        thereto, contained in our Annual Report on Form 10-K for the year ended December
        31, 2006, as filed on March 8, 2007.
  This
        report includes “forward-looking statements” within the meaning of the safe
        harbor provisions of the Private Securities Litigation Reform Act of 1995.
        These
        forward-looking statements include, but are not limited to, statements about
        our
        plans, objectives, representations and contentions and are not historical
        facts
        and typically are identified by use of terms such as “may,” “will,” “should,”
“could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “continue” and similar words, although some forward-looking
        statements are expressed differently. You should be aware that the
        forward-looking statements included herein represent management’s current
        judgment and expectations, but our actual results, events and performance
        could
        differ materially from those in the forward-looking statements. The
        forward-looking statements are subject to a number of risks and uncertainties
        which are discussed in this Quarterly Report on Form 10-Q, Part II, under
        the
        heading “Item 1A. Risk Factors” and elsewhere in this report and in other
        documents filed by us with the Securities and Exchange Commission. We do
        not
        intend to update any of these factors or to publicly announce the results
        of any
        revisions to these forward-looking statements, other than as is required
        under
        the federal securities laws.
  -
            12
            -
 Index
  **Overview**
  We
        are a
        pharmaceutical company focused on developing products which can provide improved
        efficacy, safety or patient convenience in the treatment of acute and chronic
        pain and pain related conditions. We operate a business model that focuses
        on
        the following:
  ·
              obtaining
                  patents for innovative ideas which we believe have value in the
                  marketplace;
  ·
              utilizing
                  a small group of talented employees to develop those ideas through
                  proof
                  of concept by working with strategic outsource partners;
                  and
  ·
              licensing
                  the resulting product or technology to a strong pharmaceutical
                  partner to
                  commercialize.
  We
        hire
        experts with strong project management skills in the specific disciplines
        we
        believe are important to maintain within our company. We contract with and
        manage strong outsource partners as we complete the necessary development
        work,
        permitting us to avoid incurring the cost of buying or building laboratories,
        manufacturing facilities or clinical research operation sites. This allows
        us to
        control our annual expenses, but to utilize “best in class” resources as
        required.
  After
        we
        establish the proof of concept for an innovative idea, we work with the FDA
        or
        foreign regulatory agencies to design a clear path forward to the filing
        of a
        new drug application (NDA) or its foreign equivalent. We then seek a strong
        pharmaceutical partner to license the product or technology, to collaborate
        with
        us in the remaining development and to commercialize the product or technology
        after approval. The success of our business is highly dependent on the market
        place value of our ideas and the related patents we obtain, our ability to
        obtain from the required regulatory agencies approval to sell the developed
        products and our ability to find strong commercial partners to successfully
        commercialize the products.
  We
        have
        developed TreximaTM in collaboration
        with GlaxoSmithKline (GSK). GSK’s Trexima**was the proposed brand
        name for the product candidate combining sumatriptan 85 mg, as the succinate
        salt, formulated with RT TechnologyTM and naproxen sodium 500 mg in a single
        tablet designed for the acute treatment of migraine. Several new names are
        under
        consideration at the U.S. Food and Drug Administration (FDA), but pending
        a
        final decision on a new name, the product will still be referred to as Trexima.
        Trexima incorporates our MT 400 technology, which refers to our proprietary
        combinations of a triptan (5-HT1B/1D agonist)
        and a
        non-steroidal anti-inflammatory drug (NSAID). Under our MT 400 technology,
        we
        sought to develop product candidates that provide acute migraine therapy
        by
        combining the activity of two drugs that act by different mechanisms to reduce
        the pain and associated symptoms of migraine. We filed a New Drug Application
        (NDA) for Trexima with the FDA in August 2005 and in June 2006, we received
        an
        approvable letter requiring us to provide certain additional safety information
        relating to Trexima, some of which required new studies. An approvable letter
        is
        an official notification from the FDA that contains conditions that must
        be
        satisfied prior to obtaining final U.S. marketing approval. We, along with
        GSK,
        met with the FDA in July 2006 to discuss the approvable letter and we submitted
        a response to the FDA’s approvable letter in November 2006. In December 2006,
        the FDA told us that our response was not a complete submission and requested
        that we provide additional analyses and supporting information relating to
        the
        data we submitted in our November response. The FDA also indicated that it
        was
        necessary to provide a complete and accurate presentation of these data,
        which
        had to sufficiently address their safety concerns, including cardiovascular
        safety. We worked with GSK to compile and format the additional data requested
        by the FDA and delivered a revised full response to the FDA in early February
        2007. On August 1, 2007, we received a second approvable letter from the
        FDA for
        Trexima. In that letter, the FDA requested that POZEN further address the
        FDA’s
        concern about the product’s potential for genotoxicity. Together with GSK, we
        met with the FDA in September and filed a response to the second approvable
        letter in October 2007. The submission includes, in addition to a required
        routine Safety Update and revised product labeling, the results of three
        non-clinical (*in vitro*) studies that provide clarifying information
        about the Chinese Hamster Ovary (CHO) assay. has notified us that it considers
        the response to be a complete, Class II response (six months) which could
        result
        in a new decision date of April 15, 2008. In addition, POZEN is conducting
        a
        seven day clinical evaluation of the genotoxic potential of *Trexima* in
        human volunteers in the event the FDA requires this information. Results
        from
        this evaluation are expected to be available during the first quarter of
        2008.
        If these data are submitted to the FDA, the review period, and the time to
        approval, may be extended.
 
 We
        are
        also developing product candidates that combine a type of acid inhibitor,
        a
        proton pump inhibitor (PPI), with an NSAID (our PN program). These product
        candidates are intended to provide management of pain and inflammation
        associated with conditions such as osteoarthritis, and are intended to have
        fewer gastrointestinal complications compared to an NSAID taken
        alone.
  -
            13
            -
 Index
  In
        August
        2006, we entered into an exclusive global collaboration and license agreement
        with AstraZeneca AB (AstraZeneca) to co-develop and commercialize proprietary
        fixed dose combinations of the PPI esomeprazole magnesium with the NSAID
        naproxen, in a single tablet using our PN formulation technology which was
        amended in September 2007. We began the phase 3 program in September 2007.
        As
        part of the program, we are conducting two Phase 3 pivotal trials in patients
        who are at risk for developing NSAID-associated gastric ulcers. In addition,
        we
        are conducting a long-term, open label safety study and a smaller study in
        patients at high risk of gastrointestinal related events from
        NSAIDs.
  Another
        product candidate program (our PA program), a combination of a PPI and aspirin,
        is currently in formulation and clinical development testing. Our PA product
        candidates are excluded under our agreement with AstraZeneca. We have met
        with
        the FDA and confirmed that the development program for PA325 will be similar
        to
        our PN product development program. The objective of the program will be
        to
        establish that patients taking our PA325 product have fewer gastric ulcers
        than
        patients taking enteric coated (EC) 325mg aspirin over the study treatment
        period. An IND is expected to be filed in the fourth quarter of 2007 and
        Phase 3
        studies could begin as early as the first quarter of 2008.
  In
        addition, we are exploring the development of product candidates containing
        lornoxicam, an NSAID that is currently marketed outside the U.S. (including
        Europe and Japan) to treat pain or other pain-related indications. These
        product
        candidates, which are being developed under an exclusive license agreement
        with
        Nycomed Danmark ApS (Nycomed), grant us certain rights to develop and
        commercialize products containing lornoxicam. We have filed Investigational
        New
        Drug Applications (INDs) with the FDA for an oral and an injectable lornoxicam
        formulation.
  We
        are
        also conducting both formulation development and early stage clinical studies
        with new product concepts that are currently in the exploratory stage. If
        warranted, we may file U.S. and international patent applications with claims
        directed toward these novel combinations and formulations.
  We
        have
        incurred significant losses since our inception and have not generated any
        revenue from product sales. As of September 30, 2007, our accumulated deficit
        was approximately $122.9 million. Our historical operating losses have resulted
        principally from our research and development activities, including clinical
        trial activities for our product candidates and general and administrative
        expenses. Research and development expenses include salaries and benefits
        for
        personnel involved in our research and development activities and direct
        development costs, which include costs relating to the formulation and
        manufacturing of our product candidates, costs relating to preclinical studies,
        including toxicology studies, and clinical trials, and costs relating to
        compliance with regulatory requirements applicable to the development of
        our
        product candidates. Since inception, our research and development expenses
        have
        represented 72% of our total operating expenses. For the nine month period
        ended
        September 30, 2007, our research and development expenses represented
        approximately 78% of our total operating expenses.
  Statement
        of
        Financial Accounting Standards Board (SFAS) No. 7, “Accounting and Reporting by
        Development Stage Enterprises,” states that an enterprise shall be considered to
        be in the development stage if either planned principal operations have not
        commenced or planned principal operations have commenced, but there has been
        no
        significant revenue there from. We will remain a development stage company
        until
        such time as significant revenues have been generated from the marketing
        and
        sale of our product candidates.
 
 We
        expect
        that we may continue to incur operating losses over the next several years
        as we
        complete the development and seek regulatory approval for our product
        candidates, develop other product candidates and acquire and develop product
        portfolios in other therapeutic areas. Our results may vary depending on
        many
        factors, including:
  •
              
              The
                  progress of Trexima, our PN and PA product candidates and our other
                  product candidates in the clinical and regulatory process;•
              
              The
                  ability of GSK to successfully launch and market Trexima in the
                  United
                  States;•
              
              The
                  establishment of new collaborations and progress and/or maintenance
                  of our
                  existing collaborations for the development and commercialization
                  of any
                  of our product candidates; and•
              
              The
                  acquisition and/or in-licensing, and development, of other therapeutic
                  product candidates.
   -
            14
            -
 Index
  We
        do not
        currently have commercialization or manufacturing capabilities. We have entered
        into collaborations and currently plan to enter into additional collaborations
        with established pharmaceutical or pharmaceutical services companies to
        commercialize and manufacture our product candidates once approved. Our ability
        to generate revenue is dependent upon our ability, alone or with collaborators,
        to achieve the milestones set forth in our collaboration agreements, to enter
        into additional collaboration agreements, and successfully develop product
        candidates, obtain regulatory approvals and successfully manufacture and
        commercialize our future products. These milestones are earned when we have
        satisfied the criteria set out in our revenue recognition footnote accompanying
        the financial statements included elsewhere in this Quarterly Report on Form
        10-Q. These payments generate large non-recurring revenue that will cause
        large
        fluctuations in quarterly and annual profit and loss.
  **Status
        of Our Product Candidates**
  There
        follows a brief discussion of the status of each of our product candidates,
        as
        well as the costs relating to our development activities. Our research and
        development expenses that are not direct development costs consist of personnel
        and other research and development departmental costs and are not allocated
        by
        product candidate. We do not maintain records that allocate our employees’ time
        by the projects on which they work and, therefore, are unable to identify
        costs
        related to the time that employees spend on research and development by product
        candidate. Total compensation and benefit costs for our personnel involved
        in
        our research and development activities during the nine month period ended
        September 30, 2007 were $4.3 million. Other research and development department
        costs for the nine month period ended September 30, 2007 were $0.3
        million.
  **Trexima**
  In
        June
        2006, we received an approvable letter from the FDA related to the NDA for
        Trexima. An approvable letter is an official notification from the FDA that
        contains conditions that must be satisfied prior to obtaining final U.S.
        marketing approval. The approvable letter reflected that the FDA has determined
        that Trexima is effective as an acute treatment for migraine headaches. The
        FDA
        requested additional safety information on Trexima, some of which required
        new
        studies. After meeting with the FDA in July 2006, we and GSK submitted a
        response to the approvable letter in November 2006 using additional data
        from
        GSK sponsored clinical trials. In December 2006, we received notification
        that
        the response was not yet considered complete. Specifically, the FDA requested
        that we provide additional analyses and supporting information relating to
        the
        data we submitted in our November response. The FDA also indicated that it
        was
        necessary to provide a complete and accurate presentation of these data,
        which
        had to sufficiently address their safety concerns, including cardiovascular
        safety. We worked with GSK to compile and format the additional data requested
        by the FDA and delivered a revised full response to the FDA in early February
        2007. On August 1, 2007, we received a second approvable letter from the
        FDA for
        Trexima. In that letter, the FDA requested that we further address the FDA’s
        concern about the product’s potential for genotoxicity. The companies met with
        the FDA in September and submitted a response in October to the approvable
        letter. The submission includes, in addition to a required routine Safety
        Update
        and revised product labeling, the results of three non-clinical (*in
        vitro*) studies that provide clarifying information about  the
        Chinese Hamster Ovary (CHO) assay. The FDA has notified us that it considers
        the
        response to be a complete, Class II response (six months) which could result
        in
        a new decision date of April 15, 2008.
 
 In
        addition, POZEN is conducting a seven day clinical evaluation of the genotoxic
        potential of *Trexima* in human volunteers in the event the FDA requires
        this information. Results from this evaluation are expected to be available
        during the first quarter of 2008. If these data are submitted to the FDA,
        the
        review period, and the time to approval, may be extended.
 
 As
        part
        of our NDA program for Trexima, we conducted five Phase 1 trials, two Phase
        3
        pivotal trials, and one 12-month open label safety trial using a formulation
        of
        Trexima developed by GSK. The Phase 3 pivotal trials, including the endpoints
        required to evaluate Trexima, were designed to demonstrate superiority to
        placebo for relief of pain and the associated symptoms of migraine (nausea,
        photophobia and phonophobia) at two hours. Additionally, the program was
        designed to demonstrate that each component makes a contribution to the efficacy
        of Trexima (the “combination drug rule” that the FDA requires of all combination
        products). The efficacy endpoint for the combination was sustained pain free,
        which is defined as improvement from moderate or severe pain to no pain at
        two
        hours and remaining at no pain through twenty four hours without the use
        of
        rescue medicine. Further, GSK continues to conduct pre-approval market support
        studies for Trexima under our IND.
  -
            15
            -
 Index
  We
        cannot
        reasonably estimate or know the amount or timing of the costs necessary to
        obtain regulatory approval of Trexima. In the second approvable letter from
        FDA
        for Trexima which we received on August 1, 2007, the FDA requested that POZEN
        further address its concern about the potential implications from one
        preclinical in vitro chromosomal aberration study, one of four standard
        genotoxicity assays, in which genotoxicity was seen for the combination of
        naproxen sodium and sumatriptan. We and GSK met with the FDA to discuss the
        proposed plan for addressing their concerns and we filed a response to the
        approvable letter in October which contains new non-clinical information.
        However, it is unknown whether the non-clinical data submitted will adequately
        address their concerns. Even if the FDA requires and we submit data from
        a
        short-term clinical study of the genotoxic potential of Trexima in human
        volunteers in addition to such non-clinical data, there are no guarantees
        that
        the FDA will find our response to the second approvable letter to be sufficient,
        that additional testing will not be needed to address the FDA’s concerns
        described in the second approvable letter or to address other issues the
        FDA may
        raise in the future, that additional warnings will not be required on the
        product labeling, or that the FDA will approve the NDA. In the event that
        additional clinical trials or other research and development activities are
        required, under our agreement, GSK will be responsible for the costs of such
        additional trials or activities, except for our personnel-related costs.
        Further, we have no assurance that GSK will continue with the development
        of the
        product in the event of additional delays in obtaining marketing
        approval.
  We
        incurred $0.8 million in direct development costs associated with the
        development of MT 400/Trexima for the nine month period ended September 30,
        2007
        and we have incurred $25.3 million from inception to date. Our direct
        development costs do not include the cost of research and development personnel
        or any allocation of our overhead expenses.
  **PN
        Program**
  Under
        our
        PN program, we have completed formulation development and clinical studies
        for
        several combinations of a PPI and an NSAID in a single tablet intended to
        provide effective management of pain and inflammation associated with chronic
        conditions such as osteoarthritis, and intended to have fewer gastrointestinal
        complications compared to an NSAID taken alone in patients at risk for
        developing NSAID associated gastric ulcers. We initially conducted studies
        with
        two PN product formulations in this program - PN 100, a combination of the
        PPI
        lansoprazole and the NSAID naproxen, and PN 200, a combination of the PPI
        omeprazole and naproxen. Our present development and commercialization efforts
        under the PN program are covered under our exclusive collaboration agreement
        with AstraZeneca, which we entered into on August 1, 2006 and was amended
        in
        September 2007. Under our agreement with AstraZeneca, we and AstraZeneca
        are
        co-developing and AstraZeneca will commercialize proprietary fixed dose
        combinations of the PPI esomeprazole magnesium with the NSAID naproxen, in
        a
        single tablet. The initial product to be developed under the agreement, PN
        400,
        is being studied for the management of pain and inflammation associated with
        conditions such as osteoarthritis and rheumatoid arthritis in patients who
        are
        at risk for developing NSAID-associated gastric ulcers. On March 2, 2007,
        we
        filed an IND with the FDA for PN 400 and in April 2007, the initial Phase
        1
        study was initiated.
  In
        discussions with the FDA during 2005 regarding our development plans for
        studies
        to pursue FDA approval of PN 100 and PN 200, the FDA agreed that by including
        naproxen as the NSAID within the PN formulation, we could expect that all
        indications for use of naproxen in adults would accrue to the PN product,
        if
        clinical trials successfully demonstrated improved safety (lower incidence
        of
        gastric ulcers) of the PN product compared with naproxen alone and the PN
        formulation was shown to be bioequivalent to marketed formulations of naproxen.
        Prior to entering into our collaboration agreement with AstraZeneca, we
        completed a study designed to demonstrate the bioequivalence of the naproxen
        component of our PN 200 product candidate development formulation to
        enteric-coated naproxen. This study demonstrated that the PN formulation
        was
        bioequivalent to the reference drug, EC Naprosyn®.
  In
        early
        2006, we submitted a Special Protocol Assessment (SPA) to the FDA for our
        pivotal Phase 3 clinical trials for PN 200. The SPA is a process in which
        the
        FDA provides evaluations and guidance on clinical trial protocols for pivotal
        Phase 3 clinical trials. In April 2006, we announced that we had reached
        an
        agreement with the FDA on the Phase 3 pivotal clinical trials for PN 200
        for the
        treatment of the signs and symptoms of osteoarthritis, rheumatoid arthritis
        and
        ankylosing spondylitis in patients at risk of developing NSAID-associated
        gastric ulcers. We also reached agreement with the FDA that the development
        program and study design proposed for PN 200 would be applicable to a product
        that contained an isomer of omeprazole combined with naproxen. In light of
        our
        collaboration agreement with AstraZeneca, we, along with AstraZeneca have
        met
        with the FDA and confirmed the core development program and the SPA already
        agreed upon do apply to the new product consisting of proprietary fixed dose
        combinations of esomeprazole magnesium with naproxen.
 
 In
        the
        third quarter of 2006, we began recruiting subjects for a six month comparative
        trial of PN 200 as compared to EC naproxen in patients requiring chronic
        NSAID
        therapy. The primary endpoint for the trial is the cumulative incidence of
        gastric ulcers over six months of treatment. Because we will not have final
        results until the fourth quarter of 2007, we, together with AstraZeneca reviewed
        the interim results of this trial prior to commencing Phase 3 studies of
        PN 400
        in September 2007. We are currently conducting two Phase 3 pivotal trials
        in
        patients who are at risk for developing NSAID-associated gastric ulcers.
        In
        addition, we are conducting a long-term, open label safety study and a smaller
        study in patients at high risk of gastrointestinal related events from
        NSAIDs.
  -
            16
            -
 Index
  In
        2005,
        we also had discussions with the FDA concerning the implications of the FDA’s
        guidance issued in June 2005 concerning labeling of NSAID-containing products,
        which resulted from an FDA advisory committee meeting held in February 2005.
        The
        advisory committee addressed the safety of NSAIDs, and, in particular, the
        cardiovascular risks of COX-2 selective NSAIDs. Based on our discussions
        with
        the FDA reviewing division for PN products, we believe that, unless new
        information about naproxen safety concerns becomes available, long-term
        cardiovascular safety studies will not be required at this time for FDA approval
        of our PN product candidates containing naproxen. However, we cannot guarantee
        that such studies will not be required. We will continue to evaluate and
        review
        with the FDA its expectations and recommendations regarding the efficacy
        and
        safety requirements and study design necessary to support approval of NDAs
        for
        our PN and PA product candidates.
 
 Additionally,
        we have met with four national European regulatory agencies to discuss the
        proposed development program for PN. While further clarification will be
        needed,
        based on the intention to develop the esomeprazole combination, further clinical
        studies, beyond those specifically required for the NDA submission in the
        U.S.,
        will likely need to be conducted. In part, these studies will be required
        as the
        naproxen-containing products on the European market differ in strength and
        formulation from those available in the U.S. Under our agreement with
        AstraZeneca, AstraZeneca has responsibility for the development program for
        PN
        outside the United States, including interactions with regulatory
        agencies.
 
 We
        cannot
        reasonably estimate or know the amount or timing of the costs necessary to
        obtain regulatory approval of PN 400. Nor can we reasonably estimate or know
        the
        amount or timing of the costs necessary to continue exploratory development
        and/or complete the development of any PN product candidates we may seek
        to
        develop or when, if and to what extent we will receive cash inflows from
        any PN
        products. The additional costs that may be incurred include expenses relating
        to
        clinical trials and other research and development activities and activities
        necessary to obtain regulatory approvals.
 
 We
        incurred direct development costs associated with the development of our
        PN
        program of $19.4 million for the nine month period ended September 30, 2007
        and
        we have incurred $37.2 million from inception to date, $21.4 million of which
        was funded by development revenue from AstraZeneca. Our direct development
        costs
        do not include the cost of research and development personnel or any allocation
        of our overhead expenses.
  **PA
        Program**
  As
        part
        of our PA program, we are exploring the development of a combination of a
        PPI
        and aspirin in a single tablet. Similar to the PN program, our PA product
        candidate is intended to induce fewer gastrointestinal complications compared
        to
        an aspirin taken alone, in patients at risk for developing aspirin associated
        gastric ulcers. Our PA product candidates are covered under the same patent
        as
        PN but we have retained all rights to this program.
  Our
        initial PA product candidate, PA325, is currently in formulation and early-stage
        clinical development. We completed a Phase I proof of concept study of PA325
        in
        the first quarter of 2007. The primary endpoint was gastrointestinal damage
        as
        measured by the Lanza scoring system used in our previous PN studies. The
        results were highly significant with 10 percent of the PA group having Lanza
        3
        or 4 gastrointestinal damage, whereas 57.5% of the EC aspirin group had this
        level of gastrointestinal damage during the 28 day study. We recently completed
        a second proof of concept study with PA325 as compared to 81 mg of EC aspirin.
        These results confirmed the earlier levels of gastric damage as measured
        by
        Lanza scoring at about 10% for PA325. While these results were numerically
        different, they did not achieve statistical significance from the results
        obtained with 81mg EC aspirin (21%). After reviewing these data, we decided
        to
        increase the dose of omeprazole to 40mg per tablet and conduct an additional
        28
        day phase I study using  the new PA325 (40 mg of immediate release of
        omeprazole and 325 mg of aspirin) tablet compared to 325 mg EC aspirin. Topline
        results from this study indicate a highly significant (P=0.003) reduction
        in GI
        damage with the higher strength PA325 tablet as compared with 325mg EC aspirin
        (2.5% vs 27,5% grade 3 or 4 Lanza scores, respectively). In this last study,
        75%
        of subjects treated with the new PA325 tablet showed no GI damage at all
        as
        compared to < 50% with eth 20mg version of PA325. We met with the FDA in July
        2007 and confirmed that the development program for PA will be similar to
        our PN
        product development program. The objective of the program will be to provide
        a
        safer cardioprotective form of aspirin. To achieve that goal, we must prove
        bioequivalence to EC aspirin to allow Pozen to receive all the cardio- and
        cerebrovascular secondary prevention claims of aspirin and to establish that
        patients taking our PA product have fewer gastric ulcers than patients taking
        EC
        325mg aspirin over the study treatment period. An IND is expected to be filed
        in
        4Q07 and Phase 3 studies could commence as early as the first quarter of
        2008.
  We
        cannot
        reasonably estimate or know the amount or timing of the costs necessary to
        continue exploratory development and/or complete the development of any PA
        product candidates we may seek to develop or when, if and to what extent
        we will
        receive cash inflows from any PA products. The additional costs that may
        be
        incurred include expenses relating to clinical trials and other research
        and
        development activities and activities necessary to obtain regulatory
        approvals.
  -
            17
            -
 Index
  We
        incurred direct development costs associated with the development of our
        PA
        program of $4.9 million during the nine month period September 30, 2007,
        and we
        have incurred $6.7 million from inception to date. Our direct development
        costs
        do not include the cost of research and development personnel or any allocation
        of our overhead expenses.
  **Lornoxicam
        Program**
  We
        have
        conducted development work and clinical studies to investigate the development
        of novel product candidates containing lornoxicam, alone or in combination
        with
        other active ingredients, as potential treatments for pain or other indications.
        Our exploratory and development work is being conducted under an exclusive
        license agreement with Nycomed, pursuant to which Nycomed licensed to us
        certain
        rights to develop and commercialize products containing lornoxicam in the
        U.S.
        As a part of our agreement with Nycomed, we have also granted certain exclusive
        rights to Nycomed to supply us, or our commercialization partners, if any,
        with
        lornoxicam active drug substance for use in the manufacture of any of our
        lornoxicam product candidates.
  Oral
        Tablet Formulation - We filed an IND with the FDA in 2003 for an oral
        lornoxicam tablet formulation and completed our first human study with this
        formulation in 2004 in patients undergoing dental surgery. The data from
        this
        study confirmed the acute safety profile for lornoxicam in these patients
        and
        provided preliminary evidence of efficacy in this pain model. As a result
        of the
        FDA advisory committee meeting held in 2005 addressing the safety and
        cardiovascular risks of NSAIDs, described above, the FDA has indicated that
        long-term cardiovascular safety studies will be required prior to NDA approval
        of new NSAID products that may be used on an intermittent or chronic basis,
        such
        as our oral tablet lornoxicam product candidate.
 
 Injectable
        Formulation - We filed an IND with the FDA for an injectable lornoxicam
        formulation in May 2005, and during 2005 we initiated the first human studies
        with this formulation under our IND. We have completed a Phase 1 pharmacokinetic
        study as well as two Phase 2 studies to evaluate lornoxicam for management
        of
        acute post-operative bunionectomy pain and for management of migraine pain.
        In
        the Phase 2 bunionectomy study, both active doses of lornoxicam were
        significantly better than placebo in the acute management of pain following
        bunionectomy. Based on the results of our Phase 2 migraine study, we currently
        do not intend to pursue the migraine indication.
 
 We
        continue to evaluate the strategic direction of our lornoxicam product
        candidates and the lornoxicam program based on the results of our clinical
        studies, the regulatory environment and commercial opportunities. We cannot
        reasonably estimate or know the amount or timing of the costs necessary to
        continue exploratory development and/or complete the development of any
        lornoxicam product candidates we may seek to develop or when, if and to what
        extent we will receive cash inflows from any lornoxicam products. The additional
        costs that may be incurred include expenses relating to clinical trials and
        other research and development activities and activities necessary to obtain
        regulatory approvals.
  We
        incurred no direct development costs associated with the development of our
        lornoxicam program for the nine month period ended September 30, 2007, and
        we
        have incurred $8.5 million from inception to date. Our direct development
        costs
        do not include the cost of research and development personnel or any allocation
        or our overhead expenses.
  **MT
        100**
  In
        October 2002, we submitted a Market Authorization Application (MAA) for MT
        100
        for the acute treatment of migraine to the Medicines and Healthcare Products
        Regulatory Agency (MHRA) in the United Kingdom (UK). In November 2005, we
        received notification that the MHRA had granted us marketing approval for
        MT 100
        in the UK. In May 2004, we received a not-approvable letter from the FDA
        with
        respect to our NDA for MT 100, our proprietary combination of metoclopramide
        hydrochloride and naproxen sodium. We are exploring the possibility of selling
        or otherwise disposing of the MT 100 asset to a third party, although there
        can
        be no assurance that we will, or will be able to, consummate such a
        transaction.
  We
        are
        not currently conducting and do not plan to conduct any clinical trials for
        MT
        100 and do not expect to incur any additional significant development costs
        related to MT 100. We incurred direct development costs associated with the
        development of MT 100 of $103,200 for the nine month period ended September
        30,
        2007, and we have incurred $39.9 million from inception to date. Our direct
        development costs do not include the cost of research and development personnel
        or any allocation of our overhead expenses.
  -
            18
            -
 Index
  **MT
        300**
  In
        October 2003, we received a not-approvable letter from the FDA related to
        our
        NDA for MT 300, which we had submitted in December 2002. We are not currently
        conducting any clinical trials for MT 300 and do not expect to incur any
        additional significant development costs related to MT 300, nor do we believe
        that we will receive any future cash inflows from MT 300. We incurred direct
        development costs associated with the development of MT 300 of $56,300 for
        the
        nine month period ended September 30, 2007, and we have incurred $14.7 million
        from inception to date. Our direct development costs do not include the cost
        of
        research and development personnel or any allocation of our overhead
        expenses.
  In
        July
        2005, we received a letter from our partner, Valeant NA, seeking payment
        of a
        $1.0 million withdrawal fee required under certain conditions under the
        agreement. Under the agreement, if we determine that additional studies or
        data
        that are required by the FDA for approval of the NDA for MT 300 would jeopardize
        the commercial viability of MT 300 or exceed our financial resources available
        for MT 300, we may elect to withdraw the NDA. If we notify Valeant NA of
        this
        situation and Valeant NA elects not to assume control of efforts to seek
        approval of the NDA, then, under the conditions outlined in the agreement,
        upon
        notice from Valeant NA, the agreement will terminate and we would be required
        to
        pay Valeant NA a termination fee of $1.0 million. If Valeant NA decides to
        assume development, it would be credited $1.0 million in development expense.
        We
        do not believe that the withdrawal fee is payable under the circumstances
        of
        receipt of the not-approvable letter from the FDA. The agreement requires
        that
        unresolved disputes by the parties be referred to the respective chief executive
        officers for resolution. If still unresolved, the agreement provides for
        binding
        arbitration. Valeant NA has disputed our conclusion that the withdrawal fee is
        not payable and has indicated its intention to pursue the dispute resolution
        provisions provided for under the agreement. We can give no assurance that
        Valeant NA will agree to termination terms acceptable to us, or that we will
        not
        be required to pay Valeant NA the withdrawal fee described above.
  **Collaborative
        Arrangements**
  We
        have
        entered into and plan to continue to enter into collaborations with established
        pharmaceutical or pharmaceutical services companies to develop, commercialize
        and/or manufacture our product candidates. Our existing collaborations are
        described below.
  ***GlaxoSmithKline
        (GSK)***
  In
        June
        2003, we signed an agreement with GSK for the development and commercialization
        of proprietary combinations of a triptan (5-HT1B/1D agonist)
        and a
        long-acting NSAID. The combinations covered by the agreement are among the
        combinations of MT 400. Under the terms of the agreement, GSK has exclusive
        rights in the U.S. to commercialize all combinations which combine GSK’s
        triptans, including Imitrex® (sumatriptan
        succinate) or Amerge® (naratriptan
        hydrochloride), with a long-acting NSAID. We were responsible for development
        of
        the first combination product, while GSK provided formulation development
        and
        manufacturing. GSK had proposed Trexima as the brand name of the combination
        of
        sumatriptan succinate, formulated with GSK’s RT TechnologyTM, and
        naproxen
        sodium in a single tablet, but this brand name was not acceptable to the
        FDA.
        The Company and GSK have submitted alternative trade names to FDA, which
        are
        currently under consideration. Pending a final decision on a new name, the
        product will still be referred to as Trexima. Pursuant to the terms of the
        agreement, we received $25.0 million in initial payments from GSK following
        termination of the waiting period under the Hart-Scott-Rodino notification
        program and the issuance of a specified patent. In May 2004, we received
        a $15.0
        million milestone payment as a result of our commencement of Phase 3 clinical
        trial activities. In October 2005, we received a $20.0 million milestone
        payment
        upon the FDA’s acceptance for review of the Trexima NDA. Additionally, GSK is
        obligated to make payments to us in a total amount of $20.0 million upon
        FDA
        approval of the Trexima NDA and GSK’s notification of intent to commercialize
        Trexima. In addition, GSK will pay us two sales performance milestones totaling
        $80.0 million if certain sales thresholds are achieved. Up to an additional
        $10.0 million per product is payable upon achievement of milestones relating
        to
        other products. GSK will also pay us royalties on all net sales of marketed
        products until at least the expiration of the last to expire issued applicable
        patent (August 14, 2017 based upon the scheduled expiration of currently
        issued
        patents). GSK may reduce, but not eliminate, the royalty payable to us if
        generic competitors attain a pre-determined share of the market for the
        combination product, or if GSK owes a royalty to one or more third parties
        for
        rights it licenses from such third parties to commercialize the product.
        The
        agreement terminates on the date of expiration of all royalty obligations
        unless
        earlier terminated by either party for a material breach or by GSK at any
        time
        upon ninety (90) days’ written notice to us for any reason or no reason. Among
        the contract breaches that would entitle us to terminate the agreement is
        GSK’s
        determination not to further develop or to launch the combination product
        under
        certain circumstances. GSK has the right, but not the obligation, to bring,
        at
        its own expense, an action for infringement of certain patents by third parties.
        If GSK does not bring any such action within a certain time frame, we have
        the
        right, at our own expense, to bring the appropriate action. With regard to
        certain other patent infringements, we have the sole right to bring an action
        against the infringing third party. Each party generally has the duty to
        indemnify the other for damages arising from breaches of each party’s
        representations, warranties and obligations under the agreement, as well
        as for
        gross negligence or intentional misconduct. We also have a duty to indemnify
        GSK
        for damages arising from our development and manufacture of MT 400 prior
        to the
        effective date of the agreement, and each party must indemnify the other
        for
        damages arising from the development and manufacture of any combination product
        after the effective date.
  -
            19
            -
 Index
  ***AstraZeneca
          AB (AstraZeneca)***
  In
        August
        2006, we entered into a collaboration and license agreement dated as of August
        1, 2006 and effective September 7, 2006 with AstraZeneca, a Swedish corporation,
        regarding the development and commercialization
        of****proprietary fixed dose combinations of the PPI
        esomeprazole magnesium with the NSAID naproxen, in a single tablet for the
        management of pain and inflammation associated with conditions such as
        osteoarthritis and rheumatoid arthritis in patients who are at risk for
        developing NSAID associated gastric ulcers. Under the terms of the agreement,
        we
        granted to AstraZeneca an exclusive, fee-bearing license, in all countries
        of
        the world except Japan, under our patents and know-how relating to combinations
        of gastroprotective agents and NSAIDs (other than aspirin and its derivatives).
        AstraZeneca may, at no additional cost, elect to include Japan in the licensed
        territory within two years after the effective date of the agreement. Pursuant
        to the terms of the agreement, we received an upfront license fee of $40
        million
        from AstraZeneca following termination of the waiting period under the
        Hart-Scott-Rodino notification program.
 
 In
        September 2007, we agreed with AstraZeneca to amend our collaboration and
        license agreement effective as of September 6, 2007. Under the terms of the
        amendment, AstraZeneca has agreed to pay us up to $345 million, in the
        aggregate, in milestone payments upon the achievement of certain development,
        regulatory and sales events. We received an immediate $30 million payment
        in September 2007, which included a $10 million payment upon execution of
        the
        Amendment and a $20 million payment in recognition of the achievement of
        successful proof of concept. An additional $55 million will be paid upon
        achievement of certain development and regulatory milestones, and $260 million
        will be paid as sales performance milestones if certain aggregate sales
        thresholds are achieved. Under the original agreement, we were to have received
        development and regulatory milestones totaling $160 million, of which $20
        million was to be paid upon the successful completion of the proof of concept
        studies, and sales performance milestones totaling $175 million.
 
 In
        addition, the amendment revised the royalty rates we are to have received
        under
        the original agreement. Under the original agreement, we were to receive a
        royalty based on annual net sales by AstraZeneca, its affiliates or sublicensees
        during the royalty term. The royalty rate varied based on the level of annual
        net sales of products made by AstraZeneca, its affiliates and sublicensees,
        ranging from the mid-single digits to the mid-teens. Under the Amendment,
        we
        will now receive a flat, low double digit royalty rate during the royalty
        term
        on annual net sales of products made by AstraZeneca, its affiliates and
        sublicensees, in the United States and royalties ranging from the mid-single
        digits to the high-teens on annual net sales of products made by AstraZeneca,
        its affiliates and sublicensees outside of the United States. The amendment
        also
        revises the rate of reduction to the royalty rate based upon loss of market
        share due to generic competition inside and outside of the United States
        to
        account for the new royalty structure.
 
 Our
        right
        to receive royalties from AstraZeneca for the sale of such products expires
        on a
        country-by-country basis upon the later of (a) expiration of the last-to-expire
        of certain patent rights relating to such products in that country, and (b)
        ten
        years after the first commercial sale of such products in such
        country.
 
 We
        retain responsibility for the
        development and filing of the New Drug Application (NDA) for the product
        in the
        U.S. AstraZeneca is responsible for all development activities outside the
        U.S.,
        as well as for all manufacturing, marketing, sales and distribution activities
        worldwide. We have agreed to bear all expenses related to certain specified
        U.S.
        development activities. All other development expenses, including all
        manufacturing-related expenses, will be paid by AstraZeneca. The agreement
        established joint committees with representation of both us and AstraZeneca
        to
        manage the development and commercialization of the product. The committees
        operate by consensus, but if consensus cannot be reached, we generally will
        have
        the deciding vote with respect to development activities required for marketing
        approval of the product in the U.S. and AstraZeneca generally will have the
        deciding vote with respect to any other matters.
 
 The
        agreement, unless earlier
        terminated, will expire upon the payment of all applicable royalties for
        the
        products commercialized under the agreement. Either party has the right to
        terminate the agreement by notice in writing to the other party upon or after
        any material breach of the agreement by the other party, if the other party
        has
        not cured the breach within 90 days after written notice to cure has been
        given,
        with certain exceptions. The parties also can terminate the agreement for
        cause
        under certain defined conditions. In addition, AstraZeneca can terminate
        the
        agreement at will, for any reason or no reason, in its entirety or with respect
        to countries outside the U.S., upon 90 days’ notice. If terminated at will,
        AstraZeneca will owe us a specified termination payment or, if termination
        occurs after the product is launched, AstraZeneca may, at its option, under
        and
        subject to the satisfaction of conditions specified in the agreement**,**elect to transfer the product and all rights to us.
  -
            20
            -
 Index
  ***Valeant
        Pharmaceuticals North American (Valeant NA) (formerly Xcel Pharmaceuticals
        Inc.)***
  In
        September 2003, we signed an agreement with Valeant NA for the further
        development and commercialization of MT 300. In March 2005, Valeant
        Pharmaceuticals International (Valeant International) acquired Valeant NA.
        Under
        the terms of the agreement, Valeant NA would have exclusive rights in the
        United
        States to commercialize MT 300 subject to certain minimum commercialization
        obligations. Pursuant to the terms of the agreement, Valeant NA paid us an
        upfront fee of $2.0 million. Upon certain future regulatory approvals, including
        the FDA’s approvals relating to MT 300, and the achievement of a predetermined
        sales threshold on MT 300, potential milestone payments of up to $8.0 million
        would be due. Valeant NA is also obligated to pay us royalties on all combined
        net sales of MT 300 and Valeant NA’s D.H.E. 45® (dihydroergotamine
        mesylate) Injection, upon commercialization of MT 300, until at least the
        expiration of the last to expire issued applicable patent (2020, based upon
        the
        scheduled expiration of the last to expire currently issued applicable patent),
        subject to reduction in certain instances of generic competition, or in the
        event that Valeant NA pays royalties to one or more third parties to license
        rights from such third parties to commercialize MT 300. The agreement terminates
        on the date of expiration of all royalty obligations (2020, based upon the
        scheduled expiration of the last to expire currently issued applicable patent)
        unless earlier terminated by either party for a material breach or in the
        event
        that either party determines not to pursue approval of MT 300, under the
        conditions described below. Under certain circumstances, the agreement provides
        for the terminating party to facilitate the assumption of its responsibilities
        by the non-terminating party. Generally, each party must indemnify the other
        for
        damages arising from such party’s breach of its representations, warranties and
        obligations under the agreement, as well as for the gross negligence or willful
        misconduct by either party. Additionally, Valeant NA must indemnify us for
        damages arising from the development, manufacture or use of any product after
        the effective date of the agreement, while we must indemnify Valeant NA for
        any
        damages arising from such development, manufacture or use prior to the effective
        date. We must also indemnify Valeant NA for any use by us or any sub licensee
        of
        certain technology owned by Valeant NA.
  Under
        the
        agreement, if we determine that additional studies or data that are required
        by
        the FDA for approval of the NDA for MT 300 would jeopardize the commercial
        viability of MT 300 or exceed our financial resources available for MT 300,
        we
        may elect to withdraw the NDA. If we notify Valeant of this situation and
        Valeant NA does not assume control of efforts to seek approval of the NDA,
        then,
        under the conditions outlined in the agreement, upon notice from Valeant
        NA the
        agreement will terminate and we would be required to pay Valeant NA a withdrawal
        fee of $1.0 million. If Valeant decides to assume development, it would be
        credited $1.0 million in development expense. Based upon our understandings
        from
        our most recent communications with the FDA and our understanding of the
        FDA’s
        current standards for approval of migraine drugs, we believe it is not possible
        to reverse the not approvable status of the NDA for MT 300 and we have begun
        discussions regarding termination of our commercialization agreement with
        Valeant NA. In July 2005, we received a letter from Valeant NA seeking payment
        of the $1.0 million withdrawal fee. We do not believe that the withdrawal
        fee is
        payable based on our receipt of a not-approvable letter from the FDA with
        respect to our NDA for MT 300. The agreement requires that unresolved disputes
        by the parties be referred to the respective chief executive officers for
        resolution. If still unresolved, the agreement provides for binding arbitration.
        Valeant NA has disputed our conclusion that the withdrawal fee is not payable
        and has indicated its intention to pursue the dispute resolution provisions
        provided for in the agreement. We intend to vigorously defend our position
        under
        the agreement. At this time, it is not possible to determine if any withdrawal
        fee will be required to be paid to Valeant NA upon the ultimate resolution
        of
        this dispute.
  Based
        upon the delays related to commercialization of MT 300 due to our receipt
        of the
        not-approvable letter for MT 300 and our efforts to address with the FDA
        the
        issues raised in that letter, we and Valeant NA had previously agreed to
        extend
        the time for certain activities under our agreement with Valeant NA that
        are
        dependent on the FDA’s actions with respect to MT 300. In the event of
        termination of the agreement, these obligations will not be relevant. We
        can
        give no assurance that Valeant NA or Valeant International will agree to
        termination terms acceptable to us or that we will not be required to pay
        Valeant NA the withdrawal fee of $1.0 million described above.
  **Results
        of Operations**
  ***Three
        months ended September 30, 2007 compared to the three months ended September
        30,
        2006***
  *Net
        profit/( loss) per share*: Net profit attributable to common stockholders
        for the three months ended September 30, 2007 was $14.8 million or $0.48
        per
        share, on a diluted basis, as compared to a net loss of $(4.1) million, or
        $(0.14) per share, on a diluted basis, for the three months ended September
        30,
        2006. The net profit for the three month period ended September 30, 2007
        included a $0.4 million or $0.01 per share charge for non-cash stock-based
        compensation expense as compared to $1.5 million, or $(0.05) per share for
        the
        same period of 2006. The Company reversed $1.0 million of previously expensed
        stock-based compensation in September 2007 for which the vesting is contingent
        on the FDA approval of Trexima by December 31, 2007.
  -
            21
            -
 Index
  *Revenue*:
        We recognized $27.6 million of revenue for the three months ended September
        30,
        2007 as compared to $3.4 million for the three months ended September 30,
        2006.
        The increase in revenue was primarily due to a $30.0 million payment received
        from AstraZeneca for the PN 400 program, of which $20.0 million was recognized
        as a milestone payment and $10.0 million was deferred in accordance with
        our
        development and commercialization agreement. Our licensing and collaboration
        agreements have terms that include upfront payments upon contract signing
        and
        additional payments if and when certain milestones in product development
        or
        related activities are achieved. All upfront payments were deferred and the
        non-refundable portions are being amortized over the periods ending on the
        anticipated dates of regulatory approvals, as specified in the agreements
        relating to the product candidates,or the conclusion
        of any
        obligation on our part. Approximately $38.3 million remains in deferred revenue
        at September 30, 2007. Substantive milestone payments are recognized as revenue
        upon completion of the contractual events.
  *Research
        and development*: Research and development expenses increased by $5.4
        million to $9.7 million for the three months ended September 30, 2007, as
        compared to the same period of 2006. The increase was due primarily to an
        increase in direct development costs for PN and PA program activities, as
        compared to the same period of 2006. Direct development costs for the PN
        program
        increased by $3.7 million to $5.8 million, primarily due to Phase 3 clinical
        trial activities and other PN product development activities pursuant to
        the
        AstraZeneca agreement during the third quarter of 2007, as compared to the
        same
        period of 2006. Direct development costs for the PA program increased by
        $2.1
        million to $2.2 million during the third quarter of 2007, as compared to
        the
        same period of 2006. Other direct development costs and departmental expenses
        decreased by $0.6 million primarily due to lower personnel costs, including
        reduced non-cash stock based compensation expense, as compared to the same
        period of 2006. We have included in our research and development total expenses
        the departmental personnel costs associated with our research and development
        activities and direct costs associated with pharmaceutical development, clinical
        trials, toxicology activities, and regulatory matters.
 
 *General
        and administrative*: General and administrative expenses decreased by $1.5
        million to $2.2 million for the three months ended September 30, 2007, as
        compared to the same period of 2006. The decrease was due primarily to a
        reduction in personnel related expenses, including the reversal of previously
        expensed stock-based compensation expense related to the Trexima incentive
        program, as compared to the same period of 2006. General and administrative
        expenses consisted primarily of the costs of administrative personnel, facility
        infrastructure, business development expenses and public company
        activities.
 
 *Other
        income*: Interest income was $0.2 million for the three months ended
        September 30, 2007 and $0.3 million for the three months ended September
        30,
        2006. Investment income from bond amortization for the three month period
        ended
        September 30, 2007 totaled $0.6 million as compared to $0.1 million during
        the
        same period of 2006.
  ***Nine
        months ended September 30, 2007 compared to the nine months ended September
        30,
        2006***
  *Net
        profit/( loss) per share*: Net profit attributable to common stockholders
        for the nine months ended September 30, 2007 was $8.9 million or $0.29 per
        share, on a diluted basis, as compared to a net loss of $(18.9) million,
        or
        $(0.65) per share, on a diluted basis, for the nine months ended September
        30,
        2006. The net profit for the nine months ended September 30, 2007 included
        a
        $2.9 million or ($0.09) per share charge for non-cash stock-based compensation
        expense as compared to $4.7 million, or $(0.15) per share for the same period
        of
        2006.
  *Revenue*:
        We recognized $47.2 million of revenue for the nine months ended September
        30,
        2007 as compared to $6.5 million for the nine months ended September 30,
        2006.
        The increase in revenue was primarily due to a $30.0 million payment received
        from AstraZeneca for the PN 400 program, of which $20.0 million was recognized
        as a milestone payment, and a $4.1 million increase in the amortization of
        upfront payments we received and a $16.6 million increase in other revenue
        from
        development activities we completed in the period pursuant to our development
        and commercialization agreements with AstraZeneca and GSK. Our licensing
        and
        collaboration agreements have terms that include upfront payments upon contract
        signing and additional payments if and when certain milestones in product
        development or related activities are achieved. All upfront payments were
        deferred and the non-refundable portions are being amortized over the periods
        ending on the anticipated dates of regulatory approvals, as specified in
        the
        agreements relating to the product candidates,or the conclusion
        of any
        obligation on our part. Approximately $38.3 million remains in deferred revenue
        at September 30, 2007. Substantive milestone payments are recognized as revenue
        upon completion of the contractual events.
   -
            22
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 Index
  *Research
        and development*: Research and development expenses increased by $14.2
        million to $30.6 million for the nine months ended September 30, 2007, as
        compared to the same period of 2006. The increase was due primarily to an
        increase in direct development costs for PN and PA program activities, partially
        offset by a decrease in direct development costs for the lornoxicam program,
        as
        compared to the same period of 2006. Direct development costs for the PN
        program
        increased by $12.9 million to $19.4 million, primarily due to Phase 3 clinical
        trial activities and other PN product development activities pursuant to
        the
        AstraZeneca agreement during the nine months ended September 30, 2007, as
        compared to the same period of 2006. Direct development costs for the PA
        program
        increased to $4.9 million during the nine months ending September 30, 2007,
        as
        compared to the same period of 2006. Direct development costs for the lornoxicam
        program decreased by $3.4 million primarily due to Phase I/II clinical trial
        activities during the nine months ending September 30, 2006. Other direct
        development costs and departmental expenses decreased by $1.1 million primarily
        due to a reduction in personnel costs including reductions in non-cash stock
        based compensation expense, as compared to the same period of 2006. We have
        included in our research and development total expenses the departmental
        personnel costs associated with our research and development activities and
        direct costs associated with pharmaceutical development, clinical trials,
        toxicology activities, and regulatory matters.
 
 *General
        and administrative*: General and administrative expenses decreased by $2.0
        million to $8.4 million for the nine months ended September 30, 2007, as
        compared to the same period of 2006. The decrease was due primarily to a
        reduction in non-cash stock based compensation expense, as a result of the
        reversal of previously expensed stock-based compensation expense related
        to the
        Trexima incentive program, and a decrease in public company legal expenses
        as
        compared to the same period of 2006. General and administrative expenses
        consisted primarily of the costs of administrative personnel, facility
        infrastructure, business development expenses and public company
        activities.
 
 *Other
        income*: Interest income was $0.9 million for the nine months ended
        September 30, 2007 as compared to $0.7 million for the nine months ended
        September 30, 2006. Investment income from bond amortization for the nine
        month
        period ended September 30, 2007 totaled $1.4 million as compared to $0.6
        million
        during the same period of 2006.
  **Income
        Taxes**
  We
          estimate an annual effective tax rate of 15.6% for the year ended December
          31,
          2007 based upon financial results and annual forecasts available at September
          30, 2007. Our effective tax rate is 15.6% for the nine month period ended
          September 30, 2007. Although we have significant loss carryforwards, we
          project
          that we will be subject to Alternative Minimum Tax in 2007.  Based
          upon the company’s historic losses, management has recorded a valuation
          allowance on the net deferred tax assets.  Accordingly, the company
          has not recognized a deferred tax benefit in the current year associated
          with
          the projected AMT credit generated.  The actual effective rate may
          vary depending upon actual licensing fees and milestone payments received,
          specifically the pre-tax book income for the year, and other factors. Income
          taxes have been accounted for using the liability method in accordance
          with SFAS
          109, “Accounting for Income Taxes.” Since our inception, we have incurred
          substantial losses and may incur substantial and recurring losses in future
          periods. The Tax Reform Act of 1986 (the “Act”) provides for a limitation on the
          annual use of net operating loss and research and development tax credit
          carry
          forwards (following certain ownership changes, as defined by the Act) that
          could
          limit our ability to utilize these carry forwards. We have experienced
          various
          ownership changes, as defined by the Act, as a result of, among other reasons,
          past financings. Accordingly, our ability to utilize the aforementioned
          carry
          forwards may be limited. Additionally, because tax laws limit the time
          during
          which these carry-forwards may be applied against future taxes, we may
          not be
          able to take full advantage of these carry-forwards for federal income
          tax
          purposes.
 
 We
          currently file income tax returns in the U.S. federal jurisdiction, and
          the
          state of North Carolina. We are no longer subject to federal or North Carolina
          income tax examinations by tax authorities for years before 2003. However,
          the
          loss carryforwards generated from 1996 through 2002 are subject to change,
          if we
          subsequently begin utilizing these losses in a year that is open under
          statute
          and subject to federal or North Carolina income tax examinations by tax
          authorities.
 
 We
          adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
          in Income Taxes (“FIN 48”), on January 1, 2007 and as a result, there were no
          material impacts to the financial statements.
 
 We
          recognize any interest and penalties accrued related to unrecognized tax
          benefits as income tax expense. During the nine-month periods ended September
          30, 2007 and 2006, there were no such interest and penalties.
  -
              23
              -
 Index
  **Liquidity
        and Capital Resources**
  Since
        our
        inception, we have financed our operations and internal growth primarily
        through
        private placements of preferred stock and our initial public offering, resulting
        in cash inflows of $133.9 million. Since 2003, we have received $102.5 million
        from upfront and milestone payments from our collaborators. Additionally,
        since
        August 2006, we have received $9.0 million for development activities pursuant
        to the terms of our agreement with AstraZeneca. At September 30, 2007, cash
        and
        cash equivalents, along with short-term investments, totaled $78.8 million,
        an
        increase of $16.2 million compared to December 31, 2006. The increase in
        cash
        was primarily due to the $30 million payment received from AstraZeneca. Expenses
        for the period were also offset in part by cash receipts for development
        activities received from AstraZeneca pursuant to our PN collaboration agreement.
        There is a $4.3 million accounts receivable from AstraZeneca at September
        30,
        2007. Our cash is invested in money market funds that invest primarily in
        short-term, highly rated investments, including U.S. Government securities,
        commercial paper and certificates of deposit guaranteed by banks and short-term
        corporate fixed income obligations and U.S. Government agency
        obligations.
  We
        received $15.5 million in operating cash during the nine months ended September
        30, 2007 pursuant to the terms of our collaboration agreement with AstraZeneca.
        In addition, our balance sheet includes $4.3 million in accounts receivable
        for
        invoiced development activities under the terms of the AstraZeneca agreement.
        Cash received from financing activities during the period totaled $2.1 million,
        reflecting net proceeds from the exercise of stock options.
  Based
        upon the indirect method of presenting cash flow, as used in the Statement
        of
        Cash Flows included in our financial statements, cash provided by operating
        activities totaled $12.6 million for the nine months ended September 30,
        2007.
        Cash provided by operating activities was $13.1 million for the fiscal year
        ended December 31, 2006 and $6.7 million cash was used in operating activities
        for the fiscal year ended December 31, 2005. Net cash provided by investing
        activities during the nine months ended September 30, 2007 totaled $6.5 million,
        reflecting investing activities associated with the sale of short-term
        securities. These holdings were reinvested in securities with maturities
        of
        three months or less and are classified on our balance sheet as cash and
        cash
        equivalents.
  As
        of
        September 30, 2007, we had $47.6 million in cash and cash equivalents and
        $31.2
        million in short-term investments. Our operating expenses for 2007 and 2008
        are
        expected to increase from the level of our operating expenses in 2006. However,
        we believe that we will have sufficient cash reserves to maintain that level
        of
        business activities through 2008 provided that certain development expenses
        are
        paid by AstraZeneca, as outlined in the agreement.
  As
        part
        of our ongoing assessment of our business and liquidity needs, we regularly
        assess available funding options and will consider available funding
        opportunities as they arise. We may sell shares of common stock in the future
        to
        fund additional development activities and increase our working capital.
        We have
        filed with the Securities and Exchange Commission (SEC), and the SEC has
        declared effective, a shelf registration statement on Form S-3 under which
        we
        may register up to 8,540,000 shares of our common stock for sale in one or
        more
        public offerings. Certain selling stockholders named in the prospectus for
        the
        registration statement may offer up to an aggregate of 540,000 of such shares,
        and we will not receive any of the proceeds from the sales of shares made
        by the
        selling stockholders. Any additional equity financing may be dilutive to
        stockholders, and debt financing, if available, may involve restrictive
        covenants.
  Our
        forecast of the period of time through which we expect that our financial
        resources will be adequate to support our operations is a forward-looking
        statement that involves risks and uncertainties, and actual results could
        vary
        as a result of a number of factors. Our future capital requirements will
        depend
        on many factors, including:
  ·
              the
                  number and progress of our clinical trials and other trials and
                  studies;
  ·
              our
                  success, or any delays, in obtaining, and any delays in obtaining,
                  regulatory approval of our product candidates and success in, and
                  manner
                  of, commercializing our products;
  ·
              the
                  success of our existing collaborations and our ability to establish
                  additional collaborations;
  ·
              the
                  extent to which we acquire or invest in businesses, technologies
                  or
                  products;
  ·
              costs
                  incurred to enforce and defend our patent claims and other intellectual
                  rights; and
  ·
              our
                  ability to negotiate favorable terms with various contractors assisting
                  in
                  our trials and studies.
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            24
            -
 Index
  **Item
        3. Quantitative and Qualitative Disclosures About Market
        Risk**
  The
        proceeds from our initial public offering and, private placements and revenue
        from our collaboration agreements have been invested, in accordance with
        our
        investment policy, in money market funds that invest primarily in short-term,
        highly-rated investments, including U.S. Government securities, commercial
        paper
        and certificates of deposit guaranteed by banks and short-term corporate
        fixed
        income obligations and U.S. Government and Government agency obligations.
        Under
        our current policies, we do not use interest rate derivative instruments
        to
        manage our exposure to interest rate changes. Because of the short-term
        maturities of our investments, we do not believe that a decrease in market
        rates
        would have a significant negative impact on the value of our investment
        portfolio.
  **Item
        4. Controls and Procedures**
  (a)
        Evaluation of Disclosure Controls and Procedures
  Our
        management, with the participation of our chief executive officer and chief
        financial officer, evaluated the effectiveness our disclosure controls and
        procedures as of the end of the period covered by this report. Based on that
        evaluation, our chief executive officer and chief financial officer concluded
        that our disclosure controls and procedures as of the end of the period covered
        by this report were designed and functioning effectively to provide reasonable
        assurance that the information required to be disclosed by us in reports
        filed
        under the Securities Exchange Act of 1934 is recorded, processed, summarized
        and
        reported within the time periods specified in the SEC’s rules and forms and
        accumulated and communicated to our management, including our chief executive
        officer and chief financial officer, as appropriate to allow timely decisions
        regarding disclosures. We believe that a controls system, no matter how well
        designed and operated, cannot provide absolute assurance that the objectives
        of
        the controls system are met, and no evaluation of controls can provide absolute
        assurance that all control issues and instances of fraud, if any, within
        a
        company have been detected.
  (b)
        Change in Internal Control over Financial Reporting
  No
        change
        in our internal control over financial reporting occurred during our most
        recent
        fiscal quarter that has materially affected, or is reasonably likely to
        materially affect, our internal control over financial reporting.
  **PART
        II. OTHER INFORMATION**
  **Item
        1. Legal Proceedings**
 
 Five
        purported class action lawsuits
        were filed during 2004 by holders of our securities against us and certain
        of
        our current and former officers, in the U. S. District Court for the Middle
        District of North Carolina, alleging violations of securities laws. These
        actions were filed as a single consolidated amended complaint on December
        20,
        2004. The amended complaint alleged, among other claims, violations of federal
        securities laws, including Section 10(b) of the Securities Exchange Act of
        1934,
        as amended (the "Exchange Act"), and Rule 10b-5 and Section 20(a) of the
        Exchange Act against us and Dr. John R. Plachetka, our chairman and chief
        executive officer, arising out of allegedly false and misleading statements
        made
        by us concerning our product candidates, MT 100 and MT 300, during the class
        period. On July 10, 2007 we announced that we had reached an agreement to
        amicably settle the consolidated class action lawsuit. All claims against
        us and
        Dr. Plachetka will be dismissed in their entirety without admission of liability
        or wrongdoing by any party. The settlement agreement, which was granted
        preliminary approval by the court on October 2, 2007, will be funded entirely
        with proceeds from our directors and officers’ liability insurance and it is the
        current judgment of management that it is unlikely that this litigation will
        have a material adverse effect on our results of operations, financial condition
        or cash flows.
  A purported
        class action lawsuit claiming violations of securities
        laws  was filed  on August 10,  2007 in the
        U.S. District Court for the Middle District of North Carolina by  a
 holder of our securities against us, our chairman and chief executive
        officer and one of our directors. The complaint alleges, among other claims,
        violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange
        Act
        arising out of allegedly false and misleading statements made by the Company
        concerning its migraine drug candidate, Trexima, during the purported class
        period, July 31, 2006 through August 1, 2007. The Company and the individual
        defendants believe that the plaintiff's allegations are without merit, and
        intend to defend these claims vigorously.
  As
        with
        any litigation proceeding, we cannot predict with certainty the eventual
        outcome
        of the pending class action lawsuit described above. Furthermore, we will
        have
        to incur expenses in connection with this lawsuit, which may be substantial.
        In
        the event of an adverse outcome, our business could be materially harmed.
        Moreover, responding to and defending the pending litigation will result
        in a
        significant diversion of management’s attention and resources and an increase in
        professional fees.
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            25
            -
 Index
  **Item
          1A. Risk Factors**
  Described
        below are various risks and
        uncertainties that may affect our business. These risks and uncertainties
        are
        not the only ones we face. You should recognize that other significant risks
        and
        uncertainties may arise in the future, which we cannot foresee at this time.
        Also, the risks that we now foresee might affect us to a greater or different
        degree than expected. Certain risks and uncertainties, including ones that
        we
        currently deem immaterial or that are similar to those faced by other companies
        in our industry or business in general, may also affect our business. If
        any of
        the risks described below actually occur, our business, financial condition
        or
        results of operations could be materially and adversely affected.
  ***Risks
        Related to Our Business***
  **We
        depend heavily on the success of our product candidates, which may never
        be
        approved for commercial use. If we are unable to develop, gain approval of
        or
        commercialize those product candidates, we will never receive revenues from
        the
        sale of our product candidates.**
  We
        anticipate that for the foreseeable future our ability to achieve profitability
        will be dependent on the successful development, approval and commercialization
        of our current product candidates. Many factors could negatively affect our
        ability to obtain regulatory approval for our product candidates. For example,
        in June 2006 we received an approvable letter relating to our NDA for Trexima,
        in which the FDA requested additional safety information on Trexima, some
        of
        which required new studies. We submitted a full response to the FDA’s approvable
        letter in November 2006. In December 2006, the FDA told us the full response
        was
        not a complete submission and requested that we provide additional analyses
        and
        supporting information relating to the data we submitted in our November
        response. The FDA also indicated that it is necessary to provide a complete
        and
        accurate presentation of these data, which had to sufficiently address their
        safety concerns, including cardiovascular safety. We worked with GSK to compile
        and format the additional data requested by the FDA and delivered a revised
        full
        response to the FDA in early February 2007. On August 1, 2007, we received
        a
        second approvable letter from the FDA for Trexima. In that letter, the FDA
        requested that POZEN further address the FDA’s concern about the product’s
        potential for genotoxicity. The companies met with the FDA in September and
        filed a response to the second approvable letter in October 2007. The FDA
        has notified us that it considers the response to be a complete, Class II
        response (six months) which could result in a new decision date of April
        15, 2008. In addition, POZEN is conducting a seven day clinical evaluation
        of
        the genotoxic potential of *Trexima* in human volunteers in the event the
        FDA requires this information. Results from this evaluation are expected
        to be
        available during the first quarter of 2008. If these data are submitted to
        the
        FDA, the review period, and the time to approval, may be extended. There
        are no
        guarantees that the FDA will find our response to the second approvable letter
        to be sufficient, that further testing in addition to the short-term study
        in
        human volunteers we are conducting will not be needed to address the FDA’s
        concerns described in the second approvable letter or to address other issues
        the FDA may raise in the future, that additional warnings will not be required
        on the product labeling, or that the FDA will approve the NDA. In the event
        that
        additional clinical trials or other research and development activities are
        required, under our agreement, GSK will be responsible for the costs of such
        additional trials or activities, except for our personnel-related costs.
        Further, we have no assurance that GSK will continue with the development
        of the
        product in the event of additional delays in obtaining marketing
        approval.
  In
        addition to the inability to obtain regulatory approval, many other factors
        could negatively affect the success of our efforts to develop and commercialize
        our product candidates, including those discussed in the risk factors that
        follow as well as negative, inconclusive or otherwise unfavorable results
        from
        any studies or clinical trials, such as those that we obtained with respect
        to
        MT 500, which led to our decision to discontinue development of that product
        candidate in 2002.
  **We
        have incurred losses since inception and we may continue to incur losses
        for the
        foreseeable future. We do not have a current source of product
        revenue.**
  We
        have
        incurred significant losses since our inception. As of September 30, 2007,
        we
        had an accumulated deficit of approximately $122.9 million. Our ability to
        receive product revenue from the sale of products is dependent on a number
        of
        factors, principally the development, regulatory approval and successful
        commercialization of our product candidates. We expect that the amount of
        our
        operating losses will fluctuate significantly from quarter to quarter
        principally as a result of increases and decreases in our development efforts
        and the timing of payments that we may receive from others. We expect to
        continue to incur significant operating losses and do not know when, if and
        to
        what extent we will generate product revenue.
  Our
        only
        current potential sources of revenue are the payments that we may receive
        pursuant to our collaboration agreements with GSK and AstraZeneca. Our remaining
        milestone payments under our collaboration agreement with GSK related to
        Trexima
        are payable upon FDA approval and notification of GSK’s intent to commercialize
        Trexima, receipt of which will be delayed as a result of our receipt of a
        second
        approvable letter for the product on August 1, 2007. Further, we may have
        to pay
        Valeant NA a $1.0 million withdrawal fee if we do not prevail in our current
        dispute with them as to whether the withdrawal fee is payable. This amount
        is
        currently reflected in our financial statements as deferred revenue and will
        never be recognized as revenue if repaid.
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            26
            -
 Index
  **Changes
        in regulatory approval policy or statutory or regulatory requirements, or
        in the
        regulatory environment, during the development period of any of our product
        candidates may result in delays in the approval, or rejection, of the
        application for approval of one or more of our product candidates. If we
        fail to
        obtain approval, or are delayed in obtaining approval, of our product
        candidates, our ability to generate revenue will be severely
        impaired.**
  The
        process of drug development and regulatory approval for product candidates
        takes
        many years, during which time the FDA’s interpretations of the standards against
        which drugs are judged for approval may evolve or change. The FDA can also
        change its approval policies based upon changes in laws and regulations.
        In
        addition, it can decide, based on its then current approval policies, any
        changes in those policies and its broad discretion in the approval process,
        to
        weigh the benefits and the risks of every drug candidate. As a result of
        any of
        the foregoing, the FDA may decide that the data we submit in support of an
        application for approval of a drug candidate are insufficient for approval.
        Further, changes in policy or interpretation may not be the subject of published
        guidelines and may therefore be difficult to evaluate. For example, the FDA
        has
        not recently published guidelines for the approval of new migraine therapies,
        and we have had to rely on periodic guidance from the FDA obtained in
        conversations and other meetings, the content of which may be subject to
        significant modification over the period of a drug’s development program. There
        is also the risk that we and the FDA may interpret such guidance
        differently.
  Further,
        additional information about the potential risks of marketed drugs may affect
        the regulatory approval environment, or the FDA’s approval policies, for new
        product candidates. For example, in February 2005 an advisory committee convened
        by the FDA met to address the potential cardiovascular risks of COX-2 selective
        NSAIDs and related drugs in response to disclosures made about possible adverse
        effects from the use of some of these drugs. On April 7, 2005 the FDA issued
        a
        Public Health Advisory (Advisory) based, in part, upon the recommendations
        of
        the advisory committee. The Advisory stated that it would require that
        manufacturers of all prescription products containing NSAIDs provide warnings
        regarding the potential for adverse cardiovascular events as well as
        life-threatening gastrointestinal events associated with the use of NSAIDs.
        Moreover, subsequent to the FDA advisory committee meeting in February 2005,
        the
        FDA has indicated that long-term studies evaluating cardiovascular risk will
        be
        required for approval of new NSAID products that may be used on an intermittent
        or chronic basis. For example, we believe that long-term cardiovascular safety
        studies will be required for NDA approval of any oral lornoxicam product
        candidate we may develop. We do not know to what extent the FDA’s actions may
        otherwise adversely affect or delay the approvability of our Trexima, PN
        or
        other product candidates that contain NSAIDs. The FDA is also reviewing the
        safety of two marketed proton-pump inhibitors with respect to the possibility
        of
        increased cardiovascular risk. Although, the FDA’s preliminary conclusion was
        that an observed difference in the risk of heart attacks and other heart-related
        problems seen in two small studies was not a true effect, the agency has
        said it
        will continue to review the issue. Future regulatory action by the FDA could
        adversely affect or delay the approvability of our PA and PN product candidates
        that contain proton-pump inhibitors.
  **If
        we, or our current or future collaborators, do not obtain and maintain required
        regulatory approvals for one or more of our product candidates, we will be
        unable to commercialize those product candidates. Further, if we are delayed
        in
        obtaining or unable to obtain, any required approvals, our collaborators
        may
        terminate, or be entitled to terminate, their agreements with us or reduce
        or
        eliminate their payments to us under these agreements or we may be required
        to
        pay termination payments under these agreements.**
  Our
        product candidates under development are subject to extensive domestic and
        foreign regulation. The FDA regulates, among other things, the development,
        testing, manufacture, safety, efficacy, record keeping, labeling, storage,
        approval, advertisement, promotion, sale and distribution of pharmaceutical
        products in the United States. In order to market our products abroad, we
        must
        comply with extensive regulation by foreign governments. If we are unable
        to
        obtain and maintain FDA and foreign government approvals for our product
        candidates, we, alone or through our collaborators, will not be permitted
        to
        sell them. Failure to obtain regulatory approval for a product candidate
        will
        prevent us from commercializing that product candidate. Except for MT 100,
        which
        has been approved for sale in the UK, none of our product candidates have
        been
        approved for sale in the U.S. or any foreign market and they may never be
        approved. For example, we have received two approvable letters relating to
        our
        NDA for Trexima which have communicated FDA’s concerns that have delayed
        marketing approval. An approvable letter is an official notification from
        the
        FDA that contains conditions that must be satisfied prior to obtaining final
        U.S. marketing approval. In June 2006, we received the first approvable letter
        in which the FDA requested additional safety information on Trexima, and
        in
        August 2007, we received a second approvable letter in which the FDA requested
        that we address their concern about the potential implications from one
        preclinical in vitro chromosomal aberration study in which genotoxicity was
        seen
        for the combination of naproxen sodium and sumatriptan. We also previously
        received not-approvable letters from the FDA relating to our NDAs for MT
        100 and
        MT 300.
  In
        the
        U.S., a separate NDA or supplement must be filed with respect to each indication
        for which marketing approval of a product is sought. Each NDA, in turn, requires
        the successful completion of preclinical, toxicology, genotoxicity and
        carcinogenicity studies, as well as clinical trials demonstrating the safety
        and
        efficacy of the product for that particular indication. We may not receive
        regulatory approval of any of the NDAs that we file with the FDA or of any
        approval applications we may seek in the future outside the U.S.
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            27
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 Index
  Further,
        our current or future collaboration agreements may terminate, or require
        us to
        make certain payments to our collaborators, or our collaborators may have
        the
        right to terminate their agreements with us or reduce or eliminate their
        payments to us under these agreements, based on our inability to obtain,
        or
        delays in obtaining, regulatory approval for our product candidates. For
        example, under our PN collaboration agreement with AstraZeneca, AstraZeneca
        has
        the right to terminate the agreement if certain delays occur or specified
        development and regulatory objectives are not met. Both AstraZeneca and GSK
        have
        the right to terminate their respective agreement with us upon 90 days notice
        for any reason.****Further, under our MT 300 collaboration
        agreement with Valeant NA, we may elect to withdraw the NDA, if we determine
        that additional studies or data that are required by the FDA for approval
        of the
        NDA would jeopardize the commercial viability of MT 300 or exceed our financial
        resources available for MT 300. If we notify Valeant NA of this situation
        and
        Valeant NA elects not to assume control of efforts to seek approval of the
        NDA,
        then upon notice from Valeant, the agreement would terminate and we would
        be
        required to pay to Valeant NA a withdrawal fee of $1.0 million. Based on
        the
        not-approvable letter received from the FDA with respect to MT 300, we began
        discussions regarding termination of our commercialization agreement with
        Valeant NA. In July 2005, we received a letter from Valeant NA seeking payment
        of the $1.0 million withdrawal fee required under certain conditions under
        the
        agreement. We do not believe that the withdrawal fee is payable based on
        our
        receipt of a not-approvable letter from the FDA with respect to our NDA for
        MT
        300. The agreement requires that unresolved disputes by the parties be referred
        to the respective chief executive officers for resolution. If still unresolved,
        the agreement provides for binding arbitration. Valeant NA has disputed our
        conclusion that the withdrawal fee is not payable and has indicated its
        intention to pursue the dispute resolution provisions provided for in the
        agreement. We can give no assurance that Valeant NA will agree to termination
        terms acceptable to us or that we will not be required to pay Valeant NA
        the
        $1.0 million withdrawal fee.
  If
        we or
        our contract manufacturers do not maintain required regulatory approvals,
        we may
        not be able to commercialize our products. Approval of a product candidate
        may
        be conditioned upon certain limitations and restrictions as to the drug’s use,
        or upon the conduct of further studies, and is subject to continuous review.
        The
        FDA may also require us to conduct additional post-approval studies. These
        post-approval studies may include carcinogenicity studies in animals or further
        human clinical trials. The later discovery of previously unknown problems
        with
        the product, manufacturer or manufacturing facility may result in criminal
        prosecution, civil penalties, recall or seizure of products, or total or
        partial
        suspension of production, as well as other regulatory action against our
        product
        candidates or us. If approvals are withdrawn for a product, or if a product
        is
        seized or recalled, we would be unable to sell that product and therefore
        would
        not receive any revenues from that product.
  We
        and
        our contract manufacturers are required to comply with the applicable FDA
        current Good Manufacturing Practices (“cGMP”) regulations, which include
        requirements relating to quality control and quality assurance, as well as
        the
        corresponding maintenance of records and documentation.
  Further,
        manufacturing facilities must be approved by the FDA before they can be used
        to
        manufacture our product candidates, and are subject to additional FDA
        inspection. We, or our third-party manufacturers, may not be able to comply
        with
        cGMP regulations or other FDA regulatory requirements, which could result
        in a
        delay or an inability to manufacture the products. If we or our partners
        wish or
        need to identify an alternative manufacturer, delays in obtaining FDA approval
        of the alternative manufacturing facility could cause an interruption in
        the
        supply of our products.
  Labeling
        and promotional activities are subject to scrutiny by the FDA and state
        regulatory agencies and, in some circumstances, the Federal Trade Commission.
        FDA enforcement policy prohibits the marketing of unapproved products as
        well as
        the marketing of approved products for unapproved, or off-label, uses. These
        regulations and the FDA’s interpretation of them may limit our or our partners’
ability to market products for which we gain approval. Failure to comply
        with
        these requirements can result in federal and state regulatory enforcement
        action. Further, we may not obtain the labeling claims we or our partners
        believe are necessary or desirable for the promotion of our product
        candidates.
  **Our
        reliance on collaborations with third parties to develop and commercialize
        our
        products is subject to inherent risks and may result in delays in product
        development and lost or reduced revenues, restricting our ability to
        commercialize our products and adversely affecting our
        profitability.**
  Under
        our
        current strategy, and for the foreseeable future, we expect to depend upon
        collaborations with third parties to develop our product candidates and we
        expect to depend substantially upon third parties to commercialize our products.
        As a result, our ability to develop, obtain regulatory approval of, manufacture
        and commercialize our existing and any future product candidates depends
        upon
        our ability to maintain existing, and enter into and maintain new, contractual
        and collaborative arrangements with others. We also engage, and intend in
        the
        future to continue to engage, contract manufacturers and clinical trial
        investigators.
  In
        addition, the identification of new compounds or product candidates for
        development has led us, and may continue to require us, to enter into license
        or
        other collaborative agreements with others, including pharmaceutical companies
        and research institutions, such as our license and development agreement
        with
        Nycomed pursuant to which we obtained an exclusive license to certain rights
        to
        develop, manufacture and commercialize products containing lornoxicam. Such
        collaborative agreements for the acquisition of new compounds or product
        candidates would typically require us to pay license fees, make milestone
        payments and/or pay royalties. Furthermore, these agreements may result in
        our
        revenues being lower than if we developed our product candidates ourselves
        and
        in our loss of control over the development of our product
        candidates.
  -
            28
            -
 Index
  Contractors
        or collaborators may have the right to terminate their agreements with us
        or
        reduce their payments to us under those agreements on limited or no notice
        and
        for reasons outside of our control. We currently have a collaboration with
        GSK
        for the development and commercialization of certain triptan combinations
        using
        our MT 400 technology, including Trexima, in the U.S., a global collaboration
        with AstraZeneca for the development and commercialization of proprietary
        combinations of gastroprotective agents and naproxen, and a collaboration
        with
        Valeant NA in the U.S. for the development and commercialization of MT 300.
        In
        these collaboration agreements, as well as under our lornoxicam license
        agreement with Nycomed described above, our collaborators have the right
        to
        terminate the agreement upon a default by us. In addition, GSK and AstraZeneca
        are entitled to terminate their respective agreements with us upon 90 days’
notice for any reason. Additionally, both GSK and AstraZeneca have the right
        to
        reduce the royalties on net sales of products payable to us under their
        respective agreements if generic competitors attain a pre-determined share
        of
        the market for products marketed under the agreements, or if either GSK or
        AstraZeneca must pay a royalty to one or more third parties for rights it
        licenses from those third parties to commercialize products marketed under
        the
        agreements. AstraZeneca is also entitled to terminate its agreement with
        us if
        certain delays occur or specified development or regulatory objectives are
        not
        met. Valeant NA is entitled to terminate its agreement with us and a $1.0
        million withdrawal fee payable by us in the event we choose to withdraw the
        NDA
        if we determine that additional studies or data that are required by the
        FDA for
        approval of the NDA would jeopardize the commercial viability of MT 300 or
        exceed our financial resources available for MT 300. Due to our belief that
        the
        FDA will not approve the NDA for MT 300, we began discussions with Valeant
        NA
        regarding termination of our agreement. Valeant NA has demanded payment of
        the
        $1.0 million withdrawal fee, which POZEN is disputing.
  If
        our
        current or future licensees exercise termination rights they may have, or
        if
        these license agreements terminate because of delays in obtaining regulatory
        approvals, or for other reasons, and we are not able to establish replacement
        or
        additional research and development collaborations or licensing arrangements,
        we
        may not be able to develop and/or commercialize our product candidates.
        Moreover, any future collaborations or license arrangements we may enter
        into
        may not be on terms favorable to us.
  A
        further
        risk we face with our collaborations is that business combinations and changes
        in the collaborator or their business strategy may adversely affect their
        willingness or ability to complete their obligations to us.
  Our
        current or any future collaborations or license arrangements ultimately may
        not
        be successful. Our agreements with collaborators typically allow them discretion
        in electing whether to pursue various regulatory, commercialization and other
        activities or with respect to the timing of the development, such as our
        agreement with GSK under which GSK determined, among other things, the exact
        formulation and composition of the product candidates using our MT 400
        technology for use in the Trexima clinical trials. Similarly, under our
        agreement with AstraZeneca, AstraZeneca has the right to manufacture clinical
        trial material itself or through a third party. If AstraZeneca experiences
        delays in supplying such clinical trial material, the start of pivotal studies
        could be delayed. If any collaborator were to breach its agreement with us
        or
        otherwise fail to conduct collaborative activities in a timely or successful
        manner, the pre-clinical or clinical development or commercialization of
        the
        affected product candidate or research program would be delayed or terminated.
        Any delay or termination of clinical development or commercialization, such
        as
        the delay in FDA approval we are currently experiencing as a result of
        approvable letters we received from the FDA in June 2006 and August 2007
        related
        to our Trexima NDA, would delay or possibly eliminate our potential product
        revenues. Further, our collaborators may be able to exercise control, under
        certain circumstances, over our ability to protect our patent rights under
        patents covered by the applicable collaboration agreement. For example, under
        our collaboration agreements with GSK and AstraZeneca, GSK and AstraZeneca
        each
        has the first right to enforce our patents under their respective agreements
        and
        would have exclusive control over such enforcement litigation.
  Other
        risks associated with our collaborative and contractual arrangements with
        others
        include the following:
  •
              we
                  may not have day-to-day control over the activities of our contractors
                  or
                  collaborators;
  •
              our
                  collaborators may fail to defend or enforce patents they own on
                  compounds
                  or technologies that are incorporated into the products we develop
                  with
                  them;
  •
              third
                  parties may not fulfill their regulatory or other
                  obligations;
  •
              we
                  may not realize the contemplated or expected benefits from collaborative
                  or other arrangements; and
  •
              disagreements
                  may arise regarding a breach of the arrangement, the interpretation
                  of the
                  agreement, ownership of proprietary rights, clinical results or
                  regulatory
                  approvals.
  These
        factors could lead to delays in the development of our product candidates
        and/or
        the commercialization of our products or reduction in the milestone payments
        we
        receive from our collaborators, or could result in our not being able to
        commercialize our products. Further, disagreements with our contractors or
        collaborators could require or result in litigation or arbitration, which
        would
        be time-consuming and expensive. Our ultimate success may depend upon the
        success and performance on the part of these third parties. If we fail to
        maintain these relationships or establish new relationships as required,
        development of our product candidates and/or the commercialization of our
        products will be delayed or may never be realized.
  -
            29
            -
 Index
  **A
          collaborator may withdraw support or cease to perform work on our product
          candidates if the collaborator determines to develop its own competing
          product
          candidate or other product candidates instead.**
  We
        have
        entered into collaboration and license agreements, and expect to continue
        to
        enter into such agreements, with companies that have products and are developing
        new product candidates that compete or may compete with our product candidates
        or which have greater commercial potential. If one of our collaborators should
        decide that the product or a product candidate that the collaborator is
        developing would be more profitable for the collaborator than our product
        candidate covered by the collaboration or license agreement, the collaborator
        may withdraw support for our product candidate or may cease to perform under
        our
        agreement. In the event of a termination of the collaborator’s agreement upon
        such cessation of performance, we would need to negotiate an agreement with
        another collaborator in order to continue the development and commercialization
        efforts for the product candidate. If we were unsuccessful in negotiating
        another agreement, we might have to cease development activities of the
        particular product candidate. For example, our development and commercialization
        agreement with GSK is subject to this risk. GSK has publicly disclosed that
        it
        is exploring the development of several compounds for the treatment of migraine.
        If GSK decides to focus its development and commercialization efforts on
        its own
        products rather than continuing to work with us on Trexima or any other product
        candidates that may be developed under the agreement, it has the ability
        to
        terminate our agreement upon 90 days’ written notice. In such a case, we would
        need to enter into a new development and commercialization agreement and
        would
        need to start the development process all over again. If we were able to
        negotiate a new development and commercialization agreement to develop our
        MT
        400 technology, which is not certain, we would face delays and redundant
        expenses in that development.
  **We
        need to maintain current agreements and enter into additional agreements
        with
        third parties that possess sales, marketing and distribution capabilities,
        or
        establish internally the capability to perform these functions, in order
        to
        successfully market and sell our future drug products.**
  We
        have
        no sales or distribution personnel or capabilities. If we are unable to maintain
        current collaborations or enter into additional collaborations with established
        pharmaceutical or pharmaceutical services companies to provide those
        capabilities, or, alternatively, we are unable to develop internally sales
        and
        distribution capabilities, we will not be able to successfully commercialize
        our
        products. To the extent that we enter into marketing and sales agreements
        with
        third parties, our revenues, if any, will be affected by the sales and marketing
        efforts of those third parties. Further, we cannot guarantee that, should
        we
        elect to develop our own sales and distribution capabilities, we would have
        sufficient resources to do so, or would be able to hire the qualified sales
        and
        marketing personnel we would need.
  **Because
        we do not believe it is possible to convince the FDA to reverse its conclusion
        as stated in its not-approvable letter for MT 300, we do not expect to receive
        any revenue from sales of MT 300 in the U. S.**
 
 In
        October 2003, we received a not-approvable letter from the FDA related to
        our
        NDA for MT 300. The letter was issued based on the FDA’s conclusion that we had
        not submitted substantial evidence of effectiveness for MT 300 as an acute
        treatment for migraine. The FDA noted that, although MT 300 provided a
        statistically significant improvement over placebo on the pre-defined endpoint
        of sustained pain relief at 24 hours post dose as well as relief of pain
        at two
        hours post dose, MT 300 failed to achieve statistical significance versus
        placebo for the relief of all of the ancillary symptoms of migraine (nausea,
        photophobia and phonophobia) at two hours. Further, the FDA noted that the
        incidence of nausea, one of the associated symptoms of migraine, was
        statistically significantly higher following MT 300 treatment versus placebo
        at
        two hours. After our receipt of the not-approvable letter, we had continuing
        communications with the FDA regarding the MT 300 NDA. Based upon our
        understandings from our most recent communications with the FDA and our
        understanding of the FDA’s current standards for approval of migraine drugs, we
        do not believe it is possible to reverse the not approvable status of the
        MT 300
        NDA. Therefore, we do not believe that we will receive any revenue from sales
        of
        MT 300 in the U.S.
  **We
        need to conduct preclinical, toxicology, genotoxicity and carcinogenicity
        and
        other safety studies, and clinical trials for our product candidates. Any
        negative or unanticipated results, unforeseen costs or delays in the conduct
        of
        these studies or trials, or the need to conduct additional studies or trials
        or
        to seek to persuade the FDA to evaluate the results of a study or trial in
        a
        different manner, could cause us to discontinue development of a product
        candidate or reduce, delay or eliminate our receipt of potential revenues
        for
        one or more of our product candidates and adversely affect our ability to
        achieve profitability.**
  -
            30
            -
 Index
  Generally,
        we must demonstrate the efficacy and safety of our product candidates before
        approval to market can be obtained from the FDA or the regulatory authorities
        in
        other countries. Our existing and future product candidates are and will
        be in
        various stages of clinical development. Depending upon the type of product
        candidate and the stage of the development process of a product candidate,
        we
        will need to complete preclinical, toxicology, genotoxicity and carcinogenicity
        and other safety studies, as well as clinical trials, on these product
        candidates before we submit marketing applications in the United States and
        abroad. These studies and trials can be very costly and time-consuming. For
        example, long-term cardiovascular safety studies, such as those the FDA has
        indicated will be required for approval of certain product candidates containing
        NSAIDs, typically take approximately three years. In addition, we rely on
        third
        parties to perform significant aspects of our studies and clinical trials,
        introducing additional sources of risk into our development
        programs.
  It
        should
        be noted that the results of any of our preclinical and clinical trial testing
        are not necessarily predictive of results we will obtain in subsequent or
        more
        extensive clinical trials or testing. This may occur for many reasons,
        including, among others, differences in study design, including
        inclusion/exclusion criteria, the variability of patient characteristics,
        including patient symptoms at the time of study treatment, the larger scale
        testing of patients in later trials, or differences in formulation or doses
        of
        the product candidate used in later trials. For example, our results from
        the
        first of our two Phase 3 pivotal clinical trials of Trexima differed from
        the
        results of our second Phase 3 clinical trial and from the Phase 2
        proof-of-concept trial of MT 400 that we conducted prior to entering into
        our
        collaboration with GSK. Whereas in the Phase 2 trial statistical significance
        was reached at two hours over placebo in the relief of all associated symptoms
        of migraine (nausea, photophobia and phonophobia), in the first Phase 3 study
        Trexima failed to achieve statistical significance at two hours compared
        to
        placebo in the relief of nausea. In the second Phase 3 pivotal clinical trial,
        Trexima demonstrated superiority over the individual components measured
        by
        sustained pain-free response (p<0.001 vs. naproxen; p=0.009 vs. sumatriptan)
        and met all other regulatory endpoints versus placebo.
  The
        successful completion of any of our clinical trials depends upon many factors,
        including the rate of enrollment of patients. If we are unable to recruit
        sufficient clinical patients during the appropriate period, we may need to
        delay
        our clinical trials and incur significant additional costs. We also rely
        on the
        compliance of our clinical trial investigators with FDA regulatory requirements
        and noncompliance can result in disqualification of a clinical trial
        investigator and data that is unusable. In addition, the FDA or Institutional
        Review Boards may require us to conduct additional trials or delay, restrict
        or
        discontinue our clinical trials on various grounds, including a finding that
        the
        subjects or patients are being exposed to an unacceptable health
        risk.
  Further,
        even though we may have completed all clinical trials for a product candidate
        that were planned for submission in support of a marketing application, we
        may
        be required to conduct additional clinical trials, studies or investigations
        or
        to submit additional data to support our marketing applications. In addition,
        we
        and/or our marketing or development partners may determine that pre-approval
        marketing support studies should be conducted. Unanticipated adverse outcomes
        of
        such studies, including recognition of certain risks to human subjects, could
        a
        have material impact on the approval of filed or planned market applications
        or
        could result in limits placed on the marketing of the product. We may also
        determine from time to time that it would be necessary to seek to provide
        justification to the FDA or other regulatory agency that would result in
        evaluation of the results of a study or clinical trial in a manner that differs
        from the way the regulatory agency initially or customarily evaluated the
        results. In addition, we may have unexpected results in our preclinical or
        clinical trials or other studies that require us to reconsider the need for
        certain studies or trials or cause us to discontinue development of a product
        candidate. For example, in reviewing our NDA for Trexima the FDA has expressed
        concern about the potential implications from one preclinical in vitro
        chromosomal aberration study, one of four standard genotoxicity assays, in
        which
        genotoxicity was seen for the combination of naproxen sodium and sumatriptan.
        While we have submitted data from additional pre-clinical studies conducted
        by
        GSK to the FDA and we plan to conduct a short-term clinical study in healthy
        human volunteers in the event such a clinical study is required by the FDA,
        we
        have no guarantee that such data will adequately address the FDA’s
        concerns.
  Once
        submitted, an NDA requires FDA approval before the product described in the
        application can be distributed or commercialized. Even if we determine that
        data
        from our clinical trials, toxicology, genotoxicity and carcinogenicity studies
        are positive, we cannot assure you that the FDA, after completing its analysis,
        will not determine that the trials or studies should have been conducted
        or
        analyzed differently, and thus reach a different conclusion from that reached
        by
        us, or request that further trials, studies or analyses be conducted. For
        example, the FDA requested additional safety information on Trexima in the
        approvable letter we received in June 2006 relating to our NDA for Trexima,
        which required conduct of additional studies. We submitted a full response
        to
        the FDA’s approvable letter in November 2006, but were told by the FDA that it
        was not a complete submission and that additional analyses and supporting
        information relating to the new data were required. The FDA also indicated
        that
        it was necessary to provide a complete and accurate presentation of these
        data,
        which must sufficiently address their safety concerns, including cardiovascular
        safety. We worked with GSK to compile and format the additional data requested
        by the FDA and delivered a revised full response to the FDA in early February
        2007. On August 1, 2007, we received a second approvable letter in which
        the FDA
        raised an additional concern about the potential implications from one
        preclinical in vitro chromosomal aberration study, one of four standard
        genotoxicity assays, in which genotoxicity was seen for the combination of
        naproxen sodium and sumatriptan.
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            31
            -
 Index
  Further,
        although we believe that we provided the necessary data to support approval
        of
        the NDAs for MT 100 and MT 300, the FDA issued not-approvable letters for
        the MT
        100 and MT 300 NDAs in May 2004 and October 2003, respectively, and based
        upon
        our understandings from our most recent communication with the FDA and our
        understanding of the FDA’s current standards for approval of migraine drugs, we
        do not believe it is possible to reverse the not approvable status of the
        NDA
        for MT 300. In addition, based upon our receipt of the not approvable letter
        for
        MT 100 and the outcome of an August 2005 FDA Advisory Committee meeting relating
        to the potential risk of tardive dyskinesia associated with the use of one
        of
        the components of MT 100, we made the decision to discontinue further
        development of MT 100 in the U.S.
  The
        FDA
        may also require data in certain subpopulations, such as pediatric use, or,
        if
        such studies were not previously completed, may require long-term
        carcinogenicity studies, prior to NDA approval, unless we can obtain a waiver
        of
        such a requirement. We face similar regulatory hurdles in other countries
        to
        those that we face in the U.S.
  Our
        costs
        associated with our human clinical trials vary based on a number of factors,
        including:
  •
              the
                  order and timing of clinical indications
                  pursued;
  •
              the
                  extent of development and financial support from collaborative
                  parties, if
                  any;
  •
              the
                  need to conduct additional clinical trials or
                  studies;
  •
              the
                  number of patients required for
                  enrollment;
  •
              the
                  difficulty of obtaining sufficient patient populations and
                  clinicians;
  •
              the
                  difficulty of obtaining clinical supplies of our product candidates;
                  and
  •
              governmental
                  and regulatory delays.
  **We
        currently depend and will in the future depend on third parties to manufacture
        our product candidates. If these manufacturers fail to meet our requirements
        or
        any regulatory requirements, the product development and commercialization
        of
        our product candidates will be delayed.**
  We
        do not
        have, and have no plans to develop, the internal capability to manufacture
        either clinical trial or commercial quantities of products that we may develop
        or have under development. We rely upon third-party manufacturers and our
        partners to supply us with our product candidates. We also need supply contracts
        to sell our products commercially. There is no guarantee that manufacturers
        that
        enter into commercial supply contracts with us will be financially viable
        entities going forward, or will not otherwise breach or terminate their
        agreements with us. If we do not have the necessary commercial supply contracts,
        or if our current manufacturer is, or any of our future manufacturers are,
        unable to satisfy our requirements or meet any regulatory requirements, and
        we
        are required to find alternative sources of supply, there may be additional
        costs and delays in product development and commercialization of our product
        candidates or we may be required to comply with additional regulatory
        requirements.
  **If
        our competitors develop and commercialize products faster than we do or if
        their
        products are superior to ours, our commercial opportunities will be reduced
        or
        eliminated.**
  Our
        product candidates will have to compete with existing and any newly developed
        migraine therapies or therapies for any newly developed product candidates
        for
        the treatment of other diseases. There are also likely to be numerous
        competitors developing new products to treat migraine and the other diseases
        and
        conditions for which we may seek to develop products in the future, which
        could
        render our product candidates or technologies obsolete or non-competitive.
        For
        example, our primary competitors will likely include large pharmaceutical
        companies (including, based upon their current migraine portfolios, GSK,
        Merck
& Co., AstraZeneca, Johnson & Johnson, Pfizer, Inc. and Endo
        Pharmaceuticals), biotechnology companies, universities and public and private
        research institutions. The competition for our PN products that receive
        regulatory approval will come from the oral NSAID market, or more specifically
        the traditional non-selective NSAIDs (such as naproxen and diclofenac),
        traditional NSAID/gastroprotective agent combination products or combination
        product packages (such as Arthrotec® and Prevacid®
        NapraPACTM), combinations
        of
        NSAIDs and PPIs taken as separate pills and the only remaining COX-2 inhibitor,
        Celebrex®.
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            32
            -
 Index
  Based
        upon their drug product and pipeline portfolios and the overall competitiveness
        of our industry, we believe that we face, and will continue to face, intense
        competition from other companies for securing collaborations with pharmaceutical
        companies, establishing relationships with academic and research institutions,
        and acquiring licenses to proprietary technology. Our competitors, either
        alone
        or with collaborative parties, may also succeed with technologies or products
        that are more effective than any of our current or future technologies or
        products. Many of our actual or potential competitors, either alone or together
        with collaborative parties, have substantially greater financial resources,
        and
        almost all of our competitors have larger numbers of scientific and
        administrative personnel than we do.
  Many
        of
        these competitors, either alone or together with their collaborative parties,
        also have significantly greater experience than we do in:
  •
              developing
                  product candidates;
  •
              undertaking
                  preclinical testing and human clinical
                  trials;
  •
              obtaining
                  FDA and other regulatory approvals of product candidates;
                  and
  •
              manufacturing
                  and marketing products.
  Accordingly,
        our actual or potential competitors may succeed in obtaining patent protection,
        receiving FDA or other regulatory approval or commercializing products where
        we
        cannot or before we do. Any delays we encounter in obtaining regulatory
        approvals for our product candidates, such as we have experienced as a result
        of
        the approvable letters we received from the FDA in June 2006 and August 2007
        relating to the Trexima NDA, and as we have previously experienced as a result
        of the not-approvable letters we received from the FDA on MT 100 and MT 300,
        increase this risk. Our competitors may also develop products or technologies
        that are superior to those that we are developing, and render our product
        candidates or technologies obsolete or non-competitive. If we cannot
        successfully compete with new or existing products, our marketing and sales
        will
        suffer and we may not ever receive any revenues from sales of products or
        may
        not receive sufficient revenues to achieve profitability.
  **If
        there is an adverse outcome in the securities class action lawsuits that
        have
        been filed against us or our current or former directors and officers, our
        business may be materially harmed. Further, defending against these lawsuits
        may
        be expensive and will divert the attention of our
        management.**
  Five
        purported class action lawsuits claiming violations of securities laws were
        filed during 2004 by holders of our securities against us and certain of
        our
        current and former officers. These actions were consolidated for pre-trial
        purposes and a lead plaintiff appointed by the court filed a consolidated
        amended complaint (amended complaint) on December 20, 2004. The defendants
        named
        in the amended complaint were POZEN and John R. Plachetka, our chairman and
        chief executive officer. The complaint alleged violations of federal securities
        laws, including violations of Section 10(b) of the Securities Exchange Act
        of
        1934, as amended, and Rule 10b-5, and violations of Section 20(a) of the
        Exchange Act against Dr. Plachetka. The amended complaint alleged that we
        made
        false and misleading statements concerning our product candidates MT 100
        and MT
        300 during the class period. On July 10, 2007, we announced that the Company
        has
        reached an agreement to amicably settle this action. All claims against the
        Company and Dr. Plachetka will be dismissed in their entirety without admission
        of liability or wrongdoing by any party. We believe that the settlement
        agreement will be funded entirely with proceeds form the Company’s directors and
        officers’ liability insurance. The settlement agreement was granted preliminary
        court approval on October 2, 2007.
  A purported
        class action lawsuit claiming violations of securities
        laws  was filed  on August 10,  2007 in the
        U.S. District Court for the Middle District of North Carolina by  a
 holder of our securities against us, our chairman and chief executive
        officer and one of our directors. The complaint alleges, among other claims,
        violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange
        Act
        arising out of allegedly false and misleading statements made by the Company
        concerning its migraine drug candidate, Trexima, during the purported class
        period, July 31, 2006 through August 1, 2007. The Company and the individual
        defendants believe that the plaintiff's allegations are without merit, and
        intend to defend these claims vigorously.
  As
        with
        any litigation proceeding, we cannot predict with certainty the eventual
        outcome
        of the pending class action lawsuit described above. Furthermore, we will
        have
        to incur expenses in connection with this lawsuit, which may be substantial.
        In
        the event of an adverse outcome, our business could be materially harmed.
        Moreover, responding to and defending the pending litigation will result
        in a
        significant diversion of management’s attention and resources and an increase in
        professional fees.
  -
            33
            -
 Index
  **If
        we are unable to protect our patents or proprietary rights, or if we are
        unable
        to operate our business without infringing the patents and proprietary rights
        of
        others, we may be unable to develop our product candidates or compete
        effectively.**
  The
        pharmaceutical industry places considerable importance on obtaining patent
        and
        trade secret protection for new technologies, products and processes. Our
        success will depend, in part, on our ability, and the ability of our licensors,
        to obtain and to keep protection for our products and technologies under
        the
        patent laws of the United States and other countries, so that we can stop
        others
        from using our inventions. Our success also will depend on our ability to
        prevent others from using our trade secrets. In addition, we must operate
        in a
        way that does not infringe, or violate, the patent, trade secret and other
        intellectual property rights of other parties.
  We
        cannot
        know how much protection, if any, our patents will provide or whether our
        patent
        applications will issue as patents. The breadth of claims that will be allowed
        in patent applications cannot be predicted and neither the validity nor
        enforceability of claims in issued patents can be assured**.**If,
        for any reason, we are unable to obtain and enforce valid claims covering
        our
        products and technology, we may be unable to prevent competitors from using
        the
        same or similar technology or to prevent competitors from marketing identical
        products. In addition, due to the extensive time needed to develop, test
        and
        obtain regulatory approval for our products, any patents that protect our
        product candidates may expire early during commercialization. This may reduce
        or
        eliminate any market advantages that such patents may give us. In certain
        territories outside the U.S., our issued patents may be subject to opposition
        by
        competitors within a certain time after the patent is issued. For example,
        in
        October 2005 oppositions were filed against our issued European patent for
        MT
        400 by Merck & Co., Inc. and Almirall Prodesfarma asserting that the
        European patent should not have been granted. Such opposition proceedings
        may
        not be resolved for several years, and may result in the revocation of the
        issued patent.
  We
        may
        need to submit our issued patents for amendment or reissue if we determine
        that
        any claims within our patents should not have been issued. While such a
        submission may be based on our view that only specified claims should not
        have
        been granted to us, there can be no assurance that a patent examiner will
        not
        determine that additional claims should not have been granted to us. Such
        was
        the case with one of our patents covering MT 100, which we submitted for
        reissue
        after determining that certain specified claims that are not central to our
        protection of MT 100 should not have been issued. In April 2006, we received
        an
        office action on the reissue application and, consistent with our decision
        not
        to devote further resources to the development of this product in the U.S.,
        the
        reissue application was abandoned in January 2007.
  We
        may
        need to license rights to third party patents and intellectual property to
        continue the development and marketing of our product candidates. If we are
        unable to acquire such rights on acceptable terms, our development activities
        may be blocked and we may be unable to bring our product candidates to
        market.
  We
        may
        enter into litigation to defend ourselves against claims of infringement,
        assert
        claims that a third party is infringing one or more of our patents, protect
        our
        trade secrets or know-how, or determine the scope and validity of others’ patent
        or proprietary rights. As a result of such litigation, our patent claims
        may be
        found to be invalid, unenforceable or not of sufficient scope to cover the
        activities of an alleged infringement. With respect to some of our product
        candidates, under certain circumstances, our development or commercialization
        collaborators have the first right to enforce our patents and would have
        exclusive control over such enforcement litigation. For example, under our
        collaboration agreements with GSK and AstraZeneca, GSK and AstraZeneca each
        has
        the first right to enforce our patents under their respective
        agreements.
  If
        we are
        found to infringe the patent rights of others, then we may be forced to pay
        damages in an amount that might irreparably harm our business and/or be
        prevented from continuing our product development and marketing activities.
        Additionally, if we or our development or commercialization collaborator
        seek to
        enforce our patents and are unsuccessful, we may be subject to claims for
        bringing a failed enforcement action, including claims alleging various forms
        of
        antitrust violations (both state and federal) and unfair competition. If
        we are
        found to be liable for such claims, then we may be forced to pay damages
        in an
        amount that might irreparably harm our business and/or be prevented from
        continuing our product development and commercialization activities. Even
        if we
        are successful in defending any such claims of infringement or in asserting
        claims against third parties, such litigation is expensive, may have a material
        effect on our operations, and may distract management from our business
        operations. Regardless of its eventual outcome, any lawsuit that we enter
        into
        may consume time and resources that would impair our ability to develop and
        market our product candidates.
  We
        have
        entered into confidentiality agreements with our employees, consultants,
        advisors and collaborators. However, these parties may not honor these
        agreements and, as a result, we may not be able to protect our rights to
        unpatented trade secrets and know-how. Others may independently develop
        substantially equivalent proprietary information and techniques or otherwise
        gain access to our trade secrets and know-how. Also, many of our scientific
        and
        management personnel were previously employed by competing companies. As
        a
        result, such companies may allege trade secret violations and similar claims
        against us.
  -
            34
            -
 Index
  **If
        we fail to acquire, develop and commercialize additional products or product
        candidates, or fail to successfully promote or market approved products,
        we may
        never achieve profitability.**
  As
        part
        of our business strategy, we plan to identify, self-invent and/or acquire
        product candidates or approved products in areas in which we possess particular
        knowledge. Because we do not directly engage in basic research or drug
        discovery, we may rely upon third parties to sell or license product
        opportunities to us. Other companies, including some with substantially greater
        financial, marketing and sales resources, are competing with us to acquire
        such
        products and product candidates. We may not be able to acquire rights to
        additional products or product candidates on acceptable terms, if at all.
        In
        addition, if we acquire new products or product candidates with different
        marketing strategies, distribution channels and bases of competition than
        those
        of our current product candidates, we may not be able to compete favorably
        in
        those product categories.
  **None
        of our products may be accepted by the market.**
  The
        commercial success of our other product candidates depends upon the acceptance
        of these products in the marketplace. Even if a product displays a favorable
        efficacy and safety profile in clinical trials, market acceptance of a product
        will not be known until after it is launched and a product may not generate
        the
        revenues that we anticipate. The degree of market acceptance will depend
        upon a
        number of factors, including:
  •
              the
                  receipt and timing of regulatory
                  approvals;
  •
              the
                  availability of third-party
                  reimbursement;
  •
              the
                  indications for which the product is
                  approved;
  •
              the
                  rate of adoption by healthcare
                  providers;
  •
              the
                  rate of product acceptance by target patient
                  populations;
  •
              the
                  price of the product relative to alternative
                  therapies;
  •
              the
                  availability of alternative
                  therapies;
  •
              the
                  extent and effectiveness of marketing efforts by us and third-party
                  distributors and agents;
  •
              the
                  existence of adverse publicity regarding our products or similar
                  products;
                  and
  •
              the
                  extent and severity of side effects as compared to alternative
                  therapies.
  **If
        we do not receive adequate third-party reimbursements for our future products,
        our revenues and profitability will be reduced.**
  Our
        ability to commercialize our product candidates successfully will depend,
        in
        part, on the extent to which reimbursement for the costs of such products
        and
        related treatments will be available from government health administration
        authorities, such as Medicare and Medicaid in the U.S., private health insurers
        and other organizations. Significant uncertainty exists as to the reimbursement
        status of a newly approved healthcare product. Adequate third-party coverage
        may
        not be available to enable us to maintain price levels sufficient to realize
        an
        appropriate return on our investment in product research and development.
        If
        adequate coverage and reimbursement levels are not provided by government
        and
        third-party payors for use of our products, our products may fail to achieve
        market acceptance.
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            35
            -
 Index
  Our
        future revenues, profitability and access to capital will be affected by
        the
        continuing efforts of governmental and private third-party payors to contain
        or
        reduce the costs of healthcare through various means. We expect that a number
        of
        federal, state and foreign proposals will seek to control the cost of drugs
        through governmental regulation. We are unsure of the form that any healthcare
        reform legislation may take or what actions federal, state, foreign and private
        payors may take in response to any proposed reforms. Therefore, we cannot
        predict the effect of any implemented reform on our business.
  **If
        product liability lawsuits are successfully brought against us, we may incur
        substantial liabilities and may be required to limit commercialization of
        our
        product candidates.**
  The
        testing and marketing of pharmaceutical products entails an inherent risk
        of
        product liability. Product liability claims might be brought against us by
        consumers, healthcare providers, pharmaceutical companies or others selling
        our
        future products. If we cannot successfully defend ourselves against such
        claims,
        we may incur substantial liabilities or be required to limit the
        commercialization of our product candidates. We have product liability insurance
        that covers our human clinical trials in an amount equal to up to $10.0 million
        annual aggregate limit with a $0.1 million deductible per claim. The amount
        of
        insurance that we currently hold may not be adequate to cover all liabilities
        that may occur. However, insurance coverage is becoming increasingly expensive,
        and no assurance can be given that we will be able to maintain insurance
        coverage at a reasonable cost or in sufficient amounts to protect us against
        losses due to liability. We intend to expand our insurance coverage to include
        the sale of Trexima and future marketed products when we obtain marketing
        approval for such products and commercial sales of such products begin. However,
        we may not be able to obtain commercially reasonable product liability insurance
        for any products approved for marketing. If a plaintiff brings a successful
        product liability claim against us in excess of our insurance coverage, if
        any,
        we may incur substantial liabilities and our business may be harmed or
        fail.
  **We
        may need additional funding and may not have access to capital. If we are
        unable
        to raise capital when needed, we may need to delay, reduce or eliminate our
        product development or commercialization efforts.**
  In
        the
        future, we may need to raise additional funds to execute our business strategy.
        We have incurred losses from operations since inception and we may continue
        to
        incur additional operating losses. Our actual capital requirements will depend
        upon numerous factors, including:
  •
              the
                  progress of our research and development
                  programs;
  •
              the
                  progress of preclinical studies, clinical and other testing or
                  the need
                  conduct additional trials, studies or other
                  testing;
  •
              the
                  time and cost involved in obtaining any regulatory
                  approvals;
  •
              the
                  costs of filing, prosecuting, defending and enforcing any patent
                  claims
                  and other intellectual property
                  rights;
  •
              the
                  effect of competing technological and market
                  developments;
  •
              the
                  timing of our receipt, if any, of milestone payments and royalties
                  under
                  collaborative agreements;
  •
              the
                  effect of changes and developments in, or termination of, our
                  collaborative, license and other
                  relationships;
  •
              the
                  terms and timing of any additional collaborative, license and other
                  arrangements that we may establish;
                  and
  •
              our
                  ability to arrange for the commercialization of our product
                  candidates.
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            36
            -
 Index
  Our
        operating expenses for the year ended December 31, 2006 totaled $35.2 million,
        including non-cash compensation expense of $5.5 million related to stock
        options
        and other stock-based awards, primarily associated with our adoption of SFAS
        No.
        123(R) on January 1, 2006. For fiscal years 2004 through 2006, our average
        annual operating expenses (including average non-cash deferred compensation
        of
        $2.4 million) were $30.7 million. We are currently in discussions with
        AstraZeneca on the timing and scope of marketing studies to support the
        commercialization of PN 400. These marketing studies may impact revenue and
        expenses for the 2007 year.****At the end of the third
        quarter 2007 we estimated operating expenses for the 2007 fiscal year to
        be
        between $52.0 million and $54.0 million, including $4.2 million of non-cash
        compensation expenses, related to stock options and other stock-based awards,
        resulting from our adoption of SFAS 123(R) on January 1, 2006. Increased
        operating expenses, under that estimate, were expected to be partially offset
        by
        revenue of between $18.0 million and $20.0 million for work performed under
        our
        collaborative agreement. As of September 30, 2007, we had an aggregate of
        $78.8
        million in cash and cash equivalents and short-term investments. If our
        operating expenses for the remainder of 2007 and 2008 remain at the level
        of our
        operating expenses in  the first nine months of 2007, we believe that
        we will have sufficient cash reserves to maintain that level of business
        activities through 2008 provided certain increased development expenses are
        paid
        by AstraZeneca, as outlined in the agreement. However, our expenses might
        increase during that period beyond currently expected levels if we decide
        to, or
        any regulatory agency requires us to, conduct additional clinical trials,
        studies or investigations for any of our product candidates, including in
        connection with the agency’s consideration, or reconsideration, of our
        regulatory filings for our product candidates. In addition, we may be required
        to pay Valeant NA a withdrawal fee of $1.0 million if we do not prevail in
        our
        current dispute with them as to whether a withdrawal fee is payable under
        our MT
        300 collaboration agreement.
  We
        may be
        unable to raise additional equity funds when we desire to do so due to
        unfavorable market conditions in our industry or generally, or other unforeseen
        developments in our business. Further, we may not be able to find sufficient
        debt or equity funding, if at all, on acceptable terms. If we cannot, we
        may
        need to delay, reduce or eliminate research and development programs and
        therefore may not be able to execute our business strategy. Further, to the
        extent that we obtain additional funding through collaboration and licensing
        arrangements, it may be necessary for us to give up valuable rights to our
        development programs or technologies or grant licenses on terms that may
        not be
        favorable to us.
  The
        sale
        by us of additional equity securities or the expectation that we will sell
        additional equity securities may have an adverse effect on the price of our
        common stock.
  **We
        depend on key personnel and may not be able to retain these employees or
        recruit
        additional qualified personnel, which would harm our research and development
        efforts.**
  We
        are
        highly dependent on the efforts of our key management and scientific personnel,
        especially John R. Plachetka, Pharm.D., our Chairman, President and Chief
        Executive Officer. Dr. Plachetka signed an amended and restated employment
        agreement with us on March 14, 2006, which was amended on September 28, 2007,
        for a three-year term with automatic one-year renewal terms. We have also
        entered into employment agreements with certain of our other key management
        personnel, which provide for one or two-year terms with automatic one-year
        renewal terms which were amended on September 28, 2007. If we should lose
        the
        services of Dr. Plachetka, or are unable to replace the services of our other
        key personnel who may leave the Company, such as Dr. Marshall E. Reese,
        Executive Vice President, Product Development, or William L. Hodges, Senior
        Vice
        President Finance and Administration and Chief Financial Officer or if we
        fail
        to recruit other key scientific personnel, we may be unable to achieve our
        business objectives. There is intense competition for qualified scientific
        personnel. Since our business is very science-oriented, we need to continue
        to
        attract and retain such people. We may not be able to continue to attract
        and
        retain the qualified personnel necessary for developing our business.
        Furthermore, our future success may also depend in part on the continued
        service
        of our other key management personnel and our ability to recruit and retain
        additional personnel, as required by our business.
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            37
            -
 Index
  ***Factors
        That May Affect Our Stockholders***
  **Our
        stock price is volatile, which may result in significant losses to
        stockholders.**
  There
        has
        been significant volatility in the market prices of biotechnology companies’
securities. Various factors and events may have a significant impact on the
        market price of our common stock. These factors include:
  •
              fluctuations
                  in our operating results;
  •
              announcements
                  of technological innovations, acquisitions or licensing of therapeutic
                  products or product candidates by us or our
                  competitors;
  •
              published
                  reports by securities analysts;
  •
              positive
                  or negative progress with our clinical trials or with regulatory
                  approvals
                  of our product candidates;
  •
              commercial
                  success of products in the marketplace once
                  approved;
  •
              governmental
                  regulation, including reimbursement
                  policies;
  •
              developments
                  in patent or other proprietary
                  rights;
  •
              developments
                  in our relationships with collaborative
                  partners;
  •
              developments
                  in new or pending litigation;
  •
              public
                  concern as to the safety and efficacy of our products;
                  and
  •
              general
                  market conditions.
  The
        trading price of our common stock has been, and could continue to be, subject
        to
        wide fluctuations in response to these factors, including the sale or attempted
        sale of a large amount of our common stock into the market. From October
        16,
        2000, when our common stock began trading on The National Market (now known
        as
        The NASDAQ Global Market), through September 30, 2007, the high and low sales
        prices of our common stock ranged from $2.25 to $21.75. Broad market
        fluctuations may also adversely affect the market price of our common
        stock.
  **Sales
        of substantial amounts of our common stock in the public market could depress
        our stock price.**
  We
        have
        not sold shares of common stock in a public offering since our initial public
        offering in October 2000. Accordingly, we have a relatively small number
        of
        shares that are traded in the market and four of our stockholders and their
        affiliates beneficially hold approximately 33% of our outstanding shares.
        Any
        sales of substantial amounts of our common stock in the public market, including
        sales or distributions of shares by our large stockholders, or the perception
        that such sales might occur, could harm the market price of our common stock
        and
        could impair our ability to raise capital through the sale of additional
        equity
        securities. For example, our chief executive officer and one of our
        directors may sell up to an aggregate of 1,180,000 shares pursuant
        to Rule 10b5-1 trading plans. Sales under those plans began in October
        2006. Further, stockholders’ ownership will be diluted if we raise additional
        capital by issuing equity securities. We have filed with the SEC, and the
        SEC
        has declared effective, a shelf registration statement on Form S-3 under
        which
        we may register up to 8,540,000 shares of our common stock for sale to the
        public in one or more public offerings. Certain selling stockholders named
        in
        the prospectus for the registration statement may offer up to 540,000 of
        such
        shares, and we would not receive any of the proceeds from sales of those
        shares.
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            38
            -
 Index
  **Anti-takeover
        provisions in our charter documents and under Delaware law could prevent
        or
        delay transactions that our stockholders may favor and may prevent stockholders
        from changing the direction of our business or our
        management.**
  Provisions
        of our charter and bylaws may discourage, delay or prevent a merger or
        acquisition that our stockholders may consider favorable, including transactions
        in which you might otherwise receive a premium for your shares, and may also
        frustrate or prevent any attempt by stockholders to change the direction
        or
        management of POZEN. For example, these provisions:
  •
              authorize
                  the issuance of “blank check” preferred stock without any need for action
                  by stockholders;
  •
              provide
                  for a classified board of directors with staggered three-year
                  terms;
  •
              require
                  supermajority stockholder approval to effect various amendments
                  to our
                  charter and bylaws;
  •
              eliminate
                  the ability of stockholders to call special meetings of
                  stockholders;
  •
              prohibit
                  stockholder action by written consent;
                  and
  •
              establish
                  advance notice requirements for nominations for election to the
                  board of
                  directors or for proposing matters that can be acted on by stockholders
                  at
                  stockholder meetings.
  Further,
        in January 2005 our board of directors adopted a stockholder rights plan,
        similar to plans adopted by many other publicly-traded companies. The
        stockholder rights plan is intended to deter an attempt to acquire us in
        a
        manner or on terms not approved by our board of directors.
  -
            39
            -
 Index
  **Item
        6.
        Exhibits**
 
 **Exhibit**
                **Number**
              **Description**3.1
              Second
                  Amended and Restated Bylaws of POZEN Inc., approved September 19,
                  2007
                  (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed
                  on September 20, 2007).10.1
              First
                  Amendment to Second Amended and Restated Executive Employment Agreement
                  with John R. Plachetka, dated September 28, 2007.10.2
              First
                  Amendment, dated September 28, 2007, to Restricted Stock Unit Agreement,
                  dated May 4, 2004, between Registrant and John R.
                  Plachetka.10.3
              First
                  Amendment, dated September 28, 2007, to Restricted Stock Unit Agreement,
                  dated February 14, 2007, between the Registrant and John R.
                  Plachetka.10.4
              First
                  Amendment to Long Term Incentive Cash Award Agreement, dated September
                  28,
                  2007, between the Registrant and John R. Plachetka.10.5
              First
                  Amendment to Executive Employment Agreement with William L. Hodges,
                  dated
                  September 28, 2007.10.6
              First
                  Amendment to Executive Employment Agreement with Marshal E. Reese,
                  Ph.D.,
                  dated September 28, 2007.10.7
              First
                  Amendment to Executive Employment Agreement with John E. Barnhardt,
                  dated
                  September 28, 2007.10.8†
              Amendment
                  No. 1 to the Collaboration and License Agreement, dated September
                  6, 2007,
                  between the Registrant and AstraZeneca, AB.10.9†
              Side
                  Letter Agreement, dated October 1, 2007, between the Registrant
                  and
                  AstraZeneca, AB.31.1
              Certification
                  of the Chief Executive Officer 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 2002.31.2
              Certification
                  of the Chief Financial Officer 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 2002.32.1
              Certification
                  of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.32.2
              Certification
                  of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
 __________
 
 †
              Confidential
                  treatment requested. Confidential materials omitted and filed separately
                  with the Securities and Exchange
                  Commission.
 
 
 
 
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            40
            -
 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.
 
 POZEN
                  Inc.
                (Registrant)November
                  5, 2007
              By:
              /s/
                  JOHN R. PLACHETKAJohn
                  R. PlachetkaPresident
                  and Chief Executive OfficerNovember
                  5, 2007
              By:
              /s/
                  WILLIAM L. HODGESWilliam
                  L. HodgesChief
                  Financial OfficerNovember
                  5, 2007
              By:
              /s/
                  JOHN E. BARNHARDTJohn
                  E. BarnhardtPrincipal
                  Accounting Officer
 
  -
            41
            -
 Index
  **EXHIBIT
        INDEX**
 
 **Exhibit**
                **Number**
              **Description**3.1
              Second
                  Amended and Restated Bylaws of POZEN Inc., approved September 19,
                  2007
                  (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed
                  on September 20, 2007).10.1
              First
                  Amendment to Second Amended and Restated Executive Employment Agreement
                  with John R. Plachetka, dated September 28, 2007.10.2
              First
                  Amendment, dated September 28, 2007, to Restricted Stock Unit Agreement,
                  dated May 4, 2004, between Registrant and John R.
                  Plachetka.10.3
              First
                  Amendment, dated September 28, 2007, to Restricted Stock Unit Agreement,
                  dated February 14, 2007, between the Registrant and John R.
                  Plachetka.10.4
              First
                  Amendment to Long Term Incentive Cash Award Agreement, dated September
                  28,
                  2007, between the Registrant and John R. Plachetka.10.5
              First
                  Amendment to Executive Employment Agreement with William L. Hodges,
                  dated
                  September 28, 2007.10.6
              First
                  Amendment to Executive Employment Agreement with Marshal E. Reese,
                  Ph.D.,
                  dated September 28, 2007.10.7
              First
                  Amendment to Executive Employment Agreement with John E. Barnhardt,
                  dated
                  September 28, 2007.10.8†
              Amendment
                  No. 1 to the Collaboration and License Agreement, dated September
                  6, 2007,
                  between the Registrant and AstraZeneca, AB.10.9†
              Side
                  Letter Agreement, dated October 1, 2007, between the Registrant
                  and
                  AstraZeneca, AB.31.1
              Certification
                  of the Chief Executive Officer 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 2002.31.2
              Certification
                  of the Chief Financial Officer 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 2002.32.1
              Certification
                  of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.32.2
              Certification
                  of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
 __________
 
 †
              Confidential
                  treatment requested. Confidential materials omitted and filed separately
                  with the Securities and Exchange
                  Commission.
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