10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2006

Commission file number 0-17254

NOVEN PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

STATE OF DELAWARE	59-2767632
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

11960 S.W. 144th Street, Miami, FL 33186

(Address of principal executive offices) (Zip Code)

(305) 253-5099

(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.

Class	Outstanding at October 31, 2006
Common stock $.0001 par value	24,361,178

NOVEN PHARMACEUTICALS, INC.

INDEX

	Page No.
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Condensed Financial Statements
Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005		3
Condensed Balance Sheets as of September 30, 2006 and December 31, 2005		4
Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005		5
Notes to Unaudited Condensed Financial Statements		6
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3 - Quantitative and Qualitative Disclosures About Market Risk		41
Item 4 - Controls and Procedures		42
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings		43
Item 1A - Risk Factors		43
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 5 - Other Information		44
Item 6 - Exhibits		45
SIGNATURES		46
EX-10.1 Nonqualified Deferred Compensation Plan
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 302 Certification of CFO

Cautionary Factors: Statements in this report that are not descriptions of historical facts are “forward-looking statements” provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. Our actual results, performance and achievements may be materially different from those expressed or implied by such statements and readers should consider the risks and uncertainties associated with our business that are discussed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2005 and in Item 1A of Part II of any quarterly reports on Form 10-Q we have filed with the Securities and Exchange Commission since the filing of our Form 10-K, as well as other reports filed from time to time with the Securities and Exchange Commission.

Trademark Information: Vivelle^®, Vivelle-Dot^™, Estradot^® and Menorest are trademarks of Novartis AG or its affiliated companies; CombiPatch^® and Estalis^® are registered trademarks of Vivelle Ventures LLC; Intrinsa^™ is a trademark of Procter & Gamble Pharmaceuticals, Inc.; and Daytrana^™ is a trademark of Shire Pharmaceuticals Ireland Limited.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NOVEN PHARMACEUTICALS, INC.

Condensed Statements of Operations

Three and Nine Months Ended September 30,

(in thousands, except per share amounts)

(unaudited)

	Three Months						Nine Months
	2006			2005			2006			2005
Revenues:
Product revenues — Novogyne:
Product sales	$	5,273		$	4,740		$	13,990		$	14,432
Royalties		1,791			1,790			5,138			4,617
Total product revenues — Novogyne		7,064			6,530			19,128			19,049
Product revenues — third parties		5,761			3,917			15,648			11,888
Total product revenues		12,825			10,447			34,776			30,937
Contract and license revenues:
Contract		44			769			1,112			1,793
License		2,839			1,024			7,559			3,017
Contract and license revenues		2,883			1,793			8,671			4,810
Net revenues		15,708			12,240			43,447			35,747
Expenses:
Cost of products sold — Novogyne		3,702			3,521			10,304			9,219
Cost of products sold — third parties		5,339			11,895			16,764			17,307
Total cost of products sold		9,041			15,416			27,068			26,526
Research and development		2,527			3,826			8,899			9,752
Marketing, general and administrative		6,010			4,237			16,386			12,481
Total expenses		17,578			23,479			52,353			48,759
Loss from operations		(1,870	)		(11,239	)		(8,906	)		(13,012	)
Equity in earnings of Novogyne		8,234			8,081			19,323			17,094
Interest income, net		1,168			512			2,890			1,608
Income (loss) before income taxes		7,532			(2,646	)		13,307			5,690
Provision (benefit) for income taxes		2,501			(1,224	)		4,439			1,780
Net income (loss)	$	5,031		$	(1,422	)	$	8,868		$	3,910
Basic earnings (loss) per share	$	0.21		$	(0.06	)	$	0.37		$	0.17
Diluted earnings (loss) per share	$	0.20		$	(0.06	)	$	0.37		$	0.16
Weighted average number of common shares outstanding:
Basic		23,954			23,586			23,768			23,554
Diluted		24,574			23,586			24,142			24,021

The accompanying notes are an integral part of these statements.

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NOVEN PHARMACEUTICALS, INC.

Condensed Balance Sheets

(in thousands, except share data)

(unaudited)

	September 30, 2006		December 31, 2005
Assets
Current Assets:
Cash and cash equivalents	$	8,676	$	66,964
Short-term investments available-for-sale, at fair value		130,510		17,900
Accounts receivable — trade (less allowance for doubtful accounts of $47 in 2006 and $53 in 2005)		6,091		2,919
Accounts receivable — Novogyne, net		7,783		8,912
Inventories		8,134		7,861
Net deferred income tax asset, current portion		4,200		6,000
Prepaid income taxes		6,007		7,697
Prepaid and other current assets		2,481		1,357
		173,882		119,610
Property, plant and equipment, net		37,414		34,455
Other Assets:
Investment in Novogyne		22,710		23,243
Net deferred income tax asset		8,225		6,373
Patent development costs, net		2,371		2,211
Deposits and other assets		221		18
		33,527		31,845
	$	244,823	$	185,910
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses	$	4,824	$	5,812
Capital lease obligation — current portion		34		121
Accrued liability — Shire		419		5,488
Accrued compensation and related liabilities		4,729		5,771
Other accrued liabilities		2,679		2,124
Deferred rent credit		89		89
Deferred contract revenues		1,758		1,481
Deferred license revenues — current portion		11,174		7,602
		25,706		28,488
Long-Term Liabilities:
Capital lease obligation		38		—
Deferred rent credit		681		748
Deferred license revenues		55,936		16,053
Deferred compensation liability		134		—
		82,495		45,289
Commitments and Contingencies (Note 14)
Stockholders’ Equity:
Preferred stock — authorized 100,000 shares of $.01 par value; no shares issued or outstanding		—		—
Common stock — authorized 80,000,000 shares, par value $.0001 per share; issued and outstanding 24,294,309 at September 30, 2006 and 23,617,221 at December 31, 2005		2		2
Additional paid-in capital		102,685		89,846
Retained earnings		59,641		50,773
		162,328		140,621
	$	244,823	$	185,910

The accompanying notes are an integral part of these statements.

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NOVEN PHARMACEUTICALS, INC.

Condensed Statements of Cash Flows

Nine Months Ended September 30,

(in thousands)

(unaudited)

	2006			2005
Cash flows from operating activities:
Net income	$	8,868		$	3,910
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		2,864			1,892
Write-off of fentanyl inventories deemed non-saleable		—			9,475
Stock-based compensation expense		2,358			—
Amortization of patent costs		379			334
Increase in cash surrender value of company-owned life insurance		(3	)		—
Amortization of deferred rent credit		(67	)		(53	)
Income tax benefits on exercise of stock options		687			228
Deferred income tax benefit		(52	)		(689	)
Recognition of deferred license revenues		(7,559	)		(3,017	)
Equity in earnings of Novogyne		(19,323	)		(17,094	)
Distributions from Novogyne		17,644			18,092
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable — trade, net		(3,172	)		2,430
Decrease in accounts receivable — Novogyne, net		1,129			3,319
Increase in accounts receivable — Endo		—			(4,467	)
(Increase) decrease in inventories		(273	)		93
Decrease in prepaid income taxes		3,902			3,987
Increase in prepaid and other current assets		(1,124	)		(1,130	)
(Increase) decrease in deposits and other assets		(15	)		3
Decrease in accounts payable		(988	)		(5,346	)
Decrease in accrued liability — Shire		(5,069	)		(5,608	)
Decrease in accrued compensation and related liabilities		(1,042	)		(1,595	)
Increase in other accrued liabilities		555			111
Increase (decrease) in deferred contract revenue, net		277			(741	)
Increase in deferred license revenue		51,000			—
Increase in deferred compensation liability		134			—
Amounts recoverable from (reimburseable to) Shire and offset against deferred license revenue related to Daytrana™ approval		14			(5,170	)
Cash flows provided by (used in) operating activities		51,124			(1,036	)
Cash flows from investing activities:
Purchases of property, plant and equipment, net		(5,823	)		(10,462	)
Payments for patent development costs, net		(539	)		(410	)
Purchase of company-owned life insurance		(185	)		—
Purchases of short-term investments		(1,012,385	)		(340,590	)
Proceeds from sale of short-term investments		899,775			289,765
Cash flows used in investing activities		(119,157	)		(61,697	)
Cash flows from financing activities:
Issuance of common stock from exercise of stock options		8,080			1,201
Payments under capital leases		(49	)		(86	)
Excess tax deduction from exercise of stock options		1,714			—
Cash flows provided by financing activities		9,745			1,115
Net decrease in cash and cash equivalents		(58,288	)		(61,618	)
Cash and cash equivalents, beginning of period		66,964			93,958
Cash and cash equivalents, end of period	$	8,676		$	32,340

The accompanying notes are an integral part of these statements.

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NOVEN PHARMACEUTICALS, INC.

Notes to Unaudited Condensed Financial Statements

1. DESCRIPTION OF BUSINESS:

     Noven Pharmaceuticals, Inc. (“Noven”) was incorporated in Delaware in 1987 and is engaged in the research, development, manufacture and marketing of advanced transdermal drug delivery technologies and prescription transdermal products.

     Noven and Novartis Pharmaceuticals Corporation (“Novartis”) entered into a joint venture, Vivelle Ventures LLC (d/b/a Novogyne Pharmaceuticals) (“Novogyne”), effective May 1, 1998, to market and sell women’s prescription healthcare products in the United States and Canada. These products include Noven’s transdermal estrogen delivery systems marketed under the brand names Vivelle^®, Vivelle-Dot^™ and CombiPatch^®. Noven accounts for its 49% investment in Novogyne under the equity method and reports its share of Novogyne’s earnings as “Equity in earnings of Novogyne” on its statements of operations. Noven defers the recognition of 49% of its profit on products sold to Novogyne until the products are sold by Novogyne to third party customers.

2. BASIS OF PRESENTATION:

     In management’s opinion, the accompanying unaudited condensed financial statements of Noven contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly, in all material respects, the financial position of Noven as of September 30, 2006, and the results of its operations and its cash flows for the three and nine months ended September 30, 2006 and 2005. Noven’s business is subject to numerous risks and uncertainties including, but not limited to, those set forth in Part I – Item 1A of Noven’s Annual Report on Form 10-K for the year ended December 31, 2005 (“Form 10-K”) and in Part II — Item 1A - “Risk Factors” of any quarterly reports on Form 10-Q filed by Noven with the Securities and Exchange Commission (“SEC”) since the filing of Noven’s Form 10-K, as well as in other reports filed from time to time with the SEC. Accordingly, the results of operations and cash flows for the three and nine months ended September 30, 2006 and 2005 are not, and should not be construed as, necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 2006 or for periods thereafter.

     The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the SEC for reporting on Form 10-Q. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The unaudited condensed financial statements should be read in conjunction with the financial statements and the notes to the financial statements included in Noven’s Form 10-K. The accounting policies followed for interim financial reporting are the same as those disclosed in Note 2 of the notes to the financial statements included in Noven’s Form 10-K, as updated and supplemented by the following:

     VENDOR DISCOUNTS:

     Noven receives purchase-volume-related discounts and rebates from vendors in the normal course of business. Management uses projected purchase volumes to estimate accrual rates, validates those projections based on actual purchase trends and applies those rates to actual purchase volumes to determine the amount of funds accrued by Noven and receivable

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from the vendor. Amounts accrued could be impacted if actual purchase volumes differ from projected purchase volumes. Purchase-volume-related discounts or rebates are treated as a reduction of inventory cost or cost of products sold, depending on whether the related inventory is on-hand or has been previously sold.

3. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:

     Cash and cash equivalents includes all highly liquid investments with an original maturity of three months or less at the date of purchase. Cash and cash equivalents as of September 30, 2006, and December 31, 2005, consisted primarily of overnight money market accounts, time deposits, commercial paper and money market funds with original maturities of three months or less at the date of purchase. Noven has invested a majority of its cash in short-term investments, which primarily consist of investment grade, asset backed, variable rate debt obligations and municipal auction rate securities, which are categorized as available-for-sale under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities”. Despite the long-term nature of their stated contractual maturities, these securities have provisions that allow for liquidation in the short-term. Accordingly, the short-term investments are reported at fair value, with any related unrealized gains and losses included in comprehensive income as a separate component of stockholder’s equity, net of applicable taxes. As of September 30, 2006 and December 31, 2005, the cost of all short-term investments approximated fair value. No unrealized gains and losses have been recognized for the quarters ended September 30, 2006 and 2005, respectively. Realized gains and losses, interest, and dividends are included in interest income or interest expense, as appropriate.

4. RECLASSIFICATIONS AND REVISIONS:

     Certain reclassifications have been made to prior period financial statements to conform to the current period’s presentation. Cost of products sold has been revised for the prior period to include certain amounts previously included in research and development expenses.

5. CASH FLOW INFORMATION:

     Cash payments for income taxes were $0.8 million and $0.1 million for the nine months ended September 30, 2006 and 2005, respectively. Under Noven’s stock-based compensation arrangements, there can be increases in the value of equity instruments issued under those arrangements that are not recognizable as an expense for accounting purposes but are deductible in determining taxable income. Noven would have paid an additional $1.7 million in income taxes for the nine months ended September 30, 2006 had these increases not been deductible from taxable income. Cash payments for interest were not material for the nine months ended September 30, 2006 and 2005.

Non-cash Operating Activities

     In 2002, the State of New Jersey enacted legislation that requires Novogyne to remit estimated state income tax payments on behalf of its owners, Noven and Novartis. In April 2006 and 2005, Novogyne paid $2.2 million and $1.5 million, respectively, to the New Jersey Department of Revenue, representing Noven’s portion of Novogyne’s estimated state income tax payment. These payments were deemed a distribution to Noven from Novogyne.

Non-cash Investing Activities

     During the nine months ended September 30, 2005, Noven recorded approximately $0.9 million in leasehold improvements as a deferred rent credit as the landlord paid for the applicable leasehold improvements.

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6. RECENT ACCOUNTING PRONOUNCEMENTS:

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”) to clarify the accounting for uncertainties related to income taxes that are recognized in an enterprise’s financial statements in accordance with SFAS 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition, which requires an enterprise to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step is measurement, which requires a company to recognize a tax position that meets the more likely than not recognition threshold at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. FIN 48 is effective as of the beginning of the first annual reporting period that begins after December 15, 2006. Noven is currently assessing FIN 48 and is unable to estimate the impact it will have on its results of operations and financial condition.

     In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), which added Section N to Topic 1, Financial Statements, of the Staff Accounting Bulletin Series. Section N provides guidance on the consideration of the effects of prior year misstatements when quantifying current year financial statement misstatements for the purpose of materiality assessment. The SEC concluded in SAB 108 that a registrant’s materiality evaluation of an identified unadjusted error should quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. If either the carryover or reversing effects of prior year misstatements is material, the misstatements should be corrected in the current year. If correcting an error in the current year for prior year misstatements causes the current year to be materially misstated, the prior year financial statements should be corrected, even though such revision previously was and continues to be immaterial to the prior year financial statements. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction may be made the next time the registrant files the prior year financial statements. The guidance of SAB 108 should be applied in the annual financial statements covering the fiscal year ending after November 15, 2006.

7. INVENTORIES:

     The following are the major classes of inventories (in thousands):

	September 30, 2006						December 31, 2005
	Commercial		Pre-launch		Total		Commercial		Pre-launch		Total
Finished goods	$	1,362	$	—	$	1,362	$	760	$	—	$	760
Work in progress		2,735		—		2,735		1,278		1,004		2,282
Raw materials		4,037		—		4,037		3,422		1,397		4,819
	$	8,134	$	—	$	8,134	$	5,460	$	2,401	$	7,861

     Pre-launch inventories as of December 31, 2005 consisted of Noven’s Daytrana^™ product, which received final approval from the United States Food and Drug Administration (“FDA”) in April 2006 and was commercially launched in June 2006. Provisions have been made to reduce inventories to net realizable value.

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     Certain materials and compounds are available from limited sources and, in some cases, a single supplier. While Noven has not, to date, experienced any difficulty acquiring from its suppliers materials necessary to manufacture its products, no assurance can be given that Noven will not experience such difficulty in the future. In addition, the Drug Enforcement Administration (“DEA”) controls access to controlled substances, including methylphenidate, the active ingredient in Daytrana^™. Manufacturers of products containing controlled substances must annually apply to the DEA for procurement quota in order to obtain these substances for manufacturing. In 2006, Noven received an initial grant of methylphenidate quota and has submitted supplemental applications for additional quota in order to fulfill the 2006 product orders received from Shire plc (“Shire”). The DEA, which grants quota based primarily on historical product sales and prescription data, has not, to date, granted Noven’s requests for additional 2006 quota. While Noven and Shire continue to work with the DEA to obtain additional methylphenidate quota for the remainder of 2006, Noven cannot assure that it will be successful in convincing the DEA that additional quota is necessary to meet patient demand. Because Noven has not received additional quota for 2006, Noven expects to complete the year with approximately $8.0 million in full-year Daytrana^™ product sales to Shire and approximately $2.0 million in Daytrana^™ product backorders that Noven would expect to fulfill following the receipt of its expected 2007 quota supply in the first quarter of 2007.

     Other than products produced for commercial sale, Noven’s policy is to immediately recognize as expense all inventory purchased for research and development purposes.

     Shire retains title to the active methylphenidate ingredient (“AMI”) in Daytrana^™. AMI is not included in Daytrana^™ product revenues or in Noven’s cost of products sold. Noven records AMI maintained at its manufacturing facility as consignment inventory and bears certain manufacturing risks of loss related to the AMI. These risks include the contractual obligation of Noven to reimburse Shire for the cost of AMI if Noven does not meet certain minimum yields of the finished product. During the nine months ended September 30, 2006, Noven used $2.7 million of AMI in the finished product and reimbursed Shire approximately $0.1 million and $0.5 million for the three and nine months ended September 30, 2006, respectively, for excess AMI used in production, which amount is included in cost of products sold. Noven had $1.2 million of consignment AMI inventory on hand at September 30, 2006, which is not reflected in the table above.

8. EMPLOYEE STOCK PLANS:

     Prior to January 1, 2006, all awards granted to employees under the 1999 Long-Term Incentive Plan (the “1999 Plan”) were stock options. In 2006, Noven began granting stock-settled stock appreciation rights (“SSARs”) to employees and nonvested shares (“restricted stock”) to non-employee directors in lieu of stock options.

     At September 30, 2006, there were 3,257,091 stock options and 28,726 SSARs issued and outstanding under the 1999 Plan. Since November 21, 2004, stock options and SSARs granted under the 1999 Plan have had a vesting period of four years, beginning one year after date of grant, and expire seven years after date of grant.

     In May 2006, Noven issued a total of 34,344 shares of restricted stock to its non-employee directors. The grants fall under the definition of nonvested shares under SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). The shares vest over each director’s one-year service period at the end of each calendar quarter beginning with the quarter ended June 30, 2006.

     During the first quarter of 2006, Noven adopted the provisions of, and began accounting for stock-based compensation in accordance with, SFAS 123(R). Under the fair value

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recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. Noven elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123(R) apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. Estimated compensation for grants that were outstanding as of the effective date will be recognized over the remaining service period using the grant date fair value previously calculated for the SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) pro forma disclosures requisite.

     Noven currently uses the Black-Scholes option pricing model to determine the fair value of stock options and SSARs. The grant date fair value of stock-based payment awards using an option-pricing model is affected by Noven’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include Noven’s expected stock price volatility over the term of the awards, actual and projected employee equity award exercise behaviors, risk-free interest rate, estimated forfeitures of awards and expected dividends.

     Noven estimates the expected term of options granted by taking the average of the vesting term and the contractual term of the option, as described in the SEC’s Staff Accounting Bulletin Topic 14: Share-Based Payment (SAB 107) (“SAB 107”). Noven estimates the volatility of common stock by using a combination of both historical and implied volatility based on an equal weighting of each as management believes it is the expected volatility that marketplace participants would likely use in determining an exchange price for an option. Noven bases the risk-free interest rate that Noven uses in the option valuation model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. Noven does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. Noven is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Noven uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. The assumptions used to value option grants for the quarters ended September 30, 2006 and September 30, 2005 are as follows:

	2006			2005
Volatility		52.8	%		69.0	%
Risk free interest rate		5.17	%		3.88	%
Expected life (years)		5			5

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     Total stock-based compensation recognized in Noven’s statements of operations for the three and nine months ended September 30, 2006 was as follows (in thousands):

	Three		Nine
	Months		Months
Marketing, general and administrative	$	649	$	1,791
Research and development		109		333
Cost of products sold		71		234
	$	829	$	2,358
Tax benefit recognized related to compensation expense	$	198	$	556

     There were no stock-based compensation costs capitalized as part of inventory or fixed assets for the period ended September 30, 2006.

     Prior to the adoption of SFAS 123(R), Noven presented all tax benefits for deductions resulting from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options as operating cash flows on its statement of cash flows. SFAS 123(R) requires the benefits of tax deductions in excess of recognized compensation expense, determined on an individual award basis, to be reported as a financing cash flow, rather than as an operating cash flow. This requirement has the effect of reducing net operating cash flows and increasing net financing cash flows in periods after adoption. However, under this requirement, total cash flow remains unchanged from what would have been reported under prior accounting rules. Cash received from options exercised under all share-based payment arrangements for the nine months ended September 30, 2006 and 2005 was $8.1 million and $1.2 million, respectively. The tax benefit realized on the tax deductions from option exercises under stock-based compensation arrangements totaled $2.4 million and $0.2 million for the nine months ended September 30, 2006 and 2005, respectively, of which $1.7 million was reported as a financing cash flow for the nine months ended September 30, 2006. There were no amounts reported as financing cash flow for the nine months ended September 30, 2005.

     Stock option transactions related to the plans are summarized as follows for the nine months ended September 30, 2006 (options / SSARs and aggregate intrinsic value in thousands):

	2006
								Weighted
				Weighted				Average
				Average		Aggregate		Remaining
	Options/			Exercise		Intrinsic		Contractual
	SSARs			Price		Value		Term
Outstanding at beginning of the period		4,004		$	17.23
Granted		29			17.62
Exercised		(682	)		11.99	$	6,748
Canceled and expired		(65	)		12.37
Outstanding at end of the period		3,286		$	18.32	$	23,087		4.05
Outstanding and exercisable at end of period		2,274		$	20.91	$	11,313		3.64

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     The following table summarizes information concerning Noven’s restricted stock at September 30, 2006 (shares in thousands):

	2006
				Weighted
				Average
				Grant-Date
	Shares			Fair Value
Nonvested at December 31, 2005		—		$	—
Granted		34			17.47
Vested		(17	)		17.47
Forfeited		—			—
Nonvested at September 30, 2006		17		$	17.47

     As of September 30, 2006, the unamortized compensation expense that Noven expects to record in future periods related to currently outstanding unvested stock options, SSARs and restricted stock, as determined in accordance with SFAS 123(R), is approximately $5.4 million before the effect of income taxes, of which $0.8 million, $2.5 million, $1.5 million and $0.6 million is expected to be incurred in the remainder of 2006 and in 2007, 2008 and 2009, respectively. The weighted-average period over which this compensation cost is expected to be recognized is 2 years.

     Prior to 2006, in accordance with the provisions of SFAS 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS 148”), Noven elected to continue to apply the provisions of the Accounting Principles Board’s Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations in accounting for its employee stock option plans. Therefore no stock-based employee compensation cost is reflected in net income for the three months ended September 30, 2005, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

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     The following table illustrates the pro forma effect on net income and earnings per share for the three and nine months ended September 30, 2005 if Noven had applied the fair value recognition provisions of SFAS 123, as amended by SFAS 148 (in thousands, except per share amounts):

	Three Months			Nine Months
	2005			2005
Net income:
As reported	$	(1,422	)	$	3,910
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(149	)		(12,119	)
Pro forma	$	(1,571	)	$	(8,209	)
Basic earnings per share:
As reported	$	(0.06	)	$	0.17
Pro forma	$	(0.07	)	$	(0.35	)
Diluted earnings per share:
As reported	$	(0.06	)	$	0.16
Pro forma	$	(0.07	)	$	(0.35	)

     In order to eliminate some of the future compensation expense that Noven would otherwise have recognized in its statements of operations under SFAS 123(R), during 2005 Noven accelerated the vesting of certain stock options under the 1999 Plan. As a result of this action, options to purchase approximately 1.1 million shares of Noven’s common stock became immediately exercisable, including options held by Noven’s executive officers to purchase approximately 455,000 shares. Noven recorded an immaterial charge to compensation expense during the fourth quarter of 2005 due to the acceleration of a nominal amount of “in-the-money” options. As a result of the acceleration, during 2005, approximately $10.1 million of compensation expense, net of applicable income taxes, was eliminated from Noven’s future statements of operations and included in the pro forma footnote disclosure for the year ended December 31, 2005.

9. DEFERRED COMPENSATION PLAN:

     Effective January 1, 2006, Noven established a deferred compensation plan (the “Plan”) available to Noven’s officers and members of its Board of Directors. The Plan permits participants to defer receipt of part of their current compensation to a later date as part of their personal retirement or financial planning. Participants may elect to defer, as applicable, portions of their director fees, base salary, bonus, long-term incentive plan awards, and/or restricted stock grants. Benefit security for the Plan is provided by a funded rabbi trust.

     The compensation withheld from Plan participants, together with investment income on the Plan, is reflected as a deferred compensation obligation to participants and is classified as a long-term liability in the accompanying condensed balance sheets. The related assets, which are held in the rabbi trust in the form of a company-owned life insurance policy that names Noven as the beneficiary, are classified within other assets in the accompanying condensed balance sheets and are reported at cash surrender value, which was approximately $0.2 million as of September 30, 2006. At September 30, 2006, the balance of the deferred compensation liability totaled $0.1 million.

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10. CONTRACT AND LICENSE AGREEMENTS:

     Shire

     On April 6, 2006, Noven’s amended New Drug Application (“NDA”) for Daytrana^™ was approved for marketing by the FDA. In April 2006, Noven received a $50 million milestone payment from Shire (the global licensee of the product) as a result of the approval, and Noven may also earn additional milestone payments of up to $75 million depending on the level of Shire’s commercial sales of the product. The product was commercially launched by Shire in June 2006. Noven expects to defer and recognize approval and sales milestones as license revenues on a straight-line basis through the first quarter of 2013, which is Noven’s current best estimate of the useful economic life of the product. Noven began recognizing the $50 million milestone payment as well as the balance of the Shire deferred license revenues ($4.8 million at March 31, 2006) in the second quarter of 2006. Noven also manufactures and supplies finished product for Shire.

     In July 2006, Noven and Shire amended their agreement related to the development of a transdermal amphetamine patch for Attention Deficit Hyperactivity Disorder (“ADHD”). Under the original agreement, Noven was entitled to payments of up to $5.0 million if certain development milestones were achieved. At the time of the signing of the amended agreement, Noven had received $0.5 million in such milestone payments. Under the amendment, Shire paid Noven an additional $1.0 million in August 2006, which is included in deferred contract revenues as of September 30, 2006, and Noven will perform certain early-stage development activities which were previously to be performed by Shire. Upon completion of such development activities by Noven, Shire may elect to retain exclusive rights to the product under development in exchange for payment of a total of $5.9 million.

     P&G Pharmaceuticals

     In April 2003, Noven established a collaboration with Procter & Gamble Pharmaceuticals, Inc. (“P&G Pharmaceuticals”) for the development of new prescription patches for Hypoactive Sexual Desire Disorder (“HSDD”). The product under development explores follow-on product opportunities for Intrinsa^™, P&G Pharmaceuticals’ in-licensed investigational transdermal testosterone patch designed to help restore sexual desire in menopausal women diagnosed with HSDD. In the U.S., P&G Pharmaceuticals withdrew its NDA for Intrinsa^™ in December 2004 based on safety concerns expressed by an FDA Advisory Committee and other factors. P&G Pharmaceuticals has indicated that work on Intrinsa^™ for the U.S. market has been placed on hold while they evaluate alternatives for the project. If P&G Pharmaceuticals is unable to identify a practical strategy to complete development and commercialize the product in the U.S., or if their evaluation of alternatives significantly delays the project, the prospects for Noven’s collaboration with P&G Pharmaceuticals will be adversely affected.

     Other

     During the nine months ended September 30, 2006, Noven recognized a $1.0 million one-time payment from a third party for a license to certain Noven patents due to Noven having no continuing involvement nor Noven having any future economic benefit related to the license.

11. INVESTMENT IN VIVELLE VENTURES LLC (d/b/a NOVOGYNE):

     Noven shares in the earnings of Novogyne, after satisfaction of an annual preferred return of $6.1 million to Novartis, according to an established formula. Noven’s share of Novogyne’s earnings increases as Novogyne’s product sales increase, subject to a cap of 49%. Novogyne produced sufficient income in the first quarter of 2006 and 2005 to meet Novartis’ annual

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preferred return for those years and for Noven to recognize earnings from Novogyne under the formula.

     During the three and nine months ended September 30, 2006 and 2005, Noven had the following transactions with Novogyne (in thousands):

	Three Months				Nine Months
	2006		2005		2006		2005
Revenues:
Product sales	$	5,273	$	4,740	$	13,990	$	14,432
Royalties		1,791		1,790		5,138		4,617
	$	7,064	$	6,530	$	19,128	$	19,049
Reimbursed expenses	$	7,125	$	6,576	$	21,043	$	20,196

     As of September 30, 2006 and December 31, 2005, Noven had amounts due from Novogyne of $7.8 million and $8.9 million, respectively, for products sold to, and marketing expenses reimbursable by, Novogyne.

     The unaudited condensed statements of operations of Novogyne for the three and nine months ended September 30, 2006 and 2005 are as follows (in thousands):

	Three Months				Nine Months
	2006		2005		2006		2005
Gross revenues	$	39,204	$	37,974	$	112,138	$	100,519
Sales allowances		4,283		4,007		11,622		11,078
Sales return allowances		1,193		192		4,576		1,057
Sales allowances and returns		5,476		4,199		16,198		12,135
Net revenues		33,728		33,775		95,940		88,384
Cost of sales1		7,529		7,940		22,212		21,347
Selling, general and administrative expenses		9,419		9,187		28,172		25,627
Income from operations		16,780		16,648		45,556		41,410
Interest income		250		201		564		336
Net income	$	17,030	$	16,849	$	46,120	$	41,746
Noven’s equity in earnings of Novogyne	$	8,234	$	8,081	$	19,323	$	17,094

¹ Novogyne’s costs of sales for all periods presented include the amortization of the marketing rights Novogyne acquired for CombiPatch^® of $1.5 million and $4.6 million for each of the three and nine months ended September 30, 2006 and 2005, respectively. This amortization was previously reported as a separate operating expense in Novogyne’s statement of operations.

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     The activity in the Investment in Novogyne account for the nine months ended September 30, 2006 is as follows (in thousands):

Investment in Novogyne, beginning of period	$	23,243
Equity in earnings of Novogyne		19,323
Cash distributions from Novogyne		(17,644	)
Non-cash distribution from Novogyne (Note 5)		(2,212	)
Investment in Novogyne, end of period	$	22,710

     Subject to the approval of Novogyne’s management committee, Novogyne may, from time to time, distribute cash to Novartis and Noven based upon a contractual formula. For the three and nine months ended September 30, 2006, Noven received cash distributions representing return on investment of $7.4 million and $17.6 million from Novogyne, respectively. For the three and nine months ended September 30, 2005, Noven received cash distributions representing return on investment of $9.2 million and $18.1 million from Novogyne, respectively. In addition, as discussed in Note 5, tax payments of $2.2 million and $1.5 million were made by Novogyne on Noven’s behalf to the New Jersey Department of Revenue in April 2006 and 2005, respectively. These payments were deemed distributions from Novogyne to Noven and were recorded as reductions in Noven’s investment in Novogyne when deemed received.

12. SHARE REPURCHASE PROGRAM:

     In the first quarter of 2003, Noven’s Board of Directors authorized a share repurchase program under which Noven may acquire up to $25.0 million of its common stock. To date, Noven has repurchased 105,000 shares of its common stock at an aggregate price of approximately $1.3 million. No shares were repurchased during the nine months ended September 30, 2006 or 2005.

13. COST REDUCTION PROGRAM:

     Over the past two years, Noven expanded its facilities and increased staffing for the production of fentanyl, Daytrana^™ and other developmental products. In September 2005, the FDA ceased review of Noven’s Abbreviated New Drug Application (“ANDA”) for its fentanyl product after informing Noven that it did not expect to approve the ANDA. In the third quarter of 2006, Noven implemented a program to reduce overhead associated with this expansion. This program included the elimination of certain employee positions. A pre-tax one-time termination charge of $0.6 million associated with the elimination of these positions was included in marketing, general and administrative expenses for the three months ended September 30, 2006. In addition, Noven may incur an additional $0.1 million in pre-tax outplacement costs, which will be recognized as incurred in marketing, general and administrative expenses. Noven does not expect any further workforce reductions in connection with this program. There were no payments made as of September 30, 2006 related to this workforce reduction.

14. COMMITMENTS AND CONTINGENCIES:

     HT Studies

     As a result of the findings from the Women’s Health Initiative (“WHI”) study and other studies previously disclosed in Noven’s Form 10-K, the FDA has required that “black box” labeling be included on all menopausal hormone therapy (“HT”) products marketed in the United States to warn, among other things, that these products have been associated with increased risks

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for heart disease, heart attacks, strokes, and breast cancer and that they are not approved for heart disease prevention.

     Researchers continue to analyze data from both arms of the WHI study and other studies. Other studies evaluating HT are currently underway or in the planning stages. The market for Noven’s products could be adversely affected if these studies find that a transdermal estrogen patch is less beneficial than other dosage forms, and Noven could be subject to increased product liability risk if HT patch products are found to increase the risk of adverse health consequences. Noven is currently named as a defendant in six product liability lawsuits involving its HT products and Noven may have liability with respect to other actions in which it has not, to date, been made a party. See “Litigation, Claims and Assessments” below for a further discussion on related product liability lawsuits.

     Since the July 2002 publication of the WHI and other study data, total United States prescriptions have declined for substantially all HT products, including Noven’s products in the aggregate. Prescriptions for CombiPatch^®, Noven’s combination estrogen/progestin patch, continue to decline in the post-WHI environment. Novogyne recorded the acquisition of the marketing rights for Noven’s CombiPatch^® product at cost and Novogyne tests this asset for impairment on a periodic basis. Further adverse change in the market for HT products could have a material adverse impact on the ability of Novogyne to recover its investment in these rights, which could require Novogyne to record an impairment loss on the CombiPatch^® intangible asset. Impairment of the CombiPatch^® intangible asset would adversely affect Novogyne’s and Noven’s financial results. Management cannot predict whether these or other studies will have additional adverse effects on Noven’s liquidity and results of operations, or Novogyne’s ability to recover the net carrying value of the CombiPatch^® intangible asset.

     Production Issues

     Noven maintains in-house product stability testing for its commercialized products. This process includes, among other things, testing samples from commercial lots under a variety of conditions to confirm that the samples remain within required specifications for the shelf life of the product.

     In 2003, Noven’s product stability testing program revealed that certain lots of CombiPatch^® and Vivelle-Dot^™ patches did not maintain required specifications throughout the products’ shelf lives, resulting in product recalls of certain lots. As a result, Noven initiated a series of special stability protocols to monitor commercial lots in distribution as well as future production. In the first quarter of 2005, a total of ten lots of Vivelle-Dot^™ manufactured in 2003 were identified for recall when one of Noven’s stability protocols revealed that these lots did not meet required specification or were associated with lots that did not meet specification. The recall of these lots in the first quarter of 2005 did not have a material impact on Noven’s or Novogyne’s results of operations because an immaterial number of patches from these lots remained in distribution. A joint Noven and Novartis task force is working to identify the definitive root cause of the Vivelle-Dot^™ stability failures. Based on testing and analysis to date, Noven believes that the probable cause of the Vivelle-Dot^™ stability failures relates to certain patch backing material that Noven obtained from a raw material supplier. If the root cause determination or additional testing indicates that the production issue affects more product than Noven’s current testing and analysis suggests, additional recalls may be required. Noven continues to manufacture and ship Vivelle-Dot^™ to Novogyne.

     In the fourth quarter of 2005, Novartis Pharma AG (“Novartis Pharma”), an affiliate of Novartis, recalled three commercial lots of Estalis^® (the form of CombiPatch^® manufactured for sale outside the United States) after special stability protocols put in place after an October 2004 CombiPatch^® stability failure indicated that certain lots did not maintain required specifications

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throughout the product’s shelf-life due to the formation of crystals. The recall of these lots did not have a material impact on Noven’s financial statements for the year ended December 31, 2005. During 2006, additional lots of Estalis^® have been found to have developed crystals as well. Any recall of these lots by Novartis Pharma is not expected to have a material impact on Noven’s results of operations because an immaterial number of patches from these lots remain in distribution. Noven continues to manufacture and ship Estalis^® to Novartis Pharma.

     Noven continues to maintain stability testing related to the foregoing production issues. If Noven’s testing indicates that additional lots of CombiPatch^®, Estalis^® or Vivelle-Dot^™ or other products do not meet specifications, there could be additional recalls. Although Noven and Novartis work together in assessing production issues related to these products, the decision to recall product resides with Novartis and its affiliates as the holders of the regulatory approvals for these products and is not within Noven’s control. If Noven’s estimate concerning product returns associated with a recall are incorrect, or if Noven’s continued testing indicates that additional lots are affected, or if Novartis should initiate additional recalls for any reason, then Noven’s and Novogyne’s business and results of operations could be materially and adversely impacted. Among other things, any CombiPatch^® recalls could have a material adverse impact on the ability of Novogyne to recover its investment in its CombiPatch^® marketing rights.

     The recent recalls may result in an FDA inspection of Noven’s facilities and procedures and Noven cannot assure that the FDA will be satisfied with Noven’s operations and procedures, which could result in more frequent and stringent inspections and monitoring. If the FDA were to conclude that Noven’s manufacturing controls and procedures are not sufficient, Noven could be required to suspend production until Noven demonstrates to the FDA that Noven’s controls and procedures are sufficient.

     Supply Agreement

     Noven’s supply agreement with Novogyne for Vivelle^® and Vivelle-Dot^™ patches expired in January 2003. Since expiration, the parties have continued to operate in accordance with the supply agreement’s commercial terms. There is no assurance that the agreement’s non-commercial terms would be enforceable with respect to post-expiration occurrences. A decision to discontinue operating in accordance with the agreement under the agreement’s commercial terms could have a material adverse effect on Noven’s financial position and results of operations. Novogyne’s designation of a new supplier and approval of a new supply agreement would require the affirmative vote of four of the five members of Novogyne’s Management Committee. Accordingly, both Novartis and Noven must agree on Novogyne’s supplier.

     Litigation, Claims and Assessments

     In September 2005, Noven, Novogyne and Novartis were served with a summons and complaint from an individual plaintiff in Superior Court of New Jersey Law Division, Atlantic County in which the plaintiff claims personal injury allegedly arising from the use of HT products, including Vivelle^®. The plaintiff claims compensatory, punitive and other damages in an unspecified amount. Noven does not expect any activity in this case in the near future, as the court has entered an order to stay proceedings in all its pending and future HT cases except for cases where Wyeth Pharmaceuticals and its affiliates and Pfizer, Inc. are the defendants.

     In April 2006, an individual plaintiff and her husband filed a complaint in the United States District Court, District of Minnesota against Noven, Novogyne, Novartis, Wyeth Inc. and Wyeth Pharmaceuticals, Inc. alleging liability in connection with personal injury claims allegedly arising from the use of HT products, including Noven’s CombiPatch^® product. The plaintiffs claim compensatory and other damages in an unspecified amount.

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     In July 2006, four complaints were filed in the United States District Court, District of Minnesota against Noven and other pharmaceutical companies by four separate individual plaintiffs, each filing alone or with her husband. Three of the complaints also name Novartis as a defendant, and of these, two name Novogyne as a defendant as well. Each complaint alleges liability in connection with personal injury claims allegedly arising from the use of HT products, including Vivelle^® in one case and CombiPatch^® in two of the cases. The plaintiffs in each case claim compensatory and other damages in an unspecified amount. Noven has established an accrual for the expected legal fees related to the cases referenced above, although the amount is not material.

     Novartis has advised Noven that Novartis has been named as a defendant in at least 28 pending additional lawsuits that include approximately 35 plaintiffs that allege liability in connection with personal injury claims allegedly arising from the use of HT patches distributed and sold by Novartis and Novogyne, including Noven’s Vivelle-Dot^™, Vivelle^®, and CombiPatch^® products. In addition, Novartis has been named as a defendant in over 80 additional lawsuits in which the plaintiffs’ complaints do not identify the HT products used by the plaintiffs and therefore these cases may also involve Noven HT products. Novogyne has been named as a defendant in one lawsuit in addition to the four lawsuits referenced above. Novartis has indicated that it will seek indemnification from Noven and Novogyne to the extent permitted by the agreements between and among Novartis, Novogyne and Noven. Novogyne has established an accrual for the expected legal fees and settlements of these lawsuits for $8.5 million with an offsetting insurance recovery of $6.1 million. This accrual represents Novartis management’s best estimate as of September 30, 2006. Although Novogyne believes that recovery of the insurance receivable is probable, no assurance can be given that Novogyne will in fact recover such amount, including as a result of any decision by Novogyne’s product liability insurance carrier to contest a claim.

     Noven intends to defend all of the foregoing lawsuits vigorously, but the outcome of these product liability lawsuits cannot ultimately be predicted.

     Noven is a party to other pending legal proceedings arising in the normal course of business, none of which Noven believes is material to its financial position, results of operations or cash flows.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following section addresses material aspects of our financial condition at September 30, 2006, and our results of operations for the three and nine months ended September 30, 2006 and 2005. The contents of this section include:

• An executive summary of our results of operations for the three months ended September 30, 2006;

• An overview of Noven and our Novogyne joint venture;

• A review of certain items that may affect the historical or future comparability of our results of operations;

• An analysis of our results of operations and our liquidity and capital resources;

• An outlook that includes our current financial guidance;

• A discussion of how we apply our critical accounting estimates; and

• A discussion of recently-issued accounting standards.

     This discussion should be read in conjunction with Noven’s financial statements for the three and nine months ended September 30, 2006 and 2005 and the related notes included elsewhere in this Form 10-Q, as well as the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” from our Form 10-K.

Executive Summary

     The following Executive Summary is qualified in its entirety by the more detailed discussion and analysis of our financial condition and results of operations appearing in this Item 2 as well as in our financial statements and related notes included in this Form 10-Q.

     The three months ended September 30, 2006 included a strong performance by our Novogyne joint venture, the first full quarter of commercial sales of Daytrana^™, and significant improvement in our overall gross margin compared to the second quarter of 2006.

     Daytrana^™ was approved by the FDA on April 6, 2006, triggering payment of a $50 million approval milestone payment from Shire. The three months ended September 30, 2006 included the recognition of $2.0 million in license revenues associated with that milestone and $2.0 million in Daytrana^™ product sales to Shire. Primarily due to Daytrana^™ product and license revenues, our net revenues for the three months ended September 30, 2006 increased 28% to $15.7 million.

     Due in part to our efforts undertaken in the three months ended September 30, 2006 to improve efficiencies and reduce costs associated with Daytrana^™ production, our overall gross margin improved from 11% in the three months ended June 30, 2006 to 30% in the three months ended September 30, 2006.

     Research and development expenses for the three months ended September 30, 2006 decreased $1.3 million or 34% to $2.5 million compared to the same period in the prior year, primarily as a result of higher 2005 expenses associated with development of Daytrana^™. Marketing, general and administrative expenses increased $1.8 million or 42% to $6.0 million, primarily as a result of the recognition of $0.6 million in stock-based compensation expenses in 2006 pursuant to accounting guidance that we adopted in January 2006, and a $0.6 million charge in the three months ended September 30, 2006 resulting from the elimination of certain employee positions as part of a program intended to reduce costs and improve efficiencies within Noven.

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     We recognized $8.2 million in earnings from Novogyne for the three months ended September 30, 2006 compared to $8.1 million for the same period in the prior year. For the three months ended September 30, 2006, we reported net income of $5.0 million ($0.20 diluted earnings per share), compared to a net loss of $1.4 million ($0.06 diluted loss per share) reported in the 2005 quarter.

     Novogyne’s net revenues for the three months ended September 30, 2006 were $33.7 million, largely unchanged from the 2005 quarter, reflecting increased sales of Vivelle-Dot^™, offset by increased sales and returns allowances. Novogyne’s gross margin for the three months ended September 30, 2006 increased slightly to 78% due to increased sales of Vivelle-Dot^™. Novogyne’s selling, general and administrative expenses for the third quarter of 2006 increased 3% to $9.4 million compared to the same period in the prior year, primarily reflecting increased promotional spending in support of Vivelle-Dot^™. Novogyne’s net income for the three months ended September 30, 2006 was $17.0 million compared to $16.8 million for the same period in 2005.

     Total prescriptions for Vivelle-Dot^™ increased 4% in the third quarter of 2006 compared to the third quarter of 2005, and total prescriptions for Novogyne’s products, taken as a whole, increased 1% period-over-period. By comparison, the overall U.S. HT market declined 4% for the third quarter of 2006 compared to the same period of 2005. Total prescriptions for Daytrana^™ (launched in June 2006) increased 17% in September 2006 (the most recent month for which data are available) compared to August 2006, while prescriptions for ADHD stimulant therapies as a class were largely unchanged for the same period.

Overview of Noven and Our Novogyne Joint Venture

     We develop and manufacture advanced transdermal patches and presently derive the majority of our revenues from sales of transdermal patches for use in menopausal HT. In the United States, our HT products are marketed and sold by Novogyne Pharmaceuticals, the joint venture that we formed with Novartis in 1998. Our business, financial position and results of operations currently depend on Novogyne and its marketing of our three principal HT products — Vivelle^®, Vivelle-Dot^™ and CombiPatch^®— in the United States. A discussion of Novogyne’s results of operations and their impact on our results can be found under the caption “—Results of Operations—Equity in Earnings of Novogyne.”

     In all countries other than the United States, Canada and Japan, we have licensed the marketing rights to these products to Novartis Pharma, which is an affiliate of Novartis. In most of these markets, Vivelle^® is marketed under the brand name Menorest, Vivelle-Dot^™ is marketed under the brand name Estradot^® and CombiPatch^® is marketed under the brand name Estalis^®.

     We hold a 49% equity interest in Novogyne, and Novartis holds the remaining 51% equity interest. Under the terms of the joint venture agreements, we manufacture and supply Vivelle^®, Vivelle-Dot^™ and CombiPatch^® to Novogyne, perform marketing, sales and promotional activities, and receive royalties from Novogyne based on Novogyne’s sales of the estrogen therapy (“ET”) products. Novartis distributes Vivelle^®, Vivelle-Dot^™ and CombiPatch^® and provides certain other services to Novogyne, including financial and accounting functions.

     Novartis is entitled to an annual $6.1 million preferred return from Novogyne, which has the effect of reducing our share of Novogyne’s income in the first quarter of each year. After the annual preferred return to Novartis, our share of Novogyne’s income increases as product sales increase, subject to a maximum of 49%. Our share of Novogyne’s income was $19.3 million and $17.1 million for the nine months ended September 30, 2006 and 2005, respectively. The income we recognize from Novogyne is a non-cash item. Any cash we receive from Novogyne is in the form of cash distributions declared by Novogyne’s Management Committee. Accordingly, the amount of cash that we receive from Novogyne in any period may not be the same as the amount of income we

21

recognize from Novogyne for that period. For the nine months ended September 30, 2006 and 2005, we received $17.6 million and $18.1 million, respectively, in distributions from Novogyne, which, not including the $50 million received from Shire, accounted for a substantial portion of our net cash flows generated by operating activities for these periods. We expect that a significant portion of our earnings and cash flow for the next several years will be generated through our interest in Novogyne, as well as any additional milestone payments we may receive from Shire. Any failure by Novogyne to remain profitable or to continue to make distributions would have a material adverse effect on our results of operations and financial condition.

     The market for HT products, including our transdermal HT products, has contracted since the July 2002 publication of the WHI study that found adverse health risks associated with HT products. Comparing the second quarter of 2002 (the quarter immediately preceding the publication of initial data from the WHI study) to the third quarter of 2006, total prescriptions dispensed in the HT market in the United States decreased by 53.8%. For the same period, aggregate prescriptions for Noven’s United States HT products decreased 6.5%. The estrogen segment of the HT market in the United States declined 49.4%, while our Vivelle^® line of products increased 7.6%. Vivelle-Dot^™, which represented approximately 87.0% of our total United States prescriptions in the third quarter of 2006, increased 36.6% from the second quarter of 2002 to the third quarter of 2006. We believe Vivelle-Dot^™ patch prescriptions have benefited from both increased demand and patient conversions from the original Vivelle^® product.

     United States prescriptions for our CombiPatch^® product (which represented 9.7% of our total United States prescriptions in the third quarter of 2006) declined 57.9% from the second quarter of 2002 to the third quarter of 2006, while prescriptions for the total United States market for fixed combination hormone therapy products decreased 71.8%. Further decreases in net sales of our CombiPatch^® product (whether as a result of the WHI studies, the production issues discussed below, higher rates of sales returns or otherwise) could require Novogyne (which holds the CombiPatch^® marketing rights) to record an impairment loss related to this intangible asset ($27.8 million at September 30, 2006), which would adversely affect the results of operations of both Noven and Novogyne.

Certain Items that May Affect Historical or Future Comparability

     For a discussion of certain items that may affect the historical or future comparability of our results of operations and financial condition, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K as well as the following updated and/or supplemented items. Such disclosure is not intended to address every item that may affect the historical or future comparability of our results of operations or financial condition and such disclosure should be read in conjunction with the discussion and analysis of our results of operations, liquidity and capital resources and outlook appearing elsewhere in this Item 2.

Cost Reduction Program

     Over the past two years, we expanded our facilities and increased staffing for the production of fentanyl, Daytrana^™ and other developmental products. In September 2005, the FDA ceased review of our ANDA for our fentanyl product after informing us that it did not expect to approve the ANDA. In the third quarter of 2006, we implemented a program to reduce overhead associated with this expansion. This program included the elimination of certain employee positions, which we believe will result in annual pre-tax savings of up to $1.8 million. A pre-tax one-time termination charge of $0.6 million associated with the elimination of these positions was included in marketing, general and administrative expenses for the three months ended September 30, 2006. In addition, we may incur an additional $0.1 million in pre-tax outplacement costs, which will be recognized as incurred in marketing, general and administrative expenses. We do not expect any further workforce reductions in connection with this program.

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DEA Quota

     The DEA controls access to controlled substances, including methylphenidate, the active ingredient in Daytrana^™. Manufacturers of products containing controlled substances must annually apply to the DEA for procurement quota in order to obtain these substances for manufacturing. In 2006, we received an initial grant of methylphenidate quota and have submitted supplemental applications for additional quota in order to fulfill the 2006 product orders received from Shire. The DEA, which grants quota based primarily on historical product sales and prescription data, has not, to date, granted our requests for additional 2006 quota. While Noven and Shire continue to work with the DEA to obtain additional methylphenidate quota for the remainder of 2006, we cannot assure that we will be successful in convincing the DEA that additional quota is necessary to meet patient demand. Because we have not received additional quota for 2006, we expect to complete the year with approximately $8.0 million in full-year Daytrana^™ product sales to Shire and approximately $2.0 million in Daytrana^™ product backorders that we would expect to fulfill following receipt of our expected 2007 quota supply in the first quarter of 2007. As discussed under “Outlook” below, the reduction in Daytrana^™ revenues will negatively affect our gross margin in the fourth quarter of 2006 but, to the extent that these backorders are filled as expected in the first quarter of 2007, the related revenues should benefit our gross margin in 2007. If the DEA declines to grant us additional 2006 quota, it is possible (subject to a number of factors including ongoing demand for the product) that product supply for certain dosage strengths may be interrupted and, as a result, Daytrana^™ sales as well as our results of operations could be adversely affected.

P&G Pharmaceuticals

     In April 2003, we established a collaboration with P&G Pharmaceuticals for the development of new prescription patches for HSDD. The product under development explores follow-on product opportunities for Intrinsa^™, P&G Pharmaceuticals’ in-licensed investigational transdermal testosterone patch designed to help restore sexual desire in menopausal women diagnosed with HSDD. In the U.S., P&G Pharmaceuticals withdrew its New Drug Application for Intrinsa^™ in December 2004 based on safety concerns expressed by an FDA Advisory Committee and other factors. P&G Pharmaceuticals has indicated that work on Intrinsa™ for the U.S. market has been placed on hold while they evaluate alternatives for the project. If P&G Pharmaceuticals is unable to identify a practical strategy to complete development and commercialize the product in the U.S., or if their evaluation of alternatives significantly delays the project, the prospects for our collaboration with P&G Pharmaceuticals will be adversely affected.

Stock-Based Compensation

     Currently, our outstanding stock-based compensation consists of: (i) stock options; (ii) SSARs; and (iii) for our non-employee directors, restricted stock awards. Prior to January 1, 2006, all awards granted to employees under the 1999 Plan were stock options. In 2006, Noven began granting SSARs to employees and restricted stock to non-employee directors in lieu of stock options, and from time to time we may consider or grant other forms of stock-based compensation.

     On January 1, 2006, we adopted the provisions of, and for the three and nine months ended September 30, 2006, we accounted for stock-based compensation in accordance with, SFAS 123(R). We elected the modified-prospective method, under which prior periods are not revised for comparative purposes. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is typically the vesting period. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. See “—Critical Accounting Estimates.”

     Total stock-based compensation recognized in our statements of operations for the nine months ended September 30, 2006 was $2.4 million, of which $1.8 million was recognized in

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marketing, general and administrative and $0.3 million was recognized in each of research and development and cost of products sold, respectively. There were no stock-based compensation costs capitalized as part of inventory or fixed assets for the nine months ended September 30, 2006.

     At September 30, 2006, the unamortized compensation expense that we expect to record in future periods related to currently outstanding unvested stock options, SSARs and restricted stock, as determined in accordance with SFAS 123(R), is approximately $5.4 million before the effect of income taxes, of which $0.8 million, $2.5 million, $1.5 million and $0.6 million is expected to be incurred in the remainder of 2006 and in 2007, 2008 and 2009, respectively. We will also incur additional expense in future years related to new equity awards that may be granted in the future that cannot yet be quantified.

     In order to eliminate some of the future compensation expense that we would otherwise have recognized in our statements of operations under SFAS 123(R), during 2005 we accelerated the vesting of certain stock options under the 1999 Plan. As a result of this action, options to purchase approximately 1.1 million shares of our common stock became immediately exercisable, including options held by our executive officers to purchase approximately 455,000 shares. We recorded an immaterial charge to compensation expense during the fourth quarter of 2005 due to the acceleration of a nominal amount of in-the-money options. As a result of the acceleration, during 2005, we eliminated approximately $10.1 million of compensation expense, net of applicable income taxes, from our future statements of operations and this expense is included in the pro forma footnote disclosure for the year ended December 31, 2005.

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Results of Operations

Three and nine months ended September 30, 2006 compared to the three and nine months ended September 30, 2005

Revenues

     Total revenues for the three and nine months ended September 30, 2006 and 2005 are summarized as follows (dollar amounts in thousands):

	Three Months							Nine Months
	2006		2005		% Change			2006		2005		% Change
Product revenues — Novogyne:
Product sales	$	5,273	$	4,740		11	%	$	13,990	$	14,432		(3	%)
Royalties		1,791		1,790		0	%		5,138		4,617		11	%
		7,064		6,530		8	%		19,128		19,049		0	%
Product revenues — third parties:
Product sales		5,671		3,823		48	%		15,402		11,646		32	%
Royalties		90		94		(4	%)		246		242		2	%
		5,761		3,917		47	%		15,648		11,888		32	%
Total product revenues		12,825		10,447		23	%		34,776		30,937		12	%
Contract and license revenues:
Contract		44		769		(94	%)		1,112		1,793		(38	%)
License		2,839		1,024		177	%		7,559		3,017		151	%
		2,883		1,793		61	%		8,671		4,810		80	%
Net revenues	$	15,708	$	12,240		28	%	$	43,447	$	35,747		22	%

Net Revenues

     As described in more detail below, the 28% increase in net revenues for the three months ended September 30, 2006 as compared to the same period in 2005 was primarily attributable to the launch of Daytrana^™ and an increase in license revenue associated with that product. In addition, aggregate sales to Novogyne increased due to timing of shipments. These increases were offset by an aggregate decline in international product sales, which we believe was due to the timing of orders.

     As described in more detail below, the 22% increase in net revenues for the nine months ended September 30, 2006 as compared to the same period in 2005 was primarily attributable to the product launch of Daytrana^™, an increase in license revenue associated with that product and an increase in royalties. These increases were offset by an aggregate decline in product sales to Novogyne and international product sales, which we believe was due primarily to the timing of orders.

Product Revenues – Novogyne

     Product revenues – Novogyne consists of our sales of Vivelle-Dot^™/Estradot^®, CombiPatch^® and Vivelle^® to Novogyne at a fixed price for resale by Novogyne primarily in the United States as well as the royalties we receive as a result of Novogyne’s sales of Vivelle-Dot^™ and Vivelle^®.

     The $0.5 million increase in product revenues from Novogyne for the three months ended September 30, 2006 as compared to the same period in the prior year primarily related to a $0.8

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million increase in unit sales of Vivelle-Dot^™, partially offset by a $0.2 million and $0.1 million decline in unit sales of Estradot^® and Vivelle^®, respectively. The increase in Vivelle-Dot^™ and the decrease in Estradot^® and Vivelle^® are primarily related to the timing of trade product orders from Novogyne.

     The $0.1 million increase in product revenues from Novogyne for the nine months ended September 30, 2006 as compared to the same period in the prior year primarily related to a $0.3 million increase in unit sales of Vivelle-Dot^™ and a $0.5 million increase in royalties, partially offset by a $0.4 million, $0.2 million and $0.1 million decline in unit sales of CombiPatch^®, Estradot^® and Vivelle^®, respectively. The increase in Vivelle-Dot^™ was primarily attributable to a $0.8 million increase in product samples, partially offset by a $0.4 million decline in unit sales of trade product. The increase in product samples related to the timing of shipments to Novogyne. The decline in trade product sales was attributable to the timing of orders placed by Novogyne and not a decline in market demand. The increase in royalties was attributable to higher sales by Novogyne for the nine months ended September 30, 2006. The decline in CombiPatch^® was primarily related to declining prescription trends which we believe are attributable to the ongoing effects of WHI and other studies on combination therapy products as well as the impact of a competitive product. The decline in unit sales of Estradot^® were attributable to the timing of trade product orders. The decline in unit sales of Vivelle^® to Novogyne primarily reflected the planned discontinuation of the production of this mature product by the end of 2006.

Product Revenues — Third Parties

     Product revenues — third parties consists of sales of Estradot^®, Estalis^® and Menorest to Novartis Pharma at a price based on a percentage of Novartis Pharma’s net selling price (subject to certain minima) for resale primarily outside the United States and Japan, together with royalties generated from Novartis Pharma’s sales of Vivelle^® and Estradot^® in Canada. Beginning in the second quarter of 2006, product revenues — third parties also includes sales of Daytrana^™ to Shire for commercial resale in the United States.

     The $1.8 million increase in product revenues from third parties for the three months ended September 30, 2006 as compared to the same period in the prior year primarily related to a $2.0 million, $0.2 million and $0.1 million increase in unit sales of Daytrana^™ , Estradot^® and Estalis^®, respectively, partially offset by a $0.5 million decline related to pricing. The increase in Daytrana^™ was due to the initial product launch that occurred during the period while the increase in Estradot^® and Estalis^® was attributable to the timing of orders. The decline related to pricing was due to a decline in price reconciliation payments from Novartis Pharma.

     The $3.8 million increase in product revenues from third parties for the nine months ended September 30, 2006 as compared to the same period in the prior year primarily related to a $5.7 million increase in unit sales of Daytrana^™ partially offset by a decline in unit sales of $0.7 million and $0.4 million of Estalis^® and Menorest, respectively. In addition, the nine month period included a decline of $0.9 million related to pricing as we recognized less of a price reconciliation payment in the current nine month period for all products sold to Novartis Pharma. The increase in Daytrana^™ and the decline related to pricing are attributable to the same factors as discussed above for the three-month comparable periods. The decline in Estalis^® was attributable to the timing of orders while the decline in Menorest was attributable to the continued transition from Menorest to Estradot^®.

Contract and License Revenues

     Contract revenues consist of the recognition of payments received as work is performed on research and development projects. The payments received may take the form of non-refundable up- front payments, payments received upon the completion of certain phases of work and success

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milestone payments. License revenues consist of the recognition of non-refundable up-front, milestone and similar payments under license agreements.

     Contract revenues declined $0.7 million for both the three and nine months ended September 30, 2006 as compared to the same periods in the prior year due to a decline in contract work performed. License revenues increased $1.8 million and $4.5 million for the three and nine months ended September 30, 2006, respectively, due primarily to the recognition in the nine months ended September 30, 2006 of $3.9 million in deferred license revenues related to Daytrana^™ and the recognition of a $1.0 million one-time non-refundable payment from a third party for a license to certain of our patents.

Gross Margin

     The following section presents Noven’s gross margin on (i) total product revenues, (ii) product revenues derived from sales to Novogyne, which for accounting purposes is considered to be a related party; and (iii) product revenues derived from sales to third parties (i.e., excluding sales to Novogyne).

     The allocation of overhead costs impacts our determination of gross margins, including our gross margins for product revenues derived from sales to Novogyne compared to gross margins for product revenues derived from sales to third parties. Overhead costs consist of salaries and benefits, supplies and tools, equipment costs, depreciation and insurance costs and represent a substantial portion of our production costs. The allocation of overhead between and among our various products requires us to make significant estimates that involve subjective and often complex judgments. Using different estimates would likely result in materially different gross margins for product revenues derived from sales to Novogyne compared to gross margins for product revenues derived from sales to third parties.

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Gross Margin — Total

     Noven’s overall gross margin for the three and nine months ended September 30, 2006 and 2005 is summarized as follows (dollar amounts in thousands):

	Three Months						Nine Months
	2006			2005			2006			2005
Gross Margin Total:
Product revenues	$	12,825		$	10,447		$	34,776		$	30,937
Cost of products sold		9,041			15,416			27,068			26,526
Gross profit (product revenues less cost of products sold)		3,784			(4,969	)		7,708			4,411
Gross margin (gross profit as a percentage of product revenues)		30	%		-48	%		22	%		14	%
Pre-launch inventory write-off		—			9,475			—			9,475
Gross profit excluding pre-launch inventory write-off of fentanyl		3,784			4,506			7,708			13,886
Gross margin excluding pre-launch inventory write-off of fentanyl		30	%		43	%		22	%		45	%

     Our overall gross margin for the three and nine months ended September 30, 2005 was adversely affected by a $9.5 million charge incurred in the third quarter of 2005 related to the write-off of fentanyl pre-launch inventories. In light of the significance of this charge, we have provided gross margin information that excludes its effect. We believe such non-GAAP information is useful to investors in order to meaningfully evaluate our ongoing, underlying business and to compare our financial results for the periods presented in 2006 and 2005. For the same reasons, management uses these non-GAAP financial measures to evaluate Noven’s ongoing, underlying business. These measures should not be considered alternatives to measures computed in accordance with GAAP, nor should they be considered indicators of our overall financial performance.

     Excluding the effect of our write-off of pre-launch fentanyl inventory in the third quarter of 2005, the decline in our overall gross margin for the three and nine months periods ended September 30, 2006 compared to the same periods in the prior year was primarily due to costs and inefficiencies associated with the start-up of commercial production of Daytrana^™, which was launched in June 2006. The cost reduction program commenced in the three months ended September 30, 2006 to reduce costs and improve efficiencies and yields contributed to significant improvement in overall gross margin for the three months ended September 30, 2006 compared to the overall gross margin that we recognized for the three months ended June 30, 2006. Our expectations for overall gross margin in future periods are addressed under “Outlook” below.

     Increased personnel and other resources dedicated to quality control in our HT operations also contributed to a decline in gross margin for the three and nine month periods ended September 30, 2006 compared to the same periods in the prior year. The cost of these resources increased approximately $0.2 million and $0.8 million for the three and nine months ended September 30, 2006, respectively, compared to the same periods in 2005.

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     Over the past two years, we expanded our facilities and increased staffing for the production of fentanyl, Daytrana^™ and other developmental products. In September 2005, the FDA ceased review of our ANDA for our fentanyl product after informing us that it did not expect to approve the ANDA. In the third quarter of 2006, we implemented a program intended to reduce overhead associated with this expansion. Our results of operations and gross margins for future periods are expected to continue to be adversely affected by our prior expansion activities and related continuing overhead expenses unless and until we are able to improve the utilization of these resources through the commercialization of additional products. No assurance can be given that we will be able to improve the utilization of these resources.

     As described in our Form 10-K, Noven’s cost of products sold may be affected in a given period by changes in deferred profit on Noven’s sale of product to Novogyne. For the three and nine months ended September 30, 2006, however, changes in deferred profit on Noven’s sale of product to Novogyne did not materially affect our overall gross margin or the gross margin from our sales to Novogyne and therefore such information has not been included in this Form 10-Q.

Gross Margin — Sales to Novogyne

	Three Months						Nine Months
	2006			2005			2006			2005
Gross Margin Novogyne:
Product revenues	$	7,064		$	6,530		$	19,128		$	19,049
Cost of products sold		3,702			3,521			10,304			9,219
Gross profit (product revenues less cost of products sold)		3,362			3,009			8,824			9,830
Gross margin (gross profit as a percentage of product revenues)		48	%		46	%		46	%		52	%

     Gross margin on product sales to Novogyne for the three months ended September 30, 2006 increased, primarily due to a shift in the product mix as there was an increase in product sales of Vivelle-Dot^™ and a decline in sales of Estradot^® and Vivelle^® and overall samples sold to Novogyne. Vivelle-Dot^™ has a higher gross margin than Estradot^® and Vivelle^® and product sales have a higher gross margin than sample sales. These increases are partially offset by increased overhead costs associated with the facilities expansion and increased staffing discussed above.

     Gross margin on product sales to Novogyne for the nine months ended September 30, 2006 declined due to the product mix, as there was a higher percentage of sample sales to Novogyne (which have a lower margin than sales of trade product). Sample product sales to Novogyne were 15% of total product sales to Novogyne, not including royalties, for the nine months ended September 30, 2006 as compared to 8% for the comparable period in 2005. In addition, the facilities expansion and increased staffing discussed above contributed to the decline in gross margin in this period.

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Gross Margin — Sales to third parties

	Three Months						Nine Months
	2006			2005			2006			2005
Gross Margin Third Parties:
Product revenues	$	5,761		$	3,917		$	15,648		$	11,888
Cost of products sold		5,339			11,895			16,764			17,307
Gross profit (loss) (product revenues less cost of products sold)		422			(7,978	)		(1,116	)		(5,419	)
Gross margin (gross profit (loss) as a percentage of product revenues)		7	%		(204	%)		(7	%)		(46	%)
Pre-launch inventory write-off of fentanyl		—			9,475			—			9,475
Gross profit (loss) excluding pre-launch inventory write-off of fentanyl		422			1,497			(1,116	)		4,056
Gross margin excluding pre-launch inventory write-off of fentanyl		7	%		38	%		(7	%)		34	%

     Excluding the charge taken in the third quarter of 2005 from the write-off of pre-launch fentanyl inventory, the decline in gross margin related to third parties for the three and nine months ended September 30, 2006, primarily related to on-going inefficiencies associated with manufacturing Daytrana^™, the facilities expansion and increased staffing discussed above, and to a lesser extent smaller production orders in our third party HT business.

     For the three month period ended September 30, 2006, Daytrana^™ product revenues were $2.0 million and cost of products sold related to Daytrana^™ was $2.7 million. This represents a significant improvement from the second quarter of 2006. The increase in gross margin was attributable to the implementation of a program in the three months ended September 30, 2006 intended to improve Daytrana^™ production efficiencies and reduce manufacturing costs. Only a portion of the expected benefits of this program was recognized in the three month period ended September 30, 2006. The quarter ended September 30, 2006 also included $2.0 million in non-cash license revenues related to Daytrana^™ that are not included in the calculation of gross margin.

     The active methylphenidate ingredient is not included in our Daytrana^™ product revenues or in our cost of products sold. Shire is responsible for supplying us with the AMI used in the production of Daytrana^™ and Shire retains title to the AMI. We maintain AMI on hand at our manufacturing facility as consignment inventory and bear certain risks of manufacturing loss related to the AMI. These risks include the contractual obligation to reimburse Shire for the cost of AMI if we do not meet certain minimum contractual yields of the finished product. During the three and nine months ended September 30, 2006, we reimbursed Shire approximately $0.1 million and $0.5 million, respectively, for excess AMI used in production, which amounts are included in costs of products sold for such periods.

     Our expectations for overall gross margin in future periods are addressed under “Outlook” below.

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Operating Expenses

          Operating expenses for the three and nine months ended September 30, 2006 and 2005 are summarized as follows (dollar amounts in thousands):

	Three Months							Nine Months
	2006		2005		% Change			2006		2005		% Change
Research and development	$	2,527	$	3,826		(34	%)	$	8,899	$	9,752		(9	%)
Marketing, general and administrative		6,010		4,237		42	%		16,386		12,481		31	%

Research and Development

          Research and development expenses include costs associated with, among other things, product formulation, pre-clinical testing, clinical studies, regulatory and medical affairs, production for clinical and regulatory purposes, production related development engineering for developmental products, and the personnel associated with each of these functions.

          The decline in research and development expenses for the three months ended September 30, 2006 was primarily attributable to a $1.3 million decline in production of clinical and regulatory supplies related to Daytrana^™ and other products and a $0.3 million decline in clinical trial costs. This decline was partially offset by a $0.1 million increase in consulting costs, a $0.1 million in stock-based compensation and a $0.1 million increase in personnel costs.

          The decline in research and development expenses for the nine months ended September 30, 2006 compared to the same period of 2005 was primarily attributable to the absence of development engineering expenses related to our fentanyl transdermal system in the 2006 period, compared to $2.3 million of such expenses in the 2005 period, as well as a $0.3 million decline in pre-clinical costs, partially offset by a $0.4 million increase in development engineering and production of clinical and regulatory supplies related to Daytrana^™, $0.4 million in personnel costs, $0.3 million in stock-based compensation expense, a $0.2 million increase in the purchase of testing supplies and a $0.1 million increase in clinical costs related to other products under development.

Marketing, General and Administrative

          The increase in marketing, general and administrative expenses for the three months ended September 30, 2006 was primarily attributable to a $0.7 million increase in salary and related benefits, $0.6 million in stock-based compensation expenses that were not required to be recognized in the 2005 quarter, and the $0.6 million charge associated with the elimination of employee positions discussed above. These increases were partially offset by a $0.2 million decline in professional fees due to the timing of services performed.

          The increase in marketing, general and administrative expenses for the nine months ended September 30, 2006 was primarily attributable to $1.8 million in stock-based compensation expenses that were not required to be recognized in the 2005 period, a $1.3 million increase in salary and related benefits, the $0.6 million charge associated with the elimination of employee positions discussed above, and a $0.1 million increase in costs associated with compliance with the Sarbanes-Oxley Act of 2002, the latter of which was due to the timing of services performed. In addition, 2005 benefited from a $0.2 million reduction in product recall related expenses. These increases were offset by a $0.2 million reduction in professional fees primarily in the areas of legal and human resources.

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Other Income and Expenses

Interest Income

          Interest income for the three and nine months ended September 30, 2006 increased $0.7 million and $1.3 million, respectively, due to an increase in the average cash balance, which was primarily attributable to the $50 million milestone payment received from Shire in April 2006 in connection with the approval of our Daytrana^™ product by the FDA. In addition to higher average cash balances, we invested a higher portion of our cash in short-term investments that yielded higher interest income.

Income Taxes

          Our effective tax rate was approximately 33% and 31% for the nine months ended September 30, 2006 and 2005, respectively. The increase in our effective tax rate is primarily related to higher taxable income for the nine months ended September 30, 2006 compared to the comparable period in the prior year due to the fentanyl write-offs in the prior year, as well as certain credits and reductions for reserves for pending Internal Revenue Service audits that occurred in the prior period that did not recur in the current period. These increases are partially offset by higher non-taxable interest as a percentage of taxable income. The provision for income taxes is based on the Federal statutory and state income tax rates. Net deferred income tax assets are measured using the average graduated tax rate for the estimated amount of annual taxable income in the years that the liability is expected to be settled or the asset recovered. The effect of adjusting the expected tax rate related to the net deferred income tax assets is included in the provision for income taxes. As of September 30, 2006, we had a net deferred tax asset of $12.4 million. Realization of this deferred tax asset depends upon the generation of sufficient future taxable income. Although realization is not assured, we believe it is more likely than not that the deferred income tax asset will be realized based upon estimated future taxable income.

Equity in Earnings of Novogyne

          We share in the earnings of Novogyne according to an established formula after satisfaction of an annual preferred return of $6.1 million to Novartis. Our share of Novogyne’s earnings (a non-cash item) increases as Novogyne’s product sales increase, subject to a cap of 49%. Novogyne produced sufficient income in the first quarters of 2006 and 2005 to meet Novartis’ annual preferred return for those periods and for us to recognize earnings from Novogyne under the formula. We report our share of Novogyne’s earnings as “Equity in earnings of Novogyne” in our unaudited statements of operations.

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          The financial results of Novogyne for the three and nine months ended September 30, 2006 and 2005 are summarized as follows (dollar amounts in thousands):

	Three Months									Nine Months
	2006			2005			% Change			2006			2005			% Change
Gross revenues1	$	39,204		$	37,974			3	%	$	112,138		$	100,519			12	%
Sales allowances		4,283			4,007			7	%		11,622			11,078			5	%
Sales returns allowances		1,193			192			N/M			4,576			1,057			N/M
Sales and returns allowances		5,476			4,199			30	%		16,198			12,135			33	%
Net revenues		33,728			33,775			0	%		95,940			88,384			9	%
Cost of sales2		7,529			7,940			(5	%)		22,212			21,347			4	%
Gross profit		26,199			25,835			1	%		73,728			67,037			10	%
Gross margin percentage		78	%		76	%					77	%		76	%
Selling, general and administrative expenses		9,419			9,187			3	%		28,172			25,627			10	%
Income from operations		16,780			16,648			1	%		45,556			41,410			10	%
Interest income		250			201			24	%		564			336			68	%
Net income	$	17,030		$	16,849			1	%	$	46,120		$	41,746			10	%
Noven’s equity in earnings of Novogyne	$	8,234		$	8,081			2	%	$	19,323		$	17,094			13	%

N/M — Not Meaningful
1	Novogyne’s gross revenues, which are calculated by adding sales allowances and sales returns allowances to net revenues, are discussed in this section because Noven’s management believes it is a useful measure to evaluate and compare Novogyne’s sales period to period in light of the significant historic fluctuations in Novogyne’s sales allowances and returns.
2	Novogyne’s costs of sales for all periods presented include the amortization of the marketing rights Novogyne acquired for CombiPatch® of $1.5 million and $4.6 million for each of the three and nine months ended September 30, 2006 and 2005, respectively. This amortization was previously reported as a separate operating expense in Novogyne’s statement of operations.

Novogyne Net Revenues

          Novogyne sells its products to trade customers, including wholesalers, distributors and chain pharmacies. As has historically been the case, the timing of purchases by trade customers is driven by the inventory needs of each customer and other factors, and does not necessarily track underlying prescription trends in any given period or coincide with Novogyne’s quarterly financial reporting periods. As a result, the timing of orders by trade customers is difficult to predict and can lead to significant variability in Novogyne’s quarterly results.

          Novogyne’s gross revenues increased $1.2 million for the three months ended September 30, 2006 compared to the same period in the prior year. Novogyne’s gross revenues for the three months ended September 30, 2006 benefited from the release of a $0.6 million reserve that Novogyne had established since October 2004 in response to certain pricing claims made by the Veterans Administration, which claims were rejected by a federal court during the three months ended September 30, 2006. By product, the increase in Novogyne’s gross revenues reflects a $2.6 million increase in sales of Vivelle-Dot^™ partially offset by a $0.6 million and $0.4 million decline in sales

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of Estradot^® to Canada and CombiPatch^®, respectively. In addition, Vivelle^®, our first generation estrogen patch declined $0.3 million in unit sales. We expect to complete our planned discontinuation of Vivelle^® production by the end of 2006. The higher Vivelle-Dot^™ sales were primarily attributable to a $3.3 million increase related to pricing, offset by a $0.7 million decrease in unit sales attributable to the timing of orders. The $0.6 million decline in sales of Estradot^® was attributable to timing of orders as sales are expected to be in line with 2005 results.

          The decrease in Novogyne’s CombiPatch^® sales was due primarily to a $0.8 million decline in unit sales, which we believe is a result of the continuing decline in the market for combination therapies and the impact of a competitive product, partially offset by a $0.4 million increase related to price increases.

          Novogyne’s gross revenues increased $11.6 million for the nine months ended September 30, 2006 compared to the same period in the prior year, primarily due to a $13.6 million increase in sales of Vivelle-Dot^™, partially offset by a $0.9 million and $0.7 million decline in sales of Vivelle^® and CombiPatch^®. In addition, sales of Estradot^® to Canada declined $0.4 million in unit sales. The higher Vivelle-Dot^™ sales were primarily attributable to a $7.6 million increase in unit sales and a $6.0 million increase related to pricing. The increase in unit sales is a result of higher prescription trends as compared to the same period in the prior year. The decline in Vivelle^® sales were primarily attributable to a $1.1 million decline in unit sales, partially offset by a $0.2 million increase related to pricing. The decline in CombiPatch^® is primarily attributable to a $1.3 million decline in unit sales, partially offset by a $0.6 million increase related to pricing. The decline in unit sales of Estradot^®, Vivelle^® and CombiPatch^® were attributable to the same factors as discussed above for the three month comparable periods.

          Sales allowances consist of chargebacks, Medicaid rebates, managed healthcare rebates, cash discounts and other allowances, which tend to fluctuate based on changes in gross revenues. These sales allowances were 11% of gross revenues for each of the three months ended September 30, 2006 and 2005, and 10% and 11% of gross revenues for the nine months ended September 30, 2006 and 2005, respectively.

          Sales returns allowances primarily consist of allowances for returns of expiring product. Allowances for returns for product recalls were not material for the three and nine months ended September 30, 2006 and 2005. The activity for sales returns allowances for the three and nine months ended September 30, 2006 and 2005 was as follows:

	Three Months						Nine Months
	2006			2005			2006			2005
Changes in allowances for returns primarily of expiring product	$	1,193		$	192		$	4,576		$	1,057
Actual returns primarily for expiring product	$	(862	)	$	(1,174	)	$	(3,135	)	$	(2,909	)

          The increase in allowances for returns of expiring product for the three months ended September 30, 2006 was primarily due to increased sales of Vivelle-Dot^™, partially offset by lower actual returns of CombiPatch^®. The increase in allowances for returns of expiring product for the nine months ended September 30, 2006 was primarily related to higher expected returns as a result of increased sales of Vivelle-Dot^™ as well as higher actual returns of CombiPatch^®. In addition, the three and nine months ended September 30, 2005 benefited from a reduction in allowances of expiring product due to lower expected returns as a result of a decline in actual returns of Vivelle^® at the time. The current three and nine month period did not benefit from such a reduction.

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Novogyne Gross Margin

          Novogyne’s gross margin was consistent for the three and nine months ended September 30, 2006 compared to the same periods of the prior year.

Novogyne Selling, General and Administrative Expenses

          Novogyne’s selling, general and administrative expenses for the three months ended September 30, 2006 increased $0.2 million compared to the same period in 2005, due primarily to a $0.7 million increase in administrative, advertising and promotional expenses, partially offset by a $0.4 million decline in litigation expenses related to HT litigation.

          Novogyne’s selling, general and administrative expenses for the nine months ended September 30, 2006 increased $2.5 million compared to the same period in 2005, due primarily to a $1.0 million increase in sample expense due to timing of shipments, a $1.3 million increase in administrative, advertising and promotional expenses and a $0.4 million increase in litigation expenses related to HT litigation, partially offset by a $0.4 million decline in sales force expenses.

Liquidity and Capital Resources

          As of September 30, 2006 and December 31, 2005, we had the following (amounts in thousands):

	September 30, 2006		December 31, 2005
Cash and cash equivalents	$	8,676	$	66,964
Short-term investments		130,510		17,900
Working capital		148,176		91,122

          Cash provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2006 and 2005 is summarized as follows (amounts in thousands):

	Nine Months
	2006			2005
Cash flows:
Operating activities	$	51,124		$	(1,036	)
Investing activities		(119,157	)		(61,697	)
Financing activities		9,745			1,115

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Operating Activities

          Net cash provided by operating activities for the nine months ended September 30, 2006 primarily resulted from the receipt of $50.0 million related to the Daytrana^™ approval and $17.6 million in cash distributions from Novogyne. These receipts were offset by changes in working capital due to the timing of certain payments, including those related to insurance, compensation and related liabilities and payments to Shire for clinical trial costs incurred in connection with obtaining Daytrana^™ regulatory approval.

          Net cash used in operating activities for the nine months ended September 30, 2005 primarily resulted from the timing of certain payments, including payments of: $10.0 million to Shire related to expenses incurred in pursuit of Daytrana^™ regulatory approval, $3.1 million made for the purchases of fentanyl, $3.3 million for compensation and related liabilities, and $2.3 million related to insurance, partially offset by $18.1 million in distributions received from Novogyne.

Investing Activities

          Beginning in the first quarter of 2005, Noven invested a portion of its cash in short-term investments, which primarily consist of investment grade, asset backed, variable rate debt obligations and municipal auction rate securities, which are categorized as available-for-sale under the provisions of SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”.

          Net cash used in investing activities for the nine months ended September 30, 2006 was primarily attributable to $112.6 million in net purchases of short-term investments, as well as the purchase of $5.8 million in fixed assets to expand production capacity for future products.

          Net cash used in investing activities for the nine months ended September 30, 2005 was primarily attributable to $50.8 million in net purchases of short-term investments, as well as the purchase of $10.5 million in fixed assets to expand production capacity for future products.

Financing Activities

     Net cash provided by financing activities for the nine months ended September 30, 2006 and September 30, 2005 was primarily attributable to $8.1 million and $1.2 million, respectively, received in connection with the issuance of common stock from the exercise of stock options.

Short-Term and Long-Term Liquidity

          Our principal sources of short-term liquidity are existing cash, cash generated from product sales, fees and royalties under development and license agreements and distributions from Novogyne. For the nine months ended September 30, 2006, all of our income before income taxes was comprised of equity in earnings of Novogyne, a non-cash item. Accordingly, our net income may not be reflective of our short-term liquidity. Although we expect to receive distributions from Novogyne, there can be no assurance that Novogyne will have sufficient profits or cash flow to pay distributions or that Novogyne’s Management Committee will authorize such distributions.

          Our short-term cash flow is dependent on distributions from Novogyne and sales, royalties and license fees associated with our transdermal products. Any decrease in sales of those products by us or our licensees or any increase in returns of products to Novogyne (including any such changes resulting from the HT studies), the further decline of the HT market, or the inability or failure of Novogyne to pay distributions would have a material adverse effect on our short-term cash flow and require us to rely on our existing cash balances or on borrowings to support our operations and business.

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          In April 2006, Noven received a $50 million milestone payment from Shire as a result of the approval of Daytrana^™, and Noven may also earn up to three additional $25 million milestone payments upon Shire’s achievement of $25 million, $50 million and $75 million in annual net sales of Daytrana^™, respectively. Shire commercially launched the product in June 2006. The majority of the income taxes related to the $50 million milestone is expected to be paid in late 2007 or early 2008.

          Capital expenditures were $5.8 million for the nine months ended September 30, 2006. We expect to fund any capital expenditures from our existing cash balances. As a general matter, we believe that we have sufficient liquidity available to meet our operating needs and anticipated short-term capital requirements.

          For our long-term operating needs, we intend to utilize funds derived from the above sources, as well as funds generated through sales of products under development or products that we may license or acquire from others. We expect that such funds will be comprised of payments received pursuant to future development and licensing arrangements, as well as possible direct sales of our own products. We expect that our cash requirements will generally continue to increase, primarily to fund plant and equipment purchases to expand production capacity for new products. If our products under development with collaborative partners are successful, these expenditures, which may include the cost of building an additional manufacturing plant, are expected to be significant.

          We cannot assure that we will successfully complete the development of such products, that we will obtain regulatory approval for any such products, that any approved product may be produced in commercial quantities, at reasonable costs, and be successfully marketed, or that we will successfully negotiate future licensing or product acquisition arrangements. Because much of the cost associated with product development and expansion of manufacturing facilities is incurred prior to product launch, if we are unsuccessful in out-licensing, or if we are unable to launch additional commercially-viable products that we develop or that we license or acquire from others, we will have incurred the up-front costs associated with product development or acquisition without the benefit of the liquidity generated by sales of those products, which could adversely affect our long-term liquidity needs. Factors that could impact our ability to develop or acquire and launch additional commercially-viable products are discussed in Part I — Item 1A of our Form 10-K and in Part II — Item 1A of any quarterly reports on Form 10-Q we have filed with the SEC since the filing of the Form 10-K, as well as in other reports filed from time to time with the SEC.

          From time to time we may explore the acquisition of one or more technologies, products or businesses that we believe may be complementary to our existing business. We may draw upon our cash and short-term investments to fund such potential strategic acquisitions. We may also consider issuing equity securities to fund potential acquisitions. To the extent our existing cash and short-term investments are insufficient to fund any large-scale acquisitions we may be required to seek debt financing or to issue equity or debt securities. If a material acquisition is completed, our results of operations and financial condition could change materially in future periods. If we finance all or any portion of an acquisition through debt financing or debt securities we could be required to devote a portion of our cash to the prepayment of such debt and could be subject to financial or operational covenants that could limit or hinder our ability to conduct our business.

          In addition, although we have not repurchased any of our common stock since 2003, it is possible that a portion of our cash and short-term investments could be used to repurchase Noven common stock under our previously-announced stock repurchase program. Stock repurchases, if any, may be made in the open market, including pursuant to a trading program under Rule 10b5-1 promulgated under the Securities Exchange Act of 1934.

          To the extent that capital requirements exceed available capital, we will seek alternative sources of financing to fund our operations. No assurance can be given that alternative financing will be available, if at all, in a timely manner or on favorable terms. If we are unable to obtain

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satisfactory alternative financing, we may be required to delay or reduce our proposed expenditures, including expenditures for research and development and plant and equipment, in order to meet our future cash requirements.

Aggregate Contractual Obligations

          There have been no material changes outside of the ordinary course of our business since December 31, 2005 to our aggregate contractual obligations previously disclosed in our Form 10-K.

Critical Accounting Estimates

          For a discussion of our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates”, which is included in our Form 10-K, as updated and supplemented by the following:

Revenue Recognition — License Revenues

          License revenues consist of up-front, milestone and similar payments under license agreements and are not recognized until earned under the terms of the applicable agreements. In most cases, license revenues are deferred and recognized over the estimated product life cycle, which is management’s best estimate of the earning period. Estimates of product life cycles are inherently uncertain as a result of regulatory, competitive or medical developments. We estimate product life cycles based on our assessment of various factors, including the expected launch date of the licensed product, the strength of the intellectual property protection of the product, the contractual terms, and various other competitive, developmental and regulatory issues. Any change to the actual or estimated product life could require us to change the recognition period. Management’s best estimate of the end of the product life cycle for Daytrana^™ extends through the first quarter of 2013, which results in the annual recognition of approximately $8.0 million in license revenues for the $50 million approval milestone payment we received from Shire in April 2006. If our estimate of the Daytrana^™ product life cycle should change, we will be required to change the license revenue recognition period, which may materially change the license revenues that we recognize in any given period. For example, Daytrana^™ license revenues would be $5.0 million and $3.8 million on an annual basis had we determined that the product life cycle ended in the first quarter of 2016 and 2019, respectively, for the $50 million approval milestone.

Stock-Based Compensation

          We currently use the Black-Scholes option pricing model to determine the fair value of stock options and SSARs. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee equity award exercise behaviors, risk-free interest rate, expected forfeiture rates and expected dividends.

          We estimate the expected term of options granted by taking the average of the vesting term and the contractual term of the option, as described in SAB 107. We estimate the volatility of common stock by using a combination of both historical and implied volatility based on an equal weighting of each as management believes it is the expected volatility that marketplace participants would likely use in determining an exchange price for an option. We base the risk-free interest rate that we use in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting

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option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All share-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and net income per share. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Stock options or SSARs may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

          The guidance in SFAS 123(R) and SAB 107 is relatively new. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimate of stock-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

Recent Accounting Pronouncements

          In July 2006, the FASB issued FIN 48 to clarify the accounting for uncertainties related to income taxes that are recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition, which requires an enterprise to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step is measurement, which requires a company to recognize a tax position that meets the more likely than not recognition threshold at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. FIN 48 is effective as of the beginning of the first annual reporting period that begins after December 15, 2006. We are currently assessing FIN 48 and are unable to estimate the impact it will have on our results of operations and financial condition.

          In September 2006, the SEC issued SAB 108, which added Section N to Topic 1, Financial Statements, of the Staff Accounting Bulletin Series. Section N provides guidance on the consideration of the effects of prior year misstatements when quantifying current year financial statement misstatements for the purpose of materiality assessment. The SEC concluded in SAB 108 that a registrant’s materiality evaluation of an identified unadjusted error should quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. If either the carryover or reversing effects of prior year misstatements is material, the misstatements should be corrected in the current year. If correcting an error in the current year for prior year misstatements causes the current year to be materially misstated, the prior year financial statements should be corrected, even though such revision previously was and continues to be immaterial to the prior year financial statements.

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Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction may be made the next time the registrant files the prior year financial statements. The guidance of SAB 108 should be applied in the annual financial statements covering the fiscal year ending after November 15, 2006.

Outlook

          A summary of our current financial guidance is provided below. This forward-looking information is based on our current assumptions and expectations, many of which are beyond our control to achieve. In particular, for purposes of this guidance we have assumed, among other things, that during the remainder of 2006 there will not be any material:

• transactions;

• changes in Noven’s or Novogyne’s accounting or accounting principles (except as indicated below with respect to Noven’s method of accounting for equity compensation) or any of the estimates or judgments underlying our critical accounting policies;

• regulatory, technological or clinical study developments;

• changes in the supply of, demand for, or distribution of our HT products or Daytrana^™, (including any changes resulting from competitive HT or ADHD products, product recalls, or new HT or ADHD study results);

• unexpected actions with respect to our applications for methylphenidate quota;

• changes in our business relationships/collaborations; or

• changes in the economy or the health care sector generally.

          Financial guidance is inherently uncertain. Accordingly, we cannot assure that we will achieve results consistent with this guidance, and our actual financial results could differ materially from the expected results discussed below. For a discussion of certain factors that may impact our actual financial results for the periods referenced, readers should carefully consider the risks, uncertainties and cautionary factors discussed in Part I — Item 1A of our Form 10-K and in Part II — Item 1A of any quarterly reports on Form 10-Q we have filed with the SEC since the filing of the Form 10-K, as well as in other reports filed from time to time with the SEC.

          Stock-Based Compensation Expenses. Effective as of the first quarter of 2006, we adopted SFAS 123(R), Accounting for Stock Based Compensation. As a result, our Statements of Operations in 2006 and subsequent periods will include significant expenses associated with stock-based compensation that were not included in 2005 and prior periods. Based on the expense associated with stock-based compensation previously awarded, and our estimate of the expense associated with such compensation that may be awarded in the course of 2006, we estimate that our total stock-based compensation expenses for full-year 2006 will be approximately $3.5 million, including approximately $2.4 million of such expenses recorded in the first nine months of 2006. The specific financial guidance provided below includes expected increases resulting from the expensing of stock-based compensation.

          Daytrana^™. On April 6, 2006, our amended NDA for Daytrana^™ was approved for marketing by the FDA. On April 7, 2006, we received a $50 million milestone payment from Shire (the global licensee of the product) as a result of the approval, and we may also earn up to three additional $25 million milestone payments depending on the level of Shire’s commercial sales of the product. We expect to defer and recognize approval and sales milestones as license revenues on a straight-line basis through the first quarter of 2013, which is our current best estimate of the useful economic life of the product. Using this method, we began recognizing the $50 million milestone payment, as well as the balance of the Shire deferred license revenues ($4.8 million at March 31, 2006), in the second quarter of 2006.

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          In 2006, we received an initial grant of methylphenidate quota and have submitted supplemental applications for additional quota in order to fulfill the 2006 product orders received from Shire. The DEA, which grants quota based primarily on historical product sales and prescription data, has not, to date, granted our requests for additional 2006 quota. While Noven and Shire continue to work with the DEA to obtain additional methylphenidate quota for the remainder of 2006, we cannot assure that we will be successful in convincing the DEA that additional quota is necessary to meet patient demand. Because we have not received additional quota for 2006, we expect to complete the year with approximately $8.0 million in full-year Daytrana^™ product sales to Shire and approximately $2.0 million in Daytrana^™ product backorders that we would expect to fulfill following receipt of our expected 2007 quota supply in the first quarter of 2007. As discussed below, the reduction in Daytrana^™ revenues will negatively affect our gross margin in the fourth quarter of 2006 but, to the extent that these backorders are filled as expected in the first quarter of 2007, the related revenues should benefit our gross margin in 2007. If the DEA declines to grant us additional 2006 quota, it is possible (subject to a number of factors including ongoing demand for the product) that product supply for certain dosage strengths may be interrupted and, as a result, Daytrana^™ sales as well as our results of operations could be adversely affected.

          HT Product Revenues. Given customer orders, prescription trends and other factors, we expect Noven’s HT product revenues for full-year 2006 to approximate 2005 levels, with growth in our U.S. HT product revenues expected to be offset by a decline in our international HT revenues.

          Gross Margin. We are working to reduce costs and improve yields, and we reported significant improvement in gross margin for the 2006 third quarter compared to 2006 second quarter levels. Due in part to the DEA quota issue discussed above, we are targeting an overall gross margin of 30% for the fourth quarter of 2006. For 2007, we believe improvement in gross margin is possible compared to 2006 third quarter levels, subject to a variety of factors (some of which are not within our control), including the availability and timing of methylphenidate quota, our ability to effectively coordinate production between Daytrana and our HT products to improve facility utilization, our ability to improve yields, and our ability to develop and commercialize new products that would be manufactured in our facilities.

          Research and Development. We expect our research and development expense in 2006 to decrease in the 10% range from full-year 2005 levels, reflecting in part the absence in 2006 of expenses associated with the development of our fentanyl and Daytrana^™ products.

          Marketing, General and Administrative Expense. We expect Noven’s marketing, general and administrative expense to increase in the 30% range over 2005 levels, primarily reflecting stock-based compensation expenses that commenced in 2006, and a $0.6 million one-time termination charge taken in the 2006 third quarter.

          Novogyne. Based on current prescription trends and other factors, we expect Novogyne’s full year 2006 net revenues to increase nearly 10% compared to 2005 levels, and we expect Novogyne’s net income and profit contribution to Noven for 2006 to increase in the 12% range compared to 2005 levels.

          Effective Tax Rate. We estimate that our effective tax rate for full-year 2006 will be in the 33% to 35% range.

          Capital Expenditures. We expect our capital expenditures for full-year 2006 to decrease significantly compared to 2005 levels.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

          Not Applicable.

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Item 4. Controls and Procedures

          Pursuant to Exchange Act Rule 13a-15, as of the end of the quarterly period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. In addition, we reviewed our internal controls, and there have not been any changes in our internal controls or in other factors that are reasonably likely to affect those controls subsequent to the date of the last evaluation. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting them to material information relating to us to allow timely decisions regarding disclosure of information required to be included in our periodic SEC filings. However, that conclusion should be considered in light of the various limitations described below on the effectiveness of those controls and procedures, some of which pertain to most if not all business enterprises, and some of which arise as a result of the nature of our business. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all error and all improper conduct. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of improper conduct, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Further, the design of any system of controls also is based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Furthermore, our level of historical and current equity participation in Novogyne may substantially impact the effectiveness of our disclosure controls and procedures. Because we do not control Novogyne, and all of Novogyne’s financial, accounting, inventory, distribution, revenues and sales deductions functions are performed by Novartis, our disclosure controls and procedures with respect to Novogyne are necessarily more limited than those we maintain with respect to ourselves. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the Chief Executive Officer’s and Chief Financial Officer’s evaluation.

          Provided with this quarterly report on Form 10-Q are certificates of our Chief Executive Officer and Chief Financial Officer. We are required to provide those certifications by Section 302 of the Sarbanes-Oxley Act of 2002 and the SEC’s implementing regulations. This Item 4 of this quarterly report is the information concerning the evaluation referred to in those certifications, and you should read this information in conjunction with those certifications for a more complete understanding of the topics presented.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

          Certain lawsuits and legal proceedings in which we are involved are described in Part I, Item 3 “Legal Proceedings” of our Form 10-K as well as in Part II, Item 1 “Legal Proceedings” of our quarterly reports on Form 10-Q for the periods ended March 31, 2006 and June 30, 2006. The following is a description of material developments related to our legal proceedings during the period covered by this Form 10-Q, and through the filing of this Form 10-Q, and should be read in conjunction with the reports referenced above. Unless otherwise indicated, all proceedings discussed in the reports referenced above remain outstanding.

          In addition to the HT cases previously disclosed in prior reports, Novartis has advised us that Novartis has been named as a defendant in at least 28 lawsuits that include approximately 35 plaintiffs that allege liability in connection with personal injury claims allegedly arising from the use of HT patches distributed and sold by Novartis and Novogyne, including our Vivelle-Dot^™, Vivelle^®, and CombiPatch^® products. In addition, Novartis has been named as a defendant in over 80 additional lawsuits in which the plaintiffs’ complaints do not identify the HT products used by the plaintiffs and therefore these cases may also involve our HT products. Novartis has indicated that it will seek indemnification from Noven and Novogyne to the extent permitted by the agreements between and among Novartis, Novogyne and Noven.

          We intend to defend all of the foregoing lawsuits vigorously, but the outcome of these product liability lawsuits cannot ultimately be predicted.

          We are a party to other pending legal proceedings arising in the normal course of business, none of which we believe is material to our financial position or results of operations.

Item 1A. Risk Factors

          There have been no material changes to the risk factors previously disclosed in our Form 10-K and in our quarterly reports on Form 10-Q we have filed with the SEC since the filing of the Form 10-K, as well as in other reports filed from time to time with the SEC. Readers are urged to carefully review our risk factors since they may cause our results to differ from the “forward-looking statements” made in this report or otherwise made by or on our behalf. The risk factors are not listed in order of priority and are not the only ones we face. If any of these risks actually occurs, our business, financial condition and results of operations would suffer. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operation. We do not undertake to update any of these forward-looking statements or to announce the results of any revisions to these forward-looking statements except as required by law.

43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

          The following table provides information with respect to our stock repurchases during the third quarter of 2006:

					Total Number of
					Shares		Approximate
					Purchased as		Dollar Value
					Part of		That May Yet
	Total Number of		Average Price		Publicly		be Purchased
	Shares		Paid		Announced		under the
	Purchased		Per Share		Program		Program(1)
July 1, 2006 to July 31, 2006		—		—		—	$	23,711,040
August 1, 2006 to August 31, 2006		—		—		—	$	23,711,040
September 1, 2006 to September 30, 2006		—		—		—	$	23,711,040
Totals		—		—		—	$	23,711,040

(1) In March 2003, we announced a stock repurchase program authorizing the repurchase of up to $25.0 million of our Common Stock. There is no expiration date specified for this program.

Item 5. Other Information

          The following executive officers have currently effective trading plans intended to comply with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934: Eduardo A. Abrao, Diane M. Barrett, Jeffrey F. Eisenberg, W. Neil Jones, and Robert C. Strauss. Other Noven executive officers (as well as Noven employees) may adopt Rule 10b5-1 trading plans from time to time. These plans generally provide for the exercise of stock options and the subsequent sale of the acquired shares on the open market, subject to specified limitations and minimum price thresholds. Under these plans, the executive officers do not control the specific timing of any option exercise or sale. Rule 10b5-1 permits corporate officers and directors to adopt written, pre-arranged stock trading plans when they are not in possession of material, non-public information. Public disclosure of the transactions under these plans is required to be made by the executive officers through Form 144 and Form 4 filings with the SEC.

44

Item 6. Exhibits

10.1	Noven Pharmaceuticals, Inc. Nonqualified Deferred Compensation Plan, as amended and restated September 15, 2006.
31.1	Certification of Robert C. Strauss, President, Chief Executive Officer and Chairman of the Board, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Diane M. Barrett, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Robert C. Strauss, President, Chief Executive Officer and Chairman of the Board, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Diane M. Barrett, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

45

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NOVEN PHARMACEUTICALS, INC.
Date: November 9, 2006		By:	/s/ Diane M. Barrett
		Diane M. Barrett
		Vice President and
		Chief Financial Officer

46

EX-10.1

Exhibit 10.1

Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

Effective January 1, 2006

As Amended and Restated September 15, 2006

Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

TABLE OF CONTENTS

	Page
ARTICLE 1   Definitions		1
ARTICLE 2 Selection, Enrollment, Eligibility		7
2.1 Selection by Committee		7
2.2 Enrollment and Eligibility Requirements; Commencement of Participation		7
ARTICLE 3   Deferral Commitments/Company Contribution Amounts/Company Restoration Matching Amounts/Restricted Stock Amounts /Vesting/Crediting/Taxes		8
3.1 Minimum Deferrals		8
3.2 Maximum Deferral		8
3.3 Election to Defer; Effect of Election Form		9
3.4 Withholding and Crediting of Annual Deferral Amounts		10
3.5 Company Contribution Amount		11
3.6 Company Restoration Matching Amount		11
3.7 Restricted Stock Amount		11
3.7 Crediting of Amounts after Benefit Distribution		11
3.9 Vesting		12
3.10 Crediting/Debiting of Account Balances		13
3.11 FICA and Other Taxes		15
ARTICLE 4 Scheduled Distribution; Unforeseeable Emergencies		16
4.1 Scheduled Distribution		16
4.2 Postponing Scheduled Distributions		16
4.3 Other Benefits Take Precedence Over Scheduled Distributions		16
4.4 Unforeseeable Emergencies		17
ARTICLE 5 Change In Control Benefit		18
5.1 Change in Control Benefit		18
5.2 Payment of Change in Control Benefit		18
ARTICLE 6 Retirement Benefit		18
6.1 Retirement Benefit		18
6.2 Payment of Retirement Benefit		18
ARTICLE 7 Termination Benefit		19
7.1 Termination Benefit		19
7.2 Payment of Termination Benefit		19

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

	Page
ARTICLE 8 Disability Benefit		20
8.1 Disability Benefit		20
8.2 Payment of Disability Benefit		20
ARTICLE 9 Death Benefit		20
9.1 Death Benefit		20
9.2 Payment of Death Benefit		20
ARTICLE 10 Beneficiary Designation		20
10.1 Beneficiary		20
10.2 Beneficiary Designation; Change; Spousal Consent		21
10.3 Acknowledgement		21
10.4 No Beneficiary Designation		21
10.5 Doubt as to Beneficiary		21
10.6 Discharge of Obligations		21
ARTICLE 11 Leave of Absence		21
11.1 Paid Leave of Absence		21
11.2 Unpaid Leave of Absence		21
11.3 Leaves Resulting in Separation from Service		22
ARTICLE 12 Termination of Plan, Amendment or Modification		22
12.1 Termination of Plan		22
12.2 Amendment		23
12.3 Plan Agreement		23
12.4 Effect of Payment		23
ARTICLE 13 Administration		23
13.1 Committee Duties		23
13.2 Administration Upon Change In Control		24
13.3 Agents		24
13.4 Binding Effect of Decisions		24
13.5 Indemnity of Committee		24
13.6 Employer Information		24
ARTICLE 14 Other Benefits and Agreements		24
14.1 Coordination with Other Benefits		24
ARTICLE 15 Claims Procedures		25

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Nonqualified Deferred Compensation Plan
Master Plan Document

	Page
15.1 Presentation of Claim		25
15.2 Notification of Decision		25
15.3 Review of a Denied Claim		25
15.4 Decision on Review		26
15.5 Legal Action		26
ARTICLE 16 Trust		26
16.1 Establishment of the Trust		26
16.2 Interrelationship of the Plan and the Trust		26
16.3 Distributions From the Trust		26
ARTICLE 17 Miscellaneous		27
17.1 Status of Plan		27
17.2 Unsecured General Creditor		27
17.3 Employer’s Liability		27
17.4 Nonassignability		27
17.5 Not a Contract of Employment		27
17.6 Furnishing Information		27
17.7 Terms		28
17.8 Captions		28
17.9 Governing Law		28
17.10 Notice		28
17.11 Successors		28
17.12 Spouse’s Interest		28
17.13 Validity		28
17.14 Incompetent		28
17.15 Court Order		29
17.16 Distribution in the Event of Income Inclusion Under 409A		29
17.17 Deduction Limitation on Benefit Payments		29
17.18 Insurance		29

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

NOVEN PHARMACEUTICALS, INC.
NONQUALIFIED DEFERRED COMPENSATION PLAN
Effective January 1, 2006
Amended and Restated September 15, 2006

Purpose

     The purpose of this Plan is to provide specified benefits to Directors and a select group of management or highly compensated Employees who contribute materially to the continued growth, development and future business success of Noven Pharmaceuticals, Inc., a Delaware corporation, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.

     The Plan is intended to comply with all applicable law, including Code Section 409A and related Treasury guidance and Regulations, and shall be operated and interpreted in accordance with this intention. This Plan was adopted effective January 1, 2006 and has been amended and restated as of August 1, 2006 to reflect certain changes necessitated by Treasury Regulations promulgated pursuant to Code Section 409A. Consistent with the foregoing, and in order to transition the Plan to the requirements of Code Section 409A and related Treasury guidance and Regulations, the Committee has made available, or will make available, to Participants certain transition relief described more fully in Appendix A of this Plan, as permitted by Code Section 409A and related Treasury guidance and Regulations.

ARTICLE 1

Definitions

     For the purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:

1.1	“Account Balance” shall mean, with respect to a Participant, an entry on the records of the Employer equal to the sum of (i) the Deferral Account balance, (ii) the Company Contribution Account balance, (iii) the Company Restoration Matching Account balance, and (iv) the Restricted Stock Account balance. The Account Balance shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan.
1.2	“Annual Deferral Amount” shall mean that portion of a Participant’s Base Salary, Bonus, Director Fees and LTIP Amounts that a Participant defers in accordance with Article 3 for any one Plan Year, without regard to whether such amounts are withheld and credited during such Plan Year. In the event of a Participant’s Retirement, Disability, death or Termination of Employment prior to the end of a Plan Year, such year’s Annual Deferral Amount shall be the actual amount withheld prior to such event.
1.3	“Annual Installment Method” shall be an annual installment payment over the number of years selected by the Participant in accordance with this Plan, calculated as follows: (i) for the first annual installment, the Participant’s vested Account Balance shall be calculated as of the close of business on or around the Participant’s Benefit Distribution Date, as determined by the

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

	Committee in its sole discretion, and (ii) for remaining annual installments, the Participant’s vested Account Balance shall be calculated on every anniversary of such calculation date, as applicable. Each annual installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one and the denominator of which is the remaining number of annual payments due the Participant. By way of example, if the Participant elects a ten (10) year Annual Installment Method for the Retirement Benefit, the first payment shall be 1/10 of the vested Account Balance, calculated as described in this definition. The following year, the payment shall be 1/9 of the vested Account Balance, calculated as described in this definition. Shares of Stock that shall be distributable from the Restricted Stock Account shall be distributable in shares of actual Stock in the same manner previously described. However, the Committee may, in its sole discretion, adjust the annual installments in order to distribute whole shares of actual Stock.
1.4	“Base Salary” shall mean the annual cash compensation relating to services performed during any calendar year, excluding distributions from nonqualified deferred compensation plans, bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, director fees and other fees, and automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee’s gross income). Base Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or nonqualified plans of any Employer and shall be calculated to include amounts not otherwise included in the Participant’s gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that had there been no such plan, the amount would have been payable in cash to the Employee.
1.5	“Beneficiary” shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 10, that are entitled to receive benefits under this Plan upon the death of a Participant.
1.6	“Beneficiary Designation Form” shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries.
1.7	“Benefit Distribution Date” shall mean the date that triggers distribution of a Participant’s vested Account Balance. A Participant’s Benefit Distribution Date shall be determined upon the occurrence of any one of the following:

(a) If the Participant Retires, his or her Benefit Distribution Date shall be

(i)	the last day of the six-month period immediately following the date on which the Participant Retires if the Participant is a Key Employee, and
(ii)	for all other Participants, the date on which the Participant Retires;
(iii)	provided, however, in the event the Participant changes his or her Retirement Benefit election in accordance with Section 6.2(b), his or her Benefit Distribution Date shall be postponed in accordance with Section 6.2(b); or

(b) If the Participant experiences a Termination of Employment, his or her Benefit Distribution Date shall be

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

(i)	the last day of the six-month period immediately following the date on which the Participant experiences a Termination of Employment if the Participant is a Key Employee, and
(ii)	for all other Participants, the date on which the Participant experiences a Termination of Employment;
(iii)	provided, however, in the event the Participant changes his or her Termination Benefit election in accordance with Section 7.2(b), his or her Benefit Distribution Date shall be postponed in accordance with Section 7.2(b); or

(c)	The date on which the Committee is provided with proof that is satisfactory to the Committee of the Participant’s death, if the Participant dies prior to the complete distribution of his or her vested Account Balance; or
(d)	The date on which the Participant becomes Disabled; or
(e)	The date on which the Company experiences a Change in Control, as determined by the Committee in its sole discretion, if (i) the Participant has elected to receive a Change in Control Benefit, as set forth in Section 5.1 below, and (ii) if a Change in Control occurs prior to the Participant’s Termination of Employment, Retirement, death or Disability.

1.8	“Board” shall mean the board of directors of the Company.
1.9	“Bonus” shall mean any compensation, in addition to Base Salary and LTIP Amounts, earned by a Participant for services rendered during a Plan Year, under any Employer’s annual bonus and cash incentive plans, or other arrangement designated by the Committee, as further specified on an Election Form.
1.10	“Change in Control” shall mean any “change in control event” as defined in accordance with Code Section 409A and related Treasury guidance and Regulations.
1.11	“Change in Control Benefit” shall have the meaning set forth in Article 5.
1.12	“Claimant” shall have the meaning set forth in Section 15.1.
1.13	“Code” shall mean the Internal Revenue Code of 1986, as it may be amended from time to time.
1.14	“Committee” shall mean the committee described in Article 13.
1.15	“Company” shall mean Noven Pharmaceuticals, Inc., a Delaware corporation, and any successor to all or substantially all of the Company’s assets or business.
1.16	“Company Contribution Account” shall mean (i) the sum of the Participant’s Company Contribution Amounts, plus (ii) amounts credited or debited to the Participant’s Company Contribution Account in accordance with this Plan, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant’s Company Contribution Account.
1.17	“Company Contribution Amount” shall mean, for any one Plan Year, the amount determined in accordance with Section 3.5.
1.18	“Company Restoration Matching Account” shall mean (i) the sum of all of a Participant’s Company Restoration Matching Amounts, plus (ii) amounts credited or debited to the Participant’s Company Restoration Matching Account in accordance with this Plan, less (iii) all

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

	distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant’s Company Restoration Matching Account.
1.19	“Company Restoration Matching Amount” shall mean, for any one Plan Year, the amount determined in accordance with Section 3.6.
1.20	“Death Benefit” shall mean the benefit set forth in Article 9.
1.21	“Deferral Account” shall mean (i) the sum of all of a Participant’s Annual Deferral Amounts, plus (ii) amounts credited or debited to the Participant’s Deferral Account in accordance with this Plan, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to his or her Deferral Account.
1.22	“Director” shall mean any elected or appointed member of the board of directors of any Employer.
1.23	“Director Fees” shall mean the annual fees payable in cash that are earned by a Director from any Employer, including retainer fees and meetings fees, as compensation for serving on the board of directors.
1.24	“Disability” or “Disabled” shall mean that a Participant is (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident or health plan covering employees of the Participant’s Employer. For purposes of this Plan, a Participant shall be deemed Disabled if determined to be totally disabled by the Social Security Administration, or if determined to be disabled in accordance with the applicable disability insurance program of such Participant’s Employer, provided that the definition of “disability” applied under such disability insurance program complies with the requirements in the preceding sentence.
1.25	“Disability Benefit” shall mean the benefit set forth in Article 8.
1.26	“Election Form” shall mean the form, which may be in electronic format, established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan.
1.27	“Employee” shall mean a person who is an employee of any Employer.
1.28	“Employer(s)” shall mean the Company and/or any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor.
1.29	“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.
1.30	“401(k) Plan” shall mean, with respect to an Employer, a plan qualified under Code Section 401(a) that contains a cash or deferral arrangement described in Code Section 401(k), adopted by the Employer, as it may be amended from time to time, or any successor thereto.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

1.31	“Key Employee” shall mean any Participant who is a “key employee” (as defined in Code Section 416(i) without regard to paragraph (5) thereof) of an Employer whose stock is publicly traded on an established securities market or otherwise, as determined by the Committee based upon the 12-month period ending on each December 31st (such 12-month period is referred to below as the “identification period”). All Participants who are determined to be key employees under Code Section 416(i) (without regard to paragraph (5) thereof) during the identification period shall be treated as Key Employees for purposes of the Plan during the 12-month period that begins on the first day of the 4th month following the close of such identification period.
1.32	“LTIP Amounts” shall mean any portion of the cash compensation attributable to a Plan Year that is earned by a Participant as an Employee under any Employer’s long-term incentive plan or any other long-term incentive arrangement designated by the Committee.
1.33	“Participant” shall mean any Employee or Director (i) who is selected to participate in the Plan, (ii) who submits an executed Plan Agreement, Election Form and Beneficiary Designation Form, which are accepted by the Committee, and (iii) whose Plan Agreement has not terminated.
1.34	“Plan” shall mean the Noven Pharmaceuticals, Inc. Nonqualified Deferred Compensation Plan, which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time.
1.35	“Plan Agreement” shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant’s Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Employer shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Employer and the Participant.
1.36	“Plan Year” shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year.
1.37	“Restricted Stock” shall mean rights to receive unvested shares of restricted stock selected by the Committee in its sole discretion and awarded to the Participant under any Noven Pharmaceuticals, Inc. stock incentive plan or director compensation program.
1.38	“Restricted Stock Account” shall mean the aggregate value, measured on any given date, of (i) the number of shares of Restricted Stock deferred by a Participant as a result of all Restricted Stock Amounts, plus (ii) the number of additional shares credited to a Participant’s Restricted Stock Account as a result of the deemed reinvestment of dividends in accordance with this Plan, less (iii) the number of shares of Restricted Stock previously distributed to the Participant or his or her Beneficiary pursuant to this Plan, subject in each case to any adjustments to the number of such shares determined by the Committee with respect to the Noven Pharmaceuticals, Inc. Stock Unit Fund pursuant to Section 3.10. This portion of the Participant’s Account Balance shall only be distributable in actual shares of Stock.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

1.39	“Restricted Stock Amount” shall mean, with respect to a Participant for any one Plan Year, the amount of Restricted Stock deferred in accordance with Section 3.7 of this Plan, calculated using the closing price of Stock at the end of the business day closest to the date such Restricted Stock would otherwise vest (and/or all restrictions on such Restricted Stock would have lapsed), but for the election to defer. In the event of a Participant’s Retirement, Termination of Employment, Disability, or death prior to the end of a Plan Year, such year’s Restricted Stock Amount shall be the actual amount withheld prior to such event.
1.40	“Retirement”, “Retire(s)” or “Retired” shall mean, with respect to an Employee, separation from service with all Employers for any reason other than death or Disability, as determined in accordance with Code Section 409A and related Treasury guidance and Regulations, on or after the earlier of the attainment of (a) age sixty-five (65) or (b) age fifty-five (55) with five (5) Years of Service; and shall mean with respect to a Director who is not an Employee, separation from service as a Director with all Employers. If a Participant is both an Employee and a Director, Retirement shall not occur until he or she Retires as both an Employee and a Director.
1.41	“Retirement Benefit” shall mean the benefit set forth in Article 6.
1.42	“Scheduled Distribution” shall mean the distribution set forth in Section 4.1.
1.43	“Stock” shall mean Noven Pharmaceuticals, Inc. common stock, $0.0001 par value, or any other equity securities of the Company designated by the Committee.
1.44	“Terminate the Plan”, “Termination of the Plan” shall mean a determination by an Employer’s board of directors that (i) all of its Participants shall no longer be eligible to participate in the Plan, (ii) no new deferral elections for such Participants shall be permitted, and (iii) such Participants shall no longer be eligible to receive company contributions under this Plan.
1.45	“Termination Benefit” shall mean the benefit set forth in Article 7.
1.46	“Termination of Employment” shall mean the separation from service with all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability or death, as determined in accordance with Code Section 409A and related Treasury guidance and Regulations. If a Participant is both an Employee and a Director, a Termination of Employment shall occur only upon the termination of the last position held. A Participant will not have a Termination of Employment unless the Participant is not employed by the Company, a Subsidiary, or any other member of the Controlled Group of Corporations as defined under Code Section 414(b) (dealing with controlled groups of corporations) and Code Section 414(c), regardless of the reason for the termination of employment.
1.47	“Trust” shall mean one or more trusts established by the Company in accordance with Article 16.
1.48	“Unforeseeable Emergency” shall mean a severe financial hardship of the Participant or his or her Beneficiary resulting from (i) an illness or accident of the Participant or Beneficiary, the Participant’s or Beneficiary’s spouse, or the Participant’s or Beneficiary’s dependent (as defined in Code Section 152(a)), (ii) a loss of the Participant’s or Beneficiary’s property due to casualty, or (iii) such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant or the Participant’s Beneficiary, all as determined in the sole discretion of the Committee.

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Nonqualified Deferred Compensation Plan
Master Plan Document

1.49 “Years of Service” shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee’s date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. The Committee shall make a determination as to whether any partial year of employment shall be counted as a Year of Service.

ARTICLE 2

Selection, Enrollment, Eligibility

2.1	Selection by Committee. Participation in the Plan shall be limited to Directors and, as determined by the Committee in its sole discretion, a select group of management or highly compensated Employees. From that group, the Committee shall select, in its sole discretion, those individuals who may actually participate in this Plan.
2.2	Enrollment and Eligibility Requirements; Commencement of Participation.

(a)	As a condition to participation, each Director or selected Employee who is eligible to participate in the Plan effective as of the first day of a Plan Year shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form, prior to the first day of such Plan Year, or such other earlier deadline as may be established by the Committee in its sole discretion. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines, in its sole discretion, are necessary.
(b)	A Director or selected Employee who first becomes eligible to participate in this Plan after the first day of a Plan Year must complete, execute and return to the Committee a Plan Agreement, an Election Form, and a Beneficiary Designation Form within thirty (30) days after he or she first becomes eligible to participate in the Plan, or within such other earlier deadline as may be established by the Committee, in its sole discretion, in order to participate for that Plan Year. In such event, such person’s participation in this Plan shall not commence earlier than the date determined by the Committee pursuant to Section 2.2(c) and such person shall not be permitted to defer under this Plan any portion of his or her Base Salary, Bonus, LTIP Amounts, Restricted Stock Amounts and/or Director Fees that are paid with respect to services performed prior to his or her participation commencement date, except to the extent permissible under Code Section 409A and related Treasury guidance or Regulations.
(c)	Each Director or selected Employee who is eligible to participate in the Plan shall commence participation in the Plan on the date that the Committee determines, in its sole discretion, that the Director or Employee has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period. Notwithstanding the foregoing, the Committee shall process such Participant’s deferral election as soon as administratively practicable after such deferral election is submitted to and accepted by the Committee.

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Master Plan Document

(d) If a Director or an Employee fails to meet all requirements contained in this Section 2.2 within the period required, that Director or Employee shall not be eligible to participate in the Plan during such Plan Year.

ARTICLE 3

Deferral Commitments/Company Contribution Amounts/
Company Restoration Matching Amounts/Restricted Stock Amounts/ Vesting/Crediting/Taxes

3.1 Minimum Deferrals.

(a) Annual Deferral Amount. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Salary, Bonus, LTIP Amounts and/or Director Fees in the following minimum amounts for each deferral elected:

Deferral	Minimum Amount
Base Salary, Bonus and/or LTIP Amounts	$	4,000 aggregate
Director Fees	$	4,000

If the Committee determines, in its sole discretion, prior to the beginning of a Plan Year that a Participant has made an election for less than the stated minimum amounts, or if no election is made, the amount deferred shall be zero. If the Committee determines, in its sole discretion, at any time after the beginning of a Plan Year that a Participant has deferred less than the stated minimum amounts for that Plan Year, any amount credited to the Participant’s Account Balance as the Annual Deferral Amount for that Plan Year shall be distributed to the Participant within sixty (60) days after the last day of the Plan Year in which the Committee determination was made.

(b)

Restricted Stock Amount. For each grant of Restricted Stock, a Participant may elect to defer, as his or her Restricted Stock Amount, Restricted Stock in the following minimum percentage:

Deferral	Minimum Percentage
Restricted Stock		0	%

	If no election is made, the percentage deferred shall be zero.
(c)	Short Plan Year. Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, the minimum Annual Deferral Amount shall be an amount equal to the minimum set forth above, multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is 12.

3.2 Maximum Deferral.

(a) Annual Deferral Amount. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Salary, Bonus, LTIP Amounts and/or Director Fees up to the following maximum percentages for each deferral elected:

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

Deferral	Maximum Percentage
Base Salary		75	%
Bonus		100	%
LTIP Amounts		100	%
Director Fees		100	%

(b) Restricted Stock Amount. For each grant of Restricted Stock, a Participant may elect to defer, as his or her Restricted Stock Amount, Restricted Stock in the following maximum percentage:

Deferral	Maximum Percentage
Restricted Stock		100	%

(c) Short Plan Year. Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, the maximum Annual Deferral Amount shall be limited to the amount of compensation not yet earned by the Participant as of the date the Participant submits a Plan Agreement and Election Form to the Committee for acceptance, except to the extent permissible under Code Section 409A and related Treasury guidance or Regulations. For compensation that is earned based upon a specified performance period, the Participant’s deferral election will apply to the portion of such compensation that is equal to (i) the total amount of compensation for the performance period, multiplied by (ii) a fraction, the numerator of which is the number of days remaining in the service period after the Participant’s deferral election is made, and the denominator of which is the total number of days in the performance period.

3.3 Election to Defer; Effect of Election Form.

(a)	First Plan Year. In connection with a Participant’s commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee.
(b)	General Timing Rule for Deferral Elections in Subsequent Plan Years. For each succeeding Plan Year, a Participant may elect to defer Base Salary, Bonus, Director Fees and LTIP Amounts, and make such other elections as the Committee deems necessary or desirable under the Plan by timely delivering a new Election Form to the Committee, in accordance with its rules and procedures, no later than (i) the December 31st preceding the Plan Year in which such compensation is earned, or (ii) such other deadline established by the Committee in accordance with the requirements of Code Section 409A and related Treasury guidance or Regulations.
	Any deferral election(s) made in accordance with this Section 3.3(b) shall be irrevocable; provided, however, that if the Committee requires Participants to make a deferral election

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Nonqualified Deferred Compensation Plan
Master Plan Document

	for “performance-based compensation” by the deadline(s) described above, it may, in its sole discretion, and in accordance with Code Section 409A and related Treasury guidance or Regulations, permit a Participant to subsequently change his or her deferral election for such compensation by submitting an Election Form to the Committee no later than the deadline established by the Committee pursuant to Section 3.3(d) below.
(c)	Restricted Stock Deferral. For an election to defer Restricted Stock to be valid, an Election Form must be completed and signed by the Participant with respect to such Restricted Stock. Such Election Form must be timely delivered to the Committee and accepted by the Committee no later than (i) the end of the calendar year preceding the Plan Year during which such Restricted Stock may be initially granted to the Participant under the terms of the applicable Noven Pharmaceuticals, Inc. stock incentive plan or director compensation program, or (ii) such other deadline established by the Committee in accordance with the requirements of Code Section 409A and related Treasury guidance or Regulations, including, without limitation, such deadline as may be applicable under Section 3.3(d) or Section 3.3(e) below.
(d)	Performance-Based Compensation. Notwithstanding the foregoing, the Committee may, in its sole discretion, determine that an irrevocable deferral election pertaining to “performance-based compensation” based on services performed over a period of at least twelve (12) months, may be made by timely delivering an Election Form to the Committee, in accordance with its rules and procedures, no later than six (6) months before the end of the performance service period. “Performance-based compensation” shall be compensation, the payment or amount of which is contingent on pre-established organizational or individual performance criteria, which satisfies the requirements of Code Section 409A and related Treasury guidance or Regulations. In order to be eligible to make a deferral election for performance-based compensation, a Participant must perform services continuously from a date no later than the date upon which the performance criteria for such compensation are established through the date upon which the Participant makes a deferral election for such compensation. In no event shall an election to defer performance-based compensation be permitted after such compensation has become both substantially certain to be paid and readily ascertainable.
(e)	Compensation Subject to Risk of Forfeiture. With respect to compensation (i) to which a Participant has a legally binding right to payment in a subsequent year, and (ii) that is subject to a forfeiture condition requiring the Participant’s continued services for a period of at least twelve (12) months from the date the Participant obtains the legally binding right, the Committee may, in its sole discretion, determine that an irrevocable deferral election for such compensation may be made by timely delivering an Election Form to the Committee in accordance with its rules and procedures, no later than the 30th day after the Participant obtains the legally binding right to the compensation, provided that the election is made at least twelve (12) months in advance of the earliest date at which the forfeiture condition could lapse.

3.4 Withholding and Crediting of Annual Deferral Amounts. For each Plan Year, the Base Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Salary. The Bonus, LTIP Amounts and/or Director Fees portion of the Annual Deferral

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

Amount shall be withheld at the time the Bonus, LTIP Amounts or Director Fees are or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself. Annual Deferral Amounts shall be credited to a Participant’s Deferral Account at the time such amounts would otherwise have been paid to the Participant.

3.5 Company Contribution Amount.

(a)

For each Plan Year, an Employer may be required to credit amounts to a Participant’s Company Contribution Account in accordance with employment or other agreements entered into between the Participant and the Employer. Such amounts shall be credited on the date or dates prescribed by such agreements.

(b)

For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to any Participant’s Company Contribution Account under this Plan, which amount shall be for that Participant the Company Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive a Company Contribution Amount for that Plan Year. The Company Contribution Amount described in this Section 3.5(b), if any, shall be credited on a date or dates to be determined by the Committee, in its sole discretion.

3.6	Company Restoration Matching Amount. A Participant’s Company Restoration Matching Amount for any Plan Year shall be an amount determined by the Committee, in its sole discretion, to make up for certain limits applicable to the 401(k) Plan or other qualified plan for such Plan Year, as identified by the Committee, or for such other purposes as determined by the Committee in its sole discretion. The amount so credited to a Participant under this Plan for any Plan Year (i) may be smaller or larger than the amount credited to any other Participant, and (ii) may differ from the amount credited to such Participant in the preceding Plan Year. The Participant’s Company Restoration Matching Amount, if any, shall be credited on a date or dates to be determined by the Committee, in its sole discretion.
3.7	Restricted Stock Amounts. Subject to any terms and conditions imposed by the Committee, a Participant may elect to defer Restricted Stock under the Plan, which amount shall be for that Participant the Restricted Stock Amount for that Plan Year. The portion of any Restricted Stock deferred shall, at the time the Restricted Stock would otherwise vest (and/or all restrictions on such Restricted Stock would have lapsed) under the terms of the applicable Noven Pharmaceuticals, Inc. stock incentive plan or director compensation program, but for the election to defer, be reflected on the books of the Company as an unfunded, unsecured promise to deliver to the Participant a specific number of actual shares of Stock in the future.
3.8	Crediting of Amounts after Benefit Distribution. Notwithstanding any provision in this Plan to the contrary, should the complete distribution of a Participant’s vested Account Balance occur prior to the date on which any portion of (i) the Annual Deferral Amount that a Participant has elected to defer in accordance with Section 3.3, (ii) the Company Contribution Amount, (iii) the Company Restoration Matching Amount, or (iv) the Restricted Stock Amount, would otherwise be credited to the Participant’s Account Balance, such amounts shall not be credited to the Participant’s Account Balance, but shall be paid to the Participant in a manner determined by the Committee, in its sole discretion.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

3.9 Vesting.

(a)	A Participant shall at all times be 100% vested in his or her Deferral Account and Restricted Stock Account.
(b)	A Participant shall be vested in his or her Company Contribution Account in accordance with the vesting schedule(s) set forth in his or her Plan Agreement, employment agreement or any other agreement entered into between the Participant and his or her Employer. If not addressed in such agreements, a Participant shall vest in his or her Company Contribution Account in accordance with a vesting schedule declared by the Committee in its sole discretion.
(c)	A Participant shall be vested in his or her Company Restoration Matching Account only to the extent that the Participant would be vested in such amounts under the provisions of the 401(k) Plan, as determined by the Committee in its sole discretion.
(d)	Notwithstanding anything to the contrary contained in this Section 3.9, in the event of a Change in Control, or upon a Participant’s Retirement, death while employed by an Employer, or Disability, a Participant’s Company Contribution Account and Company Restoration Matching Account shall immediately become 100% vested (if it is not already vested in accordance with the above vesting schedules).
(e)	Notwithstanding subsection 3.9(d) above, the vesting schedule for a Participant’s Company Contribution Account and Company Restoration Matching Account shall not be accelerated upon a Change in Control to the extent that the Committee determines that such acceleration would cause the deduction limitations of Section 280G of the Code to become effective. In the event that all of a Participant’s Company Contribution Account and/or Company Restoration Matching Account is not vested pursuant to such a determination, the Participant may request independent verification of the Committee’s calculations with respect to the application of Section 280G. In such case, the Committee must provide to the Participant within ninety (90) days of such a request an opinion from a nationally recognized accounting firm selected by the Participant (the “Accounting Firm”). The opinion shall state the Accounting Firm’s opinion that any limitation in the vested percentage hereunder is necessary to avoid the limits of Section 280G and contain supporting calculations. The cost of such opinion shall be paid for by the Company.
(f)	Section 3.9(e) shall not prevent the acceleration of the vesting schedule applicable to a Participant’s Company Contribution Account and/or Company Restoration Matching Account if such Participant is entitled to a “gross-up” payment, to eliminate the effect of the Code section 4999 excise tax, pursuant to his or her employment agreement or other agreement entered into between such Participant and the Employer.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

3.10 Crediting/Debiting of Account Balances. In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant’s Account Balance in accordance with the following rules:

(a)	Measurement Funds. Subject to the restrictions found in Section 3.10(c) below, the Participant may elect one or more of the measurement funds selected by the Committee, in its sole discretion, which are based on certain mutual funds (the “Measurement Funds”), for the purpose of crediting or debiting additional amounts to his or her Account Balance. As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund. Each such action will take effect as of the first day of the first calendar quarter that begins at least thirty (30) days after the day on which the Committee gives Participants advance written notice of such change.
(b)	Election of Measurement Funds. Subject to the restrictions found in Section 3.10(c) below, a Participant in connection with his or her initial deferral election in accordance with Section 3.3(a) above, shall elect, on the Election Form, one or more Measurement Fund(s) (as described in Section 3.10(a) above) to be used as a guide for the Committee to determine the amounts to be credited or debited to his or her Account Balance. If a Participant does not elect any of the Measurement Funds described in the previous sentence, the Participant’s Account Balance shall be credited or debited using the lowest-risk Measurement Fund, as determined by the Committee, in its sole discretion. Subject to the restrictions found in Section 3.10(c) below, the Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the amounts to be credited or debited to his or her Account Balance, or to change the portion of his or her Account Balance that is tied to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply as of the first business day deemed reasonably practicable by the Committee, in its sole discretion, and shall continue thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence. Notwithstanding the foregoing, the Committee, in its sole discretion, may impose limitations on the frequency with which one or more of the Measurement Funds elected in accordance with this Section may be added or deleted by such Participant; furthermore, the Committee in its sole discretion, may impose limitations on the frequency with which the Participant may change the portion of his or her Account Balance tied to each previously or newly elected Measurement Fund. In accordance with Section 3.10(f), no amounts from a Participant’s Account balance are invested in the Measurement Fund selected by a Participant, but merely used as a guide for the Committee to debit or credit earnings for each Participant’s Account Balance.
(c)	Noven Pharmaceuticals, Inc. Stock Unit Fund.

(i) A Participant’s Restricted Stock Account will be automatically and irrevocably allocated to the Noven Pharmaceuticals, Inc. Stock Unit Fund Measurement Fund. Participants may not select any other Measurement Fund to be used to determine the amounts to be credited or debited to their Restricted Stock Account. Furthermore, no other portion of the Participant’s Account Balance can be either

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

	initially allocated or re-allocated to the Noven Pharmaceuticals, Inc. Stock Unit Fund. Amounts allocated to the Noven Pharmaceuticals, Inc. Stock Unit Fund shall only be distributable in actual shares of Stock.
(ii)	Any stock dividends, cash dividends or other non-cash dividends that would have been payable on the Stock credited to a Participant’s Account Balance shall be credited to the Participant’s Account Balance in the form of additional shares of Stock and shall automatically and irrevocably be deemed to be re-invested in the Noven Pharmaceuticals, Inc. Stock Unit Fund until such amounts are distributed to the Participant. The number of shares credited to the Participant for a particular stock dividend shall be equal to (a) the number of shares of Stock credited to the Participant’s Account Balance as of the payment date for such dividend in respect of each share of Stock, multiplied by (b) the number of additional or fractional shares of Stock actually paid as a dividend in respect of each share of Stock. The number of shares credited to the Participant for a particular cash dividend or other non-cash dividend shall be equal to (a) the number of shares of Stock credited to the Participant’s Account Balance as of the payment date for such dividend in respect of each share of Stock, multiplied by (b) the fair market value of the dividend, divided by (c) the “fair market value” of the Stock on the payment date for such dividend.
(iii)	The number of shares of Stock credited to the Participant’s Account Balance may be adjusted by the Committee, in its sole discretion, to prevent dilution or enlargement of Participants’ rights with respect to the portion of his or her Account Balance allocated to the Noven Pharmaceuticals, Inc. Stock Unit Fund in the event of any reorganization, reclassification, stock split, or other unusual corporate transaction or event which affects the value of the Stock, provided that any such adjustment shall be made taking into account any crediting of shares of Stock to the Participant under Section 3.10.
(iv)	For purposes of this Section 3.10(c), the fair market value of the Stock shall be, in the event the Stock is traded on a recognized securities exchange or quoted by the National Association of Securities Dealers Automated Quotations on National Market Issues, an amount equal to the closing price of the Stock on such exchange or such quotation on the date set for valuation or, if no sales of Stock were made on said exchange or so quoted on that date, the closing price of the Stock on the next preceding day on which sales were made on such exchange or quotations; or, if the Stock is not so traded or quoted, that value determined, in its sole discretion, by the Committee in compliance with Section 409A.

(d)	Proportionate Allocation. In making any election described in Section 3.10(b) above, the Participant shall specify on the Election Form, in increments of one percent (1%), the percentage of his or her Account Balance or Measurement Fund, as applicable, to be allocated/reallocated.
(e)	Crediting or Debiting Method. The performance of each Measurement Fund (either positive or negative) will be determined on a daily basis based on the manner in which

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Master Plan Document

such Participant’s Account Balance has been hypothetically allocated among the Measurement Funds by the Participant.

(f)

No Actual Investment. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant’s election of any such Measurement Fund, the allocation of his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant’s Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such Measurement Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the investments on which the Measurement Funds are based, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant’s Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company.

3.11 FICA and Other Taxes.

(a)	Annual Deferral Amounts. For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Salary, Bonus and/or LTIP Amounts that is not being deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.11.
(b)	Company Restoration Matching Account and Company Contribution Account. When a Participant becomes vested in a portion of his or her Company Restoration Matching Account and/or Company Contribution Account, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Salary, Bonus and/or LTIP Amounts that is not deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes on such Company Restoration Matching Amount and/or Company Contribution Amount. If necessary, the Committee may reduce the vested portion of the Participant’s Company Restoration Matching Account or Company Contribution Account, as applicable, in order to comply with this Section 3.11.
(c)	Restricted Stock Amounts. For each Plan Year in which a Restricted Stock Amount is being first withheld from an Employee Participant, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Salary, Bonus, LTIP Amounts and/or Restricted Stock that are not being deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes on such Restricted Stock Amount. If necessary, the Committee may reduce the Restricted Stock Amount in order to comply with this Section 3.11.
(d)	Distributions. The Participant’s Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust.

ARTICLE 4

Scheduled Distribution; Unforeseeable Emergencies

4.1 Scheduled Distribution. In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a Scheduled Distribution, in the form of a lump sum payment, from the Plan with respect to all or a portion of the Annual Deferral Amount. The Scheduled Distribution shall be a lump sum payment in an amount that is equal to the portion of the Annual Deferral Amount the Participant elected to have distributed as a Scheduled Distribution, plus amounts credited or debited in the manner provided in Section 3.10 above on that amount, calculated as of the close of business on or around the date on which the Scheduled Distribution becomes payable, as determined by the Committee in its sole discretion. Subject to the other terms and conditions of this Plan, each Scheduled Distribution elected shall be paid out during a sixty (60) day period commencing immediately after the first day of any Plan Year designated by the Participant (the “Scheduled Distribution Date”). The Plan Year designated by the Participant must be at least two (2) Plan Years after the end of the Plan Year to which the Participant’s deferral election described in Section 3.3 relates, unless otherwise provided on an Election Form approved by the Committee in its sole discretion. By way of example, if a Scheduled Distribution is elected for Annual Deferral Amounts that are earned in the Plan Year commencing January 1, 2006, the earliest Scheduled Distribution Date that may be designated by a Participant would be January 1, 2009, and the Scheduled Distribution would become payable during the sixty (60) day period commencing immediately after such Scheduled Distribution Date.

4.2 Postponing Scheduled Distributions. A Participant may elect to postpone a Scheduled Distribution described in Section 4.1 above, and have such amount paid out during a sixty (60) day period commencing immediately after an allowable alternative distribution date designated by the Participant in accordance with this Section 4.2. In order to make this election, the Participant must submit a new Scheduled Distribution Election Form to the Committee in accordance with the following criteria:

(a)	Such Scheduled Distribution Election Form must be submitted to and accepted by the Committee in its sole discretion at least twelve (12) months prior to the Participant’s previously designated Scheduled Distribution Date;
(b)	The new Scheduled Distribution Date selected by the Participant must be the first day of a Plan Year, and must be at least five years after the previously designated Scheduled Distribution Date; and
(c)	The election of the new Scheduled Distribution Date shall have no effect until at least twelve (12) months after the date on which the election is made.

4.3 Other Benefits Take Precedence Over Scheduled Distributions. Should a Benefit Distribution Date occur that triggers a benefit under Articles 5, 6, 7, 8, or 9, any Annual Deferral Amount that is subject to a Scheduled Distribution election under Section 4.1 shall not be paid

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

in accordance with Section 4.1, but shall be paid in accordance with the other applicable Article. Notwithstanding the foregoing, the Committee shall interpret this Section 4.3 in a manner that is consistent with Code Section 409A and other applicable tax law, including but not limited to Treasury guidance and Regulations issued after the effective date of this Plan.

4.4 Unforeseeable Emergencies.

(a)	If the Participant experiences an Unforeseeable Emergency, the Participant may petition the Committee to receive a partial or full payout from the Plan, subject to the provisions set forth below.
(b)	The payout, if any, from the Plan shall not exceed the lesser of (i) the Participant’s vested Account Balance, excluding the portion of the Account Balance attributable to the Restricted Stock Account, calculated as of the close of business on or around the date on which the amount becomes payable, as determined by the Committee in its sole discretion, or (ii) the amount necessary to satisfy the Unforeseeable Emergency, plus amounts necessary to pay Federal, state, or local income taxes or penalties reasonably anticipated as a result of the distribution. Notwithstanding the foregoing, a Participant may not receive a payout from the Plan to the extent that the Unforeseeable Emergency is or may be relieved (A) through reimbursement or compensation by insurance or otherwise, (B) by liquidation of the Participant’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship or (C) by cessation of deferrals under this Plan.
(c)	If the Committee, in its sole discretion, approves a Participant’s petition for payout from the Plan, the Participant shall receive a payout from the Plan within sixty (60) days of the date of such approval, and the Participant’s deferrals under the Plan shall be terminated as of the date of such approval.
(d)	In addition, a Participant’s deferral elections under this Plan shall be terminated to the extent the Committee determines, in its sole discretion, that termination of such Participant’s deferral elections is required pursuant to Treas. Reg. §1.401(k)-1(d)(3) for the Participant to obtain a hardship distribution from an Employer’s 401(k) Plan. If the Committee determines, in its sole discretion, that a termination of the Participant’s deferrals is required in accordance with the preceding sentence, the Participant’s deferrals shall be terminated as soon as administratively practicable following the date on which such determination is made.
(e)	Notwithstanding the foregoing, the Committee shall interpret all provisions relating to a payout and/or termination of deferrals under this Section 4.4 in a manner that is consistent with Code Section 409A and related Treasury guidance and Regulations.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

ARTICLE 5
Change in Control Benefit

5.1 Change in Control Benefit. A Participant, in connection with his or her commencement of participation in the Plan, shall irrevocably elect on an Election Form whether to (i) receive a Change in Control Benefit upon the occurrence of a Change in Control, which shall be equal to the Participant’s vested Account Balance, calculated as of the close of business on or around the Participant’s Benefit Distribution Date, as determined by the Committee in its sole discretion, or (ii) to have his or her Account Balance remain in the Plan upon the occurrence of a Change in Control and to have his or her Account Balance remain subject to the terms and conditions of the Plan. If a Participant does not make any election with respect to the payment of the Change in Control Benefit, then such Participant’s Account Balance shall remain in the Plan upon a Change in Control and shall be subject to the terms and conditions of the Plan.

5.2 Payment of Change in Control Benefit. The Change in Control Benefit, if any, shall be paid to the Participant in a lump sum no later than sixty (60) days after the Participant’s Benefit Distribution Date. Notwithstanding the foregoing, the Committee shall interpret all provisions in this Plan relating to a Change in Control Benefit in a manner that is consistent with Code Section 409A and related Treasury guidance and Regulations.

ARTICLE 6

Retirement Benefit

6.1 Retirement Benefit. A Participant who Retires shall receive, as a Retirement Benefit, his or her vested Account Balance, calculated as of the close of business on or around the Participant’s Benefit Distribution Date, as determined by the Committee in its sole discretion.

6.2 Payment of Retirement Benefit.

(a)

A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or pursuant to an Annual Installment Method of up to ten (10) years. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such Participant shall be deemed to have elected to receive the Retirement Benefit in a lump sum.

(b)

A Participant may change the form of payment of the Retirement Benefit by submitting an Election Form to the Committee in accordance with the following criteria:

(i)	The election to modify the Retirement Benefit shall have no effect until at least twelve (12) months after the date on which the election is made; and
(ii)	The first Retirement Benefit payment shall be delayed at least five (5) years from the Participant’s originally scheduled Benefit Distribution Date described in Section 1.7(a).

For purposes of applying the requirements above, the right to receive the Retirement Benefit in installment payments shall be treated as the entitlement to a single payment.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

	The Committee shall interpret all provisions relating to changing the Retirement Benefit election under this Section 6.2 in a manner that is consistent with Code Section 409A and related Treasury guidance or Regulations.
	The Election Form most recently accepted by the Committee that has become effective shall govern the payout of the Retirement Benefit.
(c)	The lump sum payment shall be made, or installment payments shall commence, no later than sixty (60) days after the Participant’s Benefit Distribution Date. Remaining installments, if any, shall be paid no later than sixty (60) days after each anniversary of the Participant’s Benefit Distribution Date.

ARTICLE 7

Termination Benefit

7.1 Termination Benefit. A Participant who experiences a Termination of Employment shall receive, as a Termination Benefit, his or her vested Account Balance, calculated as of the close of business on or around the Participant’s Benefit Distribution Date, as determined by the Committee in its sole discretion.

7.2 Payment of Termination Benefit.

(a)

A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Termination Benefit in a lump sum or pursuant to an Annual Installment Method of up to three (3) years. If a Participant does not make any election with respect to the payment of the Termination Benefit, then such Participant shall be deemed to have elected to receive the Termination Benefit in a lump sum.

(b)

A Participant may change the form of payment of the Termination Benefit by submitting an Election Form to the Committee in accordance with the following criteria:

(i)	The election to modify the Termination Benefit shall have no effect until at least twelve (12) months after the date on which the election is made; and
(ii)	The first Termination Benefit payment is delayed at least five (5) years from the Participant’s originally scheduled Benefit Distribution Date described in Section 1.7(b) .

For purposes of applying the requirements above, the right to receive the Termination Benefit in installment payments shall be treated as the entitlement to a single payment. The Committee shall interpret all provisions relating to changing the Termination Benefit election under this Section 7.2 in a manner that is consistent with Code Section 409A and related Treasury guidance or Regulations.

The Election Form most recently accepted by the Committee that has become effective shall govern the payout of the Termination Benefit.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

(c)	Notwithstanding the foregoing, in the event a Participant’s vested Account Balance at the time of his or her Benefit Distribution Date is less than $100,000, the Participant’s entire vested Account Balance shall be paid to the Participant in a lump sum.
(d)	The lump sum payment shall be made, or installment payments shall commence, no later than sixty (60) days after the Participant’s Benefit Distribution Date. Remaining installments, if any, shall be paid no later than sixty (60) days after each anniversary of the Participant’s Benefit Distribution Date.

ARTICLE 8

Disability Benefit

8.1 Disability Benefit. Upon a Participant’s Disability, the Participant shall receive a Disability Benefit, which shall be equal to the Participant’s vested Account Balance, calculated as of the close of business on or around the Participant’s Benefit Distribution Date, as selected by the Committee in its sole discretion.

8.2 Payment of Disability Benefit. The Disability Benefit shall be paid to the Participant in a lump sum payment no later than sixty (60) days after the Participant’s Benefit Distribution Date.

ARTICLE 9

Death Benefit

9.1 Death Benefit. The Participant’s Beneficiary(ies) shall receive a Death Benefit upon the Participant’s death which will be equal to the Participant’s vested Account Balance, calculated as of the close of business on or around the Participant’s Benefit Distribution Date, as selected by the Committee in its sole discretion.

9.2 Payment of Death Benefit. The Death Benefit shall be paid to the Participant’s Beneficiary(ies) in a lump sum payment no later than sixty (60) days after the Participant’s Benefit Distribution Date.

ARTICLE 10

Beneficiary Designation

10.1 Beneficiary. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

10.2 Beneficiary Designation; Change; Spousal Consent. A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee’s rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, the Committee may, in its sole discretion, determine that spousal consent is required to be provided in a form designated by the Committee, executed by such Participant’s spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death.

10.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent.

10.4 No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided in Sections 10.1, 10.2 and 10.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant’s benefits, then the Participant’s designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant’s estate.

10.5 Doubt as to Beneficiary. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant’s Employer to withhold such payments until this matter is resolved to the Committee’s satisfaction.

10.6 Discharge of Obligations. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant’s Plan Agreement shall terminate upon such full payment of benefits.

ARTICLE 11

Leave of Absence

11.1 Paid Leave of Absence. If a Participant is authorized by the Participant’s Employer to take a paid leave of absence from the employment of the Employer, and such leave of absence does not constitute a separation from service, as determined by the Committee in accordance with Code Section 409A and related Treasury guidance and Regulations, (i) the Participant shall continue to be considered eligible for the benefits provided in Articles 4, 5, 6, 7, 8, or 9 in accordance with the provisions of those Articles, and (ii) the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3.

11.2 Unpaid Leave of Absence. If a Participant is authorized by the Participant’s Employer to take an unpaid leave of absence from the employment of the Employer for any reason, and such leave of absence does not constitute a separation from service, as determined by the Committee in accordance with Code Section 409A and related Treasury guidance and Regulations, such

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

Participant shall continue to be eligible for the benefits provided in Articles 4, 5, 6, 7, 8, or 9 in accordance with the provisions of those Articles. However, the Participant shall be excused from fulfilling his or her Annual Deferral Amount commitment that would otherwise have been withheld during the remainder of the Plan Year in which the unpaid leave of absence is taken. During the unpaid leave of absence, the Participant shall not be allowed to make any additional deferral elections. However, if the Participant returns to employment, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment and for every Plan Year thereafter while a Participant in the Plan, provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above.

11.3

Leaves Resulting in Separation from Service. In the event that a Participant’s leave of absence from his or her Employer constitutes a separation from service, as determined by the Committee in accordance with Code Section 409A and related Treasury guidance and Regulations, the Participant’s vested Account Balance shall be distributed to the Participant in accordance with Article 6 or 7 of this Plan, as applicable.

ARTICLE 12

Termination of Plan, Amendment or Modification

12.1 Termination of Plan. Although each Employer anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each Employer reserves the right to Terminate the Plan. In the event of a Termination of the Plan, the Measurement Funds available to Participants following the Termination of the Plan shall be comparable in number and type to those Measurement Funds available to Participants in the Plan Year preceding the Plan Year in which the Termination of the Plan is effective. Following a Termination of the Plan, Participant Account Balances shall remain in the Plan until the Participant becomes eligible for the benefits provided in Articles 4, 5, 6, 7, 8 or 9 in accordance with the provisions of those Articles. The Termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination. Notwithstanding the foregoing, to the extent permissible under Code Section 409A and related Treasury guidance or Regulations, during the thirty (30) days preceding or within twelve (12) months following a Change in Control an Employer shall be permitted to (i) terminate the Plan by action of its board of directors, and (ii) distribute the vested Account Balances to Participants in a lump sum no later than twelve (12) months after the Change in Control, provided that all other substantially similar arrangements sponsored by such Employer are also terminated and all balances in such arrangements are distributed within twelve (12) months of the termination of such arrangements.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

12.2 Amendment.

(a)

Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer. Notwithstanding the foregoing, (i) no amendment or modification shall be effective to decrease the value of a Participant’s vested Account Balance in existence at the time the amendment or modification is made, and (ii) no amendment or modification of this Section 12.2 or Section 13.2 of the Plan shall be effective.

(b)

Notwithstanding any provision of the Plan to the contrary, in the event that the Company determines that any provision of the Plan may cause amounts deferred under the Plan to become immediately taxable to any Participant under Code Section 409A, and related Treasury guidance or Regulations, the Company may (i) adopt such amendments to the Plan and appropriate policies and procedures, including amendments and policies with retroactive effect, that the Company determines necessary or appropriate to preserve the intended tax treatment of the Plan benefits provided by the Plan and/or (ii) take such other actions as the Company determines necessary or appropriate to comply with the requirements of Code Section 409A, and related Treasury guidance or Regulations.

12.3 Plan Agreement. Despite the provisions of Sections 12.1 and 12.2 above, if a Participant’s Plan Agreement contains benefits or limitations that are not in this Plan document, the Employer may only amend or terminate such provisions with the written consent of the Participant.

12.4 Effect of Payment. The full payment of the Participant’s vested Account Balance under Articles 4, 5, 6, 7, 8, or 9 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan, and the Participant’s Plan Agreement shall terminate.

ARTICLE 13

Administration

13.1 Committee Duties. Except as otherwise provided in this Article 13, this Plan shall be administered by a Committee, which shall consist of the Employee Benefits Committee of the Company, as designated by the Compensation Committee of the Board, or such other committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan, and (ii) decide or resolve any and all questions, including benefit entitlement determinations and interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

13.2 Administration Upon Change In Control. Within one hundred and twenty (120) days following a Change in Control, the individuals who comprised the Committee immediately prior to the Change in Control (whether or not such individuals are members of the Committee following the Change in Control) may, by written consent of the majority of such individuals, appoint an independent third party administrator (the “Administrator”) to perform any or all of the Committee’s duties described in Section 13.1 above, including without limitation, the power to determine any questions arising in connection with the administration or interpretation of the Plan, and the power to make benefit entitlement determinations. Upon and after the effective date of such appointment, (i) the Company must pay all reasonable administrative expenses and fees of the Administrator, and (ii) the Administrator may only be terminated with the written consent of the majority of Participants with an Account Balance in the Plan as of the date of such proposed termination.

13.3 Agents. In the administration of this Plan, the Committee or the Administrator, as applicable, may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel.

13.4 Binding Effect of Decisions. The decision or action of the Committee or Administrator, as applicable, with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.

13.5 Indemnity of Committee. All Employers shall indemnify and hold harmless the members of the Committee, any Employee to whom the duties of the Committee may be delegated, and the Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, any such Employee or the Administrator.

13.6 Employer Information. To enable the Committee and/or Administrator to perform its functions, the Company and each Employer shall supply full and timely information to the Committee and/or Administrator, as the case may be, on all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee or Administrator may reasonably require.

ARTICLE 14

Other Benefits and Agreements

14.1 Coordination with Other Benefits. The benefits provided for a Participant and Participant’s Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant’s Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

ARTICLE 15

Claims Procedures

15.1 Presentation of Claim. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a “Claimant”) may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant.

15.2 Notification of Decision. The Committee shall consider a Claimant’s claim within a reasonable time, but no later than ninety (90) days after receiving the claim. If the Committee determines that special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial ninety (90) day period. In no event shall such extension exceed a period of ninety (90) days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the benefit determination. The Committee shall notify the Claimant in writing:

(a)	that the Claimant’s requested determination has been made, and that the claim has been allowed in full; or
(b)	that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant’s requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant:

(i)	the specific reason(s) for the denial of the claim, or any part of it;
(ii)	specific reference(s) to pertinent provisions of the Plan upon which such denial was based;
(iii)	a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary;
(iv)	an explanation of the claim review procedure set forth in Section 15.3 below; and
(v)	a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

15.3 Review of a Denied Claim. On or before sixty (60) days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant’s duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. The Claimant (or the Claimant’s duly authorized representative):

(a)	may, upon request and free of charge, have reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claim for benefits;
(b)	may submit written comments or other documents; and/or

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

(c) may request a hearing, which the Committee, in its sole discretion, may grant.

15.4 Decision on Review. The Committee shall render its decision on review promptly, and no later than sixty (60) days after the Committee receives the Claimant’s written request for a review of the denial of the claim. If the Committee determines that special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial sixty (60) day period. In no event shall such extension exceed a period of sixty (60) days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the benefit determination. In rendering its decision, the Committee shall take into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. The decision must be written in a manner calculated to be understood by the Claimant, and it must contain:

(a)	specific reasons for the decision;
(b)	specific reference(s) to the pertinent Plan provisions upon which the decision was based;
(c)	a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits; and
(d)	a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).

15.5 Legal Action. A Claimant’s compliance with the foregoing provisions of this Article 15 is a mandatory prerequisite to a Claimant’s right to commence any legal action with respect to any claim for benefits under this Plan.

ARTICLE 16

Trust

16.1 Establishment of the Trust. In order to provide assets from which to fulfill its obligations to the Participants and their beneficiaries under the Plan, the Company may establish a trust by a trust agreement with a third party, the trustee, to which each Employer may, in its discretion, contribute cash or other property, including securities issued by the Company, to provide for the benefit payments under the Plan, (the “Trust”).

16.2 Interrelationship of the Plan and the Trust. The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan.

16.3 Distributions From the Trust. Each Employer’s obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer’s obligations under this Plan.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

ARTICLE 17

Miscellaneous

17.1 Status of Plan. The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that “is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted (i) in a manner consistent with that intent, and (ii) in accordance with Code Section 409A and related Treasury guidance and Regulations.

17.2 Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer’s assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.

17.3 Employer’s Liability. An Employer’s liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement.

17.4 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise.

17.5 Not a Contract of Employment. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an “at will” employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer, either as an Employee or a Director, or to interfere with the right of any Employer to discipline or discharge the Participant at any time.

17.6 Furnishing Information. A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

17.7 Terms. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.

17.8 Captions. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.

17.9 Governing Law. Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of Florida without regard to its conflicts of laws principles.

17.10 Notice. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

Noven Pharmaceuticals, Inc.

Attn: Vice President, Human Resources

11960 SW 144^th Street

Miami, Florida 33186

	Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.
	Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.
17.11	Successors. The provisions of this Plan shall bind and inure to the benefit of the Participant’s Employer and its successors and assigns and the Participant and the Participant’s designated Beneficiaries.
17.12	Spouse’s Interest. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse’s will, nor shall such interest pass under the laws of intestate succession.
17.13	Validity. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.
17.14	Incompetent. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person’s property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

17.15 Court Order. The Committee is authorized to comply with any court order in any action in which the Plan or the Committee has been named as a party, including any action involving a determination of the rights or interests in a Participant’s benefits under the Plan. Notwithstanding the foregoing, the Committee shall interpret this provision in a manner that is consistent with Code Section 409A and other applicable tax law. In addition, if necessary to comply with a qualified domestic relations order, as defined in Code Section 414(p)(1)(B), pursuant to which a court has determined that a spouse or former spouse of a Participant has an interest in the Participant’s benefits under the Plan, the Committee, in its sole discretion, shall have the right to immediately distribute the spouse’s or former spouse’s interest in the Participant’s benefits under the Plan to such spouse or former spouse.

17.16 Distribution in the Event of Income Inclusion Under 409A. If any portion of a Participant’s Account Balance under this Plan is required to be included in income by the Participant prior to receipt due to a failure of this Plan to meet the requirements of Code Section 409A and related Treasury guidance or Regulations, the Participant may petition the Committee or Administrator, as applicable, for a distribution of that portion of his or her Account Balance that is required to be included in his or her income. Upon the grant of such a petition, which grant shall not be unreasonably withheld, the Participant’s Employer shall distribute to the Participant an amount equal to the portion of his or her Account Balance required to be included in income as a result of the failure of the Plan to meet the requirements of Code Section 409A and related Treasury guidance or Regulations, which amount shall not exceed the Participant’s unpaid vested Account Balance under the Plan. If the petition is granted, such distribution shall be made within ninety (90) days of the date when the Participant’s petition is granted. Such a distribution shall affect and reduce the Participant’s benefits to be paid under this Plan.

17.17 Deduction Limitation on Benefit Payments. If an Employer reasonably anticipates that the Employer’s deduction with respect to any distribution from this Plan would be limited or eliminated by application of Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution from this Plan is deductible, the Employer may delay payment of any amount that would otherwise be distributed from this Plan. Any amounts for which distribution is delayed pursuant to this Section shall continue to be credited/debited with additional amounts in accordance with Section 3.10 above. The delayed amounts (and any amounts credited thereon) shall be distributed to the Participant (or his or her Beneficiary in the event of the Participant’s death) at the earliest date the Employer reasonably anticipates that the deduction of the payment of the amount will not be limited or eliminated by application of Code Section 162(m).

17.18 Insurance. The Employers, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance.

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

IN WITNESS WHEREOF, the Company has amended and restated this Plan document as of September 15, 2006.

“Company”

Noven Pharmaceuticals, Inc.,

a Delaware corporation

By: /s/ Robert C. Strauss

Title: President, CEO & Chairman of the Board

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Noven Pharmaceuticals, Inc.
Nonqualified Deferred Compensation Plan
Master Plan Document

APPENDIX A

LIMITED TRANSITION RELIEF MADE AVAILABLE IN ACCORDANCE WITH CODE SECTION 409A AND RELATED
TREASURY GUIDANCE AND REGULATIONS

Unless otherwise provided below, the capitalized terms below shall have the same meaning as provided in the Plan.

1.

Opportunity to Make New Distribution Elections. Notwithstanding the required deadline for the submission of an initial distribution election described in Articles 4, 5, 6 and 7, the Committee may, as permitted by Code Section 409A and related Treasury guidance or Regulations, provide a limited period in which Participants may make new distribution elections by submitting an Election Form on or before the deadline established by the Committee, which in no event shall be later than December 31, 2006. Any distribution election made in accordance with the requirements established by the Committee, pursuant to this section, shall not be treated as a change in the form or timing of a Participant’s benefit payment for purposes Code Section 409A or the Plan.

The Committee shall interpret all provisions relating to an election submitted in accordance with this section in a manner that is consistent with Code Section 409A and related Treasury guidance or Regulations. If any distribution election submitted in accordance with this section either (i) relates to payments that a Participant would otherwise receive in 2006, or (ii) would cause payments to be made in 2006, such election shall not be effective.

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EX-31.1

Exhibit 31.1

Certifications

Certification of Principal Executive Officer

I, Robert C. Strauss, President, Chief Executive Officer and Chairman of the Board of Noven Pharmaceuticals, Inc., certify that:

(1) I have reviewed this quarterly report on Form 10-Q of Noven Pharmaceuticals, Inc. for the three and nine months ended September 30, 2006;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Robert C. Strauss Name: Robert C. Strauss

Title: President, Chief Executive Officer and Chairman of the Board

Date: November 9, 2006

EX-31.2

Exhibit 31.2

Certifications

Certification of Principal Financial Officer

I, Diane M. Barrett, Vice President and Chief Financial Officer of Noven Pharmaceuticals, Inc., certify that:

(1) I have reviewed this quarterly report on Form 10-Q of Noven Pharmaceuticals, Inc. for the three and nine months ended September 30, 2006;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Diane M. Barrett Name: Diane M. Barrett

Title: Vice President and Chief Financial Officer

Date: November 9, 2006

EX-32.1

Exhibit 32.1

Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

          In connection with the Form 10-Q of Noven Pharmaceuticals, Inc. (“Noven”) for the three and nine months ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert C. Strauss, President, Chief Executive Officer and Chairman of the Board of Noven, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Noven.

/s/ Robert C. Strauss Name: Robert C. Strauss

Title: President, Chief Executive Officer and Chairman of the Board

Date: November 9, 2006

A signed original of this written statement required by Section 906 has been provided to Noven Pharmaceuticals, Inc. and will be retained by Noven Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

          In connection with the Form 10-Q of Noven Pharmaceuticals, Inc. (“Noven”) for the three and nine months ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Diane M. Barrett, Vice President and Chief Financial Officer of Noven, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Noven.

/s/ Diane M. Barrett Name: Diane M. Barrett

Title: Vice President and Chief Financial Officer

Date: November 9, 2006

A signed original of this written statement required by Section 906 has been provided to Noven Pharmaceuticals, Inc. and will be retained by Noven Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.