**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 June 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 July 27,
      2007 was 29,697,184.








Index


**POZEN
      Inc.**


**(A
      Development Stage Company)**


**FORM
      10-Q**








**INDEX**





**Page**PART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements (unaudited)Balance
                Sheets as of June 30, 2007 and December 31,
                2006
            1Statements
                of Operations for the Three and Six Months Ended
                June 30, 2007 and 2006 and Period From Inception (September 26, 1996)
                Through June 30, 2007
            2Statements
                of Cash Flows for the Six Months Ended June 30,
                2007 and 2006 and Period From Inception (September 26, 1996) Through
                June
                30, 2007
            3Notes
                to Financial Statements
            4Item
                2.
            Management’s
                Discussion and Analysis of Financial
                Condition and Results of Operations
            11Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            23Item
                4.
            Controls
                and Procedures
            23PART II.
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            23Item
                1A.
            Risk
                Factors
            23Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            36Item 6.
            Exhibits
            38Signature
                and Certifications
            39Exhibit
                Page
            40








Index


**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**POZEN
      Inc.**


**(A
      Development Stage Company)**


**BALANCE
      SHEETS**


**(Unaudited)**








**June
                30,**
              **2007**
            
            
            **December
                31,**
              **2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            17,339,455
            
            
            $
            26,296,884Short-term
                investments
            
            
            36,384,328
            
            
            
            36,285,102Accounts
                receivable
            
            
            8,030,914
            
            
            
            3,267,153Prepaid
                expenses and other current assets
            
            
            555,359
            
            
            
            1,108,506Total
                current assets
            
            
            62,310,056
            
            
            
            66,957,645Property
                and equipment, net of accumulated depreciation
            
            
            153,240
            
            
            
            183,468Total
                assets
            
            $
            62,463,296
            
            
            $
            67,141,113**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            2,762,520
            
            
            $
            965,563Accrued
                compensation
            
            
            1,029,167
            
            
            
            1,434,591Accrued
                expenses
            
            
            4,487,115
            
            
            
            1,756,300Deferred
                revenue
            
            
            13,468,200
            
            
            
            14,870,200Total
                current liabilities
            
            
            21,747,002
            
            
            
            19,026,654Long-term
                liabilities:Deferred
                revenue
            
            
            18,000,000
            
            
            
            24,000,000Total
                liabilities
            
            
            39,747,002
            
            
            
            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; 29,683,552,
                and
                29,447,913 shares issued and outstanding at June 30, 2007 and December
                31,
                2006, respectively
            
            
            29,684
            
            
            
            29,448Additional
                paid-in capital
            
            
            160,458,551
            
            
            
            155,920,068Accumulated
                other comprehensive loss
            
            
            (4,261
            )
            
            
            (4,092
            )Deficit
                accumulated during the development stage
            
            
            (137,767,680
            )
            
            
            (131,830,965
            )Total
                stockholders’ equity
            
            
            22,716,294
            
            
            
            24,114,459Total
                liabilities and stockholders’ equity
            
            $
            62,463,296
            
            
            $
            67,141,113








*See
      accompanying Notes to Financial Statements.*


-
          1
          -
 Index


**POZEN
      Inc.**


**(A
      Development Stage Company)**


**STATEMENTS
      OF OPERATIONS**


**(Unaudited)**





**Three
                Months Ended June 30,**
            
            
            **Six
                Months Ended June 30,**
            
            
            **Period
                From**
              **Inception**
              **(September
                26,**
              **1996)
                Through**
              **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**
            
            
            **2007****Revenue**
            
            $
            11,934,383
            
            
            $
            886,800
            
            
            $
            19,590,387
            
            
            $
            3,123,800
            
            
            $
            88,559,441**Operating
                expenses:**General
                and
                administrative
            
            
            2,924,565
            
            
            
            3,078,544
            
            
            
            6,155,104
            
            
            
            6,731,014
            
            
            
            69,050,105Research
                and
                development
            
            
            13,603,599
            
            
            
            6,659,465
            
            
            
            20,908,017
            
            
            
            12,147,643
            
            
            
            169,275,932Total
                operating expenses
            
            
            16,528,164
            
            
            
            9,738,009
            
            
            
            27,063,121
            
            
            
            18,878,657
            
            
            
            238,326,037**Other
                income:**Interest
                and other income
            
            
            746,706
            
            
            
            430,436
            
            
            
            1,536,019
            
            
            
            889,293
            
            
            
            12,933,394**Net
                loss**
            
            
            (3,847,075
            )
            
            
            (8,420,773
            )
            
            
            (5,936,715
            )
            
            
            (14,865,564
            )
            
            
            (136,833,202
            )Non-cash
                preferred stock charge
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            27,617,105Preferred
                stock dividends
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            934,478Net
                loss attributable to common stockholders
            
            $
            (3,847,075
            )
            
            $
            (8,420,773
            )
            
            $
            (5,936,715
            )
            
            $
            (14,865,564
            )
            
            $
            (165,384,785
            )Basic
                net loss per common share
            
            $
            (0.13
            )
            
            $
            (0.29
            )
            
            $
            (0.20
            )
            
            $
            (0.51
            )Shares
                used in computing
              basic
                net loss
              per
                common share
            
            
            29,502,372
            
            
            
            29,164,333
            
            
            
            29,485,882
            
            
            
            29,139,452Diluted
                net loss per common share
            
            $
            (0.13
            )
            
            $
            (0.29
            )
            
            $
            (0.20
            )
            
            $
            (0.51
            )Shares
                used in computing
              diluted
                net loss
              per
                common share
            
            
            29,502,372
            
            
            
            29,164,333
            
            
            
            29,485,882
            
            
            
            29,139,452





*See
      accompanying Notes to Financial Statements.*


-
          2
          -
 Index


**POZEN
      Inc.**


**(A
      Development Stage Company)**


**STATEMENTS
      OF CASH FLOWS**


**(Unaudited)**





**Six
                Months Ended June 30,**
            **Period
                from**
              **September
                26, 1996**
              **(inception)
                through**
              **June
                30, 2007****2007**
            
            
            **2006****Operating
                activities**Net
                loss
            
            $
            (5,936,715
            )
            
            $
            (14,865,564
            )
            
            $
            (136,833,202
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            46,579
            
            
            
            53,570
            
            
            
            984,377Write-down
                of impaired assets
            
            
            —
            
            
            
            —
            
            
            
            155,576Bond
                amortization income
            
            
            (895,242
            )
            
            
            (508,772
            )
            
            
            (2,538,471
            )Noncash
                compensation expense
            
            
            2,681,825
            
            
            
            3,268,149
            
            
            
            20,419,281Noncash
                financing charge
            
            
            —
            
            
            
            —
            
            
            
            450,000Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (4,763,761
            )
            
            
            —
            
            
            
            (8,030,914
            )Prepaid
                expenses and other current assets
            
            
            553,147
            
            
            
            316,787
            
            
            
            (555,359
            )Accounts
                payable and accrued expenses
            
            
            3,955,682
            
            
            
            (459,556
            )
            
            
            8,112,136Deferred
                revenue
            
            
            (7,402,000
            )
            
            
            (3,123,800
            )
            
            
            31,468,200Net
                cash used in operating activities
            
            
            (11,760,485
            )
            
            
            (15,319,186
            )
            
            
            (86,368,376
            )**Investment
                activities**Purchase
                of equipment
            
            
            (16,351
            )
            
            
            (39,357
            )
            
            
            (1,293,192
            )Purchase
                of investments
            
            
            (37,153,528
            )
            
            
            (18,281,452
            )
            
            
            (138,299,494
            )Sale
                of investments
            
            
            37,949,375
            
            
            
            18,600,000
            
            
            
            104,449,375Net
                cash provided by (used in) investing activities
            
            
            779,496
            
            
            
            279,191
            
            
            
            (35,143,311
            )**Financing
                activities**Proceeds
                from issuance of preferred stock
            
            
            —
            
            
            
            —
            
            
            
            48,651,850Proceeds
                from issuance of common stock
            
            
            2,023,560
            
            
            
            875,799
            
            
            
            86,357,277Proceeds
                from collections of stockholders’ receivables
            
            
            —
            
            
            
            —
            
            
            
            1,004,310Proceeds
                from notes payable
            
            
            —
            
            
            
            —
            
            
            
            3,000,000Payment
                of dividend
            
            
            —
            
            
            
            —
            
            
            
            (162,295
            )Net
                cash provided by financing activities
            
            
            2,023,560
            
            
            
            875,799
            
            
            
            138,851,142Net
                (decrease) increase in cash and cash equivalents
            
            
            (8,957,429
            )
            
            
            (14,164,195
            )
            
            
            17,339,455Cash
                and cash equivalents at beginning of period
            
            
            26,296,884
            
            
            
            27,467,789
            
            
            
            —Cash
                and cash equivalents at end of period
            
            $
            17,339,455
            
            
            $
            13,303,594
            
            
            $
            17,339,455**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 or 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 June 30, 2007,
      the Company had $17.3 million in cash and cash equivalents and $36.4 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 collaboration and license agreement
      dated August 1, 2006 between the Company and AstraZeneca AB. The Company’s
      expenses might increase additionally in 2007 and 2008 if any regulatory agency
      requires the Company to conduct additional clinical trials,
      studies****or investigations in connection with their
      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 that period. However, regulatory
      delays, such as the delay the Company is experiencing related to the approvable
      letters the Company received from the FDA in June 2006 and in August 2007 in
      connection with to the Company’s New Drug Application (NDA) for Trexima, 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 AB (AstraZeneca) related to the August 2006 Collaboration
                and License Agreement with AstraZeneca has been deferred and is being
                amortized over 40 months. 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 $3.0 million
                and $6.0
                million of revenue from the amortization of the AstraZeneca licensing
                fee
                for the three and six month period ended June 30, 2007,
                respectively.




·
            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 represents 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
                has been
                deferred to 2007. We recognized $0.7 million and $1.4 million of
                revenue
                from the amortization of GSK milestone payments for the three and
                six
                month period ended June 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 will recognize as revenue
      the direct costs and certain personnel-related expenses incurred in performing
      additional development activities described within the AstraZeneca agreement.
      We
      recognized $3.9 million and $12.2 million of revenue for development activities
      performed pursuant to the AstraZeneca agreement for the three and six month
      period ended June 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.




*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 six month periods
      ended June 30, 2007, the Company had $0.4 million and $0.9 million,
      respectively, of bond amortization included in other income for the period.
      For
      the three and six month periods ended June 30, 2006, the Company had $0.3
      million and $0.5 million, respectively, of bond amortization included in other
      income for the period.




-
          5
          -
 Index


*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 $(4,261) of unrealized losses on its
      investments that are classified on the balance sheet as accumulated other
      comprehensive income (loss) at June 30, 2007 and $(10,290) for the same period
      of 2006.




**Three
                Months Ended June 30,**
            
            
            **Six
                Months Ended June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                loss
            
            $
            (3,847,075
            )
            
            $
            (8,420,773
            )
            
            $
            (5,936,715
            )
            
            $
            (14,865,564
            )Unrealized
                gain (loss) on marketable securities
            
            
            (2,705
            )
            
            
            9,934
            
            
            
            (4,261
            )
            
            
            (10,290
            )Total
                comprehensive loss
            
            $
            (3,849,780
            )
            
            $
            (8,410,839
            )
            
            $
            (5,940,976
            )
            
            $
            (14,875,854
            )




*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 six
      months ended June 30, 2007 and June 30, 2006 includes the following stock-based
      compensation expense:





**Three
                Months Ended June 30,**
            
            
            **Six
                Months Ended June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Research
                and development
            
            $
            305,490
            
            
            $
            386,900
            
            
            $
            789,627
            
            
            $
            1,119,800General
                and administrative
            
            
            750,902
            
            
            
            960,800
            
            
            
            1,725,532
            
            
            
            2,148,300Operating
                expense
            
            
            (1,056,392
            )
            
            
            (1,347,700
            )
            
            
            (2,515,159
            )
            
            
            (3,268,100
            )Tax
                benefit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
                expense
            
            $
            (1,056,392
            )
            
            $
            (1,347,700
            )
            
            $
            (2,515,159
            )
            
            $
            (3,268,100
            )





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 1.90 years was $11.0
      million at June 30, 2007 and, over an estimated weighted-average amortization
      period of 2.2 years was $11.0 million at June 30, 2006. Unrecognized stock-based
      compensation expense expected to be recognized over the remaining period ending
      December 31, 2007 was $2.6 million at June 30, 2007 and was $3.0 million at
      June
      30, 2006 for the remaining period ending December 31, 2006. The stock-based
      compensation expense for the six months ended June 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.




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          6
          -
 Index


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. 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. 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 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. 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. As of June 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 245,560 shares of common stock remain outstanding
      under the Trexima incentive program.




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 six month periods
      ended June 30, 2007 and 2006 are shown in the following tables:





**Three
                Months Ended June 30,**
            
            
            **Six
                Months Ended June 30,****(In
                thousands)**
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Expected
                volatility
            
            
            78.8–79.2
            %
            
            
            76.6–80.0
            %
            
            
            76.0–79.2
            %
            
            
            76.0–80.0
            %Expected
                dividends
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %Expected
                terms
            
            6.25
                Years
            
            
            6.25
                Years
            
            
            6.25
                Years
            
            
            6.25
                YearsRisk-free
                interest rate
            
            
            4.6–4.7
            %
            
            
            5.0–5.1
            %
            
            
            4.6–5.1
            %
            
            
            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 six months ended June 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.


-
          7
          -
 Index


A
      summary of the time-based stock
      awards as of June 30, 2007, and changes during the three and six months ended
      June 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
            
            
            $
            20,212





The
      vesting of 46,135 time-based stock
      awards granted in the six months ended June 30, 2007 are contingent upon the
      Company’s receiving approval of the Trexima NDA from the FDA on or before
      December 31, 2007.





A
      summary
      of the time-based stock awards as of June 30, 2006, and changes during the
      three
      and six months ended June 30, 2006, was as follows:





**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
            
            
            $
            2,168




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 six months ended June 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 six months ended June 30, 2007
      was
      $1.6 million and $2.3 million, respectively. The total intrinsic value of stock
      options exercised during the three and six months ended June 30, 2006 was $0.1
      million and $0.8 million, respectively.





-
          8
          -
 Index


Restricted
      Stock and Restricted Stock Units




As
      of
      June 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 June 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. None were
      forfeited and 32,712 restricted stock units vested during the six months ended
      June 30, 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 six months ended June 30, 2007, were the same
      as those noted above under Time-Based Stock Awards.




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.




As
      of
      June 30, 2007 and 2006, there were $38,000 and $400,000, respectively, in
      unrecognized compensation expense related to performance-based awards granted
      under the Trexima incentive program. The June 30, 2007 amount is expected to
      be
      recognized over the period ending September 30, 2007. The grant-date fair value
      of these performance-based options was $3.77 per share. There were 245,560
      and
      388,593 unvested performance-based options outstanding at June 30, 2007 and
      2006, respectively. No performance-based awards were granted nor exercised
      during the six months ended June 30, 2007 and 2006; 129,691 awards were
      forfeited during the three and six months ended June 30, 2007. During the three
      and six months ended June 30, 2006, 49,542 and 54,818 awards were forfeited.
      At
      June 30, 2007 the performance-based options had an intrinsic value of $2.7
      million and a remaining contractual life of 7.5 years, while at June 30, 2006
      the performance-based options had no intrinsic value and a remaining contractual
      life of 8.5 years.




*Net
      Loss Per Share*—Basic and diluted 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 loss per common
      share amounts have been computed using the weighted-average number of shares
      of
      common stock outstanding for the six months ended June 30, 2006 and 2007. During
      the six months ended June 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 for these
      periods because the effect would have been antidilutive. Accordingly, basic
      and
      diluted net loss per share is the same for the six months ended June 30, 2006
      and 2007. 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.


-
          9
          -
 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 remains subject to
      court approval, 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.




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.




-
          10
          -
 Index




**3.
      Subsequent Events**




On
      August
      2, 2007 the Company announced that the FDA has issued a second approvable letter
      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. In
      that
      letter, the FDA requested that POZEN further address the FDA’s 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. The companies intend
      to
      request a meeting with the FDA as quickly as possible to discuss the steps
      necessary to address the FDA’s concerns.




**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.




**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.




-
          11
          -
 Index


We
      have
      developed TreximaTM in collaboration
      with GlaxoSmithKline (GSK). Trexima is GSK’s proposed brand name for the
      combination of sumatriptan succinate, formulated with GSK’s RT TechnologyTM, and naproxen
      sodium in a single tablet designed for the acute treatment of
      migraine. 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. Several new names are
      under consideration at 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 U.S. Food and Drug Administration (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
      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. The companies intend
      to
      request a meeting with the FDA as quickly as possible to discuss the steps
      necessary to address the FDA’s concerns.





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.





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. In accordance
      with our agreement with AstraZeneca, they will determine whether to proceed
      with
      the Phase 3 studies after they have had a suitable opportunity to evaluate
      certain interim data. The Phase 3 program could begin in Q3 2007. As part of
      that program, we would conduct two Phase 3 pivotal trials in patients who are
      at
      risk for developing NSAID-associated gastric ulcers. In addition, we would
      conduct 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 not covered 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 object of the program will
      be
      to establish that our PA325 product produces fewer gastric ulcers than enteric
      coated (EC) 325mg aspirin over a 6 month period. An IND is expected to be filed
      in 4Q07 and Phase 3 studies are expected to begin in 1Q08. If the studies are
      successful, an NDA is expected to be filed in mid 2009.




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.




-
          12
          -
 Index




We
      have
      incurred significant losses since our inception and have not generated any
      revenue from product sales. As of June 30, 2007, our accumulated deficit was
      approximately $137.8 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 71% of our total operating expenses. For the six month period ended
      June 30, 2007, our research and development expenses represented approximately
      77% 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.




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 six month period ended June
      30, 2007 were $3.1 million. Other research and development department costs
      for
      the six month period ended June 30, 2007 were $0.1 million.




-
          13
          -
 Index




**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 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 POZEN further address the FDA’s 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.
      The companies intend to request a meeting with the FDA as quickly as possible
      to
      discuss the steps necessary to address the FDA’s concerns.





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.





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 intend to request a meeting with
      the
      FDA as quickly as possible to discuss the steps necessary to address their
      concerns. However, until we meet with the FDA, it is unknown if we will be
      able
      to adequately address their concerns. Even if we agree with the FDA on what
      is
      required to address their concerns and we fulfill such requirements, 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 $0.5 million in direct development costs associated with the
      development of MT 400/Trexima for the six month period ended June 30, 2007
      and
      we have incurred $25.0 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. 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.


-
          14
          -
 Index


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 notwithstanding the use of a different PPI, 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 are
      reviewing the interim results of this trial in the third quarter prior to
      commencing Phase 3 studies of PN 400. In accordance with our agreement with
      AstraZeneca, they will determine whether to proceed with the Phase 3 studies
      after they have had a suitable opportunity to evaluate this interim data and
      data from our successfully completed cross-over gastric pH-based acid
      suppression study for PN 400 initiated in the second quarter of 2007. Upon
      AstraZeneca’s decision to proceed with the Phase 3 program for PN 400, we could
      begin our Phase 3 studies as soon as clinical trial material is manufactured
      and
      ready for use. We could commence Phase 3 trials for PN 400 in the third quarter
      of 2007. In conducting a Phase 3 program, we would conduct two Phase 3 pivotal
      trials in patients who are at risk for developing NSAID-associated gastric
      ulcers. In addition, we would conduct a long-term, open label safety study
      and a
      smaller study in patients at high risk of gastrointestinal related events from
      NSAIDs.





Achieving
      the primary endpoints of the PN 200 trial and the PN 400 acid suppression study
      described above would qualify us for a $20 million milestone payment from
      AstraZeneca. According to the terms of the AstraZeneca agreement and the current
      timeline, the earliest this milestone could be earned is December 2007 upon
      delivery of finished study reports. If one or both of these trials do not meet
      the pre-specified primary endpoints, AstraZeneca has the right to terminate
      the
      agreement within a specified timeframe. If the agreement is not terminated
      within such timeframe, the collaboration would continue and the milestone would
      be payable.





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
      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.





-
          15
          -
 Index


We
      incurred direct development costs associated with the development of our PN
      program of $13.7 million for the six month period ended June 30, 2007 and we
      have incurred $31.5 million from inception to date, $17.0 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, PA 325, is currently in formulation and
      early-stage clinical development. We completed a Phase I proof of concept study
      of PA 325 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 percent
      of
      the EC aspirin group had this level of gastrointestinal damage. Furthermore,
      no
      ulcers were seen in the PA group, while 20 percent of subjects in the EC aspirin
      325mg group developed a gastric ulcer during the study. This difference was
      also
      statistically significant. We recently completed a second proof of concept
      study
      with PA 325 as compared to 81 mg of EC aspirin. These results confirmed the
      earlier levels of gastric damage as measured by Lanza scoring at about 11%
      for
      PA325. These results were numerically different, but not statistically
      significant from the results obtained with 81mg EC aspirin (22%). After
      reviewing these data, we decided to conduct an additional phase I study using
      40mg of immediate release of omeprazole and 325mg of aspirin as compared to
      325mg EC aspirin. Results from this study are expected to be available during
      3Q07. We met with the FDA in July 2007 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 prove bioequivalence to EC aspirin and
      receive all the claims of aspirin and to establish that our PA325 product
      produces fewer gastric ulcers than EC 325mg aspirin over a 6 month period.
      An
      IND is expected to be filed in 4Q07 and we will be in a position to start Phase
      3 studies 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.





We
      incurred direct development costs associated with the development of our PA
      program of $2.7 million during the six month period June 30, 2007, and we have
      incurred $4.5 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.


-
          16
          -
 Index


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 direct development costs associated with the development of our
      lornoxicam program of $26,000 for the six month period ended June 30, 2007,
      and
      we have incurred $8.6 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 $62,000 for the six month period ended June 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.




**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 $41,000 for
      the
      six month period ended June 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.




-
          17
          -
 Index


***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.




***AstraZeneca
      AB (AstraZeneca)***




In
      August
      2006, we entered into a collaboration and license agreement 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 addition, AstraZeneca has agreed to make milestone payments upon
      the
      achievement of certain development events and sales events. If all development
      milestones are achieved, total development milestone payments due us under
      the
      agreement will be $160 million. If all sales milestone events are achieved,
      total sales milestone payments due us under the agreement will be $175 million.
      We will also receive a royalty based on annual net sales by AstraZeneca, its
      affiliates or sublicensees under the agreement during the royalty term. The
      royalty rate varies based on the level of annual net sales of products made
      by
      AstraZeneca, its affiliates and sublicensees, with percentages ranging from
      the
      mid-single digits to the mid-teens. In addition, the agreement provides for
      certain reductions to the royalty rate based on qualified royalty payments
      to
      other third parties and loss of market share due to generic competition. 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.








-
          18
          -
 Index


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 establishes joint committees with representation
      of
      both us and AstraZeneca to manage the development and commercialization of
      the
      product. The committees will 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, shall 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.




***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.




-
          19
          -
 Index




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 June 30, 2007 compared to the three months ended June 30,
      2006***




*Net
      loss per share*: Net loss attributable to common stockholders for the three
      months ended June 30, 2007 was $(3.8) million or $(0.13) per share as compared
      to a net loss of $(8.4) million, or $(0.29) per share, for the three months
      ended June 30, 2006. The net loss for the three month period ended June 30,
      2007
      included a $1.1 million or ($0.04) per share charge for non-cash stock-based
      compensation expense as compared to $1.3 million, or $(0.05) per share for
      the
      same period of 2006.




*Revenue*:
      We recognized $11.9 million of revenue for the three months ended June 30,
      2007
      as compared to $0.9 million for the three months ended June 30, 2006. The
      increase in revenue was primarily due to a $3.0 million increase in the
      amortization of upfront payments we received in 2006 and a $8.2 million increase
      in other revenue from development activities we completed in the three month
      period ended June 30, 2007 pursuant to our development and commercialization
      agreement with AstraZeneca. 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 $31.5 million remains in deferred revenue
      at June 30, 2007. Substantive milestone payments are recognized as revenue
      upon
      completion of the contractual events.




*Research
      and development*: Research and development expenses increased by $7.0
      million to $13.6 million for the three months ended June 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 $6.9 million to $10.0 million, primarily due to Phase 3 clinical trial
      activities and other PN product development activities pursuant to the
      AstraZeneca agreement during the second quarter of 2007, as compared to the
      same
      period of 2006. Direct development costs for the PA program increased to $1.2
      million during the second quarter of 2007, as compared to the same period of
      2006. Direct development costs for the lornoxicam program decreased by $1.4
      million primarily due to Phase I/II clinical trial activities during the second
      quarter of 2006 as compared to the same period of 2007. Other direct development
      costs and departmental expenses decreased by $0.2 million primarily due to
      a
      reduction in personnel and related expenses including 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 $0.2
      million to $2.9 million for the three months ended June 30, 2007, as compared
      to
      the same period of 2006. The decrease was due primarily to a reduction in public
      company expenses and personnel related 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 $0.3 for the three months ended June 30, 2007
      and $0.2 million for the three months ended June 30, 2006. Investment income
      from bond amortization for the three month period ended June 30, 2007 totaled
      $0.4 million as compared to $0.3 million during the same period of
      2006.




***Six
      months ended June 30, 2007 compared to the six months ended June 30,
      2006***




*Net
      loss per share*: Net loss attributable to common stockholders for the six
      months ended June 30, 2007 was $(5.9) million or $(0.20) per share as compared
      to a net loss of $(14.9) million, or $(0.51) per share, for the six months
      ended
      June 30, 2006. The net loss for the six months ended June 30, 2007 included
      a
      $2.6 million or ($0.09) per share charge for non-cash stock-based compensation
      expense as compared to $3.3 million, or $(0.11) per share for the same period
      of
      2006.




-
          20
          -
 Index


*Revenue*:
      We recognized $19.6 million of revenue for the six months ended June 30, 2007
      as
      compared to $3.1 million for the six months ended June 30, 2006. The increase
      in
      revenue was primarily due to a $6.0 million increase in the amortization of
      upfront payments we received and a $12.2 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 $31.5 million remains in deferred revenue
      at June 30, 2007. Substantive milestone payments are recognized as revenue
      upon
      completion of the contractual events.




*Research
      and development*: Research and development expenses increased by $8.8
      million to $20.9 million for the six months ended June 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 $9.2 million to $13.7 million, primarily due to Phase 3 clinical trial
      activities and other PN product development activities pursuant to the
      AstraZeneca agreement during the first half of 2007, as compared to the same
      period of 2006. Direct development costs for the PA program increased to $2.7
      million during the first half of 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 first half
      of
      2006 as compared to the same period of 2007. Other direct development costs
      and
      departmental expenses decreased by $0.5 million primarily due to a reduction
      in
      personnel and related expenses including 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 $0.6
      million to $6.2 million for the six months ended June 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 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 $0.6 and $0.4 million for the six months ended
      June 30, 2007 and 2006, respectively. Investment income from bond amortization
      for the six month period ended June 30, 2007 totaled $0.9 million as compared
      to
      $0.5 million during the same period of 2006.




**Income
      Taxes**




We
      estimate an effective tax rate of 0% for the year ended December 31, 2007 based
      upon financial results and annual forecasts available at June 30, 2007. Our
      effective tax rate was 0% for the six month period ended June 30, 2007. However,
      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 reult, there were no
      material impacts to the financial statements.





We
      recognize interest and penalties accrued related to unrecognized tax benefits
      as
      income tax expense. As of the date of adoption, no interest and penalties have
      been accrued.


-
          21
          -
 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 June 30, 2007, cash and
      cash
      equivalents, along with short-term investments, totaled $53.7 million, a
      decrease of $8.9 million compared to December 31, 2006. The decrease in cash
      was
      primarily due to operating expenses for the period offset in part by cash
      receipts for development activities received from AstraZeneca pursuant to our
      PN
      collaboration agreement. There is an $8.0 million accounts receivable from
      AstraZeneca at June 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 $7.4 million in operating cash during the six months ended June 30,
      2007 pursuant to the terms of our collaboration agreement with AstraZeneca.
      In
      addition, our balance sheet includes $8.0 million in accounts receivable for
      invoiced development activities under the terms of the AstraZeneca agreement.
      Cash received from financing activities during the period totaled $2.0 million,
      reflecting net proceeds from the exercise of stock options.




Based
      upon the direct method of presenting cash flow, cash used in operating
      activities totaled $19.7 million for the six months ended June 30, 2007. The
      indirect method for presenting cash flow is used in the Statement of Cash Flows
      included in our financial statements. Cash used in operating activities was
      $28.8 million for the fiscal year ended December 31, 2006 and $27.4 million
      for
      the fiscal year ended December 31, 2005. Net cash provided by investing
      activities during the six months ended June 30, 2007 totaled $0.8 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
      June 30, 2007, we had $17.3 million in cash and cash equivalents and $36.4
      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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          22
          -
 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 remains subject
      to
      court approval, 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.




**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.**




-
          23
          -
 Index




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 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. The companies intend to request
      a meeting with the FDA as quickly as possible to discuss the steps necessary
      to
      address the FDA’s concerns. However, until we meet with the FDA, it is unknown
      if we will be able to adequately address their concerns. However, until we
      meet
      with the FDA, it is unknown if we will be able to adequately address their
      concerns. Even if we agree with the FDA on what is required to address their
      concerns and we fulfill such requirements, 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.




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 June 30, 2007, we had
      an
      accumulated deficit of approximately $137.8 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 likely 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.




**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.




-
          24
          -
 Index


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.




**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.




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.




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          25
          -
 Index


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.




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.




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          26
          -
 Index


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.




**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.**




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          -
 Index


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.**




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.




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          28
          -
 Index


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, 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, 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. The companies intend to request
      a meeting with the FDA as quickly as possible to discuss the steps necessary
      to
      address the FDA’s concerns. However, until we meet with the FDA, it is unknown
      if we will be able to adequately address their 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.




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.




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          29
          -
 Index




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®.




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:




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          30
          -
 Index




•
            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 is subject to court
      approval which, while expected by the end of 2007, cannot be
      guaranteed.




**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.




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          31
          -
 Index


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.




**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:




-
          32
          -
 Index




•
            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.




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.**




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          33
          -
 Index


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.




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. In accordance with our agreement with AstraZeneca,
      they will determine whether to proceed with the Phase 3 studies after they
      have
      had a suitable opportunity to evaluate certain interim data. Their decision
      and
      these marketing studies may impact revenue and expenses for the 2007
      year.****As of June 30, 2007, we had an aggregate of $53.7
      million in cash and cash equivalents and short-term investments. If our
      operating expenses for 2007 and 2008 remain at the level of our operating
      expenses in 2006, 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 in 2007 and 2008 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.




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          34
          -
 Index


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, 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. 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.




***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:




•
            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.




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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 June 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.




**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.




**Item
      4. Submission of Matters to a Vote of Security
      Holders**




Our
      annual meeting of stockholders was held on June 13, 2007. There were present
      at
      the annual meeting of stockholders in person or by proxy stockholders holding
      an
      aggregate of 26,682,270 shares of our common stock out of a total number of
      29,485,316 shares of common stock issued and outstanding and entitled to vote
      at
      the meeting. Our stockholders voted on three matters, as follows:




-
          36
          -
 Index





1.
      The
      stockholders elected three Class I directors to each serve for a three year
      term
      (until our 2010 annual meeting of stockholders and until their successors have
      been duly elected and qualified) by the following votes (there were no
      abstentions or broker non-votes in connection with the election of the Class
      I
      directors):




**Number
                of Shares of**
              **Common
                Stock****For:**
            
            **Withheld:**Paul
                J. Rizzo
            
            25,675,161
            
            1,007,108Jacques
                F. Rejeange
            
            25,674,986
            
            1,007,283




The
      other
      directors whose terms of office as director continued after the meeting are
      as
      follows: John R. Plachetka, Pharm.D, Arthur S. Kirsch, Kenneth B. Lee, Jr.,
      James J. Mauzey, Bruce A. Tomason and Peter J. Wise, M.D.







2.
      Approval of our 2000 Equity
      Compensation Plan, as amended and restated, including to increase from 5,500,000
      to 6,500,000 the number of shares issuable under the Plan, as amended and
      restated.





**Number
                of Shares of**
              **Common
                Stock****For:**
            
            **Against:**
            
            **Abstain:**
            
            **Broker**
              **non-votes:**11,242,314
            
            5,421,767
            
            229,386
            
            9,788,803








3.
      The
      stockholders ratified the appointment of Ernst & Young LLP as our
      independent auditors for the fiscal year ending December 31, 2007 by the
      following votes (there were no broker non-votes in connection with the
      ratification of our independent auditor):




**Number
                of Shares of**
              **Common
                Stock****For:**
            
            **Against:**
            
            **Abstain:**26,551,094
            
            94,855
            
            36,321








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 Index


**Item
      6.
      Exhibits**





**Exhibit**
              **Number**
            **Description**10.1
            Second
                Amended and Restated POZEN Inc. 2000 Equity Compensation
                Plan.10.2
            Form
                of Incentive Stock Option Agreement under Second Amended and Restated
                Equity Compensation Plan.10.3
            Form
                of Employee Nonqualified Stock Option Agreement under Second
                Amended and Restated Equity Compensation Plan.10.4
            Form
                of Non-Employee Director Nonqualified Stock Option Agreement under
                Second Amended and Restated Equity Compensation Plan.10.5
            Form
                of Non-Employee Director Restricted Stock Unit Agreement under Second
                Amended and Restated Equity Compensation Plan.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.












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**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)August
                7, 2007
            By:
            /s/
                JOHN R. PLACHETKAJohn
                R. PlachetkaPresident
                and Chief Executive OfficerAugust 7,
                2007
            By:
            /s/
                WILLIAM L. HODGESWilliam
                L. HodgesChief
                Financial OfficerAugust
                7, 2007
            By:
            /s/
                JOHN E. BARNHARDTJohn
                E. BarnhardtPrincipal
                Accounting Officer





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          39
          -
 Index


**EXHIBIT
      INDEX**





**Exhibit**
              **Number**
            **Description**10.1
            Second
                Amended and Restated POZEN Inc. 2000 Equity Compensation
                Plan.10.2
            Form
                of Incentive Stock Option Agreement under Second Amended and Restated
                Equity Compensation Plan.10.3
            Form
                of Employee Nonqualified Stock Option Agreement under Second
                Amended and Restated Equity Compensation Plan.10.4
            Form
                of Non-Employee Director Nonqualified Stock Option Agreement under
                Second Amended and Restated Equity Compensation Plan.10.5
            Form
                of Non-Employee Director Restricted Stock Unit Agreement under Second
                Amended and Restated Equity Compensation Plan.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.





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