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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended January 1, 2006                                                   
|          
|OR        
|          
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to                                             

Commission File Number 000-50851


NEW RIVER PHARMACEUTICALS INC.


(Exact name of registrant as specified in its charter)


|                                                                                |  |                                         
|------------------------------------------------------------------------------- |  | ----------------------------------------
|Virginia                                                                        |  | 54-1816479                              
|(State or other Jurisdiction of
    incorporation or organization)              |  | (I.R.S. employer
    identification no.)
|                                                                               
|1881 Grove Avenue
    Radford, Virginia(Address of principal executive offices) |  | 24141(zip code)                         

(540) 633-7978


(Registrants telephone number including area code)


Securities registered pursuant to Section 12(b) of the
Act:


|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange on Which Registered
|                    |  |                                          
|None                |  | None                                     

Securities registered pursuant to Section 12(g) of the
Act:


|                
|----------------
|(Title of Class)
|                
|Common Stock    

o þ


o þ


þ o


10-K 10-K. þ


12b-2


o þ o


12b-2 o þ














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TABLE OF CONTENTS


|              |  |                                                                                                                      |    |  |    | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I       
|ITEM 1.       |  | BUSINESS                                                                                                             |    |  | 3  | 
|ITEM 1A.      |  | RISK FACTORS                                                                                                         |    |  | 23 | 
|ITEM 1B.      |  | UNRESOLVED STAFF COMMENTS                                                                                            |    |  | 35 | 
|ITEM 2.       |  | PROPERTIES                                                                                                           |    |  | 35 | 
|ITEM 3.       |  | LEGAL PROCEEDINGS                                                                                                    |    |  | 35 | 
|ITEM 4.       |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                                              |    |  | 36 | 
|ITEM 5.       |  | MARKET FOR REGISTRANTS COMMON EQUITY,
    RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES |    |  | 36 | 
|ITEM 6.       |  | SELECTED FINANCIAL DATA                                                                                              |    |  | 37 | 
|ITEM 7.       |  | MANAGEMENTS DISCUSSION AND ANALYSIS
    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                            |    |  | 38 | 
|ITEM 7A.      |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES
    ABOUT MARKET RISK                                                       |    |  | 47 | 
|ITEM 8.       |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA                                                                      |    |  | 48 | 
|ITEM 9.       |  | CHANGES IN AND DISAGREEMENTS WITH
    ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                             |    |  | 48 | 
|ITEM 9A.      |  | CONTROLS AND PROCEDURES                                                                                              |    |  | 48 | 
|ITEM 9B.      |  | OTHER INFORMATION                                                                                                    |    |  | 49 | 
|ITEM 10.      |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT                                                               |    |  | 50 | 
|ITEM 11.      |  | EXECUTIVE COMPENSATION                                                                                               |    |  | 50 | 
|ITEM 12.      |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                   |    |  | 50 | 
|ITEM 13.      |  | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS                                                                   |    |  | 50 | 
|ITEM 14.      |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                               |    |  | 50 | 
|ITEM 15.      |  | EXHIBITS AND FINANCIAL STATEMENT
    SCHEDULES                                                                       |    |  | 50 | 
|SIGNATURES    |  |                                                                                                                      | 52 | 
|Exhibit 10.15
|Exhibit 21.1 
|Exhibit 23.1 
|Exhibit 31.1 
|Exhibit 31.2 
|Exhibit 32.1 
|Exhibit 32.2 



10-K 10-K), 10-K 10-K


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PART I







|        |         
|------- | --------
|ITEM 1. | BUSINESS

Overview


tm




General.




Market Opportunity








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non-medically.






Our Solution






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best-in


Advantageous patent treatment.


Potentially favorable development pathways. d-amphetamine,


Broad applicability.


Strategy




Bringing our lead products to market.


5



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Overview


Seeking intellectual property protection for our platform
and drug candidates.


Seeking shortened development and regulatory approval
pathways. d-amphetamine,


Entering into collaborations to maximize the value of our
Carrierwave platform with respect to other products.


Our Drug Development Programs






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NRP104


Overview.












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NRP104 Development.




® 12-hour




End-of




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| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | NRP104 has oral bioavailability similar to a currently marketed
    amphetamine product. 
|
| |  | The serum concentrations of NRP104 are within established
    parameters.                
|
| |  | NRP104s side effect profile appears similar to those of
    currently marketed products.
|
| |  | NRP104 may provide once per day dosing without additional
    formulation.               





| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | release amphetamine in therapeutic amounts when taken orally;                                                                                       
|
| |  | result in a significantly lower maximum drug concentration in
    the blood than amphetamine when administered in higher than
    therapeutic doses;
|
| |  | have sustained release properties;                                                                                                                  
|
| |  | have diminished levels of absorption when administered
    intranasally or intravenously;                                                           
|
| |  | have reduced acute toxicity compared to amphetamine; and                                                                                            
|
| |  | have resistance to mechanical, thermal and chemical methods of
    releasing the active pharmaceutical ingredient.                                  





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28-day




NRP290


Overview.




NRP290 Development.


10



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Comparable oral bioavailability. In rat studies, we
    examined blood levels of hydrocodone following oral
    administration of equal amounts of hydrocodone or NRP290 at a
    dose approximating human therapeutic dose ranges. The overall
    release of hydrocodone from NRP290 (AUC) was approximately
    equal to that of hydrocodone, and levels of hydrocodone released
    from NRP290 remained elevated for a longer period of time. These
    results suggest that NRP290 may have bioavailability comparable
    to that of current formulations of hydrocodone.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Less potential for dependence and abuse. In the same
    study, the Cmax for NRP290 was significantly reduced in higher
    than therapeutic doses as compared to hydrocodone. This lower
    Cmax suggests that our compound may provide a reduced potential
    to generate a sense of euphoria at onset when compared to
    hydrocodone, making it potentially less attractive to abusers
    and less likely to lead to psychological addiction by reducing
    the initial euphoric effect that can be achieved with
    hydrocodone. In other rat studies, we investigated the potential
    for active drug substance to be released from NRP290 when
    administered intravenously or intranasally at a dose that would
    be therapeutic if taken orally. In both cases, while some
    quantity of hydrocodone was released, the AUC, Cmax and total
    amount of active drug substance released were significantly less
    than for hydrocodone administered via the same route and in an
    equivalent quantity. As a result, we believe that NRP290 may
    reduce the incentives to abuse the product by circumventing the
    oral route of administration.
|
| |  | Less potential for overdose. We conducted rat studies to
    evaluate the effects of administering greater than therapeutic
    dose levels of both NRP290 and hydrocodone. In these studies
    increased doses of our CBD resulted in little increase in blood
    levels of hydrocodone. In contrast, blood levels of hydrocodone
    increased proportionally when increased doses of hydrocodone
    itself were administered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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| |  |                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------
| |  | These studies suggest that NRP290 may provide substantial
    protection against accidental and intentional overdose.

NRP409




Other Development Projects








Other Areas of Research




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Research and Development




Manufacturing




Sales and Marketing






Patents and Proprietary Rights




continuation-in


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continuation-in






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) There is one U.S. patent, and 39 patent
    applications, including U.S., Patent Cooperation Treaty stage,
    and foreign national phase applications, directed to our core
    Carrierwave technology and its various applications.
    U.S. Patent No. 6,716,452 is directed to our core
    technology and includes composition and method of delivery
    claims for alcohol, amine and carboxylic acid active agents
    attached to a polypeptide. This patent issued on April 6,
    2004 and has a scheduled expiration date of August 22, 2020.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (ii) There are 33 patent applications, including U.S.,
    Patent Cooperation Treaty stage, and foreign national phase
    applications, applying Carrierwave to our specific product
    candidates, NRP104, NRP290 and NRP369 and 21 additional patent
    applications, including U.S., Patent Cooperation Treaty stage
    and foreign applications, applying Carrierwave to abuse
    resistant compounds generically.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (iii) There are three U.S. patents, one Canadian
    patent, and six patent applications, including U.S. and foreign
    national phase applications, directed to iodothyronine mixtures,
    compounds, compositions and their methods of use.
    U.S. Patent No. 6,627,660 issued on September 30,
    2003 and includes claims directed to compositions and methods
    for treating hypothyroidism. This patent has a projected
    expiration date of November 16, 2019. U.S. Patent
    No. 5,767,227 issued on June 16, 1998 and includes
    compound, composition and method of treating thyroid disorder
    claims using iodothyronine polymers. U.S. Patent
    No. 5,910,569, a
    continuation-in-part,
    issued on June 8, 1999, includes iodothyronine copolymers
    and a method of treating thyroid disorder claims further
    comprising the 20 naturally occurring amino acids. These patents
    have a projected expiration date of June 16, 2015. We also
    have a related iodothyronine Canadian Patent No. 2,072,613,
    which has a scheduled expiration date of October 31, 2010.
    The pending applications are directed to iodothyronine mixtures,
    compounds, compositions and their methods of use.
|
| | (iv) There is one Australian Patent and one
    U.S. application directed to conformational protection of
    various active agents. There is one U.S. and one Canadian
    application directed to dendritic encapsulation of various
    active agents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



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Competition








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Government Regulation




| |        
| | -------
| | Summary







| |                      
| | ---------------------
| | New drug applications





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Completion of preclinical investigations.
    Preclinical studies generally include laboratory evaluations of
    a products chemistry, formulation and stability, as well
    as animal studies intended to assess safety and efficacy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | Submission of an IND. An IND is a submission to
    the FDA that includes the results of all preclinical
    investigations, a proposal for the clinical investigation of the
    drug, and all available information related to the previous use
    of the drug in humans (e.g., in countries outside the United
    States). Human clinical trials may not be conducted in the
    United States until 30 days after submission of an IND, and
    may not commence if the FDA objects within that time. At any
    later time, the FDA may place an IND, or any trials conducted
    under it, on clinical hold, potentially resulting in termination
    or suspension of ongoing trials.                                                                                                                   
|
| | Completion of human clinical trials. Human
    clinical trials generally consist of pharmacokinetic studies,
    dose ranging studies and adequate and well-controlled studies
    designed to demonstrate the safety and efficacy of the drug.
    These studies are typically but not necessarily conducted in
    three phases. Phase 1 studies test for safety, dosage
    tolerance, absorption, metabolism, distribution and excretion,
    usually in healthy human subjects. Phase 2 studies evaluate
    effectiveness and safety in patients who have the medical
    condition that the drug is intended to treat. Phase 3
    studies include trials that are designed to accumulate the
    pivotal safety and efficacy data that are necessary to satisfy
    the requirements for an NDA approval.



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| |                        
| | -----------------------
| | Our regulatory strategy



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| |                             
| | ----------------------------
| | Other regulatory constraints



18



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| |               
| | --------------
| | DEA regulation



19



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Product Liability Insurance




Employees






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Executive Officers


10-K:


|                            |  |     |    |  |          |                                                                                                                          
|--------------------------- |  | --- | -- |  | -------- | -------------------------------------------------------------------------------------------------------------------------
|Name                        |  | Age |    |  | Position
|                            |  |     |    |  |         
|Randal J. Kirk              |  |     | 52 |  |          | Chairman of the Board, President and Chief Executive Officer
    (principal executive officer)                           
|Krish S. Krishnan           |  |     | 41 |  |          | Chief Operating Officer, Chief Financial Officer, Secretary and
    Director (principal financial and accounting officer)
|Suma M. Krishnan            |  |     | 41 |  |          | Vice President, Product Development                                                                                      
|Robert D. Colucci, Pharm.D. |  |     | 44 |  |          | Vice President, Clinical Development                                                                                     
|Other Officers              |  |     |    |  |          |                                                                                                                          
|Clifton R. Herndon II       |  |     | 38 |  |          | Vice President, Finance and Controller                                                                                   

Randal J. Kirk


Krish S. Krishnan start-up


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Suma M. Krishnan


Robert D. Colucci


Clifton R. Herndon II




Available Information and Corporate Governance Documents.


www.nrpharma.com. 10-K, 10-Q, 8-K


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ITEM 1A.     RISK FACTORS


Risk Factors Related to Our Business


10-K, 10-K 10-K.




| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | We have a history of operating losses and may incur
    additional substantial losses in 2006. We may never achieve
    profitability.









| |   |                                               
| | - | ----------------------------------------------
| |  | developing and testing product candidates;    
|
| |  | receiving regulatory approvals;               
|
| |  | commercializing our products; and             
|
| |  | establishing a favorable competitive position.





| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Our product candidates are based on a technology that
    could ultimately prove ineffective or unsafe.



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| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to develop and commercialize our product
    candidates successfully, we may never achieve
    profitability.





| |                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face intense competition in the markets targeted by our
    lead product candidates. Many of our competitors have
    substantially greater resources than we do, and we expect that
    all of our product candidates under development will face
    intense competition from existing or future drugs.





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| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | successfully market products that compete with our products;                                         
|
| |  | successfully identify drug candidates or develop products
    earlier than we do; or                 
|
| |  | develop products that are more effective, have fewer side
    effects or cost less than our products.







| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to protect our intellectual property rights,
    our ability to pursue the development of our technologies and
    products would be negatively affected.







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| |                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have not commissioned an extensive investigation
    concerning our freedom to practice or the validity or
    enforceability of our Carrierwave technology or product
    candidates, and we may be held to infringe the intellectual
    property rights of others.









| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | cease making, using, selling, offering to sell or importing any
    products that infringe a third partys intellectual
    property through an injunction;                                                     
|
| |  | obtain a license or an assignment from the holder of the
    infringed intellectual property right, which license or
    assignment may be costly or may not be available on reasonable
    terms, if at all; or
|
| |  | redesign our products, which would be costly and time-consuming
    and may not be possible.                                                                                                                    



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | We may be involved in lawsuits to protect or enforce our
    patents, which could be expensive and time-consuming.



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| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If preclinical testing or clinical trials for our product
    candidates are unsuccessful or delayed, we will be unable to
    meet our anticipated development and commercialization
    timelines.







| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | demonstrating sufficient safety and efficacy to obtain
    regulatory approval to commence a clinical trial;
|
| |  | reaching agreement on acceptable terms with prospective contract
    research organizations and trial sites;
|
| |  | manufacturing sufficient quantities of a product
    candidate; and                                         
|
| |  | obtaining institutional review board approval to conduct a
    clinical trial at a prospective site.        

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| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ongoing discussions with the FDA or other regulatory authorities
    regarding the scope or design of our clinical trials;                                   
|
| |  | failure to conduct clinical trials in accordance with regulatory
    requirements;                                                                           
|
| |  | lower than anticipated recruitment or retention rate of patients
    in clinical trials;                                                                     
|
| |  | inspection of the clinical trial operations or trial sites by
    the FDA or other regulatory authorities resulting in the
    imposition of a clinical hold;
|
| |  | lack of adequate funding to continue clinical trials; or                                                                                                     
|
| |  | negative results of clinical trials.                                                                                                                         





| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | We have received an observation from the FDA noting that
    we did not submit an IND before conducting certain clinical
    studies in 2001.





| |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the FDA does not accept our filing under
    Section 505(b)(1) and we are unable to file for approval
    under Section 505(b)(2) of the Federal Food, Drug and
    Cosmetic Act or if we are required to generate additional data
    related to safety and efficacy in order to obtain approval under
    Section 505(b)(1) or 505(b)(2), we may be unable to meet
    our anticipated development and commercialization
    timelines.



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| |                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the FDA requires that NRP104 be scheduled by the DEA
    before the product is commercially sold, we will be unable to
    begin commercial sale of that product until the DEA completes
    scheduling proceedings, and if NRP104 is scheduled by the DEA in
    Schedule II under the Controlled Substances Act (CSA), the
    potential market for the drug may be significantly
    reduced.





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| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have engaged in extensive financial and operational
    transactions with Randal J. Kirk, our Chairman, President and
    Chief Executive Officer, and his affiliates.





| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of January 1, 2006 Randal J. Kirk controlled
    approximately 56.8% of our common stock and is able to control
    or significantly influence corporate actions, which may result
    in Mr. Kirk taking actions that advance his interests to
    the detriment of our other shareholders.





| |                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on Third Security, LLC, to provide us with certain
    services. If Third Security, LLC ceases to provide these
    services and we are unable to establish and maintain the
    necessary infrastructure to be self-sufficient, our business
    will be adversely affected.





| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Our executive officers and other key personnel are
    critical to our business, and our future success depends on our
    ability to retain them.



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on third parties to manufacture the compounds used
    in our trials, and we intend to rely on them for the manufacture
    of any approved products for commercial sale. If these third
    parties do not manufacture our product candidates in sufficient
    quantities and at an acceptable cost, clinical development and
    commercialization of our product candidates could be delayed,
    prevented or impaired.







| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure by our third-party manufacturers to comply with
    the regulatory guidelines set forth by the FDA and DEA with
    respect to our product candidates could delay or prevent the
    completion of clinical trials, the approval of any product
    candidates or the commercialization of our products.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Manufacturers are obligated to operate in accordance with
    FDA-mandated current good manufacturing practice (cGMP)
    requirements. A failure of any of our third-party manufacturers
    to establish and follow cGMP requirements and to document their
    adherence to such practices may lead to significant delays in
    the availability of material for clinical trials, may delay or
    prevent filing or approval of marketing applications for our
    products, and may cause delays or interruptions in the
    availability of our products for commercial distribution
    following FDA approval.
|
| |  | Replacing our third-party manufacturers or contracting with
    additional manufacturers may require re-validation of the
    manufacturing processes and procedures in accordance with cGMP
    and compliance with supplemental approval requirements. Any such
    necessary re-validation and supplemental approvals may be costly
    and time- consuming.                                                                                                                                                                                                                                                        





| |                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may need additional capital in the future. If
    additional capital is not available or is available at
    unattractive terms, we may be forced to delay, reduce the scope
    of or eliminate our research and development programs, reduce
    our commercialization efforts or curtail our operations.

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| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | successful commercialization of our product candidates;                                                                 
|
| |  | continued progress of research and development of product
    candidates utilizing our Carrierwave technology;          
|
| |  | the time and costs involved in obtaining regulatory approval for
    our product candidates;                            
|
| |  | costs associated with protecting our intellectual property
    rights;                                                  
|
| |  | development of marketing and sales capabilities;                                                                        
|
| |  | payments received under our collaboration agreements with Shire
    and any future collaborative agreements, if any; and
|
| |  | market acceptance of our products.                                                                                      





| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | Even if we obtain regulatory approval to market our
    product candidates, our product candidates may not be accepted
    by the market.





| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | cost-effectiveness;                                                                                                                                  
|
| |  | the safety and effectiveness of our products, including any
    potential side effects, as compared to alternative products or
    treatment methods;
|
| |  | the timing of market entry as compared to competitive products;                                                                                      
|
| |  | the rate of adoption of our products by doctors and nurses;                                                                                          
|
| |  | product labeling or product insert required by the FDA for each
    of our products;                                                                 

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| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | determination of scheduled or unscheduled status by the FDA and
    DEA;                                                                                 
|
| |  | reimbursement policies of government and third-party payors;                                                                                             
|
| |  | effectiveness of our sales, marketing and distribution
    capabilities and the effectiveness of such capabilities of our
    collaborative partners; and
|
| |  | unfavorable publicity concerning our products or any similar
    products.                                                                               





| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to establish marketing, sales and distribution
    capabilities, or fail to enter into arrangements with third
    parties to do this on our behalf, we will not be able to create
    a market for our product candidates.





| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the event that we are successful in bringing any
    products to market, our revenues may be adversely affected if we
    fail to obtain acceptable prices or adequate reimbursement for
    our products from third-party payors.





| |   |                                                  
| | - | -------------------------------------------------
| |  | government and health administration authorities;
|
| |  | private health insurers; and                     
|
| |  | other third-party payors, including Medicare.    





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| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | We could be forced to pay substantial damage awards if
    product liability claims that may be brought against us are
    successful.





| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We use hazardous chemicals in our business. Potential
    claims relating to improper handling, storage or disposal of
    these chemicals could be time consuming and costly.







| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If Shire, our collaboration partner on NRP104, or any
    other collaborative partners we retain, do not satisfy their
    obligations, we will be unable to develop our partnered product
    candidates.

day-to day-to


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| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain provisions of Virginia law, and our amended and
    restated articles of incorporation and amended and restated
    bylaws could make it more difficult for our shareholders to
    remove our board of directors and management.





| |   |                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a provision allowing our board of directors to issue preferred
    stock with rights senior to those of the common stock without
    any vote or action by the holders of our common stock. The
    issuance of preferred stock could adversely affect the rights
    and powers, including voting rights, of the holders of common
    stock;
|
| |  | a provision allowing the removal of directors only for cause;                                                                                                                                                                                                                                                                                 
|
| |  | the requirement in our bylaws that shareholders provide advance
    notice when nominating our directors or submitting other
    shareholder proposals; and                                                                                                                                                                                   
|
| |  | the inability of shareholders to convene a shareholders
    meeting without the chairman of the board, the chief executive
    officer or a majority of the board of directors first calling
    the meeting.                                                                                                                                






|         |                          
|-------- | -------------------------
|ITEM 1B. | UNRESOLVED STAFF COMMENTS








|        |           
|------- | ----------
|ITEM 2. | PROPERTIES












|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS



35



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##### Table of Contents








|        |                                                    
|------- | ---------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
    STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES





|                                                |  |      |       |  |     |   |       | 
|----------------------------------------------- |  | ---- | ----- |  | --- | - | ----- | 
|                                                |  | High |       |  | Low |  
|                                                |  |      |       |  |     |  
|Period from August 5, 2004 - September 26, 2004 |  | $    | 4.60  |  |     | $ | 2.88  | 
|Quarter ended January 2, 2005                   |  | $    | 9.00  |  |     | $ | 4.56  | 
|Quarter ended April 3, 2005                     |  | $    | 16.06 |  |     | $ | 7.73  | 
|Quarter ended July 3, 2005                      |  | $    | 16.96 |  |     | $ | 12.47 | 
|Quarter ended October 2, 2005                   |  | $    | 23.97 |  |     | $ | 14.04 | 
|Quarter ended January 1, 2006                   |  | $    | 27.10 |  |     | $ | 21.60 | 





S-1 333-115207)


|                                                                                           |  |   |              | 
|------------------------------------------------------------------------------------------ |  | - | ------------ | 
|Funding for further development of NRP104                                                  |  | $ | 14.7 million | 
|Funding for further research and development of NRP290                                     |  |   | 1.3 million  | 
|Funding for other preclinical programs, working capital and
    general corporate purposes |  |   | 14.0 million | 
|                                                                                           |  |   |             
|Total                                                                                      |  | $ | 30.0 million | 
|                                                                                           |  |   |             

36



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##### Table of Contents








|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

10-K. 10-K. 10-K.


|                                                                             |  |                                                 |            |   |            |   |            |              |  |   |              |   |  |              |            |   |  |   |            |  
|---------------------------------------------------------------------------- |  | ----------------------------------------------- | ---------- | - | ---------- | - | ---------- | ------------ |  | - | ------------ | - |  | ------------ | ---------- | - |  | - | ---------- | -
|                                                                             |  | January 1,                                      |            |   | January 2, |   |            | December 28, |  |   | December 29, |   |  | December 30, |           
|                                                                             |  | 2006                                            |            |   | 2005       |   |            | 2003         |  |   | 2002         |   |  | 2001         |           
|                                                                             |  |                                                 |            |   |            |   |            |              |  |   |              |   |  |              |           
|                                                                             |  | (In thousands, except share and per share data) |           
|Statements of operations data(1)(2):                                         |  |                                                 |            |   |            |   |            |              |  |   |              |   |  |              |            |   |  |   |            |  
|Sales, net                                                                   |  | $                                               |           |   |            | $ |           |              |  | $ |             |   |  | $            | 177        |   |  | $ | 241        |  
|Operating costs and expenses:                                                |  |                                                 |            |   |            |   |            |              |  |   |              |   |  |              |            |   |  |   |            |  
|Cost of goods sold                                                           |  |                                                 |           |   |            |   |           |              |  |   |             |   |  |              | 51         |   |  |   | 105        |  
|Net sales returns of drug unavailable for sale                               |  |                                                 |           |   |            |   |           |              |  |   |             |   |  |              |           |   |  |   | 641        |  
|Selling, general and administrative                                          |  |                                                 | 13,229     |   |            |   | 5,933      |              |  |   | 1,529        |   |  |              | 1,940      |   |  |   | 4,284      |  
|Research and development                                                     |  |                                                 | 18,366     |   |            |   | 10,235     |              |  |   | 3,139        |   |  |              | 2,683      |   |  |   | 3,909      |  
|Depreciation and amortization of property and equipment                      |  |                                                 | 157        |   |            |   | 119        |              |  |   | 140          |   |  |              | 175        |   |  |   | 163        |  
|Amortization of intangible assets                                            |  |                                                 |           |   |            |   |           |              |  |   |             |   |  |              | 39         |   |  |   | 39         |  
|                                                                             |  |                                                 |            |   |            |   |            |              |  |   |              |   |  |              |           
|Total operating expenses                                                     |  |                                                 | 31,752     |   |            |   | 16,287     |              |  |   | 4,808        |   |  |              | 4,888      |   |  |   | 9,141      |  
|                                                                             |  |                                                 |            |   |            |   |            |              |  |   |              |   |  |              |           
|Operating loss                                                               |  |                                                 | (31,752    | ) |            |   | (16,287    | )            |  |   | (4,808       | ) |  |              | (4,711     | ) |  |   | (8,900     | )
|Other income (expense):                                                      |  |                                                 |            |   |            |   |            |              |  |   |              |   |  |              |            |   |  |   |            |  
|Gain on settlement                                                           |  |                                                 |           |   |            |   | 1,764      |              |  |   |             |   |  |              |           |   |  |   |           |  
|Loss on disposal of property and equipment                                   |  |                                                 |           |   |            |   | (19        | )            |  |   |             |   |  |              | (89        | ) |  |   |           |  
|Interest expense                                                             |  |                                                 | (5         | ) |            |   | (11        | )            |  |   | (13          | ) |  |              | (59        | ) |  |   | (132       | )
|Interest income                                                              |  |                                                 | 1,890      |   |            |   | 218        |              |  |   | 4            |   |  |              | 30         |   |  |   | 102        |  
|                                                                             |  |                                                 |            |   |            |   |            |              |  |   |              |   |  |              |           
|Total other income (expense), net                                            |  |                                                 | 1,885      |   |            |   | 1,952      |              |  |   | (9           | ) |  |              | (118       | ) |  |   | (30        | )
|                                                                             |  |                                                 |            |   |            |   |            |              |  |   |              |   |  |              |           
|Net loss                                                                     |  | $                                               | (29,866    | ) |            | $ | (14,335    | )            |  | $ | (4,817       | ) |  | $            | (4,829     | ) |  | $ | (8,930     | )
|                                                                             |  |                                                 |            |   |            |   |            |              |  |   |              |   |  |              |           
|Net loss per share (basic and diluted)                                       |  | $                                               | (0.83      | ) |            | $ | (0.48      | )            |  | $ | (0.20        | ) |  | $            | (0.23      | ) |  | $ | (0.56      | )
|                                                                             |  |                                                 |            |   |            |   |            |              |  |   |              |   |  |              |           
|Weighted average number of common shares outstanding (basic and
    diluted) |  |                                                 | 35,943,596 |   |            |   | 29,694,742 |              |  |   | 23,685,626   |   |  |              | 21,379,822 |   |  |   | 15,961,194 |  






|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All of our sales, net, recognized in the fiscal years ended
    December 29, 2002 and December 30, 2001 were from
    sales of drugs, which were transferred to an affiliated party at
    the end of 2002.  
|   
|(2) | As adjusted to give effect to a one-for-two reverse stock split
    effective as of August 3, 2004 and a two-for-one stock
    split effected in the form of a stock dividend effective
    January 13, 2006.

37



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|                                     |  |            |        |   |            |   |        |              |  |   |              |   |  |              |       |   |  |   |        |  
|------------------------------------ |  | ---------- | ------ | - | ---------- | - | ------ | ------------ |  | - | ------------ | - |  | ------------ | ----- | - |  | - | ------ | -
|                                     |  | As of      |       
|                                     |  |            |       
|                                     |  | January 1, |        |   | January 2, |   |        | December 28, |  |   | December 29, |   |  | December 30, |      
|                                     |  | 2006       |        |   | 2005       |   |        | 2003         |  |   | 2002         |   |  | 2001         |      
|                                     |  |            |        |   |            |   |        |              |  |   |              |   |  |              |      
|Balance sheet data:                  |  |            |        |   |            |   |        |              |  |   |              |   |  |              |       |   |  |   |        |  
|Cash and cash equivalents            |  | $          | 3,516  |   |            | $ | 4,019  |              |  | $ | 264          |   |  | $            | 614   |   |  | $ | 3,088  |  
|Short-term investments               |  |            | 49,250 |   |            |   | 21,150 |              |  |   |             |   |  |              |      |   |  |   |       |  
|Working capital (deficit)            |  |            | 46,689 |   |            |   | 21,124 |              |  |   | (1,422       | ) |  |              | (294  | ) |  |   | 916    |  
|Total assets                         |  |            | 53,960 |   |            |   | 25,770 |              |  |   | 636          |   |  |              | 1,019 |   |  |   | 4,187  |  
|Capital lease obligation             |  |            | 49     |   |            |   |       |              |  |   |             |   |  |              |      |   |  |   |       |  
|Long-term debt                       |  |            |       |   |            |   |       |              |  |   |             |   |  |              |      |   |  |   | 5,271  |  
|Total shareholders equity (deficit) |  |            | (6,482 | ) |            |   | 21,385 |              |  |   | (1,139       | ) |  |              | 90    |   |  |   | (3,418 | )






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS

10-K.


Information Regarding Forward-Looking Statements


10-K 10-K




| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the ability to execute successfully the collaboration with Shire
    within a reasonable timeframe or at all;                                                                                                                                    
|
| |  | the progress of our product development programs;                                                                                                                                                                                                
|
| |  | the status of our preclinical and clinical development of
    potential drugs;                                                                                                                                                                   
|
| |  | the likely success of our drug products in clinical trials and
    the regulatory approval process, particularly whether and under
    what circumstances any of our drug products will be approved by
    the FDA;                              
|
| |  | our estimates for future revenues and profitability;                                                                                                                                                                                             
|
| |  | our estimates regarding our capital requirements and our needs
    for additional financing;                                                                                                                                                     
|
| |  | the likely scheduling and labeling of product candidates;                                                                                                                                                                                        
|
| |  | our ability to attract partners with acceptable development,
    regulatory and commercialization expertise;                                                                                                                                     
|
| |  | the likelihood of regulatory approval under the Federal Food,
    Drug and Cosmetic Act without having to conduct long and costly
    trials to generate all of the data often required in connection
    with a traditional new chemical entity;
|
| |  | the ability to develop, manufacture, launch and market any of
    our drug candidates;                                                                                                                                                           
|
| |  | our ability to develop safer and improved versions of widely
    prescribed drugs using our Carrierwave technology;                                                                                                                              
|
| |  | the expected benefits of our Carrierwave technology such as
    abuse resistance and decreased toxicity; and                                                                                                                                     

38



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| |   |                                               
| | - | ----------------------------------------------
| |  | our ability to obtain favorable patent claims.

10-K 10-K.


10-K


Overview






Revenues.


Selling, General and Administrative Expenses.


Research and Development Expenses.


39



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|                              |       |                    |     |       |              |   |       |            |  |   |            |        |  |   |        |        | 
|----------------------------- | ----- | ------------------ | --- | ----- | ------------ | - | ----- | ---------- |  | - | ---------- | ------ |  | - | ------ | ------ | 
|                              |       | Fiscal Years Ended |     |       |             
|                              |       |                    |     |       | Inception to |  
|                              |       | December 28,       |     |       | January 2,   |   |       | January 1, |  |   | January 1, |       
|                              |       | 2003               |     |       | 2005         |   |       | 2006       |  |   | 2006       |       
|                              |       |                    |     |       |              |   |       |            |  |   |            |       
|                              |       | (In thousands)     |    
|NRP104                        |       | $                  | 669 |       |              | $ | 7,064 |            |  | $ | 12,046     |        |  | $ | 19,779 |       
|NRP290                        |       |                    | 104 |       |              |   | 690   |            |  |   | 1,146      |        |  |   | 1,940  |       
|Other preclinical development |       |                    |    |       |              |   | 153   |            |  |   | 804        |        |  |   | 957    |       
|Carrierwave/thyroid           |       |                    | 584 |       |              |   |      |            |  |   |           |        |  |   | 5,488  |       
|                              |       |                    |     |       |              |   |       |            |  |   |            |       
|                              | Total |                    | $   | 1,357 |              |   | $     | 7,907      |  |   | $          | 13,996 |  |   | $      | 28,164 | 
|                              |       |                    |     |       |              |   |       |            |  |   |            |       





Other Income (Expense).


40



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##### Table of Contents



Results of Operations




Fiscal Year Ended January 1, 2006 Compared to Fiscal
Year Ended January 2, 2005


Selling, General and Administrative Expenses.


Research and Development Expenses.






|                                  |                                                         |                    |     |        |                 |  |     |       |        | 
|--------------------------------- | ------------------------------------------------------- | ------------------ | --- | ------ | --------------- |  | --- | ----- | ------ | 
|                                  |                                                         | Fiscal Year Ended  |    
|                                  |                                                         |                    |    
|Research and development expenses |                                                         | January 1, 2006    |     |        | January 2, 2005 | 
|                                  |                                                         |                    |     |        |                 | 
|                                  |                                                         | (In thousands)     |    
|Direct project costs:             |                                                         |                    |     |        |                 |  |     |      
|                                  | Personnel, benefits and related costs                   |                    | $   | 3,079  |                 |  | $   | 1,525 |       
|                                  | Consultants, supplies, materials and other direct costs |                    |     | 944    |                 |  |     | 598   |       
|                                  | External development costs                              |                    |     | 13,996 |                 |  |     | 7,907 |       
|                                  |                                                         |                    |     |        |                 | 
|                                  |                                                         | Total direct costs |     |        | 18,019          |  |     |       | 10,030 | 
|Indirect costs                    |                                                         |                    | 347 |        |                 |  | 205 |      
|                                  |                                                         |                    |     |        |                 | 
|                                  |                                                         | Total              |     | $      | 18,366          |  |     | $     | 10,235 | 
|                                  |                                                         |                    |     |        |                 | 

Other Income.


41



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##### Table of Contents





Fiscal Year Ended January 2, 2005 Compared to Fiscal
Year Ended December 28, 2003


Selling, General and Administrative Expenses.




Research and Development Expenses.


42



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##### Table of Contents







|                                  |                                                         |                    |     |       |                   |  |    |       |       | 
|--------------------------------- | ------------------------------------------------------- | ------------------ | --- | ----- | ----------------- |  | -- | ----- | ----- | 
|                                  |                                                         | Fiscal Year Ended  |    
|                                  |                                                         |                    |    
|Research and development expenses |                                                         | January 2, 2005    |     |       | December 28, 2003 | 
|                                  |                                                         |                    |     |       |                   | 
|                                  |                                                         | (In thousands)     |    
|Direct project costs:             |                                                         |                    |     |       |                   |  |    |      
|                                  | Personnel, benefits and related costs                   |                    | $   | 1,525 |                   |  | $  | 1,235 |      
|                                  | Consultants, supplies, materials and other direct costs |                    |     | 598   |                   |  |    | 480   |      
|                                  | External development costs                              |                    |     | 7,907 |                   |  |    | 1,357 |      
|                                  |                                                         |                    |     |       |                   | 
|                                  |                                                         | Total direct costs |     |       | 10,030            |  |    |       | 3,072 | 
|Indirect costs                    |                                                         |                    | 205 |       |                   |  | 67 |      
|                                  |                                                         |                    |     |       |                   | 
|                                  |                                                         | Total              |     | $     | 10,235            |  |    | $     | 3,139 | 
|                                  |                                                         |                    |     |       |                   | 

Other Income.


Liquidity and Capital Resources




|                               |  |           |            |     |           |   |      |                |  |   |             | 
|------------------------------ |  | --------- | ---------- | --- | --------- | - | ---- | -------------- |  | - | ----------- | 
|                               |  | Number of |            |     | Price per |   |      |               
|Fiscal Year                    |  | Shares(1) |            |     | Share(1)  |   |      | Gross Proceeds | 
|                               |  |           |            |     |           |   |      |                | 
|2001                           |  |           | 300,000    |     |           | $ | 3.33 |                |  | $ | 1,000,000   | 
|2002                           |  |           | 2,245,000  |     |           |   | 1.25 |                |  |   | 2,806,250   | 
|2002                           |  |           | 4,077,720  | (2) |           |   | 1.25 |                |  |   | 5,097,151   | 
|2003                           |  |           | 2,823,200  |     |           |   | 1.25 |                |  |   | 3,529,000   | 
|2004                           |  |           | 1,940,000  |     |           |   | 2.50 |                |  |   | 4,850,000   | 
|2004  Initial public offering |  |           | 8,400,000  |     |           |   | 4.00 |                |  |   | 33,600,000  | 
|2005  Shire collaboration     |  |           |           |     |           |   |      |                |  |   | 50,000,000  | 
|                               |  |           |            |     |           |   |      |                | 
|                               |  |           | 19,785,920 |     |           |   |      |                |  | $ | 100,882,401 | 
|                               |  |           |            |     |           |   |      |                | 






|    |                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As adjusted for a one-for-two reverse stock split effective
    August 3, 2004 and a two-for-one stock split effected in
    the form of a stock dividend effective January 13, 2006.                                                                                                                                                                        
|   
|(2) | Represents shares issued upon the conversion of a convertible
    promissory note by RJK, L.L.C., an entity controlled by
    Mr. Kirk, our Chairman, President and Chief Executive
    Officer, in the original amount of $5,000,000 plus accrued
    interest of $97,151. We received the $5,000,000 of proceeds from
    the note issuance in August 2001.



43



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|                                   |  |                |       |            |        |   |       |            |  |   |    | 
|---------------------------------- |  | -------------- | ----- | ---------- | ------ | - | ----- | ---------- |  | - | -- | 
|                                   |  |                |       | Due within |        |   |      
|                                   |  | Total          |       |            | 1 Year |   |       | Thereafter | 
|                                   |  |                |       |            |        |   |       |            | 
|                                   |  | (In thousands) |      
|Operating lease obligations        |  | $              | 148   |            |        | $ | 148   |            |  | $ |   | 
|Capital lease obligations          |  |                | 49    |            |        |   | 22    |            |  |   | 27 | 
|Research and development contracts |  |                | 4,672 |            |        |   | 4,672 |            |  |   |   | 
|                                   |  |                |       |            |        |   |       |            | 
|Total contractual cash obligations |  | $              | 4,869 |            |        | $ | 4,842 |            |  | $ | 27 | 
|                                   |  |                |       |            |        |   |       |            | 





44



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##### Table of Contents









Off-Balance Sheet Arrangements




Effects of Inflation




Recent Accounting Pronouncements


Inventory
Cost, an Amendment of ARB No. 43, Chapter 4, Inventory Pricing,


Share-based Payment, Accounting for
Stock-Based Compensation, Accounting for
Stock Issued to Employees.


45



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##### Table of Contents





Critical Accounting Policies and Estimates






Revenue Recognition. Revenue
Recognition When the Right of Return Exists,


00-21, Revenue Arrangements with Multiple Deliverables 00-21). 00-21,


Accrued Expenses.


46



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##### Table of Contents





Stock-Based Compensation. Accounting for Stock Issued to
Employees, Accounting for Stock-Based
Compensation.


Share-Based Payment,


Income Taxes.









|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK



47



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##### Table of Contents








|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE








|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures


13a-15(b) 13a-15(e)




Managements Report on Internal Control Over Financial
Reporting


13a-15(f)




| |   |                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of our assets;                                                                                                                                                                                                                
|
| |  | Provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles in the
    United States of America, and that our receipts and expenditures
    are being made only in accordance with authorization of our
    management and directors; and
|
| |  | Provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on the consolidated
    financial statements.                                                                                                                                             





48



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##### Table of Contents



Internal Control  Integrated Framework Internal Control  Integrated
Framework


10-K.




| |                                                  
| | -------------------------------------------------
| | /s/ Randal J. Kirk                               
| |                                                  
| | Randal J. Kirk                                   
| | Chairman of the Board, President and             
| | Chief Executive Officer                          
| | (Principal Executive Officer)                    
|
| | /s/ Krish S. Krishnan                            
| |                                                  
| | Krish S. Krishnan                                
| | Chief Operating Officer, Chief Financial Officer,
| | Secretary and Director                           
| | (Principal Financial and Accounting Officer)     






|         |                   
|-------- | ------------------
|ITEM 9B. | OTHER INFORMATION.



|                  |  |                |         | 
|----------------- |  | -------------- | ------- | 
|Executive Officer |  | Number of SARs |        
|                  |  |                |        
|Randal J. Kirk    |  |                | 319,500 | 
|Krish S. Krishnan |  |                | 191,700 | 
|Suma M. Krishnan  |  |                | 127,800 | 





| |                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) our quick ratio equals or exceeds 1.25 and
    (ii) the combined balance of the our cash and short-term
    investments equals or exceeds our trailing
    15-month net operating
    cash requirements (such formula to be determined as of the most
    recent fiscal annual or quarterly reporting period, but
    determined as if the SARs had already been paid).



49



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PART III







|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



8-K www.nrpharma.com.







|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION








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








|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS








|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES



PART IV







|         |                                           
|-------- | ------------------------------------------
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. FINANCIAL STATEMENTS. Except as noted, the
    following consolidated financial statements of the Company are
    set forth herein, beginning on page F-1:



| |      |                                                                                
| | ---- | -------------------------------------------------------------------------------
| | (i)  | Managements Report on Internal Control Over Financial
    Reporting (page 48).
|
| | (ii) | Reports of Independent Registered Public Accounting Firm.                      

50



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##### Table of Contents





| |       |                                                                                                                                                      
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | (iii) | Consolidated Balance Sheets at January 1, 2006 and
    January 2, 2005.                                                                              
|
| | (iv)  | Consolidated Statements of Operations for the fiscal years ended
    January 1, 2006, January 2, 2005, and
    December 28, 2003.                    
|
| | (v)   | Consolidated Statements of Shareholders Equity (Deficit)
    for the fiscal years ended January 1, 2006, January 2,
    2005, and December 28, 2003.
|
| | (vi)  | Consolidated Statements of Cash Flows for the fiscal years ended
    January 1, 2006, January 2, 2005, and
    December 28, 2003.                    
|
| | (vii) | Notes to Consolidated Financial Statements.                                                                                                          

FINANCIAL STATEMENT SCHEDULES.




| |     
| | ----
| | None

EXHIBITS.




| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | The exhibits that are required to be filed or incorporated by
    reference herein are listed in the Exhibit Index.

51



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##### Table of Contents






SIGNATURES


th




| |                                
| | -------------------------------
| | NEW RIVER PHARMACEUTICALS INC.,
| | a Virginia corporation         
| | (Registrant)                   



| |     |                   
| | --- | ------------------
| | By: | /s/ Randal J. Kirk

| |                                                
| | -----------------------------------------------
| |                                                
| | Randal J. Kirk                                 
| | Chairman of the Board, President and Chief     
| | Executive Officer (Principal Executive Officer)

th


|                                         |  |                                                                                                                           |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | 
|Signature                                |  | Title                                                                                                                    
|                                         |  |                                                                                                                          
|                                        
|/s/ Randal J. KirkRandal J. Kirk         |  | Chairman of the Board, President and Chief Executive Officer
    (Principal Executive Officer)                           
|                                        
|/s/ Krish S. KrishnanKrish S. Krishnan   |  | Chief Operating Officer, Chief Financial Officer, Secretary and
    Director (Principal Financial and Accounting Officer)
|                                        
|/s/ Cesar L. AlvarezCesar L. Alvarez     |  | Director                                                                                                                 
|                                        
|/s/ David S. BarlowDavid S. Barlow       |  | Director                                                                                                                 
|                                        
|/s/ Larry D. HornerLarry D. Horner       |  | Director                                                                                                                 
|                                        
|/s/ Burton E. SobelBurton E. Sobel, M.D. |  | Director                                                                                                                 

52



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##### Table of Contents



Report of Independent Registered Public Accounting Firm






10-K,














| |             
| | ------------
| | /s/ KPMG LLP





F-1



---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
















| |             
| | ------------
| | /s/ KPMG LLP





F-2



---



##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


Consolidated Balance Sheets


January 1, 2006 and January 2, 2005


|                                               |                                                                                                                                                                 |                                                      |            |             |            |   |         |             |            | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ---------- | ----------- | ---------- | - | ------- | ----------- | ---------- | 
|                                               |                                                                                                                                                                 | 2005                                                 |            |             | 2004       |  
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  
|ASSETS                                        
|Current assets:                                |                                                                                                                                                                 |                                                      |            |             |            |   |         |            
|                                               | Cash and cash equivalents                                                                                                                                       |                                                      | $          | 3,515,572   |            |   | $       | 4,018,556   |           
|                                               | Short-term investments                                                                                                                                          |                                                      |            | 49,250,000  |            |   |         | 21,150,000  |           
|                                               | Other receivables                                                                                                                                               |                                                      |            | 135,755     |            |   |         | 24,747      |           
|                                               | Prepaid expenses                                                                                                                                                |                                                      |            | 798,090     |            |   |         | 315,644     |           
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  
|                                               |                                                                                                                                                                 | Total current assets                                 |            |             | 53,699,417 |   |         |             | 25,508,947 | 
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  
|Property and equipment:                        |                                                                                                                                                                 |                                                      |            |             |            |   |         |            
|                                               | Leasehold improvements                                                                                                                                          |                                                      |            | 94,609      |            |   |         | 76,860      |           
|                                               | Machinery and equipment                                                                                                                                         |                                                      |            | 819,472     |            |   |         | 686,895     |           
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  
|                                               |                                                                                                                                                                 |                                                      | 914,081    |             |            |   | 763,755 |            
|                                               | Less accumulated depreciation and amortization                                                                                                                  |                                                      |            | 653,427     |            |   |         | 502,890     |           
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  
|                                               |                                                                                                                                                                 | Property and equipment, net                          |            |             | 260,654    |   |         |             | 260,865    | 
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  
|                                               |                                                                                                                                                                 | Total assets                                         |            | $           | 53,960,071 |   |         | $           | 25,769,812 | 
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  
|                                              
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
|Current liabilities:                           |                                                                                                                                                                 |                                                      |            |             |            |   |         |            
|                                               | Capital lease obligation  current                                                                                                                              |                                                      | $          | 22,298      |            |   | $       |            |           
|                                               | Accounts payable                                                                                                                                                |                                                      |            | 1,548,473   |            |   |         | 701,175     |           
|                                               | Unpaid and accrued research and development expenses                                                                                                            |                                                      |            | 3,201,732   |            |   |         | 2,100,421   |           
|                                               | Accrued compensation                                                                                                                                            |                                                      |            | 2,203,898   |            |   |         | 1,506,413   |           
|                                               | Due to affiliates                                                                                                                                               |                                                      |            | 34,138      |            |   |         | 76,920      |           
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  
|                                               |                                                                                                                                                                 | Total current liabilities                            |            |             | 7,010,539  |   |         |             | 4,384,929  | 
|Capital lease obligation  noncurrent          |                                                                                                                                                                 |                                                      | 27,148     |             |            |   |        |            
|Accrued stock-based compensation               |                                                                                                                                                                 |                                                      | 3,404,435  |             |            |   |        |            
|Deferred revenue                               |                                                                                                                                                                 |                                                      | 50,000,000 |             |            |   |        |            
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  
|                                               |                                                                                                                                                                 | Total liabilities                                    |            |             | 60,442,122 |   |         |             | 4,384,929  | 
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  
|Shareholders Equity (Deficit):                |                                                                                                                                                                 |                                                      |            |             |            |   |         |            
|                                               | Preferred stock, par value $0.001 per share. Authorized
    25,000,000 shares; none issued and outstanding                                                      |                                                      |            |            |            |   |         |            |           
|                                               | Common stock, par value $0.001 per share. Authorized
    150,000,000 shares; issued and outstanding
    36,367,064 shares in 2005 and 35,549,108 shares in 2004 |                                                      |            | 36,367      |            |   |         | 35,549      |           
|                                               | Additional paid-in capital                                                                                                                                      |                                                      |            | 63,326,824  |            |   |         | 61,328,256  |           
|                                               | Accumulated deficit                                                                                                                                             |                                                      |            | (69,845,242 | )          |   |         | (39,978,922 | )         
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  
|                                               |                                                                                                                                                                 | Total shareholders equity (deficit)                 |            |             | (6,482,051 | ) |         |             | 21,384,883 | 
|                                               | Commitments and contingencies                                                                                                                                   |                                                      |            |             |            |   |         |             |           
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  
|                                               |                                                                                                                                                                 | Total liabilities and shareholders equity (deficit) |            | $           | 53,960,071 |   |         | $           | 25,769,812 | 
|                                               |                                                                                                                                                                 |                                                      |            |             |            |  



F-3



---



##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


Consolidated Statements of Operations


Fiscal years ended January 1, 2006, January 2, 2005
and December 28, 2003


|                              |                                                         |                                   |   |            |             |   |  |            |             |   |  |           |            |  
|----------------------------- | ------------------------------------------------------- | --------------------------------- | - | ---------- | ----------- | - |  | ---------- | ----------- | - |  | --------- | ---------- | -
|                              |                                                         | 2005                              |   |            | 2004        |   |  | 2003       |            
|                              |                                                         |                                   |   |            |             |   |  |            |            
|Operating costs and expenses: |                                                         |                                   |   |            |             |   |  |            |             |   |  |          
|                              | Selling, general, and administrative                    |                                   | $ | 13,228,644 |             |   |  | 5,932,839  |             |   |  | 1,528,872 |           
|                              | Research and development                                |                                   |   | 18,366,376 |             |   |  | 10,235,111 |             |   |  | 3,138,655 |           
|                              | Depreciation and amortization of property and equipment |                                   |   | 156,597    |             |   |  | 119,450    |             |   |  | 140,278   |           
|                              |                                                         |                                   |   |            |             |   |  |            |            
|                              |                                                         | Total operating expenses          |   |            | 31,751,617  |   |  |            | 16,287,400  |   |  |           | 4,807,805  |  
|                              |                                                         |                                   |   |            |             |   |  |            |            
|                              |                                                         | Operating loss                    |   |            | (31,751,617 | ) |  |            | (16,287,400 | ) |  |           | (4,807,805 | )
|Other income (expense):       |                                                         |                                   |   |            |             |   |  |            |             |   |  |          
|                              | Gain on settlement of litigation                        |                                   |   |           |             |   |  | 1,764,043  |             |   |  |          |           
|                              | Loss on disposal of property and equipment              |                                   |   |           |             |   |  | (18,776    | )           |   |  |          |           
|                              | Interest expense                                        |                                   |   | (4,976     | )           |   |  | (11,422    | )           |   |  | (12,804   | )         
|                              | Interest income                                         |                                   |   | 1,890,273  |             |   |  | 218,645    |             |   |  | 4,184     |           
|                              |                                                         |                                   |   |            |             |   |  |            |            
|                              |                                                         | Total other income (expense), net |   |            | 1,885,297   |   |  |            | 1,952,490   |   |  |           | (8,620     | )
|                              |                                                         |                                   |   |            |             |   |  |            |            
|                              |                                                         | Net loss                          |   | $          | (29,866,320 | ) |  |            | (14,334,910 | ) |  |           | (4,816,425 | )
|                              |                                                         |                                   |   |            |             |   |  |            |            
|Net loss per share:           |                                                         |                                   |   |            |             |   |  |            |             |   |  |          
|                              | Basic and diluted                                       |                                   | $ | (0.83      | )           |   |  | (0.48      | )           |   |  | (0.20     | )         
|                              |                                                         |                                   |   |            |             |   |  |            |            



F-4



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


Consolidated Statements of Shareholders Equity
(Deficit)


Fiscal years ended January 1, 2006, January 2,
2005, and December 28, 2003


|                                                                                |  |              |            |  |            |   |        |             |  |   |            |  |  |       |             |   |  |   |             |  
|------------------------------------------------------------------------------- |  | ------------ | ---------- |  | ---------- | - | ------ | ----------- |  | - | ---------- |  |  | ----- | ----------- | - |  | - | ----------- | -
|                                                                                |  | Common Stock |            |  | Additional |   |        |             |  |  
|                                                                                |  |              |            |  | Paid-In    |   |        | Accumulated |  |   |           
|                                                                                |  | Shares       |            |  | Dollars    |   |        | Capital     |  |   | Deficit    |  |  | Total |            
|                                                                                |  |              |            |  |            |   |        |             |  |   |            |  |  |       |            
|Balances at December 29, 2002                                                   |  |              | 22,362,576 |  |            | $ | 22,362 |             |  | $ | 20,895,495 |  |  | $     | (20,827,587 | ) |  | $ | 90,270      |  
|Issuance of common stock ($1.25 per share)                                      |  |              | 2,823,200  |  |            |   | 2,824  |             |  |   | 3,526,176  |  |  |       |            |   |  |   | 3,529,000   |  
|Stock-based compensation                                                        |  |              |           |  |            |   |       |             |  |   | 58,118     |  |  |       |            |   |  |   | 58,118      |  
|Net loss                                                                        |  |              |           |  |            |   |       |             |  |   |           |  |  |       | (4,816,425  | ) |  |   | (4,816,425  | )
|                                                                                |  |              |            |  |            |   |        |             |  |   |            |  |  |       |            
|Balances at December 2, 2003                                                    |  |              | 25,185,776 |  |            |   | 25,186 |             |  |   | 24,479,789 |  |  |       | (25,644,012 | ) |  |   | (1,139,037  | )
|Issuance of common stock-prior to initial public offering
    ($2.50 per share) |  |              | 1,940,000  |  |            |   | 1,940  |             |  |   | 4,848,060  |  |  |       |            |   |  |   | 4,850,000   |  
|Stock-based compensation                                                        |  |              |           |  |            |   |       |             |  |   | 1,386,000  |  |  |       |            |   |  |   | 1,386,000   |  
|Contribution of services by related party                                       |  |              |           |  |            |   |       |             |  |   | 576,229    |  |  |       |            |   |  |   | 576,229     |  
|Initial public offering ($4.00 per share), net of issuance
    costs            |  |              | 8,400,000  |  |            |   | 8,400  |             |  |   | 29,969,036 |  |  |       |            |   |  |   | 29,977,436  |  
|Exercise of stock options                                                       |  |              | 23,332     |  |            |   | 23     |             |  |   | 69,142     |  |  |       |            |   |  |   | 69,165      |  
|Net loss                                                                        |  |              |           |  |            |   |       |             |  |   |           |  |  |       | (14,334,910 | ) |  |   | (14,334,910 | )
|                                                                                |  |              |            |  |            |   |        |             |  |   |            |  |  |       |            
|Balances at January 2, 2005                                                     |  |              | 35,549,108 |  |            |   | 35,549 |             |  |   | 61,328,256 |  |  |       | (39,978,922 | ) |  |   | 21,384,883  |  
|Stock-based compensation                                                        |  |              |           |  |            |   |       |             |  |   | 680,887    |  |  |       |            |   |  |   | 680,887     |  
|Exercise of stock options                                                       |  |              | 817,956    |  |            |   | 818    |             |  |   | 1,317,681  |  |  |       |            |   |  |   | 1,318,419   |  
|Net loss                                                                        |  |              |           |  |            |   |       |             |  |   |           |  |  |       | (29,866,320 | ) |  |   | (29,866,320 | )
|                                                                                |  |              |            |  |            |   |        |             |  |   |            |  |  |       |            
|Balances at January 1, 2006                                                     |  |              | 36,367,064 |  |            | $ | 36,367 |             |  | $ | 63,326,824 |  |  | $     | (69,845,242 | ) |  | $ | (6,482,051  | )
|                                                                                |  |              |            |  |            |   |        |             |  |   |            |  |  |       |            



F-5



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


Consolidated Statements of Cash Flows


Fiscal years ended January 1, 2006, January 2,
2005, and December 28, 2003


|                                                 |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |           |           |             |            |         |         |            |  
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------- | ------- | ---------- | ----------- | ----------- | --------- | --------- | ----------- | ---------- | ------- | ------- | ---------- | -
|                                                 |                                                                                               | 2005                                                    |                                                      |                                                      | 2004    |            |             | 2003        |          
|                                                 |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |          
|Cash flows from operating activities:            |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |           |           |             |           
|                                                 | Net loss                                                                                      |                                                         | $                                                    | (29,866,320                                          | )       |            | $           | (14,334,910 | )         |           | $           | (4,816,425 | )      
|                                                 | Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities: |                                                         |                                                      |                                                      |         |            |             |             |           |           |             |            |        
|                                                 |                                                                                               | Depreciation and amortization of property and equipment |                                                      |                                                      | 156,597 |            |             |             | 119,450   |           |             |            | 140,278 |        
|                                                 |                                                                                               | Loss on disposal of property and equipment              |                                                      |                                                      |        |            |             |             | 18,776    |           |             |            |        |        
|                                                 |                                                                                               | Stock-based compensation                                |                                                      |                                                      | 680,887 |            |             |             | 1,386,000 |           |             |            | 58,118  |        
|                                                 |                                                                                               | Contribution of services by related party               |                                                      |                                                      |        |            |             |             | 576,229   |           |             |            |        |        
|                                                 |                                                                                               | Changes in operating assets and liabilities:            |                                                      |                                                      |         |            |             |             |           |           |             |            |         |        
|                                                 |                                                                                               |                                                         | Due from affiliates                                  |                                                      |         |           |             |             |           | 88,381    |             |            |         | (73,531 | )         
|                                                 |                                                                                               |                                                         | Other receivables                                    |                                                      |         | (111,008   | )           |             |           | (24,747   | )           |            |         |        |           
|                                                 |                                                                                               |                                                         | Income taxes refundable                              |                                                      |         |           |             |             |           |          |             |            |         | 3,376   |           
|                                                 |                                                                                               |                                                         | Prepaid expenses                                     |                                                      |         | (482,446   | )           |             |           | (315,644  | )           |            |         | 1,918   |           
|                                                 |                                                                                               |                                                         | Accounts payable                                     |                                                      |         | 847,298    |             |             |           | 233,433   |             |            |         | 218,696 |           
|                                                 |                                                                                               |                                                         | Unpaid and accrued research and development expenses |                                                      |         | 1,101,311  |             |             |           | 1,192,916 |             |            |         | 432,212 |           
|                                                 |                                                                                               |                                                         | Accrued compensation                                 |                                                      |         | 697,485    |             |             |           | 1,469,640 |             |            |         | (10,110 | )         
|                                                 |                                                                                               |                                                         | Due to affiliates                                    |                                                      |         | (42,782    | )           |             |           | 64,237    |             |            |         | 952     |           
|                                                 |                                                                                               |                                                         | Accrued stock-based compensation                     |                                                      |         | 3,404,435  |             |             |           |          |             |            |         |        |           
|                                                 |                                                                                               |                                                         | Deferred revenue                                     |                                                      |         | 50,000,000 |             |             |           |          |             |            |         |        |           
|                                                 |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |          
|                                                 |                                                                                               |                                                         |                                                      | Net cash provided by (used in) operating activities  |         |            | 26,385,457  |             |           |           | (9,526,239  | )          |         |         | (4,044,516 | )
|                                                 |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |          
|Cash flows from investing activities:            |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |           |           |             |           
|                                                 | Proceeds from sale of short-term investments                                                  |                                                         |                                                      | 66,125,000                                           |         |            |             | 6,000,000   |           |           |             |           |        
|                                                 | Purchases of short-term investments                                                           |                                                         |                                                      | (94,225,000                                          | )       |            |             | (27,150,000 | )         |           |             |           |        
|                                                 | Proceeds from sale of property and equipment                                                  |                                                         |                                                      | 91                                                   |         |            |             | 7,545       |           |           |             |           |        
|                                                 | Purchases of property and equipment                                                           |                                                         |                                                      | (87,499                                              | )       |            |             | (123,744    | )         |           |             | (38,620    | )      
|                                                 |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |          
|                                                 |                                                                                               |                                                         |                                                      | Net cash used in investing activities                |         |            | (28,187,408 | )           |           |           | (21,266,199 | )          |         |         | (38,620    | )
|                                                 |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |          
|Cash flows from financing activities:            |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |           |           |             |           
|                                                 | Proceeds from notes payable to shareholder                                                    |                                                         |                                                      |                                                     |         |            |             | 1,450,000   |           |           |             | 350,000    |        
|                                                 | Repayment of notes payable to shareholder                                                     |                                                         |                                                      |                                                     |         |            |             | (1,800,000  | )         |           |             |           |        
|                                                 | Principal payments on long-term debt                                                          |                                                         |                                                      |                                                     |         |            |             |            |           |           |             | (135,714   | )      
|                                                 | Principal payments on capital lease obligation                                                |                                                         |                                                      | (19,532                                              | )       |            |             |            |           |           |             | (9,941     | )      
|                                                 | Net proceeds from issuances of common stock                                                   |                                                         |                                                      | 1,318,499                                            |         |            |             | 34,896,601  |           |           |             | 3,529,000  |        
|                                                 |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |          
|                                                 |                                                                                               |                                                         |                                                      | Net cash provided by financing activities            |         |            | 1,298,967   |             |           |           | 34,546,601  |            |         |         | 3,733,345  |  
|                                                 |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |          
|                                                 |                                                                                               |                                                         |                                                      | Net increase (decrease) in cash and cash equivalents |         |            | (502,984    | )           |           |           | 3,754,163   |            |         |         | (349,791   | )
|Cash and cash equivalents at beginning of period |                                                                                               |                                                         | 4,018,556                                            |                                                      |         |            | 264,393     |             |           |           | 614,184     |           
|                                                 |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |          
|Cash and cash equivalents at end of period       |                                                                                               | $                                                       | 3,515,572                                            |                                                      |         | $          | 4,018,556   |             |           | $         | 264,393     |           
|                                                 |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |          
|Supplemental cash flow information:              |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |           |           |             |           
|                                                 | Interest paid                                                                                 |                                                         | $                                                    | 4,976                                                |         |            | $           | 11,422      |           |           | $           | 121        |        
|                                                 |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |          
|                                                 | Income taxes refunded                                                                         |                                                         | $                                                    |                                                     |         |            | $           |            |           |           | $           | (3,376     | )      
|                                                 |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |          
|Noncash investing and financing activities:      |                                                                                               |                                                         |                                                      |                                                      |         |            |             |             |           |           |             |           





F-6



---



##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Fiscal years ended January 1, 2006, January 2,
2005, and December 28, 2003




|    |                                    
|--- | -----------------------------------
|(1) | ORGANIZATION AND NATURE OF BUSINESS



| |             
| | ------------
| | Organization





| |                   
| | ------------------
| | Nature of Business

tm




|    |                                           
|--- | ------------------------------------------
|(2) | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



|    |                            
|--- | ---------------------------
|(a) | Principles of Consolidation





|    |            
|--- | -----------
|(b) | Fiscal Year

52/53-week




|    |                          
|--- | -------------------------
|(c) | Cash and Cash Equivalents





|    |                       
|--- | ----------------------
|(d) | Short-term Investments

Accounting for Certain
Investments in Debt and Equity Securities.


F-7



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |            
|--- | -----------
|(e) | Inventories

Accounting for
Research and Development Costs,




|    |                       
|--- | ----------------------
|(f) | Property and Equipment





|    |                                            
|--- | -------------------------------------------
|(g) | Impairment or Disposal of Long-Lived Assets





|    |             
|--- | ------------
|(h) | Income Taxes





|    |                                                              
|--- | -------------------------------------------------------------
|(i) | Revenue Recognition, Cost of Goods Sold and Sales
    Returns



F-8



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Revenue Recognition When
the Right of Return Exists,


00-21, Revenue Arrangements with Multiple Deliverables 00-21). 00-21,




|    |                         
|--- | ------------------------
|(j) | Research and Development





|    |                         
|--- | ------------------------
|(k) | Stock-Based Compensation

Accounting for Stock
Issued to Employees, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion
No. 25, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or
Award Plans, Accounting for Stock-Based
Compensation,


F-9



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of SFAS No. 123.


Share-Based Payment,




|                    |                                                                                                                                                    |                    |   |             |                 |   |   |                   |             |   |   |            |            |  
|------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | - | ----------- | --------------- | - | - | ----------------- | ----------- | - | - | ---------- | ---------- | -
|                    |                                                                                                                                                    | Fiscal Years Ended |  
|                    |                                                                                                                                                    |                    |  
|                    |                                                                                                                                                    | January 1, 2006    |   |             | January 2, 2005 |   |   | December 28, 2003 |            
|                    |                                                                                                                                                    |                    |   |             |                 |   |   |                   |            
|Net loss:           |                                                                                                                                                    |                    |   |             |                 |   |   |                   |             |   |   |           
|                    | As reported                                                                                                                                        |                    | $ | (29,866,320 | )               |   | $ | (14,334,910       | )           |   | $ | (4,816,425 | )         
|                    | Add stock-based employee compensation expense included in
    reported net loss, net of related tax effects                                        |                    |   |            |                 |   |   | 3,600             |             |   |   | 58,118     |           
|                    | Deduct total stock-based employee compensation expense
    determined under fair-value-based method for all awards, net of
    related tax effects |                    |   | (2,381,404  | )               |   |   | (458,381          | )           |   |   | (236,739   | )         
|                    |                                                                                                                                                    |                    |   |             |                 |   |   |                   |            
|                    |                                                                                                                                                    | Pro forma          |   | $           | (32,247,724     | ) |   | $                 | (14,789,691 | ) |   | $          | (4,995,046 | )
|                    |                                                                                                                                                    |                    |   |             |                 |   |   |                   |            
|Net loss per share: |                                                                                                                                                    |                    |   |             |                 |   |   |                   |             |   |   |           
|                    | Basic and diluted:                                                                                                                                 |                    |   |             |                 |   |   |                   |             |   |   |            |           
|                    |                                                                                                                                                    | As reported        |   | $           | (0.83           | ) |   | $                 | (0.48       | ) |   | $          | (0.20      | )
|                    |                                                                                                                                                    | Pro forma          |   | $           | (0.90           | ) |   | $                 | (0.50       | ) |   | $          | (0.21      | )



|                         |  |                    |              |   |                 |  |          |                   |  |  |          |  
|------------------------ |  | ------------------ | ------------ | - | --------------- |  | -------- | ----------------- |  |  | -------- | -
|                         |  | Fiscal Years Ended |             
|                         |  |                    |             
|                         |  | January 1, 2006    |              |   | January 2, 2005 |  |          | December 28, 2003 | 
|                         |  |                    |              |   |                 |  |          |                   | 
|Expected dividend yield  |  |                    | 0            | % |                 |  | 0        | %                 |  |  | 0        | %
|Risk-free interest rate  |  |                    | 4.25         | % |                 |  | 4.10     | %                 |  |  | 3.95     | %
|                         |  |                    | 4.61         | % |                 |  | 4.53     | %                 |  |  | 4.67     | %
|Expected life of options |  |                    | 6 - 10 years |   |                 |  | 10 years |                   |  |  | 10 years |  
|Expected volatility*     |  |                    | 70           | % |                 |  | 70       | %                 |  |  | 0        | %






|  |                                                                                                                                                                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The expected volatility assumption for options issued during the
    fiscal year ended January 2, 2005 prior to the
    Companys initial public offering that was completed on
    August 10, 2004 was 0%. The volatility assumption in the
    table represents the assumption used for options issued upon or
    subsequent to the completion of the Companys initial
    public offering.

F-10



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                   
|--- | ------------------
|(l) | Net Loss Per Share





|    |                  
|--- | -----------------
|(m) | Reclassifications





|    |                 
|--- | ----------------
|(n) | Use of Estimates





|    |                                               
|--- | ----------------------------------------------
|(3) | COLLABORATION ARRANGEMENT AND OTHER AGREEMENTS





F-11



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|    |                                      
|--- | -------------------------------------
|(4) | LIQUIDITY AND INITIAL PUBLIC OFFERING





F-12



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|    |                    
|--- | -------------------
|(5) | ROYALTY OBLIGATIONS



F-13



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |       
|--- | ------
|(6) | LEASES





|    |                           
|--- | --------------------------
|(7) | RELATED PARTY TRANSACTIONS







F-14



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |             
|--- | ------------
|(8) | INCOME TAXES





|                                                           |                                                                 |                          |             |            |      |  |            |           |   |  |            |           |   | 
|---------------------------------------------------------- | --------------------------------------------------------------- | ------------------------ | ----------- | ---------- | ---- |  | ---------- | --------- | - |  | ---------- | --------- | - | 
|                                                           |                                                                 | 2005                     |             |            | 2004 |  |            | 2003      |  
|                                                           |                                                                 |                          |             |            |      |  |            |           |  
|Computed expected income tax benefit                     |                                                                 | $                        | (10,154,548 | )          |      |  | (4,873,869 | )         |   |  | (1,637,584 | )        
|(Increase) reduction in income tax benefit resulting from: |                                                                 |                          |             |            |      |  |            |           |   |  |            |          
|                                                           | State income tax benefit, net of effect of federal income taxes |                          |             | (1,138,369 | )    |  |            | (489,830  | ) |  |            | (142,779  | )
|                                                           | Change in effective state income tax rate                       |                          |             |           |      |  |            | (241,817  | ) |  |            |          |  
|                                                           | Stock-based compensation                                        |                          |             |           |      |  |            | 470,016   |   |  |            |          |  
|                                                           | Non-deductible compensation                                     |                          |             | 375,595    |      |  |            |          |   |  |            |          |  
|                                                           | Contribution of services from related party                     |                          |             |           |      |  |            | 195,917   |   |  |            |          |  
|                                                           | R&D tax credits                                                 |                          |             | (1,191,106 | )    |  |            | (141,496  | ) |  |            |          |  
|                                                           | Other, net                                                      |                          |             | 5,082      |      |  |            | 28,310    |   |  |            | 3,084     |  
|                                                           | Change in valuation allowance for deferred tax assets           |                          |             | 12,103,346 |      |  |            | 5,052,769 |   |  |            | 1,777,279 |  
|                                                           |                                                                 |                          |             |            |      |  |            |           |  
|                                                           |                                                                 | Total income tax benefit |             | $          |     |  |            |           |  |  |            |           |  | 
|                                                           |                                                                 |                          |             |            |      |  |            |           |  



F-15



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                          |                                   |                                 |   |             |            |  |  |             |            | 
|------------------------- | --------------------------------- | ------------------------------- | - | ----------- | ---------- |  |  | ----------- | ---------- | 
|                          |                                   | 2005                            |   |             | 2004       | 
|                          |                                   |                                 |   |             |            | 
|Deferred tax assets:      |                                   |                                 |   |             |            |  |  |            
|                          | Property and equipment            |                                 | $ | 218,405     |            |  |  | 199,235     |           
|                          | Stock-based compensation          |                                 |   | 1,729,146   |            |  |  | 550,191     |           
|                          | Accrued expenses                  |                                 |   | 251,934     |            |  |  | 622,705     |           
|                          | Research tax credit carryforwards |                                 |   | 1,332,602   |            |  |  | 141,496     |           
|                          | Net operating loss carryforwards  |                                 |   | 27,379,579  |            |  |  | 12,726,430  |           
|                          |                                   |                                 |   |             |            | 
|                          |                                   | Total gross deferred tax assets |   |             | 30,911,666 |  |  |             | 14,240,057 | 
|                          | Less valuation allowance          |                                 |   | (30,676,079 | )          |  |  | (14,152,852 | )         
|                          |                                   |                                 |   |             |            | 
|                          |                                   | Net deferred tax assets         |   |             | 235,587    |  |  |             | 87,205     | 
|Deferred tax liabilities: |                                   |                                 |   |             |            |  |  |            
|                          | Prepaid expenses                  |                                 |   | (235,587    | )          |  |  | (87,205     | )         
|                          |                                   |                                 |   |             |            | 
|                          |                                   | Net deferred tax asset          |   | $           |           |  |  |             |           | 
|                          |                                   |                                 |   |             |            | 

Accounting for Income Taxes.




F-16



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                   
|--- | ------------------
|(9) | NET LOSS PER SHARE



|                                     |                                           |             |   |             |               |  |  |            |  |  |   |       |  
|------------------------------------ | ----------------------------------------- | ----------- | - | ----------- | ------------- |  |  | ---------- |  |  | - | ----- | -
|                                     |                                           | Net loss    |   |             | Shares        |  |  | Per Share  | 
|                                     |                                           | (Numerator) |   |             | (Denominator) |  |  | Amount     | 
|                                     |                                           |             |   |             |               |  |  |            | 
|Fiscal year ended December 28, 2003: |                                           |             |   |             |               |  |  |            |  |  |   |      
|                                     | Basic net loss per share                  |             | $ | (4,816,425  | )             |  |  | 23,685,626 |  |  | $ | (0.20 | )
|                                     | Effect of dilutive stock options          |             |   |            |               |  |  |           |  |  |   |       |  
|                                     |                                           |             |   |             |               |  |  |            | 
|                                     | Diluted net loss per share                |             | $ | (4,816,425  | )             |  |  | 23,685,626 |  |  | $ | (0.20 | )
|                                     |                                           |             |   |             |               |  |  |            | 
|Fiscal year ended January 2, 2005:   |                                           |             |   |             |               |  |  |            |  |  |   |      
|                                     | Basic net loss per share                  |             | $ | (14,334,910 | )             |  |  | 29,694,742 |  |  | $ | (0.48 | )
|                                     | Effect of dilutive stock options          |             |   |            |               |  |  |           |  |  |   |       |  
|                                     |                                           |             |   |             |               |  |  |            | 
|                                     | Diluted net loss per share                |             | $ | (14,334,910 | )             |  |  | 29,694,742 |  |  | $ | (0.48 | )
|                                     |                                           |             |   |             |               |  |  |            | 
|Fiscal year ended January 1, 2006:   |                                           |             |   |             |               |  |  |            |  |  |   |      
|                                     | Basic net loss per share                  |             | $ | (29,866,320 | )             |  |  | 35,943,596 |  |  | $ | (0.83 | )
|                                     | Effect of dilutive stock options and SARs |             |   |            |               |  |  |           |  |  |   |       |  
|                                     |                                           |             |   |             |               |  |  |            | 
|                                     | Diluted net loss per share                |             | $ | (29,866,320 | )             |  |  | 35,943,596 |  |  | $ | (0.83 | )
|                                     |                                           |             |   |             |               |  |  |            | 





|     |                         
|---- | ------------------------
|(10) | STOCK-BASED COMPENSATION



F-17



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                             |                      |           |           |          |                  |  |      |       | 
|---------------------------- | -------------------- | --------- | --------- | -------- | ---------------- |  | ---- | ----- | 
|                             |                      | Number of |           |          | Weighted Average | 
|                             |                      | Shares    |           |          | Exercise Price   | 
|                             |                      |           |           |          |                  | 
|Balance at December 29, 2002 |                      |           | 1,164,500 |          |                  |  | 2.13 |      
|                             | Granted              |           |           | 523,626  |                  |  |      | 1.25  | 
|                             | Expired or Forfeited |           |           | (360,000 | )                |  |      | 3.33  | 
|                             |                      |           |           |          |                  | 
|Balance at December 28, 2003 |                      |           | 1,328,126 |          |                  |  | 1.55 |      
|                             | Granted              |           |           | 417,000  |                  |  |      | 4.09  | 
|                             | Exercised            |           |           | (23,332  | )                |  |      | 2.96  | 
|                             |                      |           |           |          |                  | 
|Balance at January 2, 2005   |                      |           | 1,721,794 |          |                  |  | 2.15 |      
|                             | Granted              |           |           | 343,000  |                  |  |      | 16.34 | 
|                             | Exercised            |           |           | (817,956 | )                |  |      | 1.61  | 
|                             | Expired or Forfeited |           |           | (30,002  | )                |  |      | 2.55  | 
|                             |                      |           |           |          |                  | 
|Balance at January 1, 2006   |                      |           | 1,216,836 |          |                  |  | 6.50 |      
|                             |                      |           |           |          |                  | 



|                         |  |                     |         |           |                     |   |       |                  |  |  |           |  |  |                  |         |  |  |   |       | 
|------------------------ |  | ------------------- | ------- | --------- | ------------------- | - | ----- | ---------------- |  |  | --------- |  |  | ---------------- | ------- |  |  | - | ----- | 
|                         |  | Options Outstanding |         |           | Options Exercisable |  
|                         |  |                     |         |           |                     |  
|                         |  |                     |         | Remaining |                     |   |      
|                         |  | Number of           |         |           | Weighted-Average    |   |       | Contractual Life |  |  | Number of |  |  | Weighted-Average |        
|Range of Exercise Prices |  | Options             |         |           | Exercise Price      |   |       | (In Years)       |  |  | Options   |  |  | Exercise Price   |        
|                         |  |                     |         |           |                     |   |       |                  |  |  |           |  |  |                  |        
|$ 1.25 - $ 1.29          |  |                     | 418,968 |           |                     | $ | 1.27  |                  |  |  | 6.27      |  |  |                  | 342,292 |  |  | $ | 1.28  | 
|$ 3.33 - $ 4.00          |  |                     | 450,200 |           |                     | $ | 3.87  |                  |  |  | 7.80      |  |  |                  | 236,868 |  |  | $ | 3.74  | 
|$ 7.11 -  11.60          |  |                     | 204,668 |           |                     | $ | 11.50 |                  |  |  | 9.22      |  |  |                  | 200,000 |  |  | $ | 11.60 | 
|$22.87 - $24.53          |  |                     | 143,000 |           |                     | $ | 22.98 |                  |  |  | 9.77      |  |  |                  |        |  |  | $ |      | 



F-18



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |              
|---- | -------------
|(11) | CONTINGENCIES









|     |                                 
|---- | --------------------------------
|(12) | RECENT ACCOUNTING PRONOUNCEMENTS

Inventory Cost, an Amendment of ARB No. 43,
Chapter 4, Inventory Pricing,




|     |                                            
|---- | -------------------------------------------
|(13) | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)



|                                     |  |               |            |   |         |  |            |            |  |  |            |   |  |  |            |  
|------------------------------------ |  | ------------- | ---------- | - | ------- |  | ---------- | ---------- |  |  | ---------- | - |  |  | ---------- | -
|                                     |  | Quarter Ended |           
|                                     |  |               |           
|                                     |  | April 3,      |            |   | July 3, |  |            | October 2, |  |  | January 1, |  
|Fiscal Year Ended January 1, 2006    |  | 2005          |            |   | 2005    |  |            | 2005       |  |  | 2006       |  
|                                     |  |               |            |   |         |  |            |            |  |  |            |  
|Net loss                             |  | $             | (6,672,232 | ) |         |  | (6,354,434 | )          |  |  | (9,101,462 | ) |  |  | (7,738,192 | )
|Basic and diluted net loss per share |  |               | (0.19      | ) |         |  | (0.18      | )          |  |  | (0.25      | ) |  |  | (0.21      | )

F-19



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##### Table of Contents



NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                     |  |           |            |   |          |  |            |               |  |  |            |   |  |  |            |  
|------------------------------------ |  | --------- | ---------- | - | -------- |  | ---------- | ------------- |  |  | ---------- | - |  |  | ---------- | -
|                                     |  | March 28, |            |   | June 27, |  |            | September 26, |  |  | January 2, |  
|Fiscal Year Ended January 2, 2005    |  | 2004      |            |   | 2004     |  |            | 2004          |  |  | 2005       |  
|                                     |  |           |            |   |          |  |            |               |  |  |            |  
|Net loss                             |  | $         | (1,833,373 | ) |          |  | (1,127,231 | )             |  |  | (4,416,264 | ) |  |  | (6,958,042 | )
|Basic and diluted net loss per share |  |           | (0.07      | ) |          |  | (0.04      | )             |  |  | (0.14      | ) |  |  | (0.20      | )



|     |            
|---- | -----------
|(14) | STOCK SPLIT



F-20



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##### Table of Contents



EXHIBIT INDEX


|        |    |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | -- | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |              
|Number  |    | Exhibit Title
|        |    |              
|        | 3  | .1            |  | Amended and Restated Articles of Incorporation of New River
    Pharmaceuticals Inc., as amended (previously filed as
    Exhibit 3.1 to New River Pharmaceuticals Inc.s
    Registration Statement on Form S-1 (Registration No.
    333-115207) and incorporated herein by reference).                                                                                                                                                                                                                                                                                                          
|       
|        | 3  | .2            |  | Amended and Restated Bylaws of New River Pharmaceuticals Inc.
    (previously filed as Exhibit 3.2 to New River
    Pharmaceuticals Inc.s Registration Statement on
    Form S-1 (Registration No. 333-115207) and
    incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                         
|       
|        | 10 | .1+           |  | New River Pharmaceuticals Inc. Incentive Compensation Plan
    (previously filed as Exhibit 10.1 to New River
    Pharmaceuticals Inc.s Registration Statement on
    Form S-1 (Registration No. 333-115207) and
    incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                           
|       
|        | 10 | .2+           |  | Form of Stock Option Agreement for Employees (previously filed
    as Exhibit 10.1 to New River Pharmaceuticals Inc.s
    Registration Statement on Form S-8 (Registration No.
    333-121102) and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                             
|       
|        | 10 | .3+           |  | Form of Stock Option Agreement for Non-Employee Directors
    (previously filed as Exhibit 10.2 to New River
    Pharmaceuticals Inc.s Registration Statement on
    Form S-8 (Registration No. 333-121102) and
    incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                            
|       
|        | 10 | .4            |  | Administrative Services Agreement, dated as of August 10,
    2004, by and between New River Pharmaceuticals Inc. and Third
    Security, LLC (previously filed as Exhibit 10.4 to New
    River Pharmaceuticals Inc.s Annual Report on
    Form 10-K for the year ended January 2, 2005, and
    incorporated herein by reference).                                                                                                                                                                                                                                                              
|       
|        | 10 | .5            |  | Lease Agreement, dated as of August 10, 2004, by and
    between New River Pharmaceuticals Inc. and Third Security, LLC,
    as amended on September 20, 2004 (previously filed as
    Exhibit 10.5 to New River Pharmaceuticals Inc.s
    Annual Report on Form 10-K for the year ended
    January 2, 2005, and incorporated herein by reference).                                                                                                                                                                                                                                              
|       
|        | 10 | .6            |  | Lease Agreement, dated May 15, 2000, by and between
    Virginia Tech Foundation, Inc. and Lotus Biochemical
    Corporation, as amended by that certain Modification and Renewal
    of Lease, dated April 25, 2001, that certain Modification
    of Lease, dated February 4, 2002, that certain Renewal of
    Lease, dated April 29, 2002, and that certain Renewal of
    Lease, dated June 25, 2003 (previously filed as
    Exhibit 10.1 to New River Pharmaceuticals Inc.s
    Registration Statement on Form S-1 (Registration No.
    333-115207) and incorporated herein by reference).
|       
|        | 10 | .6.1          |  | Modification of Lease, effective August 1, 2004, and that
    certain modification of Lease, effective November 1, 2004,
    which amend the Lease Agreement, dated May 15, 2000, by and
    between Virginia Tech Foundation, Inc. and Lotus Biochemical
    Corporation, as amended (which has been filed as
    Exhibit 10.6) (previously filed as Exhibit 10.6.1 to
    New River Pharmaceuticals Inc.s Annual Report on
    Form 10-K for the year ended January 2, 2005, and
    incorporated herein by reference).                                                                         
|       
|        | 10 | .7            |  | Sublease Agreement, dated as of July 23, 2001, as amended,
    by and among Veterinary Technologies Corporation, New River
    Pharmaceuticals Inc. and Virginia Tech Foundation, Inc.
    (previously filed as Exhibit 10.1 to New River
    Pharmaceuticals Inc.s Registration Statement on
    Form S-1 (Registration No. 333-115207) and
    incorporated herein by reference).                                                                                                                                                                                                               
|       
|        | 10 | .7.1          |  | Renewal of Sublease, effective December 21, 2004, which
    amends the Sublease Agreement, dated as of July 23, 2001,
    as amended, by and among Veterinary Technologies Corporation,
    New River, Pharmaceuticals Inc. and Virginia Tech Foundation,
    Inc. (which has been filed as Exhibit 10.7) (previously
    filed as Exhibit 10.7.1 to New River Pharmaceuticals
    Inc.s Annual Report on Form 10-K for the year ended
    January 2, 2005, and incorporated herein by reference).                                                                                                
|       
|        | 10 | .8            |  | Credit Agreement, dated April 23, 2004, by and between New
    River Pharmaceuticals Inc. and Randal J. Kirk
    (2000) Limited Partnership (previously filed as
    Exhibit 10.1 to New River Pharmaceuticals Inc.s
    Registration Statement on Form S-1 (Registration
    No. 333-115207) and incorporated herein by reference).                                                                                                                                                                                                                                                              

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##### Table of Contents



|        |    |               |  |                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |              
|Number  |    | Exhibit Title
|        |    |              
|        | 10 | .9            |  | Assignment, dated November 9, 2000, by Thomas Piccariello,
    Randal J. Kirk and Lawrence P. Olon in favor of Lotus
    Biochemical Corporation (previously filed as Exhibit 10.7
    to New River Pharmaceuticals Inc.s Registration Statement
    on Form S-1 (Registration No. 333-115207) and
    incorporated herein by reference).                                             
|       
|        | 10 | .10           |  | Assignment, dated December 26, 2001, by Thomas Piccariello,
    Randal J. Kirk and Lawrence P. Olon in favor of New River
    Pharmaceuticals Inc. (previously filed as Exhibit 10.8 to
    New River Pharmaceuticals Inc.s Registration Statement on
    Form S-1 (Registration No. 333-115207) and
    incorporated herein by reference).                                           
|       
|        | 10 | .11           |  | Assignment, dated July 16, 2003, by Thomas Piccariello,
    Randal J. Kirk and Lawrence P. Olon in favor of New River
    Pharmaceuticals Inc. (previously filed as Exhibit 10.9 to
    New River Pharmaceuticals Inc.s Registration Statement on
    Form S-1 (Registration No. 333-115207) and
    incorporated herein by reference).                                               
|       
|        | 10 | .12           |  | Agreement, dated June 30, 2004, by and among New River
    Pharmaceuticals Inc., Innovative Technologies, L.L.C. and Keith
    Latham (previously filed as Exhibit 10.10 to New River
    Pharmaceuticals Inc.s Registration Statement on
    Form S-1 (Registration No. 333-115207) and
    incorporated herein by reference).                                                       
|       
|        | 10 | .13*          |  | United States Collaboration Agreement, dated as of
    March 31, 2005, by and among New River Pharmaceuticals
    Inc., Shire LLC and Shire Pharmaceuticals Group plc. (previously
    filed as Exhibit 10.13 to New River Pharmaceuticals
    Inc.s Annual Report on Form 10-K for the year ended
    January 2, 2005, and incorporated herein by reference).                        
|       
|        | 10 | .14*          |  | ROW Collaboration Agreement, dated as of March 31, 2005, by
    and among New River Pharmaceuticals Inc., Shire Pharmaceuticals
    Ireland Limited and Shire Pharmaceuticals Group plc. (previously
    filed as Exhibit 10.14 to New River Pharmaceuticals
    Inc.s Annual Report on Form 10-K for the year ended
    January 2, 2005, and incorporated herein by reference).      
|       
|        | 10 | .15+          |  | Summary of Director Compensation for Fiscal 2006.                                                                                                                                                                                                                                                                                                                                      
|       
|        | 10 | .16+          |  | Summary of Compensation for the Chairman of the Board, President
    and Chief Executive Officer and each of the Named Executive
    Officers for Fiscal 2006 (previously filed under Item 1.01
    fo New River Pharmaceuticals Inc.s Current Report on
    Form 8-K on September 26, 2005, and incorporated
    herein by reference).                                               
|       
|        | 21 | .1            |  | Subsidiaries of New River Pharmaceuticals Inc.                                                                                                                                                                                                                                                                                                                                         
|       
|        | 23 | .1            |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                   
|       
|        | 31 | .1            |  | Certification of Randal J. Kirk, Chairman of the Board,
    President and Chief Executive Officer (Principal Executive
    Officer) of New River Pharmaceuticals Inc., pursuant to
    Rules 13a-14(a) and 15d-14(a) promulgated under the
    Securities Exchange Act of 1934, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                              
|       
|        | 31 | .2            |  | Certification of Krish S. Krishnan, Chief Operating Officer,
    Chief Financial Officer, Secretary and Director (Principal
    Financial and Accounting Officer) of New River Pharmaceuticals
    Inc., pursuant to Rules 13a-14(a) and 15d-14(a) promulgated
    under the Securities Exchange Act of 1934, as adopted pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.
|       
|        | 32 | .1            |  | Certification of Randal J. Kirk, Chairman of the Board,
    President and Chief Executive Officer (Principal Executive
    Officer) of New River Pharmaceuticals Inc., pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                               
|       
|        | 32 | .2            |  | Certification of Krish S. Krishnan, Chief Operating Officer,
    Chief Financial Officer, Secretary and Director (Principal
    Financial and Accounting Officer) of New River Pharmaceuticals
    Inc., pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                 






|  |                                                                                                                                                                                                                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The Securities and Exchange Commission has granted confidential
    treatment with respect to certain information in these exhibits.
    The confidential portions of these exhibits have been omitted. A
    complete version of this exhibit has been filed separately with
    the Securities and Exchange Commission.
| 
|+ | Denotes compensatory plans or arrangements or management
    contracts                                                                                                                                                                                                                                                   

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