Javelin Pharmaceuticals (JAV) 10-K/A 2006 FY Annual report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

Amendment No. 1

þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-31114

JAVELIN PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware	88-0471759
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

125 CambridgePark Drive, Cambridge, MA 02140

(Address of principal executive offices) (Zip Code)

(617) 349-4500

(Registrant’s telephone number, including area code)

Securities Registered under Section 12(b) of the Exchange Act: None

Securities Registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yeso Noþ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yeso Noþ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filero                    Accelerated filerþ                    Non-accelerated filero

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act (check one): Yeso Noþ

The aggregate market value of the voting common stock held by nonaffiliates of the registrant as of June 30, 2006 was approximately $93,857,195.

The number of shares of the registrant’s common stock outstanding as of March 1, 2007: 40,463,081 shares.

EXPLANATORY NOTE

     We are filing this Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2006, as originally filed with the Securities and Exchange Commission on March 16, 2007 (the “Annual Report”), solely to reinsert an explanatory footnote to a table that was mistakenly omitted from the Supplementary Financial Information (Unaudited) with respect to the 2005 Quarterly results of operations in Item 8 which had been included in our Form 10-K for the year ended December 31, 2005. Such footnote reads in its entirety as follows:

     “Grant and contract revenue during the quarter ended June 30, 2005 was overstated by approximately $147,000 due to an error in the allocation of costs among projects. The overstatement was corrected in the quarter ended September 30, 2005, resulting in an understatement of grant and contract revenue for the quarter. In addition, we had not been appropriately recognizing revenue and receivables related to reimbursable indirect project costs that were earned in prior periods, resulting in an understatement of revenue of approximately $57,000 and $52,000 for the years ended December 31, 2003 and 2004, respectively. The error also resulted in a $14,000 overstatement of revenue for the quarter ended March 31, 2005 and a $12,000 understatement of revenue for the quarter ended June 30, 2005. We corrected the cumulative effect of this error during the quarter ended September 30, 2005, resulting in an overstatement of grant and contract revenue by approximately $107,000 for the quarter ended September 30, 2005.”

     Other than the reinsertion of the footnote, this Amendment No. 1 does not include any restatements or corrections of any previously reported financial statements or change any other disclosures.

     In accordance with Rule 12b-15 of the Securities Exchange Act of 1934, as amended, we are required to include in this Amendment No. 1 the entire Item 8.

     This Amendment No. 1 continues to speak as of the date of the Annual Report for the year ended December 31, 2006 and we have not updated or amended the disclosures contained herein to reflect events that have occurred since the filing of the Annual Report, or modified or updated those disclosures in any way other than as described in the preceding paragraphs.

1

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	Page
Reports of Independent Registered Public Accounting Firms		3
Consolidated Balance Sheets as of December 31, 2005 and 2006		7
Consolidated Statements of Operations for the years ended December 31, 2004, 2005 and 2006, and the cumulative period from February 23, 1998 (inception) to December 31, 2006		8
Consolidated Statements of Redeemable Preferred Stock and Stockholders’ Equity (Deficit) for the period from February 23, 1998 (inception) to December 31, 2006, including the years ended December 31, 2004, 2005 and 2006		9
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006, and the cumulative period from February 23, 1998 (inception) to December 31, 2006		11
Notes to the Consolidated Financial Statements		12

2

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Javelin Pharmaceuticals, Inc.
Cambridge, Massachusetts

We have audited the consolidated balance sheet of Javelin Pharmaceuticals, Inc. and Subsidiary (a development stage enterprise) (the “Company”) as of December 31, 2006, and the related consolidated statements of operations, redeemable preferred stock and stockholders’ equity (deficit), and cash flows for the year then ended and the amounts included in the cumulative columns in the consolidated statements of operations and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluting the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Javelin Pharmaceuticals, Inc. and Subsidiary as of December 31, 2006, and the results of their operations and their cash flows for the year then ended and the amounts included in the cumulative columns in the consolidated statements of operations and cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

As described in Note 2 to the financial statements, the Company changed its method of accounting for stock-based compensation in 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Javelin Pharmaceuticals, Inc. and Subsidiary’s internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of Javelin Pharmaceuticals, Inc. and Subsidiary’s internal control over financial reporting.

/s/ McGladrey & Pullen, LLP
     Burlington, Massachusetts
     March 14, 2007

3

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Javelin Pharmaceuticals, Inc.

Cambridge, Massachusetts

We have audited management’s assessment, included in the accompanyingManagement’s Annual Report On Internal Control Over Financial Reporting, that Javelin Pharmaceuticals, Inc. and Subsidiary (a development stage enterprise) (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Javelin Pharmaceuticals, Inc. and Subsidiary maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, Javelin Pharmaceuticals, Inc. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

4

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Javelin Pharmaceuticals, Inc. and Subsidiary (a development stage enterprise) and the related consolidated statements of operations, redeemable preferred stock and stockholders’ equity (deficit), and cash flows as of, and for the year ended December 31, 2006, and the amounts included in the cumulative columns in the consolidated statements of operations and cash flows for the year then ended, and our report dated March 14, 2007 expressed an unqualified opinion.

/s/ McGladrey & Pullen, LLP
	Burlington, Massachusetts
	March 14, 2007

5

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Javelin Pharmaceuticals, Inc.

In our opinion, the consolidated balance sheet and the related statements of operations, changes in redeemable preferred stock and stockholders’ equity (deficit) and cash flows present fairly, in all material respects, the financial position of Javelin Pharmaceuticals, Inc. (formerly Intrac, Inc.) and its subsidiary (a development stage enterprise) (the “Company”) at December 31, 2005, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2005 and the cumulative period from February 23, 1998 (inception) to December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of the statements in accordance with the standards of the Pu blic Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the financial statements, the Company has recurring losses and limited capital resources.

/s/ PricewaterhouseCoopers LLP
New York, New York
April 14, 2006

6

Javelin Pharmaceuticals,Inc. and Subsidiaries
(A Development Stage Enterprise)

Consolidated Balance Sheets

	December 31,
	2006			2005
Assets
Current assets:
Cash and cash equivalents	$	9,273,479		$	33,307,449
Short term marketable securities available for sale		11,461,674			—
Grant receivable		113,645			573,501
Prepaid expenses and other current assets		245,593			343,958
Total current assets		21,094,391			34,224,908
Fixed assets, at cost, net of accumulated depreciation		237,163			161,866
Other assets		109,223			52,188
Total assets		21,440,777			34,438,962
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses		3,151,379			1,207,626
Deferred revenue		—			19,522
Deferred lease liability		57,869			9,871
Total current liabilities		3,209,248			1,237,019
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized as of December 31, 2006 and 2005, none of which are outstanding		—			—
Common stock, $0.001 par value; 200,000,000 and 100,000,000 shares authorized as of December 31, 2006 and December 31, 2005, respectively; 40,409,421 and 40,404,977 shares issued and outstanding at December 31, 2006 and 2005, respectively.		40,409			40,404
Additional paid-in capital		97,634,546			95,355,368
Other comprehensive income (loss)		(5,117	)		—
Unearned compensation		—			(553,756	)
Deficit accumulated during the development stage		(79,438,309	)		(61,640,073	)
Total stockholders’ equity		18,231,529			33,201,943
Total liabilities and stockholders’ equity	$	21,440,777		$	34,438,962

The accompanying notes are an integral part of the consolidated financial statements.

7

Javelin Pharmaceuticals,Inc. and Subsidiaries
(A Development Stage Enterprise)

Consolidated Statements of Operations

										Cumulative from
										February 23,
										1998
										(inception) to
	Year Ended December 31,									December 31,
	2006			2005			2004			2006
Revenues:
Government grants and contracts	$	842,171		$	1,547,753		$	836,841		$	5,804,824
Operating expenses:
Research and development		10,854,116			7,212,801			4,806,073			57,217,713
Selling, general and administrative		9,608,598			5,222,104			2,702,673			29,730,593	(1)
Depreciation and amortization		61,008			44,321			31,796			178,613
Total operating expenses		20,523,722			12,479,226			7,540,542			87,126,919
Operating loss		(19,681,551	)		(10,931,473	)		(6,703,701	)		(81,322,095	)
Other income (expense):
Interest expense		(47	)		(65	)		(356,370	)		(943,959	)
Interest income		1,282,604			319,766			9,016			2,222,760
Other income		600,758			—			4,227			604,985
		1,883,315			319,701			(343,127	)		1,883,786
Net loss		(17,798,236	)		(10,611,772	)		(7,046,828	)		(79,438,309	)
Deemed dividend related to beneficial conversion feature of Series B redeemable convertible preferred stock		—			—			—			(3,559,305	)
Net loss attributable to common stockholders	$	(17,798,236	)	$	(10,611,772	)	$	(7,046,828	)	$	(82,997,614	)
Net loss per share attributable to common stockholders
Basic and diluted	($	0.44	)	($	0.38	)	($	0.64	)
Weighted average shares		40,179,543			27,831,188			10,936,922

(1) Includes related party transaction of $1,075,182 cumulative from February 23, 1998 (inception) through December 31, 2006 (see note 12).

The accompanying notes are an integral part of the consolidated financial statements.

8

Javelin Pharmaceuticals, Inc.
(A Development Stage Enterprise)

Statements of Redeemable Preferred Stock and
Stockholders’ Equity (Deficit)

																												Deficit
	Series A					Series B					Series C													Stock				Accumulated
For the period from February 23, 1998 (inception) to	Redeemable					Redeemable					Redeemable						Additional			Unearned			��	Sub-			Other	During the			Total
December 31, 2006, including the years ended	Preferred Stock					Preferred Stock					Preferred Stock		Common Stock				Paid-in			Com-				scription			Comprehensive	Development			Stockholders’
December 31, 2004, 2005 and 2006	Shares		Amount			Shares		Amount			Shares	Amount	Shares		Amount		Capital			pensation				Receivable			Income	Stage			Equity
Sale of Common Stock to founders at inception for cash ($0.001 per share)														4,540,812	$	4,541	$	457							($3,749	)					$	1,249
Value of services provided by an affiliate (see Note 12)																		89,531														89,531
Net loss for the period February 23, 1998 (inception) to December 31, 1998																													($470,200	)		(470,200	)
Balance at December 31, 1998														4,540,812		4,541		89,988							(3,749	)			(470,200	)		(379,420	)
Issuance of 236,128 warrants in June in connection with bridge financing (see Note 7)																		101,564														101,564
Issuance of Common Stock to consultant in June for services (see Note 6)														192,985		193		93,263							(106	)						93,350
Issuance of 204,336 warrants to consultants in August for services (see Note 7)																		98,598														98,598
Value of services provided by an affiliate (see Note 12)																		155,917														155,917
Net loss for the year ended December 31, 1999																													(1,205,559	)		(1,205,559	)
Balance at December 31, 1999														4,733,797		4,734		539,330							(3,855	)			(1,675,759	)		(1,135,550	)
Issuance of 15,522 warrants to an advisor for services in connection with sales of Series A redeemable preferred stock in August (see Note 6)			($	55,790	)													55,790														55,790
Exercise of warrants by consultants														204,336		204		(6	)													198
Issuance of Common Stock in connection with acquisition of a license in September (see Note 1)														5,174,257		5,175		18,599,825														18,605,000
Sale of 160.565 Units for cash in September ($100,000 per Unit), net of offering expenses of $1,157,572		4,014,125		14,898,928
Issuance of Preferred A warrants in September (see Note 6)				(960,361	)													960,361														960,361
Issuance of Preferred A Finders Units for services in September (see Note 6)				(107,825	)													107,825														107,825
Payment of stock subscription receivable																									3,201							3,201
Non-cash compensation in connection with issuance of stock options to non-employees in August and November (see Note 10)																		707,550														707,550
Value of services provided by an affiliate (see Note 12)																		163,376														163,376
Net loss for the year ended December 31, 2000																													(23,023,842	)		(23,023,842	)
Balance at December 31, 2000		4,014,125		13,774,952										10,112,390		10,113		21,134,051							(654	)			(24,699,601	)		(3,556,091	)
Issuance of Series B Preferred with a beneficial conversion feature for cash in December (see Note 6)							989,991	$	1,935,044									3,559,305														3,559,305
Expenses in connection with sale of Series B stock									(474,317	)
Deemed dividend related to beneficial conversion feature of Series B stock (see Note 6)									3,559,305									(3,559,305	)													(3,559,305	)
Payment of stock subscription receivable																									544							544
Exercise of warrants by a consultant														15,522		15																15
Exercise of bridge warrants														15,893		16		138														154
Value of services provided by an affiliate (see Note 12)																		481,299														481,299
Net loss for the year ended December 31, 2001																													(8,067,699	)		(8,067,699	)
Balance at December 31, 2001		4,014,125		13,774,952			989,991		5,020,032					10,143,805		10,144		21,615,488							(110	)			(32,767,300	)		(11,141,778	)
Issuance of compensatory stock options to members of the Board of Directors (see Note 10)																		1,431,498			($1,431,498	)										—
Amortization of unearned compensation																					1,264,522											1,264,522
Value of services provided by an affiliate (see Note 12)																		185,059														185,059
Non-cash compensation in connection with issuance of stock options to a non-employee in September (see Note 10)																		62,564														62,564
Reversal of subscription receivable																									110							110
Net loss for the period ended December 31, 2002																													(8,059,081	)		(8,059,081	)
Balance at December 31, 2002		4,014,125		13,774,952			989,991		5,020,032					10,143,805		10,144		23,294,609			(166,976	)			—				(40,826,381	)		(17,688,604	)

9

Javelin Pharmaceuticals, Inc.
(A Development Stage Enterprise)
Statements of Redeemable Preferred Stock and
Stockholders’ Equity (Deficit)

																																		Deficit
	Series A						Series B						Series C																Stock					Accumulated
For the period from February 23, 1998 (inception) to	Redeemable						Redeemable						Redeemable										Additional			Unearned			Sub-		Other			During the			Total
December 31, 2006, including the years ended	Preferred Stock						Preferred Stock						Preferred Stock						Common Stock				Paid-in			Com-			scription		Comprehensive			Development			Stockholders’
December 31, 2004, 2005 and 2006	Shares			Amount			Shares			Amount			Shares			Amount			Shares		Amount		Capital			pensation			Receivable		Income			Stage			Equity
Amortization of unearned compensation																											113,069											113,069
Issuance of Series C Preferred as license payment in August (see Note 8)														65,360		$	100,000
Conversion of Merger Note to Series C stock in August (see Note 7)														339,736			519,795
Sale of Series C Preferred for cash in August ($1.53 per share), net of issuance expenses of $132,496														2,549,254			3,767,856
Non-cash compensation in connection with issuance of stock options to a non-employee in October (see Note 10)																								57,672														57,672
Exercise of bridge warrants (see Note 7)																				2,270		2		20														22
Net loss for the period ended December 31, 2003																																			(3,155,092	)		(3,155,092	)
Balance at December 31, 2003		4,014,125			13,774,952			989,991			5,020,032			2,954,350			4,387,651			10,146,075		10,146		23,352,301			(53,907	)		—		—			(43,981,473	)		(20,672,933	)
Conversion of Series A, B and C Preferred Stock to Common Stock (see Note 6)		(4,014,125	)		(13,774,952	)		(989,991	)		(5,020,032	)		(2,954,350	)		(4,387,651	)		8,187,259		8,187		23,174,448														23,182,635
Sale of common stock in a private placement (net of expense of $1,853,224) (see Note 6)																				6,139,913		6,140		16,227,307														16,233,447
Merger transaction with Intrac, Inc. (see Note 1)																				1,153,190		1,153		(1,153	)													—
Non-cash compensation in connection with issuance of stock options to non-employees (see Note 10)																								132,501														132,501
Issuance of compensatory stock options to employees (see Note 10)																								1,094,793			(1,094,793	)										—
Amortization of unearned compensation																											198,351											198,351
Issuance of 226,314 warrants in November in connection with Bridge Debenture financing (see Note 7)																								314,795														314,795
Net loss for the period ended December 31, 2004																																			(7,046,828	)		(7,046,828	)
Balance at December 31, 2004		—			—			—			—			—			—			25,626,437		25,626		64,294,992			(950,349	)		—		—			(51,028,301	)		12,341,968
Sale of common stock in a private placement (net of expense of $2,225,411) (see Note 6)																				14,222,215		14,222		29,760,351														29,774,573
Cancellation of compensatory stock options to employees																								(50,921	)		50,921											—
Modification of employee stock options																								125,897														125,897
Issuance of 80,184 warrants to consultants (see Note 6)																								152,290														152,290
Issuance of 40,000 options to consultants (see Note 6)																								95,200														95,200
Exercise of 1999 Bridge Warrants																				217,964		217		1,962														2,179
Exercise of Series A Warrants																				26,518		27		102,598														102,625
Issuance of stock for license payment																				169,735		170		499,830														500,000
Exercise of Stock Options																				1,241		1		11														12
Issuance of stock for liquidation damages																				140,867		141		373,158														373,299
Amortization of unearned compensation																											345,672											345,672
Net loss for the period ended December 31, 2005																																			(10,611,772	)		(10,611,772	)
Balance at December 31, 2005		—			—			—			—			—			—			40,404,977		40,404		95,355,368			(553,756	)		—		—			(61,640,073	)		33,201,943
Net loss for the period ended December 31, 2006																																			(17,798,236	)		(17,798,236	)
Unrealized loss on investments																																(5,117	)					(5,117	)
Total comprehensive income (loss)																																						(17,803,353	)
Exercise of 2005 private placement warrants																				4,444		4		9,995														9,999
Reclassification of unearned compensation																								(553,756	)		553,756											—
Stock based compensation expense																								2,822,939														2,822,939
Balance at December 31, 2006		—			—			—			—			—			—			40,409,421		40,409		97,634,546			—			—		(5,117	)		(79,438,309	)		18,231,529

Securities issued in connection with services or financings were valued based upon the estimate of fair value of the securities issued as determined by the Company’s Management.

The accompanying notes are an integral part of the consolidated financial statements.

10

Javelin Pharmaceuticals, Inc. and Subsidiaries
(A Development Stage Enterprise)

Consolidated Statement of Cash Flows

										Cumulative from
				Year Ended						February 23, 1998
				December 31,						(inception) to
	2006			2005			2004			December 31, 2006
Cash flows from operating activities:
Net loss	$	(17,798,236	)	$	(10,611,772	)	$	(7,046,828	)	$	(79,438,309	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		61,008			44,321			31,796			178,613
Stock based compensation expense		2,822,939			—			—			2,822,939
Amortization of premium/discount on marketable securities		(36,174	)		—			—			(36,174	)
Amortization of deferred financing costs		—			—			25,000			252,317
Amortization of original issue discount		—			—			—			101,564
Amortization of unearned compensation		—			345,672			—			345,672
Non-cash expense recognized with issuance of Common Stock in connection with acquisition of a license		—			—			—			18,600,000
Non-cash expense recognized with issuance of Preferred Stock for license milestone		—			—			—			100,000
Non-cash expense recognized with issuance of Common Stock in connection with liquidation damages		—			373,299			—			373,299
Amortization of discount on debenture		—			—			314,795			314,795
Stock options and warrants issued in consideration for services rendered		—			373,387			330,852			3,003,076
Non-cash expense contributed by affiliate		—			—			—			1,075,182
Changes in assets and liabilities:
(Increase) decrease in grant receivable		459,856			(458,327	)		59,863			(113,645	)
Increase) decrease in prepaid expenses, other current assets and other assets		41,329			(276,410	)		13,799			(335,022	)
(Decrease) increase in accounts payable, accrued expenses and other liabilities		1,943,756			(1,088,846	)		1,306,129			3,151,382
Increase in deferred revenue		(19,522	)		19,522			—			—
(Decrease) increase in deferred lease liability		47,998			(7,230	)		7,075			57,869
Increase in due to Licensor		—			—			500,000			500,000
Net cash used in operating activities		(12,477,046	)		(11,286,384	)		(4,457,519	)		(49,046,442	)
Cash flows from investing activities:
Purchases of short term marketable securities		(23,250,617	)		—			—			(23,250,617	)
Redemption of short term marketable securities		11,820,000			—			—			11,820,000
Capital expenditures		(136,306	)		(68,536	)		(118,629	)		(415,777	)
Net cash (used in) provided by investing activities		(11,566,923	)		(68,536	)		(118,629	)		(11,846,394	)
Cash flows from financing activities:
Proceeds from exercise of warrants		9,999			104,804			—			115,567
Proceeds from exercise of stock options		—			12			—			12
Proceeds from sale of Common Stock		—			31,999,984			18,086,671			50,096,274
Proceeds from sale of Preferred Stock		—			—			—			25,451,201
Expenses associated with sale of Common Stock		—			(2,225,411	)		(1,853,224	)		(4,078,635	)
Expenses associated with sale of Preferred Stock		—			—			—			(1,764,385	)
Proceeds from notes payable		—			—			—			2,015,000
Proceeds from issuance of debenture		—			—			1,000,000			1,000,000
Repayment of debenture		—			—			(1,000,000	)		(1,000,000	)
Expenses associated with notes payable		—			—			(25,000	)		(153,719	)
Repayment of notes payable		—			—			—			(1,515,000	)
Net cash provided by financing activities		9,999			29,879,389			16,208,447			70,166,315
Net increase in cash and cash equivalents		(24,033,970	)		18,524,469			11,632,299			9,273,479
Cash and cash equivalents at beginning of period		33,307,449			14,782,980			3,150,681			—
Cash and cash equivalents at end of period	$	9,273,479		$	33,307,449		$	14,782,980		$	9,273,479
Supplemental disclosures:
Cash paid for interest:	$	—		$	—		$	16,575		$	271,633
Supplemental disclosure of noncash investing and financing activities:
Non cash issuance of common stock	$	—		$	500,000		$	—		$	500,000
Options and warrants issued for services and financings		—			—			—		$	1,222,574
Conversion of Merger Note and accrued interest to Series C stock		—			—			—		$	519,795
Recapitalization in connection with Merger with Intrac		—			—		$	1,153		$	1,153

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Javelin Pharmaceuticals, Inc. and Subsidiaries
(A Development Stage Enterprise)

Notes to the Consolidated Financial Statements

1. Organization and Business

     Javelin Pharmaceuticals, Inc., along with its wholly owned subsidiaries Javelin Pharmaceuticals UK Limited and Innovative Drug Delivery Systems, Inc. (collectively, “we,” “us,” the “Company” or “Javelin”), is a development stage enterprise engaged in the research, development and commercialization of innovative treatments for the relief of moderate to severe pain. We conduct operations in a single segment in the United States of America.

     In addition to the normal risks associated with a new business venture, there can be no assurance that our research and development will be successfully completed or that any approved product will be commercially viable. In addition, we operate in an environment of rapid change in technology, are dependent upon raising capital to fund operations, and are dependent upon the services of our employees, collaborators and consultants.

     Javelin Pharmaceuticals, Inc. was incorporated in July 2005 in the State of Delaware by Intrac, Inc., a Nevada corporation (“Intrac”), for the purpose of migrating the Intrac corporate entity to Delaware (“the Migratory Merger”). The Migratory Merger was effective on September 7, 2005, at which time Javelin Pharmaceuticals continued the business conducted by Intrac. Through the Migratory Merger, each outstanding share of Intrac common stock was automatically exchanged for one share of Javelin Pharmaceuticals common stock. On December 6, 2004, Innovative Drug Delivery Systems, Inc. (“IDDS”), then a private operating company, consummated a merger with Intrac, a public shell company (“the Reverse Merger”). For accounting purposes, the Reverse Merger has been treated as a recapitalization of IDDS with IDDS as acquirer and with each share of IDDS common stock, stock options and warrants prior to the Reverse Merger converted to 1.018 shares of Intrac common stock, stock options and warrants following the Reverse Merger. Thus, all common share and per share data included herein have been adjusted as if the stock exchange had occurred at inception. Accordingly, IDDS is considered to have issued shares of its common stock, stock options and warrants to shareholders of Intrac in exchange for the net assets of Intrac. For the three year period prior to the Reverse Merger, Intrac’s operations were nominal. The assets, liabilities and historical operating results prior to the Reverse Merger are those of IDDS. Pro forma information giving effect to the Reverse Merger has not been provided since the Reverse Merger is not considered a business combination under Statement of Financial Accounting Standards No. 141, “Business Combinations.” At the time of the Reverse Merger, Intrac had 1,153,190 shares of common stock issued and outstanding, and Intrac did not hold any net assets. Therefore, since the Reverse Merger is accounted for as a recapitalization of IDDS, the Intrac common shares were included in the surviving corporation’s stockholders equity at their par value with an offset to additional paid-in capital of $1,153. As a result of the Migratory Merger, IDDS became a wholly-owned subsidiary of Javelin.

     Pain Management, Inc. (the “Predecessor Company”) was incorporated in the State of Delaware on February 23, 1998. On September 25, 2000, the Predecessor Company merged with IDDS. The terms of the merger provided for each share of the Predecessor Company’s common stock to convert into approximately .908 shares of IDDS common stock. Accordingly, the stockholders of the Predecessor Company exchanged 5,212,500 shares of the Predecessor Company’s common stock for 4,733,797 shares of IDDS common stock. Prior to the merger, IDDS had outstanding 5,174,257 shares of common stock. Following the closing of the merger, the only asset held by IDDS was a licensing agreement with West Pharmaceutical Services, Inc. (see Note 8) executed on August 25, 2000. IDDS was incorporated on April 8, 1999; however, it remained dormant until executing the merger and licensing agreements noted above. The Predecessor Company’s Board of Directors and management assumed similar roles in IDDS after the merger closed. For financial reporting purposes, the merger was accounted for as the acquisition of a licensing agreement by the Predecessor Company and a reorganization with IDDS becoming the surviving entity. Consequently, the assets, liabilities and historic operating results of IDDS prior to the merger are those of the Predecessor Company. The fair value of the licensing agreement was determined to be approximately $18.6 million based on the fair value of the common stock issued. The rights obtained under the licensing agreement related to an unproven technology that would require significant research and development effort to commercialize a product. There is also a significant uncertainty as to whether the research and development effort will be successful. Since the licensed technology has no alternative future use, the fair value of the consideration

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issued to obtain the licensing agreement was expensed as research and development at the time the merger closed.

2. Summary of Significant Accounting Policies

Basis of Preparation

     The consolidated financial statements include the accounts of Javelin Pharmaceuticals, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

     The financial statements have been prepared on a going-concern basis, which assumes realization of all assets and settlement or payment of all liabilities in the ordinary course of business. We have limited capital resources, net operating losses and negative cash flows from operations since inception and expect these conditions to continue for the foreseeable future. In addition, it is anticipated that we will not generate significant revenues from product sales in the twelve months following December 31, 2006. Although we believe that our existing cash resources will be sufficient to support the current operating plan at least through June 30, 2007, we will need additional financing to support our operating plan thereafter or we will need to modify our operating plan accordingly. In addition, we have the ability to reduce discretionary spending to preserve cash. We may seek to raise additional funds through the private and/or public sale of our equity securities. We may also seek to raise capital through collaborative arrangements with corporate sources or other sources of financing. There can be no assurance that such additional financing, if at all available, can be obtained on terms reasonable to us. In the event that sufficient funds are not available, we will need to postpone or discontinue planned operations and projects. Our continuance as a going concern is dependent upon, among other things, our ability to obtain adequate long-term financing, the success of our research and development program and our attainment of profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Use of Estimates

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates relate to the valuation of equity instruments issued for services rendered, recoverability of fixed assets and deferred taxes. Actual results could differ from those estimates.

Concentrations of Credit Risk

     Financial instruments which potentially subject us to concentrations of credit risk consist of cash, cash equivalents, marketable securities and receivables from the U.S. Department of Defense (“DOD”). We have established investment guidelines that relate to credit quality and diversification and that limit exposure to any one issue of securities.

Cash and Cash Equivalents

     We consider all highly liquid investments which have maturities of three months or less, when acquired, to be cash equivalents. Our cash and cash equivalents are comprised of demand deposit accounts, money market accounts and U.S. Treasury obligations. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.

Marketable Securities

     Short-term marketable securities consist of certificates of deposit, government securities and corporate auction-rate securities with original maturities of greater than three months at the time of purchase. As of December 31, 2006, all the auction-rate securities held have original maturities in excess of 1 year. Our investment policy permits investments in auction-rate securities that have interest reset dates of three months or less at the time of purchase. The reset date is the date on which the underlying interest rate is revised based on a Dutch auction and the underlying security may be readily sold. Although the securities held have extended maturities, we classify these securities as current as they are available for sale under SFAS No. 115 — Accounting for Certain Investments in Debt and Equity Securities. All available-for-sale securities are recorded at fair market value and unrealized gains and

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losses are included in accumulated other comprehensive loss in shareholders’ equity. Realized gains and losses and declines in value, if any, judged to be other-than-temporary on available-for-sale securities are reported in other expense. The cost of available-for-sale securities sold is based on the specific identification method. We have established guidelines that maintain safety and provide adequate liquidity in our available-for-sale portfolio. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. We have not recognized any charges for unrealized losses on available-for-sale securities that were determined to be other-than-temporary.

Fixed Assets

     Furniture and fixtures, laboratory equipment, and computer equipment and software are stated at cost and are depreciated on a straight-line basis over their estimated useful lives. Expenditures for maintenance and repairs which do not materially extend the useful lives of the assets are charged to expense as incurred. The cost and accumulated depreciation of assets retired or sold are removed from the respective accounts and any gain or loss is recognized in operations.

     The estimated useful lives of fixed assets are as follows:

Leaseholds	3 years
Laboratory equipment	7 years
Furniture and fixtures	5 years
Computer equipment and software	3 years

Revenue Recognition

     We have been awarded government grants and contracts from the DOD and the National Institutes of Health (the “NIH”), which are used to subsidize our research and development projects (“Projects”). This revenue is recognized as subsidized Project costs for each period are incurred. For the year ended December 31, 2002, our revenue included $214,856 and $72,390 from the DOD and the NIH, respectively. In May 2003, we were granted an extension of a prior grant by DOD in the amount of a $4.3 million contract. For the years ended December 31, 2006, 2005 and 2004, all of our research revenue came from reimbursements for costs incurred in relation to the contract from the DOD. For all periods presented, our only source of revenue was in the form of grants and contracts.

     Interest income is recognized as earned.

Research and Development Costs

     We expense all research and development costs as incurred for which there is no alternative future use. Such expenses include licensing and upfront fees paid in connection with collaborative agreements, as well as expenses incurred in performing research and development activities including salaries and benefits, clinical trial and related clinical manufacturing expenses, share-based compensation expense, contract services and other outside expenses. For the years ended December 31, 2006, 2005 and 2004, we received reimbursements for research and development costs incurred in relation to the contract from the DOD, described above. For the years ended December 31, 2006, 2005 and 2004, research and development expenses that were incurred and reimbursed under our DOD grants and contracts were $842,171, $1,547,753, and $836,841, respectively.

Patents

     As a result of research and development efforts conducted by us, we have applied, or are applying, for a number of patents to protect proprietary inventions. All costs associated with patents are expensed as incurred.

Net Loss Per Share

     We prepare our per share data in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS No. 128”). Basic net loss per share is computed on the basis of net loss for the period

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divided by the weighted average number of shares of common stock outstanding during the period. Since we have incurred net losses since inception, diluted net loss per share does not include the number of shares issuable upon exercise of outstanding options and warrants and the conversion of preferred stock since such inclusion would be anti-dilutive.

     Disclosures required by SFAS No. 128 have been included in Note 9.

Deferred Financing Costs

     Costs incurred in connection with issuance of notes payable are deferred and amortized using the interest method as interest expense over the term of the debt instrument.

Comprehensive Loss

     Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”, established standards for reporting and display of comprehensive loss and its components in the financial statements. For the year ended December 31, 2006, our comprehensive loss was $17.8 million, which consisted of our net loss and $5,117 of unrealized loss on marketable securities. We had no other comprehensive items to report other than net loss for the years ended December 31, 2005 and 2004, respectively.

Impairment of Long-Lived Assets

     In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we review our long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss is recognized if the carrying amount of the long-lived asset is not recoverable and its carrying amount exceeds its fair value, which is based upon estimated undiscounted future cash flows. For all periods presented, there have been no impairment losses incurred.

Stock-Based Compensation

     Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004) — Share-Based Payment, or SFAS 123(R). This Statement requires compensation cost relating to share-based payment transactions to be recognized in the financial statements using a fair-value measurement method. Under the fair value method, the estimated fair value of an award is charged against income on a straight-line basis over the requisite service period, which is generally the vesting period. We selected the modified prospective adoption method as prescribed in SFAS 123(R) and therefore, we have not restated our financial statements for prior periods. Under the modified prospective application, this Statement was applied to new awards granted in 2006, as well as to the unvested portion of previously granted stock option awards for which the requisite service had not been rendered as of January 1, 2006.

     Prior to January 1, 2006, our stock option plan was accounted for under the recognition and measurement provisions of APB Opinion No. 25 Accounting for Stock Issued to Employees, and related interpretations, as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Generally, no compensation expense was recognized in the financial statements in connection with the awarding of stock option grants to employees provided that, as of the grant date, all terms associated with the award are fixed and the fair value of our stock, as of the grant date, is equal to or less than the amount an employee must pay to acquire the stock. We had recognized compensation expense in situations where the terms of an option grant were not fixed or where the fair value of our common stock on the grant date was greater than the amount an employee must pay to acquire the stock.

     The adoption of SFAS 123(R) had and will have a material impact on our consolidated financial position and results of operations. See Note 10 for further information regarding our stock-based compensation assumptions and expenses, including pro forma disclosures for prior periods as if we had recorded stock-based compensation expense.

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Income Taxes

     We account for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). SFAS No. 109 requires that we recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse. SFAS No. 109 also requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.

Recent Accounting Pronouncements

     In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (SAB 108), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. We have adopted the provisions of SAB 108 in our annual financial statements for fiscal year 2006. The adoption of SAB 108 did not have a material impact our consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. We will be required to adopt the provisions of SFAS 157 beginning with our first quarter ending March 31, 2007. We do not believe that the adoption of the provisions of SFAS 157 will materially impact our consolidated financial statements.

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires an entity to recognize the impact of a tax position in its financial statements if that position is more likely than not to be sustained on audit based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of fiscal year 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Early application of FIN 48 is encouraged. We do not expect that our adoption of FIN 48 will materially impact our consolidated financial statements.

3. Marketable Securities

     The following is a summary of our short term marketable securities available for sale as of December 31, 2006:

	Carrying		Unrealized		Unrealized			Estimated
	Value		Gains		Losses			Fair Value
December 31, 2006:
Short-term marketable securities:
Certificates of Deposit	$	1,698,006	$	713	$	(137	)	$	1,698,582
U.S. Government Securities		2,398,785		—		(5,693	)		2,393,092
Taxable Auction Securities		7,370,000		—		—			7,370,000
Total short term marketable securities	$	11,466,791	$	713	$	(5,830	)	$	11,461,674

     In accordance with FASB Staff Position FAS115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” the following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2006:

16

	Less than 12 months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
December 31, 2006:
Certificates of Deposit	$	496,800	$	(137	)	$	—	$	—	$	496,800	$	(137	)
U.S. Government Securities		2,393,092		(5,693	)		—		—		2,393,092		(5,693	)
Total	$	2,889,892	$	(5,830	)	$	—	$	—	$	2,889,892	$	(5,830	)

     We have the intent and ability to hold these securities with unrealized losses to maturity or to recovery. Based on both the length of time and the extent to which the market value has been less than cost and the financial condition and near-term prospects of the issuer, we concluded that none of the unrealized losses at December 31, 2006 constituted other-than-temporary impairment.

4. Fixed Assets

     Fixed assets consist of the following:

	December 31,
	2006			2005
Leaseholds	$	15,435		$	4,824
Furniture and fixtures		113,474			60,800
Laboratory equipment		114,593			116,901
Computer equipment		136,204			76,175
Computer software		33,764			20,771
		413,470			279,471
Less, Accumulated depreciation		(176,307	)		(117,605	)
	$	237,163		$	161,866

     Depreciation expense was $61,008, $44,321 and $31,796 for 2006, 2005 and 2004, respectively.

5. Accounts Payable and Accrued Expenses

     Accounts payable and accrued expenses consist of the following:

	December 31,
	2006		2005
Accounts payable	$	685,400	$	557,252
Accrued professional fees		220,333		434,886
Accrued research and development		964,944		56,897
Accrued compensation and benefits		878,808		133,044
Accrued sales and marketing consulting costs		325,165		—
Accrued other expenses		76,729		25,547
	$	3,151,379	$	1,207,626

6. Stockholders’ Equity

     At December 31, 2006, our Certificate of Incorporation, as amended by shareholder approval on July 20, 2006, authorizes us to issue 200 million shares of our common stock, $0.001 par value, and 5 million shares of our preferred stock, $0.001 par value. At December 31, 2005, our Certificate of Incorporation authorized us to issue 100 million shares of our common stock, and 5 million shares of our preferred stock. At December 31, 2004, our Certificate of Incorporation, as amended, authorized us to issue 500 million shares of our common stock and 5 million shares of our preferred stock. Our Board of Directors has the authority to issue our preferred stock, in series, with rights and privileges determined by the Board.

     Prior to the Reverse Merger, IDDS was authorized to issue 80 million shares of common stock, $0.001 par

17

value, and 20 million shares of preferred stock, $0.001 par value. At that time, IDDS had outstanding three classes of redeemable preferred stock. The rights and provisions of the preferred stockholders included liquidation, voting, dividend, redemption and conversion. As a result of the Reverse Merger, all shares of IDDS preferred stock converted into 8,187,259 shares of common stock.

     In 1999, we issued 192,985 shares of common stock to a consultant in consideration for services rendered and a subscription receivable of $106. The fair value of the shares was $93,456, as estimated by us.

     In September 2000, we sold 160.565 units (“Units” or “Series A Financing”) to investors at a per Unit price of $100,000. Each Unit consisted of 25,000 shares of Series A redeemable Preferred Stock (“Series A Stock”) (convertible into 25,872 shares of common stock) and 2,587 warrants (the “A Preferred Warrants”). Each A Preferred Warrant entitles the holder to purchase one share of Common Stock at an exercise price of $3.87 per share. The A Preferred Warrants contain certain antidilution provisions, as defined. The fair value of the A Preferred Warrants at issuance was $960,361. On October 13, 2005, 388,885 A Preferred Warrants expired unexercised. At December 31, 2005, 26,518 of the A Preferred Warrants had been exercised (see Note 11).

     As partial consideration for the sale of the Units, we issued an option to purchase 15.83 units (the “Finders Units”) to members of the firm responsible for obtaining the Series A Financing. Each Finders Unit entitles the holder to purchase 25,000 shares of Series A Stock (convertible into 25,872 shares of Common Stock) and 2,587 Series A Preferred Warrants (the “Finders Warrants”) for $110,000 per Finders Unit. The fair value of the Series A Stock included in the Finders Units, which was accounted for as a cost of the Series A Financing, totaled $1,071,331. Each Finders Warrant entitles the holder to purchase one share of Common Stock at a per share price of $3.87. The Finders Warrants expire in September 2007. The fair value of the Finders Warrants at the date of issue was $107,825. At December 31, 2006, none of the Finders Warrants had been exercised.

     In 2000, we issued to another consultant, who acted as an advisor to the Series A Financing, warrants to purchase up to 15,522 shares of common stock at an exercise price of approximately $0.001 per share. The fair value of the warrants at the issuance date was $55,790, which has been accounted for as a cost of the Series A Financing. All of the warrants were exercised in 2001.

     During December 2001, we issued shares of Series B Redeemable Preferred Stock (“Series B Stock”).The Series B conversion price represented a discount from the estimated fair value of the Common Stock at the time of issuance. Accordingly, the discount amount was considered incremental yield (“the beneficial conversion feature”) to the preferred stockholders and has been accounted for as a deemed dividend to preferred stockholders. Based on the conversion terms of the Series B Stock, a deemed dividend of approximately $3.6 million has been added to the net loss in the calculation of net loss applicable to common stockholders in the year ended December 31, 2001.

     In December 2004 we closed the private placement of 6,139,913 shares of common stock for proceeds of approximately $16.2 million, net of offering expenses of $1.9 million. As partial consideration for services rendered, we issued to the placement agent fully vested warrants, to purchase up to 920,987 shares of common stock (the “Placement Warrants”). Each Placement Warrant entitles the holder to purchase one share of common stock at an exercise price of $2.95 per share. The Placement Warrants expire in December 2009. The fair value of the Placement Warrants at issuance was approximately $1.8 million, as estimated by us, using the method described in Note 10.

     In March 2005, in consideration of a termination fee, we granted warrants to an entity to purchase up to 10,184 shares of common stock at an exercise price of $2.49 per share. The warrants expire in March 2010. The fair value of the warrants at the date of issuance was $18,840, as estimated by us using the method described in Note 10.

     Also in March 2005, as part of an engagement fee for investor and public relations services, we granted warrants to an entity to purchase up to 25,000 shares of common stock at an exercise price of $3.00 per share. The warrants expire in March 2010. The fair value of the warrants at the date of issuance was $44,000, as estimated by us using the method described in Note 10.

     In April 2005, in consideration for investor and public relations services, we granted warrants to an entity

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to purchase up to 20,000 shares of common stock at an exercise price of $3.00 per share. The warrants expire in April 2010. The fair value of the warrants at the date of issuance was $35,200, as estimated by us using the method described in Note 10.

     In September 2005, as partial consideration for investor and public relation services, we granted warrants to an entity to purchase up to 25,000 shares of common stock at an exercise price of $3.00 per share. The warrants expire in September 2010. The fair value of the warrants at the date of issuance was $54,250, as estimated by us using the method described in Note 10.

     In November 2005 we closed the private placement of 14,222,215 shares of common stock and 711,111 warrants (the “Investor Warrants”) for proceeds of approximately $29.8 million, net of offering expenses of $2.2 million. Each Investor Warrant entitles the holder to purchase one share of common stock at an exercise price of $2.25 per share. The Investor Warrants expire in December 2010 and contain certain antidilution provisions and registration rights, as defined. The fair value of the Investor Warrants at issuance was $1,376,000, as estimated by us, using the method described in Note 10. As partial consideration for services rendered, we issued to the placement agents fully vested warrants to purchase up to 853,333 shares of common stock (the “Placement Warrants”). Each Placement Warrant entitles the holder to purchase one share of common stock at an exercise price of $2.48 per share. The Placement Warrants expire in November 2010. The fair value of the Placement Warrants at issuance was approximately $1.6 million, as estimated by us, using the method described in Note 10.

7. Notes Payable

a.	During 1998, we issued two notes payable to two banks with principal amounts of $145,000 and $80,000, respectively (the “Notes”). The Notes were due in September 2000 bearing interest of 1% over the Eurodollar rate and the bank’s prime rate, respectively. The Notes were guaranteed by one of our investors. At December 31, 1999, the outstanding balances on the Notes were $145,000 and $80,000, respectively, accrued interest totaled $1,400 and the weighted average interest rate was 7.5%. During 2000, the $145,000 Note was increased to $245,000.
	Both Notes were repaid in October 2000, following the issuance of Series A Stock (see Note 6).
b.	During 1999, we raised $1.04 million by issuing notes payable (the “Bridge Notes”) and warrants (the “Bridge Warrants”). The Bridge Notes accrued interest at 12% per annum for the first twelve months and 15% per annum for up to an additional year. At December 31, 1999, accrued interest on the Bridge Notes was approximately $86,000. In November, 2000, after the issuance of Series A Stock, the principal plus accrued interest totaling approximately $1,238,000 was repaid.
	In connection with the Bridge Notes, Bridge Warrants to purchase up to 236,127 shares of Common Stock, with an exercise price of approximately $0.01 per share, were issued to the Bridge Noteholders. The Bridge Warrants contain anti-dilution provisions and were to expire in September 2005. The fair value of the Bridge Warrants at the date of issue was $101,564. Accordingly, the Bridge Notes were recorded at an original issue discount of $101,564, which was amortized to interest expense over the term of the Bridge Notes. At December 31, 1999, the Bridge Notes were recorded at $980,256. During the years ended December 31, 2001, 2003 and 2005, Bridge Warrants to purchase 15,893 shares, 2,270 shares and 217,964 shares of common stock, respectively, were exercised. At December 31, 2005, all Bridge Warrants had been exercised (see Note 11).
	Professional fees incurred in connection with the issuance of the Bridge Notes, amounting to $128,719, were accounted for as deferred financing costs.
	In 1999, we issued to three consultants who had arranged the sale of Bridge Notes warrants to purchase up to 204,336 shares of common stock at an exercise price of approximately $0.001 per share. The fair value of the warrants, which were accounted for as deferred financing costs, at the issuance date was $98,598. All of the warrants were exercised in 2000.

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c.	In July 2000, we issued a one-year note to a commercial bank in the principal amount of $150,000 and bearing interest, payable monthly, based on the Eurodollar rate plus 1%. The note was guaranteed by one of our investors. In October 2000, following the closing of the sale of Series A Stock, the note was repaid.
d.	In November 2002, we issued a $500,000 convertible note, due on November 24, 2004, to eXegenics, Inc., pursuant to an agreement for the termination of a proposed merger with eXegenics, Inc. (the “Merger Note”). The Merger Note was bearing interest at prime plus 1%, as defined, which interest was due and payable annually. The unpaid principal and accrued interest on the Merger Note was to automatically convert into shares of our equity securities in the event that we completed a private placement, as defined, before November 24, 2004, or in the event of a consolidation, merger, combination, or reorganization, as defined. In the event of a private placement, the Merger Note and accrued interest was to be converted into the same series of securities offered in the private placement, at the same per share price paid by investors. At December 31, 2002, accrued interest on the Merger Note totaled $2,625. In August 2003, following a private placement, the principal and accrued interest, totaling $519,795, was converted into 339,736 shares of Series C Redeemable Preferred Stock (see Note 6).
e.	In November 2004, we entered into a Securities Purchase Agreement and raised $1.0 million by issuing a Senior Secured Debenture (the “Bridge Debentures”) and warrants (the “Warrants”). The Bridge Debentures accrued interest at 10% per annum for a maximum term of 12 months. Subject to certain terms and conditions we granted to investors in the Bridge Debenture a security interest in certain of our assets. At December 6, 2004, upon the sale of common stock (see Note 6), the principal plus accrued interest totaling $1,008,611 was repaid, and the security interest in our assets was released.
	In connection with the issuance of the Bridge Debentures, we issued warrants to purchase up to 226,314 shares of common stock, with an exercise price of $2.65 per share to the purchasers of the Bridge Debentures. The warrants contain anti-dilution provisions and expire in November 2009. We allocated the total proceeds to the fair value of the Bridge Debentures and the Warrants in accordance with APB No. 14, which resulted in $314,795 being allocated to the warrants. This amount was accounted for as debt discount and amortized to interest expense over the term of the Bridge Debentures. Professional fees incurred in connection with the Bridge Debentures, amounting to $25,000, were accounted for as deferred financing costs and amortized as additional interest expense during the year ended December 31, 2004.

8. Commitments and Contingencies

a.	Operating Leases
	We recognize rental expense for leases on the straight-line basis over the life of the lease.
	On September 5, 2002, we entered into a sublease (the “Sublease”) for office space in New York, New York with a term from December 7, 2002 through December 30, 2003. Minimum rent for the Sublease was $371,000 per annum, payable in equal monthly installments of $30,917, except that no rent payment was due for the first 30 days of the Sublease term (the “Free Rent Period”). In addition, upon execution of the Sublease, we prepaid rent for the first two months following the Free Rent Period and the last two months of the Sublease term, totaling $123,667. We also were required to pay additional rent, as defined. On September 22, 2003, we entered into a lease for office space in New York, New York with a term from December 1, 2003 through November 30, 2006. Minimum rent for the lease was initially $125,000 per annum with a 3% rent escalation every 12 months thereafter, payable in equal monthly installments, except that no rent payment was due for the first 60 days of the lease term (the “Free Rent Period”). In addition, upon execution of the lease, we paid a security deposit of $31,250. We vacated the New York office

20

space upon termination of the lease, and received the remainder of our security deposit in January 2007.

On May 1, 2005, we entered into a lease for office space in Cambridge, Massachusetts, which lease was amended effective June 1, 2006. Prior to the amendment, minimum rent for the lease was payable in equal monthly installments of $6,810 over the lease term. As a result of the amendment, we assumed additional office space in our Cambridge facility, the lease term was extended to May 31, 2012, and the minimum monthly rent for the lease was increased to $15,450 for the first twelve months, with rent escalations every twelve months thereafter. At December 31, 2006, our security deposit related to the lease was $97,615.

In August 2006, we entered into a new lease for office space in Lake Success, New York with a three-year extendable term, which commenced on October 1, 2006. Minimum rent for the lease is initially $57,477 per annum, with an annual 3.5% rent escalation. In addition, upon execution of the lease, we paid a security deposit of $9,580.

For the years ended December 31, 2006, 2005 and 2004, we recognized rent expense of $326,301, $176,771 and $122,355, respectively. A deferred lease liability of $57,869, $9,871 and $17,101 at December 31, 2006, 2005 and 2004, respectively, was recorded for rent expense in excess of amounts paid; the amount of additional rent paid was immaterial.

In December 2006, we entered into a three month extendable term lease for office space in the United Kingdom for Javelin Pharmaceuticals UK Ltd., effective January 1, 2007. Minimum rent is approximately $1,000 per month. We also paid a security deposit of approximately $2,000.

Future minimum lease payments under operating leases having initial or remaining noncancellable lease terms in excess of one year are as follows:

	As of
	December 31, 2006
2007	$	294,988
2008		340,245
2009		336,667
2010		306,320
2011		320,108
Thereafter		135,210
	$	1,733,538

b.	Legal Proceedings
	From time to time, we are involved in disputes or legal proceedings arising in the ordinary course of business. However, we do not believe that any such disputes or pending litigation would have a material adverse effect on our financial position, results of operations or cash flows.
c.	Research Collaboration, Licensing and Consulting Agreements

(i) In September 2000, we assumed a license agreement, dated February 25, 1998, between the Predecessor Company and Stuart Weg, M.D. The license granted us exclusive worldwide rights, including the right to grant sublicenses, for the intellectual property surrounding transnasal ketamine. In connection therewith, we made an upfront payment to Dr. Weg, Herbert Brotspies, and Calgar & Associates (collectively the “Founders”) and issued the Founders shares of common stock, of which a portion is held in escrow and will be released to the Founders, if at all, upon the successful completion of the Phase III trial. The release of the shares from escrow is not contingent on the Founders’ performance. We also reimbursed the Founders for patent and other costs. We will pay

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	semi-annual royalty payments to the Founders based on a percentage of net sales of transnasal ketamine by us or our sublicensees. In addition, we shall pay the Founders a defined percentage of all sublicensing fees or other lump sum payments. Under the terms of the license agreement, we are also obligated to make aggregate future payments upon the earlier of certain defined dates or satisfaction of certain clinical and regulatory milestones, which include the filing of a New Drug Application (“NDA”) with the Food & Drug Administration (“FDA”), the approval of an NDA by the FDA and the first commercial sale of a licensed product. A defined percentage of such milestone payments shall be creditable against royalties earned; provided, however, that in no event shall royalties earned be reduced by more than a certain percentage in any applicable semi-annual period. We may satisfy a portion of the milestone payments through the issuance of shares of our common stock provided that we are publicly traded at the time such milestone payment accrues. In April 2003 the license agreement was amended to allow for the August 2003 milestone to be paid in cash and Series C Stock. The Founders agreed to accept 65,360 shares of Series C Stock, valued at $0.1 million plus $0.15 million in cash as payment in full for the milestone. In November 2004, the license agreement was amended to defer payment of the $500,000 milestone from August 25, 2004, to a date on or before December 31, 2004. We were required to pay interest, at a rate of 4.75% per annum, on the amount of the milestone payment for the period from August 25, 2004 to the amended payment date. On December 21, 2004 we paid the milestone payment plus accrued interest totaling $507,964. On December 31, 2004 we accrued the final milestone payment of $500,000 and on April 7, 2005, we entered into an agreement and issued 169,735 shares of common stock as settlement of this final milestone payment, under the license agreement. The fair value of the shares issued was $500,000, as determined by the equity price of $2.95 on the date of grant.
(ii)	In connection with the license agreement described above, in February 1998 the Predecessor Company entered into a three year Consulting Agreement, renewable upon mutual consent, with each of Dr. Weg and Dr. Gary, pursuant to which both Dr. Weg and Dr. Gary were to provide us with such consulting services as we may reasonably request. In consideration for such services, we agreed to pay to each of Dr. Weg and Dr. Gary a consulting fee equal to $75,000 per year, payable in equal monthly installments. These agreements expired March 2001 and were not renewed.
(iii)	On August 25, 2000, we entered into a license agreement with West Pharmaceutical Services, Inc. (“West”) for rights to develop and commercialize intranasal morphine, fentanyl and other products. Under the terms of the agreement, we were granted an exclusive, worldwide, royalty bearing license, including the right to grant sublicenses, for the rights to the intellectual property covering these products. The license agreement will expire with the last to expire of the license patents in 2016. In consideration of the license, we paid and expensed on September 22, 2000 an up front fee. In addition, we are obligated to make royalty payments to West based upon net sales of products by us or our sublicensees, if any, as defined. We are also obligated to pay West a minimum annual royalty for each licensed product that receives approval by a regulatory agency to be marketed in any major market country, as defined, and to pay West a defined amount of any up-front license fees in the event that we sublicense any rights to any third party. In addition, under a Development Milestone and Option Agreement entered into in connection with the license agreement, we are obligated to make aggregate future payments totaling $5.0 million upon reaching certain defined development milestones, including the filing of an NDA with the FDA and the approval of an NDA by the FDA of a licensed product. Milestone payments can be paid in cash or equity upon the satisfaction of certain clinical and regulatory milestones and provided that we are publicly traded at the time such milestone payment accrues. Our ability to pay the upfront payment for the license agreement and the M-6-G fee (see below) was guaranteed

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by an affiliate of ours. The guarantee expired upon the payments by us of amounts owed to West. In addition, we granted West the right of first refusal to enter into a clinical manufacturing agreement for nasal morphine (see (iv) (a) below).

The license agreement and related agreements (see (iv)(a) to (iv)(d) below) may be terminated by mutual consent of the parties at any time or by either party upon written notice of default, including non-performance, by the other party that is not cured within 30 days.

(iv) In connection with the West license agreement, we entered into the following additional agreements:

(a)	A clinical manufacturing agreement, whereby we would buy from West 100% of the nasal morphine product required for conducting the clinical trials subject to West’s ability to supply 100% of the required product. West would manufacture and package the clinical product for us. This agreement was terminated effective September 2002.
(b)	An option agreement, whereby we were granted an option to include morphine -6- glucuronide (“M-6-G”) as an identified compound under the license agreement. We paid and expensed a non-refundable fee in consideration of the option, which expired unexercised on December 22, 2000.
(c)	On October 24, 2000, we expanded our license agreement to include an additional development agreement with West for rights to develop and commercialize intranasal fentanyl. Pursuant to the development agreement, we would undertake a development program for intranasal fentanyl with West, and the parties would endeavor to complete the development program within the defined time table. However, we could use other suppliers should West be unable to either provide competitive cost bids or complete the program within a reasonable timeframe. In addition, under the development agreement, we were obligated to make aggregate future payments totaling $6.3 million upon reaching certain defined development milestones, which included completion of proof-of-principle studies, successful completion of a phase I/II clinical trial, commencement of a phase III clinical trial, filing of an NDA with the FDA and the approval of an NDA by the FDA of a licensed product. These milestone payments could be paid in cash or equity upon the satisfaction of certain clinical and regulatory milestones and provided that we were publicly traded at the time such milestone payment accrues. In October 2003, we and West amended the license agreement to exclude further development of fentanyl by us. All rights, duties and obligations between us and West related to fentanyl were terminated, including aggregate remaining future milestone payments of $6.3 million.
(d)	On November 17, 2000, we entered into a clinical manufacturing agreement with West to manufacture, package, purchase and sell to us nasal ketamine clinical product according to agreed upon clinical product specifications and price schedule. The agreement expired in November 2001.

(v) On February 8, 2005, we consented to the assignment of the license agreements with West to Archimedes Pharma Limited (“Archimedes”) in connection with the sale of West’s Drug Delivery business to Archimedes. Under the terms of the assignment, Archimedes assumed all of West’s obligations and liabilities under the assigned agreements that by their respective terms are required to be paid, performed or discharged.

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(vi)	On December 14, 2001 (the “Effective Date”), we entered into an agreement (the “Shimoda Agreement”) with Shimoda Biotech (Proprietary) Ltd. and certain affiliated entities (“Shimoda”), for an exclusive worldwide license to commercialize formulations of pharmaceutical products containing diclofenac. We would pay: (i) a license fee to Shimoda and reimbursement for expenses, if certain defined events occur; (ii) two percent of the net proceeds, as defined, of our initial public offering (“IPO”) to Shimoda, but not less than $1 million or in excess of $2 million; (iii) aggregate future milestone payments of $6.0 million payable upon the satisfaction of certain clinical and regulatory milestones which includes submission of an NDA with the FDA, approval of an NDA by the FDA and one year following the date of first sale of a licensed product; and (iv) royalty payments to Shimoda based upon the sales of products by us or our sublicensees, if any, as defined. Upon achievement of a milestone, Shimoda has the option to receive payment in cash or shares of common stock. In the event Shimoda elects to receive common stock, the number of shares to be issued is based on a formula whereby the defined milestone payment is divided by the per share price of our common stock in an IPO as defined. Should common stock be issued in satisfaction of milestones, we will record a non-cash charge based on the fair value of the consideration paid at the date the milestone is achieved. Such charge could be material and could result in a material dilution to per share amounts. The Shimoda Agreement may be terminated (i) by either party due to breach by the other party that is not cured within 60 days of written notice; (ii) by Shimoda in the event of default by us for non-payment of amounts due that is not cured with 60 days of written notice; or (iii) by us at any time by giving 90 days written notice to Shimoda.
(vii)	In December 2005, we amended the license agreement with Shimoda. Under the terms of the amendment, the total aggregate future milestone payments of $6.0 million payable upon the satisfaction of certain clinical and regulatory milestones remains unchanged although as amended include allowance of an MAA by the MHRA, submission of an NDA with the FDA, approval of an NDA by the FDA and one year following the date of first sale of a licensed product.
(viii)	In May 2006, we further amended the license agreement with Shimoda. Under the previous agreement, we were required to launch a commercial product by December 14, 2007 or risk termination of the license at Shimoda’s option. Under the terms of the amendment, we are no longer required to launch a commercial product by December 14, 2007. Rather, we will be considered to be compliant with the Agreement if we diligently continue to pursue regulatory approval as of that date.
(ix)	In February 2007, we entered into a Commercial Supply Agreement (the “Supply Agreement”) with Precision Pharma Services, Inc. (“Precision”). The initial term of the Supply Agreement is two years, and it is renewable in one-year increments. Under the Supply Agreement, Precision agreed to manufacture our requirements for the supply of Dyloject™, in accordance with U.S. and E.U. good manufacturing practices. We committed to purchase at least $7,650,000 worth of product during the two year period beginning on April 1, 2007. Either party may terminate the Supply Agreement upon written notice if the other party is in material breach of any provision thereof, subject to applicable thirty (30) or ninety (90) day cure periods. Either party may also terminate the Supply Agreement upon sixty (60) days’ prior written notice upon the occurrence of certain events involving the bankruptcy or insolvency of the other party, and the Supply Agreement shall automatically terminate upon the occurrence of certain events specified therein. Moreover, we may elect to terminate the Supply Agreement if Precision fails to meet its performance obligations regarding the manufacture of Dyloject™ in accordance with good manufacturing practices, and under certain other conditions.

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9. Net Loss per Share

     Our basic net loss per share amounts have been computed by dividing net loss by the weighted-average number of common shares outstanding during the period. For all periods presented, we reported a net loss and, therefore, common stock equivalents were not included since such inclusion would have been anti-dilutive. In addition, for all periods presented, 227,044 shares of Common Stock were held in escrow. These shares have been excluded from the calculation of basic and diluted per share amounts.

     The calculation of net loss per share, basic and diluted, for the periods ending December 31 is as follows:

	2006			2005			2004
Numerator:
Net loss, basic and diluted	($	17,798,236	)	($	10,611,772	)	($	7,046,828	)
Denominator:
Weighted average common shares		40,179,543			27,831,188			10,936,922
Net loss per share, basic and diluted	($	0.44	)	($	0.38	)	($	0.64	)

     Common stock equivalents and shares issuable upon conversion of redeemable convertible preferred stock which have been excluded from diluted per share amounts because their effect would have been anti-dilutive include the following:

	For the Years Ended December 31,
	2006				2005				2004
			Weighted				Weighted				Weighted
	Weighted		Average		Weighted		Average		Weighted		Average
	Average		Exercise		Average		Exercise		Average		Exercise
	Number		Price		Number		Price		Number			Price
Options		6,120,904	$	2.99		4,889,467	$	2.91		3,730,257	$	3.06
Warrants		2,830,051		2.62		1,922,888		2.81		770,226		2.65
Convertible Preferred Stock		—				—				7,648,919
Total		8,950,955				6,812,355				12,149,402

10. Share Based Compensation

Adoption of SFAS 123(R)

     Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004) — Share-Based Payment, or SFAS 123(R). This Statement requires compensation cost relating to share-based payment transactions to be recognized in the financial statements using a fair-value measurement method. Under the fair value method, the estimated fair value of an award is charged against income on a straight-line basis over the requisite service period, which is generally the vesting period. We selected the modified prospective adoption method as prescribed in SFAS 123(R) and therefore, we have not restated our financial statements for prior periods. Under the modified prospective application, this Statement was applied to new awards granted in 2006, as well as to the unvested portion of previously granted stock option awards for which the requisite service had not been rendered as of January 1, 2006.

     Prior to January 1, 2006, our stock option plan was accounted for under the recognition and measurement provisions of APB Opinion No. 25 Accounting for Stock Issued to Employees, and related interpretations, as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Generally, no compensation expense was recognized in the financial statements in connection with the awarding of stock option grants to employees provided that, as of the grant date, all terms associated with the award are fixed and the fair value of our stock, as of the grant date, is equal to or less than the amount an employee must pay to acquire the stock. We had recognized compensation expense in situations where the terms of an option grant were not fixed or where the fair value of our common stock on the grant date was greater than the amount an employee

25

must pay to acquire the stock.

     As a result of the adoption of SFAS 123(R), we recorded share-based compensation for 2006 as follows:

	2006
Research and development	$	924,218
Selling, general and administrative		1,898,721
Total impact on results of operations	$	2,822,939
Per share impact on results of operations	$	0.07

     We have not capitalized any compensation cost. We recorded stock based compensation charges of $479,442, related to the extension of the term to exercise certain stock option grants to two employees who terminated employment and a Board member who resigned in 2006 and acceleration of vesting of stock options for two members of the Board of Directors who resigned from the Board during 2006. No options were exercised during 2006 and no cash was used to settle equity instruments granted under our stock option plans. At January 1, 2006, there was no cumulative pre-tax adjustment resulting from the compensation cost recorded prior to the adoption of SFAS123(R) under APB 25.

     The fair value of the stock option grants were estimated on the date of grant using the Black-Scholes option valuation model that uses the following assumptions:

	2006
Expected volatility		80%
Expected life	5.0 years
Dividend yield		0%
Risk free interest rate		4.5% - 5.2	%
Weighted average per share grant date fair value		$2.50

     Expected volatility is based upon implied volatility for our common stock and other factors. The expected term of stock options granted is derived from using the assumed exercise rates based on historical exercise patterns, and represents the period of time that options granted are expected to be outstanding. The risk free interest rate used is based upon the published U.S. Treasury yield curve in effect at the time of grant for instruments with a similar life. The dividend yield is based upon the fact that we have not historically granted dividends, and do not expect to in the future. Stock options granted prior to January 1, 2006 were valued based on the grant date fair value of those awards, using the Black-Scholes option pricing model, as previously calculated for pro-forma disclosures under SFAS 123 — Accounting for Stock-based Compensation.

Stock Incentive Plans

     Omnibus Plans

     In February 2001, the Board of Directors and stockholders of IDDS approved the adoption of the 2000 Omnibus Stock Incentive Plan (the “IDDS Plan”). The IDDS Plan, as amended, provided for the issuance of 4,200,000 shares of IDDS common stock to be awarded to employees, consultants, directors and other individuals who render services to IDDS (collectively, “Awardees”). Awards include options, restricted shares, bonus shares, stock appreciation rights and performance shares (the “Awards”). The IDDS Plan contains certain anti-dilution provisions in the event of a stock split, stock dividend or other capital adjustment, as defined. The IDDS Plan includes an automatic option grant program for non-employee directors, under which option grants will automatically be made at periodic intervals to non-employee board members to purchase shares of common stock as defined. The IDDS Plan provides for a Committee of the Board of Directors (the “Committee”) to grant Awards to Awardees and to determine the exercise price, vesting term, expiration date and all other terms and conditions of the Awards, including acceleration of the vesting of an Award at any time. All options granted under the IDDS Plan are intended to be non-qualified (“NQO”) unless specified by the Committee to be incentive stock options (“ISO”), as defined by the Internal Revenue Code. NQO’s may be granted to employees, consultants or other individuals at an exercise price, equal to, below or above the fair value of the common stock on the date of grant. ISO’s may only be granted to employees and may not be granted at exercise prices below fair value of the common stock on the date of

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grant (110% of fair value for employees who own 10% or more of the Company). The period during which an option may be exercised may not exceed ten years from the date of grant (five years for grants of ISO’s to employees who own 10% or more of the Company). Under the IDDS Plan, for a period of one year following the termination of an Awardee’s employment or active involvement with us, we have the right, should certain contingent events occur, to repurchase any or all shares of common stock acquired upon exercise of an Award held by the Awardee at a purchase price defined by the IDDS Plan. The IDDS Plan will terminate at the earliest of (i) its termination by the Committee, (ii) February 4, 2011 or (iii) the date on which all of the shares of common stock available for issuance under the Plan have been issued and all restrictions on such shares have lapsed. Awards granted before termination of the IDDS Plan will continue under the IDDS Plan until exercised, cancelled or expired.

     Immediately prior to and as a condition of the Reverse Merger, we adopted the Intrac 2004 Omnibus Stock Incentive Plan (the “2004 Plan”) covering the grant of stock options, restricted stock and other employee awards, subject to stockholder ratification. The terms of the 2004 Plan are substantially the same as the terms of the IDDS Plan. The 2004 Plan authorizes awards of up to 5,000,000 shares of common stock. Upon the closing of the Reverse Merger, the outstanding options under the IDDS Plan were exchanged for options under the 2004 Plan with the number of option shares and the exercise prices adjusted to reflect the merger exchange ratio (see Note 1). Our shareholders adopted the 2004 Plan at the annual Meeting of Shareholders on September 7, 2005.

     Upon closing of the Migratory Merger, the Javelin 2005 Omnibus Plan (the “2005 Plan”) became effective and the outstanding options under the 2004 Plan were exchanged for similar options under the 2005 Plan. The terms of the 2005 Plan are substantially the same as the 2004 Plan. On July 20, 2006, our shareholders approved an amendment to the 2005 Plan to increase the number of shares of common stock underlying the awards thereunder to 7,500,000 shares.

     As of December 31, 2006, under the 2005 Plan, options for the purchase of an aggregate of 5,374,477 shares of common stock have been granted and are outstanding. The number of options remaining to be granted totals 2,125,523.

     The following table summarizes stock option information for options granted under the 2005 Plan as of December 31, 2006:

	Options Outstanding					Options Exercisable
			Weighted-
			Average
			Remaining	Weighted-				Weighted-
Range of Exercise	Number		Contractual	Average		Number		Average
Prices	Outstanding		Life	Exercise Price		Exercisable		Exercise Price
$1.50 - $1.90		711,969	5.1 years	$	1.53		678,636	$	1.51
$1.91 - $1.97		1,424,418	6.8 years	$	1.96		1,101,921	$	1.96
$1.98 - $2.80		705,250	7.2 years	$	2.70		463,584	$	2.69
$2.81 - $3.27		709,000	9.2 years	$	3.06		153,000	$	2.85
$3.28 - $3.87		735,921	9.0 years	$	3.59		84,254	$	3.67
$3.88 - $4.19		727,367	8.4 years	$	4.06		73,685	$	4.05
$4.20 - $5.40		360,552	3.4 years	$	5.37		360,552	$	5.37
$1.50 - $5.40		5,374,477	7.2 years	$	2.88		2,915,632	$	2.54

     The following table summarizes stock option information for options granted under the 2005 Plan as of December 31, 2005:

	Options Outstanding					Options Exercisable
			Weighted-
			Average
			Remaining	Weighted-				Weighted-
Range of Exercise	Number		Contractual	Average		Number		Average
Prices	Outstanding		Life	Exercise Price		Exercisable		Exercise Price
$1.50		661,969	7.2 years	$	1.50		661,969	$	1.50
$1.90		50,000	9.5 years	$	1.90		-		-
$1.96		1,451,743	8.1 years	$	1.96		704,912	$	1.96
$1.97		6,620	8.5 years	$	1.97		6,620	$	1.97
$2.60		50,000	9.5 years	$	2.60		-		-
$2.70		635,750	9.3 years	$	2.70		150,000	$	2.70
$2.80		75,000	9.2 years	$	2.80		-		-
$2.85		260,000	9.7 years	$	2.85		75,000	$	2.85
$3.05		9,000	9.6 years	$	3.05		-		-
$3.33		75,000	9.6 years	$	3.33		-		-
$3.45		25,000	9.7 years	$	3.45		-		-
$3.87		50,921	6.7 years	$	3.87		50,921	$	3.87
$5.36		309,631	4.1 years	$	5.36		309,631	$	5.36
$5.40		50,921	6.3 years	$	5.40		50,921	$	5.40
$1.50 - $5.40		3,711,555	8.0 years	$	2.49		2,009,974	$	2.56

     Transactions involving options granted under the 2005 Plan during the years ended December 31, 2004, 2005 and 2006 are summarized as follows:

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				Weighted-				Weighted-
	Number of			Average		Number		Average
	shares			Exercise Price		Exercisable		Exercise Price
Balance outstanding, December 31, 2003		1,996,630		$	2.53		456,781	$	4.59
Granted		1,101,413		$	1.96		—		—
Exercised		—			—		—		—
Forfeited or expired		(385,468	)	$	1.64		—		—
Balance outstanding, December 31, 2004		2,712,575		$	2.32		1,405,358	$	2.66
Granted		1,313,750		$	2.75		—		—
Exercised		—			—		—		—
Forfeited or expired		(314,770	)	$	2.14		—		—
Balance outstanding, December 31, 2005		3,711,555		$	2.49		2,009,974	$	2.56
Granted		1,935,182		$	3.72		—		—
Exercised		—			—		—		—
Forfeited or expired		(272,260	)	$	3.77		—		—
Balance outstanding, December 31, 2006		5,374,477		$	2.88		2,915,632	$	2.54

     The deemed per share weighted average fair value of our common stock at the time of the stock option grant for the years ended December 31, 2006, 2005 and 2004 was $2.50, $1.84 and $2.18, respectively, based upon the quoted market closing price on the date of the grant using the Black-Scholes method. The aggregate intrinsic values for options outstanding and exercisable as of December 31, 2006 were approximately $12.5 million and $7.7 million, respectively. Intrinsic value for stock options is calculated based on the difference between the exercise price of the underlying awards and the quoted price of our common stock as of the reporting date. The total fair value of 905,662 shares vesting during 2006 was approximately $1.8 million.

     As of December 31, 2006, the total compensation cost related to unvested option awards not yet recognized amounted to approximately $4.0 million which will be recognized over a weighted average number of 2.0 years.

     Included in the balance outstanding at December 31, 2003 were the following options granted to members of the Board: (i) 362,194 options on February 25, 2002, with an exercise price of $5.36, approximately two-thirds of which were vested immediately with the remainder vesting through February 2003 and (ii) 50,921 options with an exercise price of $5.40 on April 1, 2002, one-quarter vesting immediately and the remainder vesting over three years. On the dates of grant, the fair value of our common stock was deemed to be $8.84 per share. Thus, in accordance with APB No. 25, we recorded unearned compensation of $1,431,498, which was equal to the total intrinsic value of those options on the respective dates of grant. We amortized unearned compensation as compensation expense, respectively, over the respective vesting periods of the options. For the years ended December 31, 2004 and 2005, we recognized $43,125 and $10,782 of compensation expense respectively for those options.

     Included in the options above, during the years ended December 31, 2000, 2002 and 2003 we granted 305,676 fully vested non-plan options, 50,921 fully vested options and 76,381 options vesting over one year under the Plan to non-employees (“Non-employee Options”) with average exercise prices of $3.87, $5.36 and $1.50, respectively, which are accounted for in accordance with EITF 96-18. The estimated fair values of the Non-employee Options on the grant dates in 2000 and 2002, totaling $707,550 and $62,564, respectively, were recognized as compensation expense in the years ended December 31, 2000 and 2002, respectively. During the year ended December 31, 2003, we recognized an expense of $57,672, in connection with Non-employee Options.

     During 2004, two consultants received a total of 6,620 options to purchase shares of common stock at an exercise price of $1.97 per share. The options fully vested upon the first anniversary of the grant and expire in June 2014. As of December 31, 2004, we recognized $14,498 of compensation expense for these options based upon their fair value as estimated by our management, at the grant date using the Black Scholes option pricing model. In addition, $118,003 of compensation expense was recognized in connection with the Non-employee Option that had been granted in 2003.

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     During 2004, we granted a total of 1,094,793 stock options with an exercise price of $1.96 per share to four employees and a Board member. The options had an exercise price of $1.96 per share, and vest over three years. The deemed per share fair value of the common stock at the time of the stock option grant was $2.95, based upon the sale of common stock to investors in December 2004 (see Note 6). Accordingly, unearned compensation of $1,094,793, representing the intrinsic value of the options granted during 2004, was recorded. Such amount was amortized to compensation expense ratably over the respective vesting periods of the options. The total amortized compensation expense associated with the options granted in 2004 totaled $155,227 for the year ended December 31, 2004 and 334,890 for the year ended December 31, 2005.

     During 2005, one person and one entity received a total of 40,000 options to purchase shares of common stock at an exercise price of $2.85 per share. The options were fully vested upon the grant date and expire in September 2015. As of December 31, 2005, we recognized $95,200 of compensation expense for these options based upon their fair value as estimated by our management, at the grant date using the Black Scholes option pricing model.

     Non-Plan options

     In addition, as of December 31, 2006, we had outstanding 1,184,058 options which were granted to our Founders outside of the Javelin 2005 Plan, prior to the adoption of the IDDS Plan.

     The following table summarizes non-plan stock option information for the options as of December 31, 2006:

	Options Outstanding					Options Exercisable
			Weighted
			Average
			Remaining	Weighted				Weighted
Range of	Number		Contractual	Average		Number		Average
Exercise Prices	Outstanding		Life	Exercise Prices		Exercisable		Exercise Price
$3.87		1,184,058	3.4 years	$	3.87		1,184,058	$	3.87

     The following table summarizes non-plan stock option information for the options as of December 31, 2005:

	Options Outstanding					Options Exercisable
			Weighted
			Average
			Remaining	Weighted				Weighted
Range of	Number		Contractual	Average		Number		Average
Exercise Prices	Outstanding		Life	Exercise Prices		Exercisable		Exercise Price
$3.87		1,184,058	4.9 years	$	3.87		1,184,058	$	3.87

     Transactions involving non-plan stock options during the years ended December 31, 2004, 2005 and 2006 are summarized as follows:

	Number			Weighted-				Weighted-
	of			Average		Number		Average
	Shares			Exercise Price		Exercisable		Exercise Price
Balance outstanding, December 31, 2003		1,340,529		$	3.87		1,340,529	$	3.87
2004: Canceled		(155,230	)	$	3.87		—	$	3.87
Balance outstanding, December 31, 2004		1,185,299		$	3.87		1,185,299	$	3.87
2005: Exercised		(1,241	)	$	0.01			$	0.01
Balance outstanding, December 31, 2005 and 2006		1,184,058		$	3.87		1,184,058	$	3.87

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Pro-forma Disclosure

     The following table illustrates the effect on net loss and loss per share if we were to have applied the fair-value based method to account for all stock-based awards for 2005 and 2004:

	Year Ended December 31,
	2005			2004
Net loss as reported	$	(10,611,772	)	$	(7,046,828	)
Add: Stock-based employee compensation included in net loss under APB No. 25		345,672			198,351
Deduct: Total stock-based employee compensation expense determined under fair value base method for all awards		(1,796,017	)		(1,469,442	)
Pro forma net loss	$	(12,062,117	)	$	(8,317,919	)
Proforma net loss per share (basic and diluted)	($	0.43	)	($	0.76	)

     For the purposes of the above pro forma calculations, the fair value of each option granted was estimated on the date of grant using the Black Scholes option pricing model. The weighted-average fair value of all options granted during 2004 and 2005 was $2.18 and $1.84, respectively. The following table summarizes the assumptions used in computing the fair value of option grants.

	2005		2004
Expected volatility		80%		80%
Expected life		5		5
Dividend yield		0%		0%
Risk free interest rate		3.4 - 4.5%		4.5%

     Prior to 2006, the fair value of options and warrants granted to non-employees for financing, goods or services are included in the financial statements and expensed over the life of the debt, as the goods are utilized or the services performed, respectively. Securities issued in connection with services or financings were valued based upon the estimate of fair value of the securities issued as determined using the Black Scholes option pricing model with the assumptions noted above. Such fair value was determined at each balance sheet date through the vesting period, in accordance with Emerging Issues Task Force No. 96-18 Accounting for Equity Instruments that are issued to other than employees for acquiring, or in conjunction with selling goods or services (“EITF 96-18”).

11. Warrants and Units

     The following table summarizes warrant and unit activity for the period from February 23, 1998 (inception) to December 31, 2006:

	Placement		Debenture		Bridge			Investor		Consultants			Finders
	Warrants		Warrants		Warrants			Warrants		Warrants			Units
Issuance of Bridge Warrants (see Note 7)						236,127
Issuance of Consultants Warrants (see Note 7)											204,336
Balance outstanding, December 31, 1999		—		—		236,127			—		204,336			—
Issuance of Preferred A Warrants (see Note 6)									415,403
Exercise of Consultants Warrants											(204,336	)
Issuance of Finders Units (see Note 6)														15.83	(1)
Issuance of Consultants Warrants (see Note 6)											15,523
Balance outstanding, December 31, 2000		—		—		236,127			415,403		15,523			15.83
Exercise of Bridge Warrant						(15,893	)
Exercise of Consultants Warrants											(15,523	)
Balance outstanding, December 31, 2001 and 2002		—		—		220,234			415,403		—			15.83
Exercise of Bridge Warrants (see Note 7)		—		—		(2,270	)
Balance outstanding, December 31, 2003		—		—		217,964			415,403		—			15.83
Issuance of Debenture Warrants (see Note 7)				226,314
Issuance of Placement Warrants (see Note 6)		920,987

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	Placement		Debenture		Bridge			Investor			Consultants		Finders
	Warrants		Warrants		Warrants			Warrants			Warrants		Units
Balance outstanding, December 31, 2004		920,987		226,314		217,964			415,403			—		15.83
Exercise of Bridge and Investor Warrants						(217,964	)		(26,518	)
Expiry of Preferred A Warrant (see Note 6)									(388,885	)
Issuance of Consultants Warrants (see Note 6)												80,184
Issuance of 2005 Investor Warrants (see Note 6)									711,111
Issuance of 2005 Placement Warrants (see Note 6)		853,333
Balance outstanding, December 31, 2005		1,774,320		226,314		—			711,111			80,184		15.83
Exercise of 2005 Investor Warrants									(4,444	)
Balance outstanding, December 31, 2006		1,774,320		226,314		—			706,667			80,184		15.83

(1) Each Finders Unit entitles the holder to purchase 28,459 shares of common stock. Total issuance entitles holders to purchase 450,506 shares common stock.

     See Note 10 for the description of the method and assumptions used to determine the fair value of the warrants issued.

12. Related Party Transactions

     From our inception, through the year ended December 31, 2002, we received financial assistance from a principal stockholder in the form of office space and management and legal assistance provided at no cost. In accordance with the Staff Accounting Bulletin No. 79, the value of such assistance has been reflected in the accompanying financial statements as an expense in the period benefited with a corresponding deemed capital contribution. The value of the financial assistance totaled $1,075,182 for the cumulative period from February 23, 1998 (inception) to December 31, 2002.

13. Income Taxes

     There is no net provision (benefit) for federal or state income taxes for the years ended December 31, 2006, 2005 and 2004 since we have incurred operating losses and have established valuation allowances equal to the total deferred tax asset due to the uncertainty with respect to achieving taxable income in the future.

     The tax effect of temporary differences and net operating losses as of December 31, 2006 and 2005 are as follows:

	December 31, 2006			December 31, 2005
Deferred tax assets and valuation allowance:
Net operating loss carry forwards	$	20,230,000		$	12,969,000
Other deferred tax assets		5,127,000			3,612,000
Research and development tax credit carryforwards		2,882,000			1,970,000
Valuation allowance		(28,239,000	)		(18,551,000	)
		—			—

     Our effective tax rates for 2006, 2005 and 2004 are calculated as follows:

	2006						2005						2004
	Amount			Percent			Amount			Percent			Amount			Percent
Pre tax income (loss)	$	(17,798,236	)				$	10,611,772	)				$	(7,046,828	)
Federal tax provision (benefit) at statutory rate		(6,051,400	)		34.0	%		(3,608,002	)		34.0	%		(2,395,922	)		34.0	%
State income tax benefit net of federal tax benefit		(1,834,003	)		10.3	%		(748,462	)		7.1	%		(722,216	)		10.2	%
Permanent differences		382,663			-2.2	%		427,039			-4.0	%		163,617			-2.2	%
R & D credit		(1,108,705	)		6.3	%		(776,328	)		7.3	%		(432,225	)		6.1	%
Change in valuation allowance		9,688,000			-54.4	%		3,679,000			-34.7	%		3,510,000			-49.8	%
Change in rate		—			—	%		911,066			-8.6	%		—			0.0	%
Other		(1,076,555	)		6.0	%		115,687			-1.1	%		(123,254	)		1.7	%
Total income tax provision / (benefit)	$	0			0.0	%	$	0			0.0	%	$	0			0.0	%

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14. Other Income

     Other income consists primarily of $1.3 million of interest income for interest earned on our cash, cash equivalents and short term marketable securities available for sale. For the year ended December 31, 2006 we had higher average invested balances of cash, cash equivalents and short term investments than in 2005. Additionally, in February 2006, we settled litigation with West Pharmaceutical Services, Inc. (“West”) regarding West’s assignment of certain license agreements to Archimedes Pharma Limited (“Archimedes”) as part of the sale West’s Drug Delivery business to Archimedes. Under the terms of the settlement, on March 1, 2006 West paid us approximately $600,000 to resolve all claims, and the parties exchanged mutual releases; this amount is included in other income for the year ended December 31, 2006.

15. Subsequent Events

     On February 6, 2007, we filed with the SEC a Registration Statement on Form S-3 under the Securities Act, which became effective on February 12, 2007. This registration statement allows us, from time to time, to offer and sell shares, and warrants to purchase shares, of our common stock, but not to exceed $50,000,000. To date, we have not issued any additional shares or warrants under this registration statement.

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SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)

     The following tables set forth unaudited quarterly operating results for fiscal years 2006 and 2005 in dollars. The information in these tables has been prepared on a basis consistent with the audited consolidated financial statements included elsewhere in this report and, in the opinion of management, all adjustments that management considers necessary for the fair presentation thereof. These unaudited results should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this report. The sum of the quarterly loss per share may not total annual amounts reported in the consolidated financial statements as a result of any quarterly changes in the amount of weighted average common shares used in the calculation of basic and diluted loss per share.

2006 Quarterly results of operations

	Unaudited Quarter ended
	March 31,			June 30,			September 30,			December 31,
(In thousands, except per share data)	2006			2006			2006			2006
Government grants and contract revenue	$	82		$	491		$	155		$	114
Operating expenses
Research and development		1,324			3,013			3,694			2,823
Selling, general and administrative		1,688			2,310			2,484			3,127
Depreciation and amortization		11			13			17			20
Operating loss		(2,941	)		(4,845	)		(6,040	)		(5,856	)
Other income (expense)		916			315			343			310
Net loss attributable to common stockholders		(2,025	)		(4,530	)		(5,697	)		(5,546	)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(0.05	)	$	(0.11	)	$	(0.14	)	$	(0.14	)
Weighted average shares		40,178			40,178			40,180			40,182

2005 Quarterly results of operations

	Unaudited Quarter Ended
	March 31,			June 30,			September 30,			December 31,
(In thousands, except per share data)	2005			2005			2005			2005
Government grants and contract revenue(1)	$	368		$	643		$	99		$	438
Operating expenses
Research and development		1,127			2,226			2,415			1,445
General and administrative		1,021			1,279			1,202			1,720
Depreciation and amortization		10			12			12			10
Operating loss		(1,790	)		(2,874	)		(3,530	)		(2,737	)
Other income (expense)		—			46			55			218
Net loss attributable to common stockholders		(1,790	)		(2,828	)		(3,475	)		(2,519	)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(0.07	)	$	(0.11	)	$	(0.13	)	$	(0.07	)
Weighted average shares		25,399			25,563			25,824			34,458

(1) Grant and contract revenue during the quarter ended June 30, 2005 was overstated by approximately $147,000 due to an error in the allocation of costs among projects. The overstatement was corrected in the quarter ended September 30, 2005, resulting in an understatement of grant and contract revenue for the quarter. In addition, we had not been appropriately recognizing revenue and receivables related to reimbursable indirect project costs that were earned in prior periods, resulting in an understatement of revenue of approximately $57,000 and $52,000 for the years ended December 31, 2003 and 2004, respectively. The error also resulted in a $14,000 overstatement of revenue for the quarter ended March 31, 2005 and a $12,000 understatement of revenue for the quarter ended June 30, 2005. We corrected the cumulative effect of this error during the quarter ended September 30, 2005, resulting in an overstatement of grant and contract revenue by approximately $107,000 for the quarter ended September 30, 2005.

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PART IV

Item 15. — Exhibits and Financial Statement Schedules

(a)(3) Exhibits

23.1	Consent of McGladrey & Pullen, LLP, independent registered public accounting firm
23.2	Consent of PricewaterhouseCoopers, LLP, independent registered public accounting firm
31.1	Certification of our Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of our Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of our Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of our Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

34

SIGNATURES

     Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 9th day of May 2007.

JAVELIN PHARMACEUTICALS, INC.
By: Name: Title:	/s/ Daniel B. CarrDaniel B. Carr, M.D. Chief Executive Officer and Chief Medical Officer

35