CIMA LABS INC, S-1/A, 1996-05-08

CIMA LABS INC
S-1/A, 1996-05-08
PHARMACEUTICAL PREPARATIONS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 1996

REGISTRATION NO. 333-4174

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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

AMENDMENT NO. 1
TO
FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------

CIMA LABS INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 2834 41-1569769
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

---------------------

10000 VALLEY VIEW ROAD
EDEN PRAIRIE, MINNESOTA 55344-9361
(612) 947-8700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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JOHN M. SIEBERT, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CIMA LABS INC.
10000 VALLEY VIEW ROAD
EDEN PRAIRIE, MINNESOTA 55344-9361
(612) 947-8700
(Name, address and telephone number of agent for service)
---------------------

Copies to:

<TABLE>
<S> <C>
ROBERT L. JONES, ESQ. VICTOR A. HEBERT, ESQ.
BRETT D. WHITE, ESQ. Heller Ehrman White & McAuliffe
Cooley Godward Castro Huddleson & Tatum 333 Bush Street
Five Palo Alto Square San Francisco, California 94104
3000 El Camino Real (415) 772-6000
Palo Alto, California 94306
(415) 843-5000
</TABLE>

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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
---------------------

If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TITLE OF SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value.................... 575,000 $8.8125 $5,067,187.50 $1,747.31
</TABLE>

(1) Includes 75,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.

(2) Estimated in accordance with Rule 457(c) for the purpose of computing the
amount of the registration fee based on the average of the high and low
prices of the Company's Common Stock as reported on the Nasdaq National
Market on May 3, 1996.

---------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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CIMA LABS INC.

CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-1

<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
IN FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
- ----------------------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus....................... Outside Front Cover Page

2. Inside Front and Outside Back Cover Pages of
Prospectus........................................... Inside Front and Outside Back Cover Pages

3. Summary Information, Risk Factors, and Ratio of Inside Front Cover Page; Prospectus Summary; Risk
Earnings to Fixed Charges............................ Factors; The Company

4. Use of Proceeds....................................... Use of Proceeds

5. Determination of Offering Price....................... Outside Front Cover Page; Underwriting

6. Dilution.............................................. Dilution

7. Selling Security Holders.............................. Principal and Selling Stockholders

8. Plan of Distribution.................................. Outside Front Cover Page; Underwriting

9. Description of Securities to be Registered............ Prospectus Summary; Capitalization; Description of
Capital Stock

10. Interests of Named Experts and Counsel................ Legal Matters; Experts

11. Information with Respect to the Registrant............ Outside Front and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; The Company;
Price Range of Common Stock; Dividend Policy;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal and
Selling Stockholders; Description of Capital Stock;
Financial Statements

12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Not Applicable
</TABLE>

<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>

SUBJECT TO COMPLETION, DATED MAY 8, 1996

2,500,000 SHARES

[CIMA LOGO]

COMMON STOCK
--------------

Of the 2,500,000 shares of Common Stock offered hereby, 1,000,000 shares are
being offered by CIMA
LABS INC. (the "Company" or "CIMA") and 1,500,000 shares are being offered by
certain Selling Stockholders (the "Selling Stockholders"). The Company will not
receive any of the proceeds from the sale of the shares by the Selling
Stockholders. See "Principal and Selling Stockholders." The Company's Common
Stock is traded on the Nasdaq National Market under the symbol "CIMA." On May 6,
1996, the last sale price of the Common Stock, as reported on the Nasdaq
National Market, was $9.25 per share. See "Price Range of Common Stock."

-------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
-----------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total(3)................ $ $ $ $
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses, payable by the Company, estimated at $435,000.

(3) The Company and a Selling Stockholder have granted the several Underwriters
a 30-day option to purchase up to an aggregate of 375,000 additional shares
of Common Stock on the same terms and conditions as set forth above, solely
to cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
the Company and Proceeds to the Selling Stockholders will be $ , $ ,
$ and $ , respectively. See "Underwriting."

-------------------

The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
the certificates for the shares of Common Stock will be available for delivery
at the offices of Volpe, Welty & Company, One Maritime Plaza, San Francisco,
California on or about , 1996.

VOLPE, WELTY & COMPANY RODMAN & RENSHAW, INC.

The date of this Prospectus is May , 1996

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DESCRIPTION OF PICTURES FOR EDGAR CIMA's 75,000 square foot manufacturing
FILING facility in Eden Prairie, Minnesota, has
been used for pilot manufacturing of
potential OraSolv products.

Picture of an employee wearing At the Eden Prairie facility, during the
white clothing and a hairnet blending process, active and inactive
placing a vessel for transportation ingredients are mixed to produce a
of the mixed active and inactive consistent granulation that will be
ingredients under the 'V Mixer' in compressed into tablets.
which such active and inactive
ingredients are mixed.
Picture of an employee wearing In the tablet press, the in-process blend
white clothing and a hairnet is compressed into finished tablets which
standing next to the production are automatically transferred to the
line where the OraSolv tablets are blister-foil
packages into blister packages and packaging machine.
boxed.
Picture of finished OraSolv tablets The finished tablets are sealed in
and blister packages containing blister-foil packages, ready to be packed
OraSolv tablets. in cartons.

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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMPANY'S SECURITIES ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
10(B)-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITING."

-------------------

CIMA-Registered Trademark-, CIMA LABS INC-Registered Trademark-,
OraSolv-Registered Trademark- and AutoLution-Registered Trademark- are
trademarks of the Company. Certain other trademarks of the Company and other
companies, including Zantac-Registered Trademark-, Pepcid
AC-Registered Trademark- and Tagamet-Registered Trademark- HB-TM-, are used in
this Prospectus.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR A DISCUSSION OF
CERTAIN FACTORS TO BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE SHARES OF
COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. SEE "UNDERWRITING."

THE COMPANY

CIMA is a drug delivery company focused primarily on the development and
manufacture of pharmaceutical products based upon its patented OraSolv
technology. OraSolv is an oral dosage formulation incorporating
microencapsulated active drug ingredients into a tablet which dissolves quickly
in the mouth without chewing or water and which effectively masks the taste of
the medication being delivered. OraSolv's fast-dissolving capability may enable
patients in certain age groups or those with a variety of conditions that limit
their ability to swallow conventional tablets to receive medication in a more
convenient oral dosage form. The Company believes that OraSolv is more
convenient than traditional tablet-based oral dosages as it does not require
water to be ingested, thereby enabling immediate medication at the onset of
symptoms. In addition, OraSolv can provide more accurate administration of doses
than liquid or suspension formulations as no measuring is required. The Company
believes OraSolv's ability to be easily ingested by patients will foster greater
patient compliance, thereby improving therapeutic outcomes and reducing costs in
the healthcare system.

CIMA's business focus has evolved over the last several years. From
inception until 1992, the Company focused on the development of liquid
effervescent products and technologies. In 1993, the U.S. patent covering
OraSolv was issued and the Company, perceiving greater commercial opportunity,
shifted its focus to the development of OraSolv products. CIMA intends to
commercialize the OraSolv technology through collaborations with pharmaceutical
and other healthcare companies by developing and manufacturing OraSolv
formulations of its collaborators' pharmaceutical products. Since the issuance
of the OraSolv patent in 1993, the Company has:

- Completed construction of a 75,000 square foot manufacturing facility in
Eden Prairie, Minnesota, which has been registered with the FDA and
licensed by the State of Minnesota.

- Entered into a License and Development Agreement with Glaxo Wellcome plc
("Glaxo") to develop an OraSolv version of Glaxo's Zantac.

- Entered into a License Agreement and a Development and License Option
Agreement with SmithKline Beecham plc ("SmithKline Beecham") to develop a
series of OraSolv versions of SmithKline Beecham products for
international and domestic distribution.

- Entered into agreements with three other potential partners for the
development and manufacture of OraSolv products.

- Entered into a License and Supply Agreement with Merck & Co., Inc.
("Merck") to provide an AutoLution (a liquid effervescent) version of
Merck's Pepcid AC.

- Added key scientific, technical and management personnel.

The Company's corporate partnerships enable it to focus on the development
and manufacture of OraSolv versions of its partners' products, while allowing
its partners to focus on the marketing and distribution of OraSolv formulations.
Generally, the Company will be responsible for optimizing the taste-masking and
microencapsulation of the active drug ingredient, manufacturing the OraSolv
tablets containing the active drug, packaging, labeling and performing quality
assurance on the finished product, and shipping the product to its partners. The
Company's corporate partners will be responsible for marketing, sale and
distribution of the OraSolv product to consumers or healthcare professionals.
Generally, corporate partners will also be responsible for the collection and
submission of required clinical data, and for the management of required federal
or international regulatory approvals of collaborative products.

The Company's goal is to have its OraSolv technology incorporated into as
many pharmaceutical products as possible with an emphasis on pharmaceutical
products which command a large market share or are in large market segments. The
Company has developed a strategic plan to accomplish this goal. The Company's
primary strategies are to: (i) establish collaborations with pharmaceutical and
other healthcare companies; (ii) focus initially on OTC products; (iii) pursue
OTC switch and prescription drugs; (iv) expand its intellectual property
position; (v) retain the manufacturing rights to the products it develops; and
(vi) retain ownership of products developed.

3
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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by:
The Company...................................... 1,000,000 shares
The Selling Stockholders......................... 1,500,000 shares
Common Stock Outstanding after the Offering........ 8,840,099 shares (1)
Use of Proceeds.................................... For initiation of commercial
production; research and development;
and working capital and general
corporate purposes
Nasdaq National Market Symbol...................... CIMA
</TABLE>

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues:
Net sales....................................... $ 2,930 $ 3,251 $ 1,857 $ 1,451 $ 151 $ 11 $ --
Research, development and licensing revenues.... 551 445 368 1,167 684 215 392
Costs and expenses:
Cost of goods sold............................ 3,339 3,279 2,844 2,799 240 59 --
Research and product development.............. 843 759 1,857 3,549 6,505 2,292 1,376
Selling, general and administrative........... 1,365 1,306 1,208 2,972 3,658 1,019 784
--------- --------- --------- --------- --------- --------- ---------
Operating loss.................................... (2,066) (1,648) (3,684) (6,702) (9,568) (3,144) (1,768)
Other income (expense), net....................... (249) (34) 4 490 461 166 34
--------- --------- --------- --------- --------- --------- ---------
Net loss.......................................... $ (2,315) $ (1,682) $ (3,680) $ (6,212) $ (9,107) $ (2,978) $ (1,734)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per share................................ $ (.90) $ (.53) $ (.78) $ (.95) $ (1.16) $ (.39) $ (.22)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of shares outstanding..... 2,565 3,198 4,727 6,505 7,822 7,541 7,824
--------- --------- --------- --------- --------- --------- ---------
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</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
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ACTUAL ACTUAL AS ADJUSTED(2)
----------------- --------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 3,559 $ 2,517 $ 10,731
Working capital.................................................... 3,147 1,528 9,742
Total assets....................................................... 15,519 14,364 22,578
Accumulated deficit................................................ (29,259) (30,993) (30,993)
Total stockholders' equity......................................... 14,282 12,643 20,857
</TABLE>

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(1) Based on shares outstanding as of March 31, 1996. Excludes 1,915,570 shares
of Common Stock reserved for issuance pursuant to the Company's stock option
plans, under which options to purchase 1,215,334 shares were outstanding as
of March 31, 1996, and 106,467 shares of Common Stock issuable pursuant to
warrants. See Note 8 to Financial Statements.

(2) As adjusted to reflect receipt of the estimated net proceeds from the sale
of 1,000,000 shares of Common Stock by the Company at an assumed public
offering price of $9.25 per share. See "Use of Proceeds" and
"Capitalization."

------------------------

THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
SIGNIFICANTLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS.

4
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RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY.

NO REVENUES FROM ORASOLV SALES

The Company's ability to generate revenues will be dependent upon its
ability to enter into and perform under collaborative agreements to develop and
manufacture OraSolv products to be marketed by pharmaceutical and other
healthcare companies and upon the successful commercialization of these
products. To date no commercial sales of OraSolv products have been made, and
the Company has not derived any revenues from sales of OraSolv products.
Further, the Company does not expect to derive any such revenues until 1997.

HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY

The Company is a development stage company and must be evaluated in light of
the uncertainties and complications present for any such company and, in
particular, a company in the pharmaceutical industry. The Company has
accumulated net losses from inception in December 1986 through March 31, 1996,
of approximately $30,899,000. Losses have resulted principally from costs
incurred in research and development of the Company's technologies and from
general and administrative costs. These costs have exceeded the Company's
revenues, which have been derived primarily from the manufacturing of liquid
effervescents and other non-OraSolv products under agreements with third
parties. The Company no longer manufactures such products and no longer derives
revenues from their manufacture. The Company expects to continue to incur losses
at least through 1997. Many of the Company's expenditures to date have been non-
recurring costs for plant, equipment and product optimization and validation.
There can be no assurance, however, that the Company will ever generate
substantial revenues or achieve profitability.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING

The Company currently has cash reserves sufficient to operate through June
1996. In the event that the offering does not close or is substantially delayed,
the Company's ability to continue as a going concern will be severely impaired.
The Company believes that the net proceeds to the Company from this offering,
combined with its currently available funds and excluding any license fees that
may be received in the future, will meet its needs at least through the first
quarter of 1997. Thereafter, or sooner if conditions make it necessary, the
Company may need to raise additional funds through public or private financings,
including equity financings which may be dilutive to stockholders, and through
collaborative arrangements. There can be no assurance that the Company will be
able to raise additional funds if its capital resources are exhausted, or that
funds will be available on terms attractive to the Company or at all. If
adequate funds are not available, the Company may be required to delay, reduce
the scope of or eliminate one or more of its research or development programs,
which would have a material adverse effect on the Company. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEPENDENCE UPON THIRD PARTIES

The Company's strategy is to enter into collaborative arrangements with
pharmaceutical and other healthcare companies to develop OraSolv products to be
marketed by the corporate partners. The Company's future ability to generate
revenues is, therefore, dependent upon the Company's ability to develop products
that meet the requirements of its corporate partners and upon the marketing
efforts of these corporate partners. Although the Company believes these
partners will have an economic motivation to market these products vigorously,
the amount and timing of resources to be devoted to marketing are not within the
control of the Company. These partners independently could make material
marketing and other commercialization decisions which could adversely affect the
Company's future revenues. Failure of these partners to market the Company's
products successfully would have a material adverse effect on the Company's
financial condition and results of operations. Moreover, certain of the
Company's products are seasonal in nature and the Company's revenues could vary
materially from one financial period to another

5
<PAGE>
depending on which of such products, if any, are then being marketed. To date,
the Company has experienced delays in the scheduled development and market
introduction of products incorporating OraSolv technology, in part because of
changes in product plans by its corporate partners. There can be no assurance
that the Company will be able to enter into additional collaborative
arrangements in the future or that any current or future collaborative
arrangements will result in successful product commercialization.

The Company is not currently reliant on any single supplier or source of
supply; however, coating materials and techniques used in connection with
manufacturing certain OraSolv products may in the future be available only from
a single supplier. Although the Company believes that satisfactory alternatives
could be substituted if any such coating materials or techniques were to become
unavailable, there can be no assurance that the Company's manufacturing
operations would not be disrupted. Any such disruption could have at least a
temporary adverse effect on the Company's business and could possibly damage
relations with its corporate partners.

NATURE OF COLLABORATIVE ARRANGEMENTS; PRODUCT DEVELOPMENT PROCESS

The Company typically begins working with its corporate partners under
feasibility study agreements or option agreements which permit CIMA and its
corporate partners to develop prototype products and manufacturing techniques
for the product in question but without a substantial contractual commitment by
either side. During this phase of the collaboration, CIMA and its partner study
issues of taste masking, bioavailability, production processes and issues that
may arise in the course of manufacturing in commercial volumes, consumer
satisfaction, and the related issues of cost, price and potential product
volume. Since no products incorporating OraSolv technology have yet been
marketed, many of these issues (particularly those related to marketing and
consumer preferences) remain commercially untested and determinations relative
to these issues are largely subjective. Accordingly, it is difficult to predict,
and impossible for the Company to control, whether a particular product
development program will lead to a decision by the corporate partner to market
the product in question. Each of the Company's current development and option
agreements permits its corporate partner to terminate the development program at
the corporate partner's discretion on relatively short notice. In addition, in
the past the Company has experienced delays and cancellations by its corporate
partners, and there can be no assurance that it will not experience delays or
cancellations in the future. Even though the Company is working with a number of
collaborators with respect to OraSolv products, there is no assurance that any
of these collaborators will ultimately market any such products.

The option and development agreements entered into by the Company generally
provide for the essential terms (including royalty amounts) to be included in a
subsequent license agreement for full commercialization, but they do not contain
all of the license terms. Even if the product development process is a success,
there can be no assurance that the parties will agree on the ultimate commercial
terms. In particular, the costs of manufacturing OraSolv products in commercial
quantities remains subject to some uncertainty, and in the highly cost-sensitive
market for OTC products, there may be instances in which CIMA and its
collaborator have difficulty agreeing on issues of manufacturing costs and
supply arrangements for commercialization.

The Company generally intends to retain product manufacturing rights in
connection with its definitive license agreements. There can be no assurance,
however, that the Company will retain such rights in every agreement or that any
such rights retained will be profitable for the Company. The failure by the
Company to retain manufacturing rights under any definitive license agreements
entered into with its corporate partners or an event such as the termination of
the Company's manufacturing rights under an agreement with a partner could have
a material adverse effect on the Company's profitability.

UNCERTAINTY OF CONSUMER ACCEPTANCE OF ORASOLV PRODUCTS

The Company's OraSolv technology, a fast-dissolving oral tablet, represents
a new dosage form for pharmaceutical products. As a consequence, the Company's
revenues will be dependent upon ultimate consumer acceptance of the OraSolv drug
delivery system as an alternative to conventional oral dosage forms, as well as
upon the marketing efforts of its corporate partners. The Company expects that
OraSolv

6
<PAGE>
products will be priced higher than conventional tablets. The Company believes
that initial consumer research has been encouraging, but there can be no
assurance that commercial market acceptance for the Company's OraSolv products
will ever develop or be sustained.

COMPETITION; TECHNOLOGICAL RISK

Competition in the areas of pharmaceutical products and drug delivery
systems is intense. Several other companies have developed or are developing
novel technologies for oral drug delivery, and these competing technologies may
prove superior, either generally or in particular market segments, in terms of
factors such as cost, consumer satisfaction, or drug delivery. The Company's
primary competitors in the business of developing and applying drug delivery
systems include companies which have substantially greater financial,
technological, marketing, personnel and research and development resources than
the Company. The Company's products will compete both with products employing
advanced drug delivery systems and with products in conventional dosage forms.
New drugs or future developments in alternative drug delivery technologies may
provide therapeutic or cost advantages to the Company's potential products.
There can be no assurance that developments by others will not render the
Company's products or technologies noncompetitive or obsolete.

PATENTS AND PROPRIETARY RIGHTS

The Company's success will depend in part on its ability to obtain and
maintain patent protection for its products and to preserve its trade secrets.
The Company holds five issued U.S. patents (including a patent covering the
OraSolv technology) and two issued non-U.S. patents. The Company also has three
U.S. patent applications pending and a number of foreign patent applications
pending, including two European Patent Office filings. No assurance can be given
that the Company's patent applications will be approved or that any issued
patents will provide competitive advantages for its products or will not be
challenged or circumvented by competitors. The Company also relies on trade
secrets and proprietary know-how which it seeks to protect, in part, through
confidentiality agreements with employees, consultants, partners and others.
There can be no assurance that these agreements will not be breached, that the
Company will have adequate remedies for any such breach or that the Company's
trade secrets will not otherwise become known or be independently developed by
competitors.

The Company has obtained a license to a U.S. patent and corresponding
foreign rights held by a third party, which patent and corresponding rights may
cover certain OraSolv products. The Company has obtained or may in the future be
required to obtain licenses from others with respect to materials used in the
Company's products or manufacturing processes, including drug coating
techniques. There can be no assurance that such licenses will be obtainable on
commercially reasonable terms, if at all, or that any licensed patents or
proprietary rights will be valid and enforceable.

The ability to commercialize the Company's products will depend on not
infringing the patents of others. Although the Company is not aware of any claim
of patent infringement against it, claims concerning patents and proprietary
technologies determined adversely to the Company could have a material adverse
effect on the Company's business. In addition, litigation may also be necessary
to enforce any patents issued or licensed to the Company or to determine the
scope and validity of third party proprietary rights. There can be no assurance
that the Company's issued or licensed patents would be held valid by a court of
competent jurisdiction. Whether or not the outcome of litigation is favorable to
the Company, the cost of such litigation and the diversion of the Company's
resources during such litigation could have a material adverse effect on the
Company.

RISK OF MANUFACTURING IN COMMERCIAL QUANTITIES; SINGLE FACILITY

The Company has not yet manufactured OraSolv products in commercial
quantities. To achieve desired levels of production, the Company will be
required to substantially increase its manufacturing focus. There can be no
assurance that manufacturing and control problems will not arise as the Company
begins manufacturing commercial quantities at its new facility (which was
completed in December 1994) or that manufacturing volume can be increased in a
timely manner to allow production in sufficient quantities to

7
<PAGE>
meet the needs of the Company's corporate partners. If such manufacturing or
control problems arise or the Company is not able to successfully increase
manufacturing volume in a timely manner for any reason, the Company's business
could be materially adversely affected.

In addition, the Company currently has only one facility capable of
manufacturing OraSolv products. In the event that this facility is damaged by
natural disaster or otherwise, or the facility becomes incapable of operating at
commercial capacity or at all due to regulatory or other reasons, the Company
would have no other means of producing OraSolv products, which would have a
material adverse effect on the Company's business. In addition, certain of the
Company's partners and potential partners have expressed concern that the
Company does not have alternative facilities to produce their products in the
event that the Company's current facility becomes damaged or is otherwise unable
to produce their products in the volumes required or at all. Such concerns may
have an adverse effect on the Company's ability to attract additional
collaborative partners or to negotiate agreements with potential partners on
terms attractive to the Company. See "Business -- Manufacturing" and "--
Properties."

GOVERNMENT REGULATION

All pharmaceutical manufacturers are subject to extensive regulation of
their activities, including research and development and production and
marketing, by numerous governmental authorities in the U.S. and other countries.
In the U.S., pharmaceutical products are subject to rigorous regulation by the
Food and Drug Administration (the "FDA"). If a company fails to comply with
applicable requirements, it may be subject to administrative or judicially
imposed sanctions such as civil penalties, criminal prosecution of the Company
or its officers and employees, injunctions, product seizure or detention,
product recalls, total or partial suspension of production and FDA refusal to
approve pending premarket approval applications or supplements to approved
applications.

The Company initially intends to emphasize OTC drug products that generally
do not require FDA premarketing approval under the FDA's OTC drug review
process. Products subject to final monographs issued by the FDA, however, are
subject to various FDA regulations such as those outlining current Good
Manufacturing Practice ("cGMP") requirements, general and specific OTC labeling
requirements (including warning statements), the restriction against advertising
for conditions other than those stated in product labeling, and the requirement
that OTC drugs contain only suitable inactive ingredients. OTC products and
manufacturing facilities, including the Company's new OraSolv manufacturing
facility, are subject to FDA inspection, and failure to comply with applicable
regulatory requirements may lead to administrative or judicially imposed
penalties, as well as delays.

Even if any required FDA approval has been obtained with respect to a
product, foreign regulatory approval of a product must be obtained prior to
marketing the product internationally. Foreign approval procedures vary from
country to country and the time required for approval may delay or prevent
marketing. Although the Company expects to rely on its pharmaceutical company
partners to obtain any necessary government approvals in foreign countries,
there can be no assurance that such approvals will be obtained in a timely
fashion, if at all.

8
<PAGE>
The Company is also subject to regulation under various federal and state
laws regarding, among other things, occupational safety, environmental
protection, hazardous substance control and product advertising and promotion.
In connection with its research and development activities and its
manufacturing, the Company is subject to federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials and
wastes. The Company believes that it has complied with these laws and
regulations in all material respects and it has not been required to take any
action to correct any material noncompliance. In the past, the Company
manufactured an herbicide product for a large chemical company involving certain
hazardous materials and chemicals. The herbicide product was manufactured in a
separate facility from the Eden Prairie facility. The Company believes that its
safety procedures for handling and disposing of such materials and chemicals
complied with the requirements of federal and state law. See "Business --
Government Regulation."

RAPID CHANGES IN THE HEALTHCARE INDUSTRY

The healthcare industry is changing rapidly as the public, government,
medical professionals, third-party payors and the pharmaceutical industry
examine ways to contain or reduce the cost of health care. Changes in the
healthcare industry could impact the Company's business, particularly to the
extent that the Company develops products for prescription drug applications. In
certain foreign markets pricing or profitability of prescription pharmaceuticals
is subject to government control. In the United States there have been, and the
Company expects that there will continue to be, a number of federal and state
proposals to implement similar government control. In addition, an increasing
emphasis on managed care in the United States has increased and will continue to
increase the pressure on pharmaceutical pricing. While the Company cannot
predict whether any such legislative or regulatory proposals will be adopted or
the effect such proposals or managed care efforts may have on its business, the
announcement of such proposals or efforts could have a material adverse effect
on the Company's ability to raise capital, and the adoption of such proposals or
efforts could have a material adverse effect on the Company's business and
financial condition. Further, to the extent that such proposals or efforts have
a material adverse effect on other pharmaceutical companies that are prospective
corporate partners for the Company, the Company's ability to establish strategic
collaborations may be adversely affected. In addition, in both domestic and
foreign markets, sales of products utilizing the Company's drug delivery systems
will depend in part on the availability of reimbursement from third-party payors
such as government health administration authorities, private health insurers
and other organizations. Third-party payors are increasingly challenging the
price and cost-effectiveness of prescription pharmaceutical products.
Significant uncertainty exists as to the reimbursement status of newly approved
healthcare products. There can be no assurance that products utilizing the
Company's drug delivery systems will be considered cost effective or that
adequate third-party reimbursement will be available to the Company's
collaborators to maintain price levels sufficient to realize an appropriate
return on the Company's investment in its drug delivery systems.

DEPENDENCE ON MANAGEMENT AND OTHER KEY EMPLOYEES

The success of the Company and of its business strategy is dependent in
large part on the ability of the Company to attract and retain key management
and operating personnel. Such individuals are in high demand and are often
subject to competing offers. In particular, the Company's success will depend,
in part, on its ability to attract and retain the services of its executive
officers and scientific and technical personnel. The loss of the services of one
or more members of management or key employees or the inability to hire
additional personnel as needed may have a material adverse effect on the
Company. The Company currently has no full-time chief financial officer, but is
actively recruiting to fill this position.

PRODUCT LIABILITY AND INSURANCE RISKS

9
<PAGE>
can be no assurance, however, that the Company will be able to maintain such
insurance on acceptable terms, that the Company will be able to secure increased
coverage as the commercialization of its products proceeds or that any insurance
will provide adequate protection against potential liabilities.

CONTROL BY EXISTING STOCKHOLDERS

Following this offering, directors, executive officers and five percent
stockholders of the Company, and certain of their affiliates, will own
approximately 35.1% of the Company's outstanding Common Stock (approximately
33.8% assuming full exercise of the Underwriters' over-allotment option).
Accordingly, these stockholders, individually and as a group, may be able to
influence the outcome of stockholder votes, including votes concerning the
election of directors, the adoption or amendment of provisions in the Company's
Certificate of Incorporation or Bylaws and the approval of certain mergers and
other significant corporate transactions, including a sale of substantially all
of the Company's assets. Such control by existing stockholders could have the
effect of delaying, deferring or preventing a change in control of the Company.
See "Principal and Selling Stockholders" and "Description of Capital Stock."

POSSIBLE VOLATILITY OF STOCK PRICE

The Company's Common Stock currently trades on the Nasdaq National Market.
The securities markets have from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. The market prices of the equity securities of many
publicly traded pharmaceutical and drug delivery companies in the past have
been, and in the future can be especially volatile. Announcements of
technological innovations or new products by the Company or its competitors,
developments or disputes concerning patents or proprietary rights, regulatory
developments and economic and other external factors, as well as
period-to-period fluctuations in the Company's financial results, may have a
significant effect on the market price of the Company's Common Stock. See "Price
Range of Common Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, based on the number of shares outstanding
on March 31, 1996, the Company will have 8,840,099 shares of Common Stock
outstanding (9,177,432 if the Underwriters' over-allotment option is exercised
in full), of which 2,500,000 are being offered hereby and of which all but
115,429 shares of Common Stock will be freely tradeable on the public market,
subject in certain cases to lock-up agreements as described below. Certain
volume resale restrictions are imposed by the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the 115,429 shares of Common Stock
referenced above, which restrictions will expire in January 1997; however, such
115,429 shares have been registered on a Form S-3 registration statement and may
be sold without such restrictions. The Company, subject to certain exceptions,
and its officers, directors and certain stockholders holding an aggregate of
approximately 2,990,207 shares of Common Stock after this offering, have agreed
not to sell or otherwise dispose of any shares of Common Stock during the 90-day
period following the date of this Prospectus without the consent of Volpe, Welty
& Company on behalf of the Underwriters. Volpe, Welty & Company, in its
discretion, may permit such sales during such period without public
announcement. See "Shares Eligible for Future Sale."

ANTI-TAKEOVER PROVISIONS

The Board of Directors is authorized to issue up to 5,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. Although there is no current
intention to do so, the issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of the Company, which
could deprive the Company's stockholders of opportunities to sell their shares
of Common Stock at a premium. Additionally, the Company could adopt in the
future one or more additional anti-takeover measures, such as a stockholder
rights plan, without first seeking stockholder approval, which measures could
also make a change in control of the Company more difficult. The Company is also
subject to provisions of the Delaware General Corporation Law that make certain
business combinations more difficult.

10
<PAGE>
ABSENCE OF DIVIDENDS; DILUTION

The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying cash dividends in the foreseeable future.
The public offering price is substantially higher than the book value per share
of the outstanding Common Stock. Investors purchasing shares of Common Stock in
this offering will therefore immediately incur substantial dilution. See
"Dilution." In addition, dilution will occur upon the exercise of outstanding
stock options and warrants of the Company and may occur upon future equity
financings of the Company.

THE COMPANY

The Company was incorporated in Delaware in December 1986. The Company's
principal executive offices are located at 10000 Valley View Road, Eden Prairie,
Minnesota 55344-9361, and its telephone number is (612) 947-8700.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby (at an assumed public offering price
of $9.25 per share) are estimated to be $8,214,000 ($11,131,000 if the
Underwriters' over-allotment option is exercised in full) after deducting the
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company. The Company will not receive any of the proceeds from
the sale of shares by the Selling Stockholders.

The Company expects to use the net proceeds from this offering primarily to
begin commercial production in its new manufacturing facility and to fund
research and development (including preclinical and clinical testing) for the
application of the OraSolv technology to pharmaceutical products. The balance of
the net proceeds will be used for working capital and other general corporate
purposes. The Company currently anticipates that the net offering proceeds will
be allocated as follows: 15% for the initiation of production; 20% for continued
research and development of new, improved OraSolv technology including improved
efficacy pharmaceuticals; 30% for research and development of OraSolv
prescription pharmaceuticals and related required clinical and consumer studies;
30% for working capital; and 5% for capital expenditures. There can be no
assurance, however, that the net proceeds of the offering will ultimately be
utilized as currently anticipated. The amount and timing of the expenditures of
the net proceeds for these purposes will depend on numerous factors, including
the status of the Company's product development efforts, the Company's business
development activities, the result of clinical trials, the regulatory approval
process and competition. The Company may also use a portion of the net proceeds
to acquire complementary businesses, products or technologies, although the
Company has no agreements and is not involved in any negotiation with respect to
any such transactions.

The Company believes that its available cash and cash equivalents, together
with the net proceeds of this offering and the interest thereon, will be
sufficient to meet its capital requirements at least through the first quarter
of 1997. Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds of the offering in short-term,
interest-bearing, investment-grade securities.

11
<PAGE>
PRICE RANGE OF COMMON STOCK

The Company's Common Stock began trading on the Nasdaq National Market under
the symbol "CIMA" on July 29, 1994. Prior to that date, there was no public
market for the Company's Common Stock. The following table sets forth, for the
periods indicated, the high and low sales prices of the Common Stock reported on
the Nasdaq National Market. These over-the-counter quotations reflect
inter-dealer prices, without retail markup, markdown or commission, and may not
necessarily represent the sales prices in actual transactions.

<TABLE>
<CAPTION>
HIGH LOW
---------- -----
<S> <C> <C>
1994
Third Quarter (from July 29).................................................................... $ 93/8 $ 85/8
Fourth Quarter.................................................................................. 121/4 85/8

1995
First Quarter................................................................................... $ 107/8 $ 43/4
Second Quarter.................................................................................. 55/8 37/8
Third Quarter................................................................................... 81/8 37/8
Fourth Quarter.................................................................................. 8 43/4

1996
First Quarter................................................................................... $ 71/4 $ 41/4
Second Quarter (through May 6, 1996)............................................................ 91/4 61/8
</TABLE>

On May 6, 1996, the last sale price of the Common Stock, as reported on the
Nasdaq National Market, was $9.25 per share.

As of April 4, 1996, there were approximately 120 stockholders of record of
the Company's Common Stock.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain any future earnings to finance the
growth and development of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future. Any future determination relating
to dividend policy will be made at the discretion of the Board of Directors of
the Company and will depend on a number of factors, including the future
earnings, capital requirements, financial condition and future prospects of the
Company and such other factors as the Board of Directors may deem relevant.

12
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company at March
31, 1996, and as adjusted for the sale by the Company of the Common Stock
offered hereby at an assumed public offering price of $9.25 per share and the
application of the net proceeds therefrom (after deduction of estimated
underwriting discounts and commissions and estimated offering expenses). This
table should be read in conjunction with the Company's Financial Statements and
Notes thereto included elsewhere in this Prospectus. See "Use of Proceeds."

<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000,000 shares authorized, none issued and
outstanding........................................................................... $ -- $ --
Common Stock, $.01 par value; 20,000,000 shares authorized; 7,840,099 shares issued and
outstanding, and 8,840,099 shares issued and outstanding, as adjusted(1).............. 78 88
Additional paid-in capital............................................................. 43,558 51,762
Deficit accumulated during the development stage....................................... (30,993) (30,993)
---------- -----------
Total stockholders' equity........................................................... 12,643 20,857
---------- -----------
Total capitalization............................................................... $ 12,643 $ 20,857
---------- -----------
---------- -----------
</TABLE>

- ---------
(1) Excludes, as of March 31, 1996, an aggregate of 1,915,570 shares of Common
Stock reserved for issuance under the Company's stock option plans, pursuant
to which options to purchase 1,215,334 shares were outstanding as of March
31, 1996, and 106,467 shares of Common Stock issuable pursuant to warrants.

DILUTION

The net tangible book value of the Company at March 31, 1996, was
approximately $12,392,000 or $1.58 per share. "Net tangible book value" per
share represents the amount of the Company's total tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of 1,000,000 of the shares of Common
Stock offered hereby (at an assumed public offering price of $9.25 per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company), the pro forma net tangible book value
of the Company at March 31, 1996 would have been approximately $20,606,000 or
$2.33 per share. This represents an immediate increase in such net tangible book
value of $.75 per share to existing stockholders and an immediate dilution of
$6.92 per share to new investors. The following table illustrates this per share
dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share...................... $ 9.25
Net tangible book value per share before offering.......... $ 1.58
Increase per share attributable to new investors........... .75
---------
Pro forma net tangible book value per share after offering... 2.33
---------
Dilution per share to new investors.......................... $ 6.92
---------
---------
</TABLE>

13
<PAGE>
SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Prospectus. The selected financial data, insofar as it relates to each of
the years 1993 through 1995, have been derived from audited financial
statements, including the balance sheets at December 31, 1994 and 1995 and the
related statements of operations and of cash flows for each of the three years
in the period ended December 31, 1995 and notes thereto appearing elsewhere
herein. The statement of operations data set forth below for the fiscal years
ended December 31, 1991 and 1992 and the balance sheet data at December 31,
1991, 1992 and 1993 are derived from audited financial statements which are not
included in this Prospectus. The selected financial data as of March 31, 1996
and for the three months ended March 31, 1995 and 1996 are derived from
unaudited financial statements of the Company and include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the three months ended March
31, 1996 are not necessarily indicative of the results that may be expected for
the entire year. The Company has never declared or paid any cash dividends on
shares of its capital stock.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Net sales........................ $ 2,930 $ 3,251 $ 1,857 $ 1,451 $ 151 $ 11 $ --
Research, development and
licensing revenues.............. 551 445 368 1,167 684 215 392
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues..................... 3,481 3,696 2,225 2,618 835 226 392
Costs and expenses:
Cost of goods sold............... 3,339 3,279 2,844 2,799 240 59 --
Research and product
development..................... 843 759 1,857 3,549 6,505 2,292 1,376
Selling, general and
administrative.................. 1,365 1,306 1,208 2,972 3,658 1,019 784
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses........... 5,547 5,344 5,909 9,320 10,403 3,370 2,160
Other income (expense):
Interest income (expense), net... (214) (84) 6 452 448 170 39
Other income (expense)........... (35) 50 (2) 38 13 (4) (5)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other income (expense)....... (249) (34) 4 490 461 166 34
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss........................... $ (2,315) $ (1,682) $ (3,680) $ (6,212) $ (9,107) $ (2,978) $ (1,734)
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss per share................. $ (.90) $ (.53) $ (.78) $ (.95) $ (1.16) $ (.39) $ (.22)
Weighted average number of shares
outstanding....................... 2,565 3,198 4,727 6,505 7,822 7,541 7,824

DECEMBER 31, MARCH 31,
---------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 169 $ 5,480 $ 1,178 $ 2,912 $ 3,559 $ 4,145 $ 2,517
Working capital.................... (1,703) 5,280 986 12,159 3,147 8,681 1,528
Total assets....................... 3,804 9,051 4,927 25,122 15,519 21,460 14,364
Capital lease obligations.......... 553 263 -- -- -- -- --
Deficit accumulated during the
development stage................. (8,485) (10,167) (13,846) (20,058) (29,259) (23,130) (30,993)
Total stockholders' equity......... 445 7,773 4,093 22,554 14,282 9,634 12,643
</TABLE>

14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS IN
THE SECTIONS ENTITLED "RISK FACTORS" AND "BUSINESS."

GENERAL

The Company was founded in 1986 to develop effervescent drug delivery
technologies and focused initially on liquid effervescents. CIMA continues to be
a development stage company. CIMA's business focus has evolved over the last
several years with the development and patenting of OraSolv, an oral dosage form
which incorporates microencapsulated drug ingredients into a tablet that
dissolves quickly in the mouth without chewing or water and which effectively
masks the taste of the medication being delivered. In 1993, following issuance
of the U.S. patent covering OraSolv, the Company began to emphasize and focus on
the development of OraSolv products and currently focuses primarily on such
products.

At March 31, 1996, the Company has accumulated net losses of approximately
$30,899,000. The Company's revenues have been from product sales using the
Company's AutoLution (a liquid effervescent) technology, license fees paid by
corporate partners in consideration of the transfer of rights under
collaboration agreements, and research and development fees paid by corporate
partners to fund the Company's research and development efforts for products
developed under such agreements. To date, such revenues have been derived
primarily from manufacturing agreements with third parties for liquid
effervescent and other products, and to a lesser extent from research and
development fees and licensing arrangements, the latter generated primarily in
the last five years. Revenues from manufacturing liquid effervescent products
under agreements with third parties have decreased as a result of the Company's
decision to discontinue manufacturing that product and focus on developing its
OraSolv technology. The last revenues for manufacturing liquid effervescent
products were recognized in 1995. In addition to revenues from such
manufacturing, research and development and licensing, the Company has funded
operations from private sales of equity securities, realizing net proceeds of
approximately $25,963,000. In July 1994, the Company completed an initial public
offering of shares of its Common Stock, realizing net proceeds of approximately
$16,379,000.

The Company expects that losses will continue through at least 1997. Costs
and expenses are expected to remain relatively stable as the majority of the
necessary research and development personnel have already been hired. It is
expected that additional manufacturing personnel will be added and operating
expenses will increase at such time as the Company initiates the commercial
production of OraSolv products.

The Company's ability to generate revenues is dependent upon its ability to
enter into and be successful in collaborative arrangements with pharmaceutical
and other healthcare companies for the development and manufacture of OraSolv
products to be marketed by these corporate partners. The Company is highly
dependent upon the efforts of the corporate partners to successfully market
OraSolv products. Although the Company believes these partners will have an
economic motivation to market these products vigorously, the amount and timing
of resources to be devoted to marketing are not within the control of the
Company. These partners independently could make material marketing and other
commercialization decisions which could adversely affect the Company's future
revenues. Moreover, certain of the Company's products are seasonal in nature and
the Company's revenues could vary materially from quarter to quarter depending
on which of such products, if any, are then being marketed.

Since the Company's initial public offering in 1994, the Company has put in
place a substantially new management team. This new management team was
responsible for the buildout and validation of the Company's Eden Prairie
manufacturing facility. See "Management -- Directors and Executive Officers."

15
<PAGE>
RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

The Company's results of operations for the year ended December 31, 1995
reflect increased emphasis on the development of OraSolv products. Net sales
decreased from $1,857,000 in 1993 and $1,451,000 in 1994 to $151,000 in 1995 as
the Company ceased to manufacture liquid effervescent and other products. In the
future, the Company does not expect to derive revenues from the sale of
contract-manufactured liquid effervescent products. Research, development and
licensing revenues were $368,000, $1,168,000 and $684,000 in 1993, 1994 and
1995, respectively. The licensing revenues in 1994 and 1995 reflect receipt of
payments under license and development agreements with multinational
pharmaceutical companies that provided for licensing fees, milestone payments,
royalties and manufacturing fees. So long as the Company has relatively few
agreements with corporate partners, research and development fees and licensing
revenues will tend to fluctuate on a quarter to quarter basis.

Cost of goods sold was $2,844,000, $2,799,000 and $240,000 in 1993, 1994 and
1995, respectively. The decline in 1994 and 1995 resulted from the Company's
decision to discontinue manufacturing the liquid effervescent product line and
focus on the development of the OraSolv technology. Research and product
development expenses were $1,857,000 in 1993 compared with $3,549,000 in 1994
and $6,505,000 in 1995. The increase from 1994 to 1995 was the result of a
product development/optimization charge of $1,385,000 from an independent
consultant for improving product taste and packaging of OraSolv products. In
addition, the costs associated with validating the OraSolv production facility
and production process for the Company's corporate partners have been charged to
research and development. Selling, general and administrative expenses were
$1,208,000 in 1993 compared with $2,972,000 in 1994 and $3,658,000 in 1995. This
increase resulted from the Company's building of an infrastructure to support
the OraSolv business, together with increased expenses related to marketing and
one-time expenses for changes in senior management. The Company expects such
changes in senior management will reduce general and administrative expenses in
1996.

Net interest income was $5,500 in 1993 compared with $452,000 in 1994 and
$448,000 in 1995, reflecting interest income from increased cash levels after
the Company's initial public offering in 1994.

THREE MONTHS ENDED MARCH 31, 1995 AND 1996

The Company's results of operations for the quarter ended March 31, 1996
reflect increased emphasis on development of OraSolv products. Product sales
declined from $11,000 in the first quarter of 1995 to no product sales in the
first quarter of 1996 as the Company ceased to manufacture liquid effervescent
and other products. The Company does not intend to manufacture liquid
effervescent products in the future. Research and development fees and licensing
revenues were $215,000 and $392,000 in the first quarter of 1995 and 1996,
respectively. These increased research and development fees and licensing
revenues reflect the signing of license option and development agreements with
multinational pharmaceutical companies that provide for licensing fees,
milestone payments, royalties and manufacturing fees. Research and development
fees and licensing revenues will tend to fluctuate on a quarter to quarter
basis.

Cost of goods sold decreased from $59,000 in the first quarter of 1995 to
zero in the first quarter of 1996. Costs of goods sold will increase when the
Company begins commercial production and sales of OraSolv products. Research and
product development expenses decreased from $2,292,000 in the first quarter of
1995 to $1,376,000 in the first quarter of 1996. This decrease was the result of
a product development/ optimization charge in the first quarter of 1995 of
$1,068,000 from an independent consultant for improving product taste and
packaging of OraSolv products. Selling, general and administrative expenses
decreased due to downsizing from $1,019,000 in the first quarter of 1995 to
$784,000 in the first quarter of 1996. Net interest income decreased from
$170,000 in the first quarter of 1995 to $39,000 in the first quarter of 1996
due to lower cash balances.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date primarily through private
and public sales of its equity securities and revenues from manufacturing
agreements. Through March 31, 1996, CIMA had received net

16
<PAGE>
offering proceeds from such private and public sales of approximately
$43,300,000 and had net sales from manufacturing agreements of approximately
$13,800,000. Among other things, these funds were used to purchase approximately
$14,300,000 of capital equipment, including approximately $7,500,000 in the last
two quarters of 1994 in connection with completing the Company's new Eden
Prairie manufacturing facility. In July 1994, the Company completed an initial
public offering of shares of its Common Stock, realizing net proceeds of
approximately $16,400,000. The funds raised in CIMA's initial public offering
have been used to buildout the manufacturing facility, purchase and validate the
appropriate production equipment, complete the research and development
facilities and purchase the necessary equipment for that facility.

The Company's long-term capital requirements will depend upon numerous
factors, including the status of the Company's collaborative arrangements, the
progress of the Company's research and development programs and receipt of
revenues from sales of the Company's products. Cash and cash equivalents, were
$2,517,000 at March 31, 1996. The Company believes that its currently available
funds will meet its needs through the second quarter of 1996. The Company
believes that the net proceeds to the Company from this offering, combined with
its currently available funds and excluding any license fees that may be
received in the future, will meet its needs at least through the first quarter
of 1997. The Company will need to raise additional funds through public or
private financings, including equity financing which may be dilutive to
stockholders. There can be no assurance that the Company will be able to raise
additional funds if its capital resources are exhausted, or that funds will be
available on terms attractive to the Company.

The Company has not generated taxable income through March 1996. At March
31, 1996, the net operating losses available to offset future taxable income
were approximately $31,397,000. Because the Company has experienced ownership
changes, pursuant to Internal Revenue Code regulations, future utilization of
the operating loss carryforwards will be limited in any one fiscal year. The
carryforwards expire beginning in 2001. As a result of the annual limitation, a
portion of these carryforwards may expire before ultimately becoming available
to reduce potential federal income tax liabilities.

17
<PAGE>
BUSINESS

OVERVIEW

CIMA's business focus has evolved over the last several years. From
inception until 1992, the Company focused on the development of liquid
effervescent products and technologies. In 1993, the U.S. patent covering
OraSolv was issued and the Company, perceiving a greater commercial opportunity,
shifted its focus to the development of OraSolv products. CIMA intends to
commercialize its OraSolv technology through collaborations with pharmaceutical
and other healthcare companies under which the Company will manufacture OraSolv
formulations of its collaborators' pharmaceutical products. Since the issuance
of the OraSolv patent in 1993, the Company has:

- Completed construction of a 75,000 square foot manufacturing facility in
Eden Prairie, Minnesota, which has been registered with the FDA and
licensed by the State of Minnesota.

- Entered into a License and Development Agreement with Glaxo to develop an
OraSolv (liquid effervescent) version of Glaxo's Zantac.

- Entered into a License Agreement and Development and a License Option
Agreement with SmithKline Beecham to develop a series of OraSolv versions
of SmithKline Beecham products for international and domestic
distribution.

- Entered into agreements with three other potential partners for the
development and manufacture of OraSolv products.

- Entered into a License and Supply Agreement with Merck to provide an
AutoLution (a liquid effervescent) version of Merck's Pepcid AC.

- Added key scientific, technical and management personnel.

BACKGROUND

DRUG DELIVERY TECHNOLOGY

Patient medications are available in a variety of delivery forms, including
solid dosage forms, liquids, effervescents, transdermal delivery methods and
intramuscular and intravenous injections. Enteral medication delivery includes
those medications delivered through the stomach, including tablets, liquids and
effervescents. Enteral medications are frequently patient-administered, because
of their non-invasive delivery method. Parenteral medications are those
delivered by injection. Parenteral medications are often administered by a
healthcare provider.

The Company believes the convenience of patient administration has made
enteral medications in general, and tablets in particular, popular with
patients, providers and payors. Industry sources estimate that patients most
frequently receive medications in an oral tablet form. However, children and the
elderly, as well as those with certain physiological or medical indications,
frequently experience difficulty in swallowing tablets. These patients often
receive medications in liquid or effervescent form, or through parenteral
methods as an alternative to tablets. The Company believes that tablets are a
more convenient, accurate and

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<PAGE>
effective medication form than are liquids or effervescents (which may spill in
the process of administering the medication, especially to children) and are
easier for patients to self-administer than parenteral therapeutics.

RECENT TRENDS IN THE HEALTHCARE AND PHARMACEUTICAL INDUSTRIES

The healthcare industry has experienced significant change in the past and
the Company expects this change to continue for the foreseeable future. The
emergence of managed care organizations has focused providers and payors on the
efficient utilization of healthcare resources. In addition, the trend towards
the "capitation" of fees, or management of a patient's health requirements for a
pre-determined, regular payment, has created an awareness among providers of the
cost-effectiveness of various medical treatments. Healthcare providers and
payors have implemented a variety of strategies to reduce the cost of medical
care, including the use of generic versions of prescription and non-prescription
drugs, the use of non-prescription remedies and the use of therapies that have
high patient compliance. The Company believes that patient non-compliance with
medicinal dosing regimens is widespread, and that such non-compliance results in
unnecessary costs to the healthcare system.

These changes in the healthcare industry have also had an impact on
participants in the pharmaceutical industry. In particular, a greater emphasis
on cost effectiveness by providers and payors has resulted in pharmaceutical
companies developing products that reduce the cost of therapy. These
pharmaceutical companies have responded by developing treatments with improved
efficacy, reduced complications and side effects, easier delivery and lower
costs. The focus on cost-effectiveness has also led to the development of
generic versions of off-patent prescription drugs. Increasingly, healthcare
payors and providers have embraced generic equivalents of branded drugs because
generic drugs provide a substantial cost savings. In addition, many
pharmaceutical companies are extending their presence in a particular
therapeutic area with the introduction of a non-prescription, or OTC, version of
a prescription drug. Many patients and providers have indicated a preference for
OTC versions of prescription formulations because of the convenience that
patient-administration of OTC therapies provides as well as the cost savings. In
addition, healthcare providers and payors have indicated a continuing interest
in therapies that improve patient compliance which ultimately leads to
significant healthcare cost savings.

As these pharmaceutical companies adjust to the evolving healthcare
industry, they must differentiate their products in an increasingly crowded
therapeutic market. To do this effectively, they must develop products or
product extensions that can successfully compete in the generic and OTC market
for drugs, develop products or product extensions that enhance patient
compliance, and do all of this within a highly regulated and cost-constrained
environment.

MARKET OPPORTUNITY

The Company believes that its OraSolv drug delivery system will provide
benefits to patients as well as healthcare industry providers and payors. These
benefits, in turn, should provide marketing advantages to CIMA's pharmaceutical
partners. The benefit to patients is convenience, which the Company believes
will result in improved compliance with dosing regimens. The benefits to
providers and payors are lower costs resulting from such improved compliance
with dosing regimens. The benefits to pharmaceuticals partners are the potential
for brand differentiation and the ability to retain brand integrity using
proprietary technology.

ADVANTAGES FOR PATIENTS, PROVIDERS AND PAYORS

The Company believes a broad group of patients will benefit from the OraSolv
rapid dissolve technology because it enables immediate medication at symptom
emergence and facilitates conformance to dosing regimens. Patient non-compliance
with dosing regimens has been associated with increased costs of medical
therapies by prolonging treatment duration, increasing the likelihood of
secondary or tertiary disease manifestation and contributing to over-utilization
of medical personnel and facilities. By improving patient compliance, providers
and payors may reduce unnecessary expenditures and improve therapeutic outcomes.
Reduction of expenditures is an increasingly important issue to providers as
capitated payment plans become more prevalent in the healthcare industry.

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<PAGE>
In addition to the general market applications, the Company believes the
OraSolv technology provides benefits to certain patient groups which experience
significant difficulty in swallowing tablets. Such patient groups include
children and the elderly and patients with certain anatomical or physiological
deformities, certain disease indications or medication-associated dysphagia. The
Company has completed quantitative consumer testing with children and
qualitative testing with physicians for the elderly which indicate the potential
for these demographic groups to better comply with dosing regimens and thus to
benefit from the OraSolv technology.
ADVANTAGES FOR PHARMACEUTICAL PARTNERS

The Company believes that pharmaceutical companies are facing challenges to
adjust to the evolving healthcare industry. These challenges include: the impact
of generic competition, which generally results in lower pricing as well as a
loss of market share; the impact of the increased role of managed care
organizations, forcing increased economic considerations in patient care, the
results of which can include shorter therapies and therapeutic substitution
(including less expensive products); and the need to maintain brand integrity
with its inherent economic benefits.

Pharmaceutical companies are addressing these issues in several ways. They
are attempting to develop new product forms which will demonstrate a medical and
economic benefit to the patient. They are also trying to develop products which
will help to improve patient compliance, which should result in a patient's more
rapid return to health. Finally, they are attempting to use approaches which can
be patented or provide a technological differentiation in order to reduce the
threat of competition. The Company believes that the OraSolv technology provides
a means for its pharmaceutical partners to meet each of these challenges.

TECHNOLOGY

ORASOLV

The Company's OraSolv technology is an oral dosage form which combines
taste-masked, microencapsulated drug ingredients with an effervescent
disintegration agent. The effervescent disintegration agent aids in rapid
dissolution of the tablet, permitting swallowing before the pharmaceutical
ingredients are released. The OraSolv tablet dissolves quickly without chewing
or water and allows for effective taste-masking of a wide variety of both
prescription and OTC active drug ingredients.

The microencapsulation of the drug ingredients used in OraSolv products is
accomplished using a variety of coating techniques, including spray coating,
spray drying, spray congealing, melt dispersion, phase separation or solvent
evaporation methods. Certain of these coating techniques have been developed by
the Company's scientists in collaboration with coating materials suppliers.
Coating materials are designed to prevent the active drug ingredient in the
OraSolv tablet from coming in contact with the taste buds and provide for
immediate release of the active ingredient in the stomach. Coating materials are
chosen based on the dose and taste of the active ingredients. A series of
experiments is then performed to determine the suitability of various
microencapsulation techniques. From these experiments, a technique is chosen
based on reproducibility, stability, effectiveness in taste masking and
cost-effectiveness. The microencapsulated drug is then combined with the
fast-dissolving tablet materials, which can include a variety of flavoring and
coloring agents, one or more sweetening agents and commonly used tablet
excipients, such as binding agents and lubricants. In addition, an effervescent
system composed of a dry acid and a dry base is added to the tablet excipients
to facilitate a mild effervescent reaction when the tablet contacts saliva. This
effervescent reaction accelerates the disintegration of the tablet through the
release of carbon dioxide. As the OraSolv tablet dissolves, it releases the
microparticles of drug into the saliva forming a micro-suspension of the drug in
the saliva. This microencapsulated drug suspension enters the stomach through
the normal swallowing process.
AUTOLUTION

The Company's AutoLution technology is a drug delivery system that creates a
liquid effervescent solution from dry drugs or chemicals. The technology
involves the preparation of the active ingredients into a tablet or powder which
is added to water to create a liquid drug solution. Since 1992, the Company has
shifted its focus away from the development of AutoLution products to the
development of OraSolv-based products. The Company will continue to develop its
AutoLution technology under contractual agreements with corporate partners or
other third parties, but it will no longer contract manufacture products using
this technology.

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<PAGE>
STRATEGY

- COLLABORATE WITH CORPORATE PARTNERS FOR MARKETING OF PRODUCTS. The Company
has entered into and intends to continue to enter into agreements with
pharmaceutical and other healthcare companies for the development and
marketing of products that incorporate the OraSolv technology. The Company
will refine the OraSolv formulation of a particular oral therapeutic and
manufacture it for its collaborators. These collaborators will market and
sell the OraSolv versions of the therapeutic. The Company believes this
strategy will reduce the time required to market products and take
advantage of the industry knowledge and presence of its partners.

- FOCUS INITIALLY ON OTC APPLICATIONS. The Company is focusing initially on
developing OraSolv products for the OTC cough/cold/flu, allergy and sinus,
and analgesic markets. The Company intends to target both adult and
pediatric applications. The Company believes that OTC products which are
subject to the FDA's OTC drug review process can generally be introduced
without FDA preapproval and thus can generate revenues sooner than
prescription products. The Company believes that OTC products using its
OraSolv delivery system can establish distinct brand identities among
otherwise largely undifferentiated OTC products, particularly in the large
but competitive cough/cold/flu, allergy and sinus, and analgesic markets.

- PURSUE OPPORTUNITIES IN OTC SWITCH PRODUCTS. The Company intends to
develop OraSolv products for drugs that are being switched from the
prescription to the OTC market. The Company believes that as prescription
products are switched into the OTC market, pharmaceutical companies will
seek methods for product differentiation. The Company believes that the
OraSolv delivery system offers significant differentiation potential for
these products. The Company's initial focus in this area is in the gastric
relief market, where opportunities have been created by the recent FDA
approval of the switch to OTC of three significant anti-ulcer drugs,
Zantac 75, Pepcid AC and Tagamet HB, and expiration of the patent on
Tagamet.

- DEVELOP SELECTED PRESCRIPTION DRUG APPLICATIONS.The Company is
investigating the development of OraSolv pediatric antibiotic products and
expects in the future to develop certain other prescription drug
applications. Qualitative market research studies (focus groups) with
pediatricians conducted by the Company have demonstrated a strong interest
by this group in utilizing OraSolv technology to improve compliance among
children taking antibiotic products. Other potential OraSolv prescription
applications include anti-nauseants, psychotherapeutics and cancer therapy
drugs. OraSolv products may offer improved taste acceptance and improved
compliance with respect to these drugs. They may also offer benefits where
patients have difficulty swallowing tablets or ingesting liquids.

- DEVELOP PROPRIETARY TECHNOLOGIES. The Company intends to continue to
develop proprietary technology and obtain patents thereon. To date, the
Company has five U.S. and two Australian patents and nine patent
applications. The Company believes that patented products and technologies
provide attractive marketing features for use by its corporate partners.

- RETAIN MANUFACTURING RIGHTS. The Company intends to continue to develop
OraSolv formulations of oral therapeutics for its collaborators, to
manufacture commercial quantities of these products in its facility in
Eden Prairie, and to rely on its collaborators to market and sell the
OraSolv formulations. The Company believes this strategy enables it to
better and more effectively manage increasing manufacturing volumes,
control quality of the products it manufactures and manufacture in small
or varying batch sizes, each of which provide it with a competitive
business advantage.

- RETAIN OWNERSHIP OF PRODUCTS DEVELOPED IN COLLABORATIONS. The Company has
retained and intends to continue to retain ownership of the OraSolv
formulations developed for its collaborators. The

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<PAGE>
Company believes this practice will provide it with the flexibility of
entering into collaborations with other potential partners should the
initial partner decide not to pursue the commercialization of a particular
OraSolv product.

TARGET MARKETS

KEY OTC MARKETS

OTC COUGH/COLD/FLU, ALLERGY AND SINUS. This large market is generally
segmented into cough/cold/flu, allergy, and sinus categories with approximately
77% of U.S. sales in terms of dollars in cough/cold/flu products, and 12% and
11% each in the allergy and sinus categories, respectively, in 1993.
Approximately 61% of sales in this market are of products using tablet, capsule
and lozenge dosage forms while the remaining 39% of sales are of products using
liquid dosage forms. This market is highly competitive. The cough/cold/flu
category is seasonal and is characterized by frequent new product entries as
companies attempt to gain market share through product differentiation. The
Company has entered into an agreement with a multinational pharmaceutical
company to develop a series of products for this market. See "-- Agreements With
Corporate Partners." The Company is also pursuing other development
opportunities in this market.

OTC ANALGESICS. This market consists of the following market segments:
acetaminophen, which represented approximately 48% of U.S. dollar sales in this
market in 1993; ibuprofen, which represented approximately 30% of such sales;
aspirin, which represented approximately 22% of such sales. New Rx-to-OTC switch
products (e.g., ketoprofen and naproxen sodium), have recently entered this
market and are expected to achieve significant growth. The Company's initial
focus in this market is on acetaminophen, the dominant segment, and the
fast-growing segments of the Rx-to-OTC products, as well as on analgesic
combinations. The Company is pursuing several development opportunities in this
market.

GASTRIC RELIEF. The Company believes that the gastric relief market for OTC
products will grow as the patents on certain anti-ulcer prescription drugs
expire. For example, the patent on a significant anti-ulcer prescription drug
recently expired. Generic versions of this drug are being introduced into the
prescription market and also switched into the OTC market. These generic
versions may be considered therapeutically equivalent to other patented,
anti-ulcer prescription drugs. The Company believes that OraSolv is an
attractive dosage form for the gastric relief market because it could provide
taste masking for anti-ulcer drugs, which tend to have a disagreeable taste.

PRESCRIPTION DRUG MARKET

The Company is investigating the development of OraSolv pediatric antibiotic
products and expects in the future to develop OraSolv products for prescription
drug applications, including products for which Abbreviated New Drug
Applications may be filed for special niche branded use. Certain antibiotics
must be manufactured at a separate facility from other pharmaceuticals, which
may impede the development of such products. Other potential OraSolv
prescription applications include anti-nauseants, psychotherapeutics and cancer
therapy drugs. The Company also believes that additional prescription
opportunities exist in the analgesic, anti-inflammatory and cough/cold/flu,
allergy and sinus markets.

PEDIATRIC VITAMINS

The Company has in the past developed and may in the future develop OraSolv
products for the pediatric vitamin market. The Company has focused on the
pediatric vitamin market rather than on the larger adult vitamin market because
the Company believes that OraSolv's improved taste acceptance and ease of
administration can offer greater compliance in the pediatric market, where
compliance with a regular dosage regimen can be difficult to achieve.

AGREEMENTS WITH CORPORATE PARTNERS

The Company's business development efforts are focused on entering into
development, licensing and manufacturing agreements with pharmaceutical and
other healthcare companies. Under these agreements, the corporate partner will
be responsible for marketing the Company's products either worldwide, or in
specified markets or territories. The collaborative arrangements typically begin
with a research and development phase which, if successful, may be followed by a
development and license option agreement for

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<PAGE>
development of product prototypes and then license and manufacturing agreements
for commercialization of such products. Alternatively, the Company may develop
product prototypes internally and enter directly into a development,
manufacturing or license agreement for commercialization of those products.

The Company's future ability to generate revenue is dependent upon the
Company's ability to enter into collaborative arrangements with pharmaceutical
and other corporate partners to develop products that meet the requirements of
its corporate partners and upon the marketing efforts of these corporate
partners. The Company believes these partners will have an economic motivation
to market the Company's products; however, the amount and timing of resources to
be devoted to marketing are not within the control of the Company. These
partners independently could make material marketing and other commercialization
decisions which could adversely affect the Company's future revenues. Failure of
these partners to market the Company's products successfully would have a
material adverse effect on the Company's financial condition and results of
operations. Moreover, certain of the Company's OTC products are seasonal in
nature and the Company's revenues could vary materially from one financial
period to another depending on which of such products, if any, are then being
marketed. In an attempt to alleviate such risk, the Company is focused on
developing for its partners a mix of OTC and prescription products. There can be
no assurance that the Company will be able to enter into additional
collaborative arrangements in the future or that any current or future
collaborative arrangements will result in successful product commercialization.
To the extent that agreements with corporate partners cover products to be sold
internationally, such sales could be adversely affected by governmental,
political and economic conditions in other countries, including tariff
regulations, taxes, import quotas and other factors.

The table below summarizes certain elements of the Company's major
collaborative arrangements, including partners, market segments, types of
agreements and CIMA technology.

<TABLE>
<CAPTION>
PARTNER MARKET SEGMENT TYPE OF AGREEMENT CIMA TECHNOLOGY
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Glaxo Wellcome plc Gastric Relief License and Development OraSolv
(Rx and OTC) Agreement

SmithKline Beecham plc (1) License Agreement OraSolv

SmithKline Beecham plc/ Analgesics and Option and Development OraSolv
Sterling Winthrop, Inc.(2) Cough/Cold/Flu Agreement

(1) (1) Full-Scale Stability, OraSolv
Manufacturing and Testing

(1) (1) Development and License OraSolv
Option Agreement

(1) (1) Development Agreement OraSolv

Merck & Co., Inc. Gastric Relief License and Supply AutoLution
Agreement
</TABLE>

- ------------
(1) Further information is confidential as disclosure of the partner company or
product category may force the collaborative partner to alter its marketing
plans, which could have a material adverse effect on the eventual marketing
of the product.

(2) As a result of corporate restructuring due to the sale of Sterling's OTC
business to SmithKline Beecham, SmithKline Beecham assumed most of
Sterling's rights under this agreement, and certain rights with respect to
the U.S. and Canada reverted to the Company. See "-- Agreements With
Corporate Partners -- SmithKline Beecham Option and Development Agreement."

GLAXO AGREEMENT

The Company has entered into a License and Development Agreement with Glaxo
(the "Glaxo Agreement") to produce an OraSolv version of Zantac to be marketed
exclusively by Glaxo in the U.S. and internationally, for both the OTC and
prescription markets. In late 1995, the FDA approved the switch to OTC of a
version of Zantac for heartburn indications (Zantac 75). Pursuant to the Glaxo
Agreement, the Company will receive certain fees to develop product prototypes
and all development costs will be borne by Glaxo. The Company will also receive
payments upon completion of certain milestones. Glaxo will pay specified
royalties to the Company on net sales of the products. The Glaxo Agreement
provides that the

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<PAGE>
Company retains the right to manufacture certain minimum quantities of the
OraSolv products for the first five years following the first commercial sale of
the products. At any time during the term of the Glaxo Agreement, however, Glaxo
may terminate the Company's manufacturing rights for specified reasons.
Termination of the Company's manufacturing rights or of the Glaxo Agreement
could have a material adverse effect on the Company's business. Timing of
product introductions under the Glaxo Agreement is within the control of Glaxo,
and the Company estimates that products developed under the Glaxo Agreement will
be introduced no earlier than the second half of 1998.

SMITHKLINE BEECHAM LICENSE AGREEMENT

The Company entered into a License Agreement with SmithKline Beecham in
April 1996. The License Agreement grants SmithKline Beecham exclusive marketing
rights for certain specific OraSolv OTC products. SmithKline Beecham will have
the right to market such products throughout the world, except in the U.S. and
Canada. Under the License Agreement, the Company will receive a license fee
which is refundable under certain circumstances, and is also entitled to receive
certain milestone payments upon the occurrence of specified events. The Company
will also receive royalties on net sales of the products by SmithKline Beecham.
SmithKline Beecham has a unilateral right to terminate the License Agreement for
any reason upon written notice to the Company within specified time periods. The
License Agreement also contemplates that the parties will negotiate and enter
into a manufacturing and supply agreement pursuant to which the Company would
manufacture and supply SmithKline Beecham with its requirements of the products.
There can be no assurance, however, that such an agreement will be reached or,
if reached, that such supply relationship will be profitable to the Company. If
the parties are unable to agree upon such manufacture and supply terms, then
SmithKline Beecham may elect to have such products manufactured by either
SmithKline Beecham or a third party manufacturer approved by the Company.

SMITHKLINE BEECHAM OPTION AND DEVELOPMENT AGREEMENT

The Company entered into an Option and Development Agreement with Sterling
Winthrop, Inc. ("Sterling") in May 1994. Subsequently, Sterling's worldwide OTC
business was purchased by SmithKline Beecham, which assumed Sterling's
development and license option rights to all 15 products under the agreement for
markets outside the U.S. and Canada, but relinquished rights to five of the
products for sales in the U.S. and Canada. The agreement provides that the
Company will develop a series of analgesic and cough/cold/flu, allergy and sinus
OraSolv products. The Company will receive certain fees to develop a number of
different product prototypes for SmithKline Beecham's evaluation and will grant
to SmithKline Beecham, upon payment of additional specified fees, options to
enter into license agreements for the marketing of any of the products
developed. While this agreement describes the basic terms to be contained in any
license agreement subsequently entered into between the Company and SmithKline
Beecham, SmithKline Beecham is not obligated to enter into any definitive
license agreement with the Company and generally has the right to abandon a
product at any time for any reason without significant penalty, or to terminate
the agreement entirely. If the Company does not enter into a definitive license
agreement with SmithKline Beecham within a specified time period, the Company
retains the right to seek an alternative corporate partner for the products
being developed, although there can be no assurance that the Company could
locate a suitable alternative corporate partner. A decision by SmithKline
Beecham to abandon one or more products, once licensed, could materially
adversely affect the Company's financial condition and results of operations.

The agreement with SmithKline Beecham specifies certain products for which
any license granted would be co-exclusive, permitting the Company to enter into
another collaborative arrangement with a different corporate partner with
respect to each such product. As to the other products to be developed, the
license granted to SmithKline Beecham would be exclusive. The agreement provides
that if any definitive license agreement is entered into, the Company would
receive certain license fees and a royalty on net sales of each of the products
subject to the license agreement. While the SmithKline Beecham agreement does
not specify the terms of any manufacture and supply agreement, the Company
intends to negotiate to retain the right to manufacture the licensed products in
connection with any definitive license agreement entered

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<PAGE>
into with SmithKline Beecham. There can be no assurance that the Company will
retain manufacturing rights or that any such rights retained will be profitable
for the Company. The failure by the Company to retain manufacturing rights could
have a material adverse effect on the Company's profitability.

OTHER ORASOLV AGREEMENTS

In the first quarter of 1996, the Company entered into three additional
agreements with three undisclosed multinational pharmaceutical companies for
development or manufacture of OraSolv products. Because the marketplace for
pharmaceutical products is highly competitive, disclosure of the potential
partner and market category or product may result in the prior implementation of
competitive strategies which would be damaging or destructive to the marketing
plans of the potential partner. That activity could result in the loss of brand
equity and the nonrecovery of substantial advertising and promotional costs.
Accordingly, at the present time both the identities of the other companies and
the nature of the products involved remain confidential.

One of these agreements, a full-scale stability, manufacturing and testing
agreement, provides for the Company to conduct stability manufacturing and
testing of an OraSolv formulation of a certain class of pharmaceutical products.
The agreement provides for the partner to pay the Company certain fees and
provides the partner an exclusive negotiation period for additional rights with
respect to the specific class of pharmaceutical products being evaluated by the
partner.

Under the other two confidential agreements, the Company is developing
prototypes of products formulated with the OraSolv technology for that partner's
evaluation. In exchange, the partner will make certain payments to CIMA. The
agreements also provide for an exclusive negotiation period for additional
rights with respect to the product.

There can be no assurance that the potential partners under any of these
confidential agreements will perform as anticipated, or that any of these
confidential agreements will result in the commercialization of products. In
addition, each of these three confidential agreements permit the respective
potential partner to terminate the agreement at any time.

MERCK AGREEMENT

The Company has a license agreement and supply agreement with Merck under
which the Company has developed an AutoLution (liquid effervescent) form of
Pepcid AC, the OTC version of Pepcid, Merck's anti-ulcer product. The license
agreement provides that the Company will receive a royalty on net sales of the
product, which Merck plans to sell in Europe. Merck may terminate the license
agreement upon 90 days' written notice for any reason.

PATENTS AND PROPRIETARY RIGHTS

The Company actively seeks, when appropriate, protection for its products
and proprietary information by means of U.S. and foreign patents, trademarks and
contractual arrangements. In addition, the Company relies upon trade secrets and
contractual arrangements to protect certain of its proprietary information and
products. The Company holds five U.S. patents. The most significant U.S. patent
issued to the Company covers the taste-masking, microencapsulation and
quick-dissolving excipient technology incorporated in the OraSolv products. The
OraSolv patent and two others were issued in 1993 and expire in 2010, the fourth
patent was issued in 1995 and expires in 2012 and the fifth patent was issued in
1996 and expires in 2013. Two of the issued U.S. patents relate to the
production of compressed effervescent and non-effervescent tablets using a
particular lubricant developed by the Company. Another patent relates to an
effervescent pediatric vitamin and mineral supplement. The fifth patent relates
to the formulation of a base coated acid effervescent mixture manufactured by a
controlled acid-base reaction. The obtained mixture can be used in the
formulation of acid sensitive compounds with OraSolv technology or other
effervescent-based products.

The Company holds two patents in Australia, which issued in 1990. The
Company also has a total of nine U.S. and foreign patent applications, including
two European Patent Office filings.

25
<PAGE>
The Company's success will depend in part on its ability to obtain and
maintain patent protection for its products and preserve its trade secrets. No
assurance can be given, however, that the Company's patent applications will be
approved or that any issued patents will provide competitive advantages for its
products or will not be challenged or circumvented by competitors.

The ability to commercialize the Company's products will depend on not
infringing the patents of others. Although the Company is not aware of any claim
of patent infringement against it, the Company has entered into a licensing
agreement with Beecham Group plc ("Beecham") to avoid the possibility of
litigation. Under the license, the Company has a non-exclusive, worldwide
license to make, have made, use and sell products covered by a particular U.S.
patent issued to Beecham and corresponding rights in other countries (the
"Beecham Patent Rights"), which may cover certain OraSolv products. Under the
terms of the license, the Company is required to pay a royalty of 2% of amounts
received by the Company in respect of OraSolv products. The license extends for
the life of the Beecham Patent Rights and is terminable upon default by either
party.

Whether or not the outcome of any litigation concerning patents and
proprietary technologies is favorable to the Company, the cost of such
litigation and the diversion of the Company's resources during such litigation
could have a material adverse effect on the Company.

Much of the Company's technology is dependent upon the knowledge, experience
and skills of key scientific and technical personnel. To protect rights to its
proprietary know-how and technology, Company policy requires all employees and
consultants to execute confidentiality agreements that prohibit the disclosure
of confidential information to anyone outside the Company. These agreements also
require disclosure and assignment to the Company of discoveries and inventions
made by such persons while devoted to Company activities. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any such breach or that the Company's trade secrets will
not otherwise become known or be independently developed by competitors. In
addition, it is possible others may infringe the patent rights of the Company.

The Company may desire or be required to obtain licenses from others with
respect to materials used in the Company's products or manufacturing processes,
including drug coating techniques. There can be no assurance that such licenses
will be obtainable on commercially reasonable terms, if at all, or that any
licensed patents or proprietary rights will be valid and enforceable.

MANUFACTURING

A key component of the Company's strategy is to be the primary manufacturer
of OraSolv products. Advantages of this strategy include the control of the
technology, the ability to quickly increase production, and to refine the
production process as necessary to rapidly and successfully bring OraSolv
products to market. Although the OraSolv process uses standard pharmaceutical
production equipment, certain modifications were required to meet the specific
needs of OraSolv products, including the need for producing softer tablets,
special protective packaging and dehumidification. During the refining process
and the process validation runs, the Company identified the key product quality
issues, which the Company has now built into the product specifications. The
Company believes that this manufacturing experience gives it an advantage over
its competitors. The Company believes that its ability to manufacture OraSolv
products provides economies of scale, therefore making the Company more
attractive to its partners by allowing them access to smaller volume line
extensions without making significant capital investments.

The Company's OraSolv production facility is located in Eden Prairie,
Minnesota, which also houses the Company's corporate headquarters. The Company
began occupying and making leasehold improvements to the new facility in late
June 1994 and the facility was completed in December 1994. See "-- Properties."
Initially, the Company will operate one production line at this facility which
it believes will be capable of producing 400 million tablets a year. The
facility is designed to be expandable to six production lines to achieve a
maximum capacity of 2.4 billion tablets a year. The production equipment
consists of an integrated blending, tableting and packaging operation. The
configuration of the production flow layout and this

26
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equipment has been designed by Company personnel and the Company's consultants.
Most of the equipment consists of components commonly used in pharmaceutical
manufacturing. Modern technology for environmental control is utilized. The
equipment was selected for ease of operation, cleaning and changeover and cost
effectiveness. The production line is capable of packaging a variety of package
designs with rapid conversion between sizes.

During 1995, the facility was validated, registered with the FDA and
licensed by the State of Minnesota. Numerous site audits by major pharmaceutical
companies have also successfully occurred. After the completion of equipment
validation, CIMA successfully conducted full scale-up runs of the production
line. To date, over 50 production batches have been manufactured using the
OraSolv production equipment.

The OraSolv production process begins with the purchase of the
pharmaceutical ingredients to be used in manufacturing the products. The active
drug ingredients may be shipped to coating materials suppliers where appropriate
coating materials are applied to microencapsulate the ingredients. In some
cases, the Company purchases the microencapsulated active ingredient from a
supplier. These coating materials suppliers are subject to extensive government
regulation, including current Good Manufacturing Practice regulations ("cGMP")
promulgated by the FDA. After coating, the active drug ingredients are sent to
the Company where they are tested again by CIMA's Analytical Quality Control
group and released to the production department. The active and inactive drug
ingredients that have been quality control released are further processed and
pressed into OraSolv tablets. The tablets are immediately transferred into
blister-foil packages and packed in cartons in a high-speed, continuous
operation. The pharmaceutical ingredients and other supplies to be used in
manufacturing OraSolv products are standard pharmaceutical products available
from numerous suppliers. Most coating materials are also available from numerous
suppliers. In some instances, however, certain coating materials or techniques
may be available only from a single supplier. If any such coating materials or
techniques were to become unavailable, the Company believes that satisfactory
alternative materials or techniques could be substituted. However, there can be
no assurance that the Company's manufacturing operations would not be disrupted.
Any such disruption could have an adverse effect on the Company's business and
could possibly damage relations with its corporate partners.

By producing many full-scale trial batches, the Company believes it has
identified and minimized potential problems that could affect product
manufacturing in commercial quantities. There can be no assurance, however, that
manufacturing and control problems will not arise as the Company begins
manufacturing at commercial scale. If manufacturing or control problems arise
and are not corrected for any reason, the Company's business could be materially
adversely affected.

MARKETING

The Company's marketing strategy is to rely on its corporate partners for
the marketing and sale of its products. The Company believes this strategy will
enable it to respond quickly to market demands, while avoiding the effort and
expense associated with the establishment of an end-user marketing capability.
The Company's internal marketing department has focused on promoting the
benefits of OraSolv to its corporate pharmaceutical partners and with conducting
consumer surveys and physician research of various OraSolv formulations.
Currently, the Company has entered into corporate collaborations with Glaxo,
Merck and SmithKline Beecham, and with three other major pharmaceutical
companies.

RESEARCH AND DEVELOPMENT

The research and development ("R&D") department at CIMA is primarily focused
on the development of oral dosage forms based on CIMA proprietary technologies.
These efforts are conducted to support the CIMA strategic and business goals.
The Company's R&D department is devoted to the development of drug delivery
technologies and dosage forms for pharmaceutical applications. The key goals for
the R&D team are: develop innovative drug delivery systems that fulfill the
pharmaceutical partners' needs and meet the strategy of the Company; develop,
expand and support systems required to fulfill cGMP production at commercial
levels necessary to meet the requirements of major pharmaceutical companies;
recruit and train high quality technical and scientific personnel; and support
the Company's intellectual property process.

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<PAGE>
The R&D department includes scientists recruited from the research and
development groups of major U.S. pharmaceutical companies. Currently R&D
personnel and support systems and facilities are organized in a way to
effectively develop formulations from bench scale through full scale/commercial
size. Such development is carried out at the R&D facilities in Brooklyn Park,
Minnesota and in the full scale manufacturing facility in Eden Prairie,
Minnesota. The Company believes that its R&D facilities are in compliance with
cGMP. In both facilities, small cGMP batches are manufactured, packaged and
released to support initial studies in humans, including both consumer studies
for OTC products and clinical studies for prescription products.

During the three years ended December 31, 1995, CIMA's total expenditures
for research and development were $1,856,900, $3,548,900 and $6,504,500,
respectively, of which amounts research and development fees from the Company's
collaborative partners were $271,800, $452,900 and $496,600, respectively.

COMPETITION

Competition in the areas of pharmaceutical products and drug delivery
systems is intense. The Company's primary competitors in the business of
developing and applying drug delivery systems include companies which have
substantially greater financial, technological, marketing, personnel and
research and development resources than the Company. The Company's products will
compete not only with products employing advanced drug delivery systems but also
with products employing conventional dosage forms. New drugs or future
developments in alternative drug delivery technologies may provide therapeutic
or cost advantages over the Company's potential products. There can be no
assurance that developments by others will not render the Company's products or
technologies noncompetitive or obsolete.

Among the technologies expected to provide competition for the Company's
OraSolv technology is the Zydis technology developed by R.P. Scherer Corporation
("Scherer") and the Shearform Matrix technology developed by Fuisz Technologies,
Ltd. ("Fuisz"). The Zydis technology is a fast-dissolving oral drug delivery
system based on a freeze-dried gelatin tablet. The Shearform Matrix technology
has application to two tablet formats, one of which involves waterless, fast
dissolving oral delivery which Fuisz calls "FlashDose."

The principal competitive factors in the market for rapid dissolving tablet
technologies are compatibility with taste-masking techniques, dosage capacity,
drug compatibility, cost and ease of manufacture and required capital investment
for manufacturing. The Company believes that its rapid dissolving tablet
technology competes favorably with respect to these factors. However, both
Scherer and Fuisz have been successful in licensing their technologies to a
number of pharmaceutical companies. The Company also believes that certain
pharmaceutical companies may be developing other rapid dissolving tablet
technologies which might be competitive with the Company's technology.

GOVERNMENT REGULATION

All pharmaceutical manufacturers are subject to extensive regulation of
their activities, including research and development and production and
marketing, by numerous governmental authorities in the U.S. and other countries.
In the U.S., pharmaceutical products are subject to rigorous regulation by the
FDA. The federal Food, Drug, and Cosmetic Act, as amended, and the regulations
promulgated thereunder, and other federal and state statutes and regulations,
govern, among other things, the research, development, testing, manufacture,
storage, recordkeeping, labeling, advertising and promotion, and marketing and
distribution of pharmaceutical products. If a company fails to comply with
applicable requirements, it may be subject to administrative or judicially
imposed sanctions such as civil penalties, criminal prosecution of the company,
its officers and employees, injunctions, product seizure or detention, product
recalls, total or partial suspension of production and FDA refusal to approve
pending premarket approval applications or supplements to approved applications.

In general, FDA approval is required before a new drug product may be
marketed in the U.S. However, most OTC drug products are exempt from the FDA's
premarketing approval requirements. In 1972, the FDA instituted the ongoing OTC
Drug Review in order to evaluate the safety and effectiveness of all OTC drugs
then on the market. Through the OTC Drug Review process, the FDA issues
monographs that set forth the specific active ingredients, dosages, indications,
and labeling statements for OTC drugs that the

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<PAGE>
FDA will consider generally recognized as safe and effective and therefore not
subject to premarket approval. For certain categories of OTC drug products not
yet subject to a final monograph, the FDA usually will not take regulatory
action against such a product unless failure to do so poses a potential health
hazard to consumers. The Company initially intends to emphasize OTC drug
products that generally do not require FDA approval. Products subject to final
monographs, however, are subject to various FDA regulations such as those
outlining cGMP requirements, general and specific OTC labeling requirements
(including warning statements), the restriction against advertising for
conditions other than those stated in product labeling, and the requirement that
OTC drugs contain only suitable inactive ingredients. OTC products and
manufacturing facilities are subject to FDA inspection, and failure to comply
with applicable regulatory requirements may lead to administrative or judicially
imposed penalties.

Future marketing of products not formulated in compliance with final OTC
drug monographs typically will require a formal submission to the FDA, such as
an Abbreviated New Drug Application ("ANDA"), New Drug Application ("NDA") or
Supplement to existing New Drug Application ("SNDA"), and ultimate approval by
the FDA. This application and approval process can be expensive and time
consuming, typically taking from six months to several years to complete.
Further, there can be no assurance that approvals can be obtained, or that any
such approvals will be on the terms or have the scope necessary for successful
commercialization of these products. The Company expects that any required FDA
approvals in connection with the introduction of new, non-monographed products,
such as an OraSolv version of Zantac, would be sought by the Company's corporate
partners. Marketing of such products could be delayed or prevented because of
this process. Even after an ANDA, NDA or SNDA has been approved, existing FDA
procedures may delay initial product shipment. Delays caused by the FDA approval
process may materially reduce the period during which there is an exclusive
right to exploit patented products or technologies. Even if any required FDA
approval has been obtained with respect to a product, foreign regulatory
approval of a product must be obtained prior to marketing the product
internationally. Foreign approval procedures vary from country to country and
the time required for approval may result in delays in or ultimately prevent
marketing. The Company expects to rely on its pharmaceutical company partners to
obtain any necessary government approvals in foreign countries.

Prescription drug products with proven safety and efficacy profiles may be
"switched" to OTC status through the submission to and approval by the FDA of an
NDA. The information and data required to support a switch application vary with
individual drugs. In some cases, the manufacturer may be required to conduct
clinical investigations or other scientific studies to assess the safety and
effectiveness of the drug for OTC use. In evaluating an OTC switch, the FDA
considers whether the drug product is safe for use by consumers without the
supervision of an appropriate licensed healthcare professional. As prescription
drug products are switched to the OTC market, pharmaceutical companies face the
same challenges to establish brand identification and product differentiation as
they face with current OTC drug products. Although switched products in certain
cases may be eligible for a three-year period of market exclusivity (during
which time the FDA will not consider any ANDAs for the same drug), the Company
believes that its OraSolv drug delivery system can help its corporate partners
differentiate their products during any exclusivity period and maintain a
competitive advantage thereafter.

If a generic version of a drug already approved under an NDA and no longer
subject to any FDA marketing exclusivity, is bioequivalent to the approved
product, preparation and submission of an ANDA will be the most time and
cost-effective approach to the FDA premarket approval. The methodology for
establishing bioequivalence through in vitro or in vivo methods is viewed to be
straightforward. Because CIMA's taste-masking systems are used in immediate
release dosage forms, this approach is generally the most expeditious.

Certain drugs may raise distinctive issues, such as a need for a unique
approach to proving bioequivalence. In those cases, premarket approval under
section 505(b)(2) of the Food, Drug, and Cosmetic Act would be more appropriate.
Section 505(b)(2) allows the FDA to approve an NDA using shortened procedures,
usually for drugs that have proven safety profiles because of their marketplace
performance among a large population group. In a 505(b)(2) application, a
company may rely on clinical investigations conducted by others to which it does
not hold a right of reference. In general, a 505(b)(2) application is supported
by two or three clinical studies among the target population group designed to
verify the safety

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<PAGE>
and efficacy of the drug product in that population using the target dose and
dose sequence. The cost of this approach, which is generally used when a new
delivery system or indication is added to an existing drug product, is typically
much less that a standard NDA.

Each domestic drug product manufacturing facility must be registered with
the FDA. Each manufacturer must inform the FDA of every drug product it has in
commercial distribution and keep such list updated. Domestic manufacturing
facilities are also subject to at least biannual inspection by the FDA for
compliance with cGMP regulations. Compliance with cGMP is required at all times
during the manufacture and processing of drug products. CIMA's existing
manufacturing facilities have been inspected periodically by the FDA. While the
Company's new OraSolv manufacturing facility is required to be registered with
the FDA and to comply with cGMP regulations at all times, FDA approval will not
be required prior to commencement of manufacturing of OTC drug products. An FDA
inspection of the premises once manufacturing has been initiated is very likely.
Even though the Company has worked diligently to assure compliance with FDA
regulations and has been audited by the quality control/compliance groups of
several of its current and potential corporate partners, there can be no
guarantee that FDA inspections will proceed without any compliance issues
requiring the expenditure of money and resources to resolve. The Company's
facilities have been inspected by and the Company has received a license from
the Minnesota Board of Pharmacy to manufacture drug products in its facilities.

The Company is also subject to regulation under various federal and state
laws regarding, among other things, occupational safety, environmental
protection, hazardous substance control and product advertising and promotion.
In connection with its research and development activities and its
manufacturing, the Company is subject to federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials and
wastes. The Company believes that it has complied with these laws and
regulations in all material respects and it has not been required to take any
action to correct any material noncompliance. The Company does not currently
anticipate that any material capital expenditures will be required in order to
comply with federal, state and local environmental laws or that compliance with
such laws will have a material effect on the earnings or competitive position of
the Company. The Company is unable to predict, however, the impact on the
Company's business of any changes in such environmental laws or of any new laws
or regulations that may be imposed in the future and there can be no assurance
that the Company will not be required to incur significant compliance costs or
be held liable for damages resulting from violations of these laws and
regulations. The Company has manufactured an herbicide product for a large
chemical company involving certain hazardous materials and chemicals. The
herbicide product was manufactured in a separate facility from the Eden Prairie
facility. The Company believes that its safety procedures for handling and
disposing of such materials and chemicals complied with the requirements of
federal and state law.

PROPERTIES

The Company has leased a 75,000 square foot facility in Eden Prairie,
Minnesota, a suburb of Minneapolis, which houses its corporate headquarters and
has been prepared for use as an OraSolv production facility. This lease has an
initial term of ten years with minimum annual base rent payments (exclusive of
real estate taxes and maintenance fees) of approximately $337,500 through the
third year, $375,000 for years four through seven and $412,500 for years eight
through ten of the lease. The Company has the option to extend the lease term
for an additional seventy months with a minimum annual base rent payment
(exclusive of real estate taxes and maintenance fees) of approximately $450,000.

In addition to its new OraSolv production facility, the Company also leases
32,000 square feet located in an industrial park in Brooklyn Park, Minnesota.
The Brooklyn Park facility contains offices as well as research and development
and certain other pilot development and manufacturing operations. The lease for
this facility expires in September 1998 and is renewable for an additional
three-year period and two five-year periods. The Company currently pays
approximately $144,600 in annual base rent (exclusive of real estate taxes and
maintenance fees) under this lease. The Company's non-OraSolv manufacturing
operations, including AutoLution, are located in the Brooklyn Park facility. The
Company believes that its facilities are adequate for its current and
anticipated future operations and that any necessary lease renewals or
additional leased space could be obtained on commercially reasonable terms.

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EMPLOYEES

On March 31, 1996, the Company had 49 full-time employees, of whom 12 were
engaged in research and development (including 5 with Ph.D.s), 17 in
manufacturing, 7 in compliance, 3 in quality control and 10 in administration,
business development, finance and human resources. Most of the Company's
scientific and engineering employees have had prior experience with
pharmaceutical or medical products companies. No employee is represented by a
union, and the Company has never experienced a work stoppage. The Company
believes its employee relations are good.

LIABILITY INSURANCE

The Company's business involves exposure to potential product liability
risks that are inherent in the production and manufacture of pharmaceutical
products. Although the Company has not experienced any product liability claims
to date, any such claims could have a material adverse impact on the Company.
The Company currently has general liability insurance and product liability
insurance with coverage limits of $5,000,000 per occurrence and $5,000,000 on an
annual aggregate basis. The Company's insurance policies provide coverage on a
claims made basis and are subject to annual renewal. There can be no assurance,
however, that the Company will be able to maintain such insurance on acceptable
terms or that the Company will be able to secure increased coverage as the
commercialization of its products proceeds or that any insurance will provide
adequate protection against potential liabilities.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Information with respect to the directors and executive officers of the
Company is set forth below:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
John M. Siebert, Ph.D............... 56 President, Chief Executive Officer, Chief Financial Officer and
Director
Robert Z. Arnold.................... 46 Senior Vice President, Business Development
Brian M. Jones...................... 43 Senior Vice President, Operations
Rafael E. Sarabia, Ph.D............. 49 Vice President, Research and Development
Terrence W. Glarner(1).............. 52 Chairman of the Board
David B. Musket(2).................. 37 Director
Steven B. Ratoff(2)................. 53 Director
Joseph R. Robinson, Ph.D............ 57 Director
Jerry A. Weisbach, Ph.D.(1)(2)...... 62 Director
</TABLE>

- ---------
(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

JOHN M. SIEBERT, PH.D., has been the President of the Company since July
1995, Chief Executive Officer of the Company since September 1995, Chief
Financial Officer of the Company since April 1996 and a director of the Company
since May 1992. From 1992 to 1995, Dr. Siebert was Vice President, Technical
Affairs at Dey Laboratories, Inc., a pharmaceutical company. From 1988 to 1992,
Dr. Siebert worked at Miles, Inc. Dr. Siebert has also been employed by E.R.
Squibb & Sons, Inc., G.D. Searle & Co. and The Procter & Gamble Company.

ROBERT Z. ARNOLD has served as Senior Vice President, Business Development
since January 1994 and as Vice President of Business Development since July
1989. He is currently responsible for strategic planning, marketing and
corporate partnering. Mr. Arnold has played a significant role in signing
partnering agreements with five pharmaceutical companies for OraSolv products.
Prior to joining CIMA, Mr. Arnold held various marketing, acquisition, ventures
and management positions at The Pillsbury Company.

BRIAN M. JONES has served as Senior Vice President, Operations since joining
CIMA in February 1994. His responsibilities include both contract and OraSolv
manufacturing. Mr. Jones oversaw the buildout of CIMA's manufacturing facility
and corporate headquarters in Eden Prairie. From 1990 to 1994, Mr. Jones worked
for International Medication Systems, Ltd. as Vice President, Pharmaceutical
Manufacturing responsible for all aseptic filling and packaging. Prior to that
time, he was employed at Kendall McGaw Pharmaceuticals and The Procter & Gamble
Company.

RAFAEL E. SARABIA, PH.D., has served as Vice President, Research and
Development since January 1994. He joined the Company as Senior Director of
Product Development in July 1993. From 1989 to July 1993, Dr. Sarabia was Group
Leader/Scientist for Product Development at Marion Merrell Dow, Inc. where he
was responsible for development of dosage forms including immediate and
sustained release formulations. Dr. Sarabia was actively involved in the
development process and regulatory approval for products such as Pentasa,
Rifater and Carafate Suspension.

TERRENCE W. GLARNER has been a director of the Company since July 1990 and
has served as the Chairman of the Board since April 1995. Mr. Glarner has been
President of West Concord Ventures, Inc. since February 1993. He also consults
with Norwest Venture Capital. Mr. Glarner was President of North Star Ventures,
Inc. from 1988 to February 1993 and held various other positions there since
1976. Mr. Glarner is a Chartered Financial Analyst. He serves as a director of
Aetrium Incorporated, Datakey, Inc. and FSI International, Inc., as well as of
several privately-held corporations.

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<PAGE>
DAVID B. MUSKET has been a director of the Company since May 1992. Since
September 1991, Mr. Musket has been the President of Musket Research Associates,
Inc., an investment banking firm that specializes in financing small
capitalization healthcare companies. From May 1989 to August 1991, he was
employed by EGS Partners and prior to that time by Goldman Sachs & Co. Mr.
Musket also has been President of DBM Corporate Consulting Group since 1991, and
is the Managing Director of ProMed Asset Management LLC and ProMed Management
LLC, each of which he recently formed. Mr. Musket is a director of
Cardiometrics, Inc.

STEVEN B. RATOFF has been a director of the Company since March 1995. Mr.
Ratoff has been Executive Vice President and Chief Financial Officer of
Brown-Forman Corporation since December 1994. From February 1992 to November
1994, Mr. Ratoff was a private investor in a number of small privately-held
companies. Mr. Ratoff was Senior Vice President and Chief Financial Officer of
the Pharmaceutical Group of Bristol-Myers Squibb Company from January 1990 to
January 1992 and held various other positions at Bristol-Myers Squibb Company
since 1975.

JOSEPH R. ROBINSON, PH.D., has been a director of the Company since January
1993. Dr. Robinson is Professor of Pharmacy, University of Wisconsin at Madison,
and has been employed in such capacity since 1966. Dr. Robinson is the past
President of the Controlled Release Society and of the American Association of
Pharmaceutical Scientists. He serves on the scientific advisory boards of
several companies.

JERRY A. WEISBACH, PH.D., has been a director of the Company since January
1993. From 1988 to 1994, Dr. Weisbach served as the Director of Technology
Transfer and Adjunct Professor at Rockefeller University, and from 1994 to 1996
served as a consultant to Rockefeller University. Prior to that time, Dr.
Weisbach was a Vice President of Warner-Lambert Company and the President of its
Pharmaceutical Research Division, and also held positions at SmithKline French
Laboratories. In addition, Dr. Weisbach serves as a director of Hybridon Inc.,
Neose Technologies, Inc. and Xenometrix, Inc. and consults for and serves on the
clinical advisory board and the scientific advisory board of several other
companies.

The Board has an Audit Committee which consists of Messrs. Ratoff and Musket
and Dr. Weisbach. The Audit Committee reviews the results and scope of the
annual audit and other services provided by the Company's independent auditors
as well as the Company's accounting principles and its system of internal
controls, and reports the results of these reviews to management and the Board.
The Audit Committee also meets with the Company's independent auditors at least
once annually to review the results of the annual audit and discusses the
financial statements, recommends to the Board the independent auditors to be
retained and receives and considers the accountants' comments as to controls,
adequacy of staff and management performance and procedures in connection with
audit and financial controls.

The Compensation Committee (i) determines the amount of compensation for the
Chief Executive Officer and President of the Company, (ii) reviews
recommendations of the Chief Executive Officer concerning compensation for the
other executive officers and incentive compensation, including stock options,
for the other employees of the Company, subject to ratification by the Board and
(iii) otherwise administers the Company's stock option plans. The Compensation
Committee is currently composed of two non-employee directors: Mr. Glarner and
Dr. Weisbach. Prior to July 1, 1995, when Dr. Siebert became an executive
officer of the Company, Dr. Siebert also served on the Compensation Committee.

Directors are elected annually and its members hold office until the next
annual meeting of stockholders or until their successors are duly elected and
qualified, or until their earlier removal or resignation. Executive officers are
elected by the Board. There are no family relationships among any of the
directors and executive officers of the Company.

DIRECTOR COMPENSATION

Each non-employee director of the Company is entitled to receive an annual
fee of $5,000, payable quarterly, a per meeting fee of $2,500 for each meeting
(including telephonic meetings) of the Board attended by such non-employee
director and a per meeting fee of $1,250 for each meeting of (i) a committee of
the Board not held in connection with a regular Board meeting or (ii) an
operating committee of the Company, in each case attended by such non-employee
director; provided, however, that the aggregate

33
<PAGE>
amount of fees paid shall not exceed $20,000 (excluding expense reimbursement)
per director per year. In the fiscal year ended December 31, 1995, the total
compensation paid to non-employee directors was $62,500. The members of the
Board are also eligible for reimbursement for their reasonable expenses incurred
in connection with attendance at Board meetings in accordance with Company
policy. Messrs. Glarner and Musket are currently voluntarily foregoing the
payment of any fees.

Each non-employee director of the Company also receives stock option grants
under the 1994 Directors' Stock Option Plan (the "Directors' Plan"). Only
directors of the Company who are not employees of the Company or a subsidiary of
the Company are eligible to receive grants of options under the Directors' Plan.
Options granted under the Directors' Plan are intended by the Company not to
qualify as incentive stock options under the Code.

Option grants under the Directors' Plan are non-discretionary. On the first
business day immediately following the annual stockholders' meeting of each
year, each member of the Company's Board who is not an employee of the Company
is automatically granted under the Directors' Plan, without further action by
the Company, the Board or the stockholders of the Company, an option to purchase
7,500 shares of Common Stock of the Company. In addition, each new non-employee
director will receive an option to purchase 20,000 shares of Common Stock of the
Company on the first business day following the date such new director is
elected to the Board. No other options may be granted at any time under the
Directors' Plan. The exercise price of options granted under the Directors' Plan
is 100% of the fair market value of the Common Stock subject to the option on
the date of the option grant. Options granted pursuant to the initial grant to
purchase of 20,000 shares of Common Stock under the Directors' Plan become
exercisable as to 50% of the option shares on the 12-month anniversary of the
date of grant and the remainder become exercisable on the 24-month anniversary
of the date of grant. Options granted on the business day following the annual
meeting of stockholders become fully exercisable six months subsequent to the
date of grant. The term of options granted under the Directors' Plan is ten
years. In the event of a merger of the Company with or into another corporation
or a consolidation, reorganization, recapitalization, stock dividend, stock
split, or other change in the corporate structure, appropriate adjustments to
the Directors' Plan and the outstanding options will be made so as not to
increase or decrease the option rights outstanding.

During the year ended December 31, 1995, the Company granted options
covering 7,500 shares to each non-employee director of the Company at an
exercise price per share of $4.75 and an option covering 20,000 shares to Mr.
Ratoff upon his election as a director at an exercise price per share of $5.625.
The fair market value of such Common Stock on the date of grant was $4.75 and
$5.625 per share, respectively (based on the closing sales price reported in the
Nasdaq National Market for the date of grant). As of March 31, 1996, no options
had been exercised under the Directors' Plan.

34
<PAGE>
EXECUTIVE COMPENSATION

The following table shows for the fiscal years ended December 31, 1995, 1994
and 1993, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its other three most highly compensated executive officers
at December 31, 1995 and two former executive officers who departed from the
Company during fiscal year 1995 (the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
SECURITIES
-------------------- UNDERLYING ALL OTHER
SALARY BONUS OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) SARS(#)(2) ($)
- ----------------------------------------------------------- --------- --------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C>
John M. Siebert, Ph.D.(3) ................................. 1995 $ 105,769 $ 25,000 187,500(4) $ 49,496(5)
President, Chief Executive Officer and Chief Financial
Officer
Robert Z. Arnold .......................................... 1995 149,975 10,000 25,000 1,927(6)
Senior Vice President, Business Development 1994 126,633 41,325 52,500 1,346(7)
1993 77,315 -- 10,000 823(7)
Brian M. Jones ............................................ 1995 165,000 50,000 25,000 748(8)
Senior Vice President, Operations 1994 130,977 50,000 70,000 3,648(9)
Rafael E. Sarabia, Ph.D. .................................. 1995 140,000 7,000 20,000 1,768(10)
Vice President, Research and Development 1994 97,500 8,500 25,000 1,277(7)
1993 11) 43,542 60,000 20,000 30,726(9)
Randall J. Wall(12) ....................................... 1995 79,384 -- -- 220,000(13)
Former Chairman of the Board and Chief Executive Officer 1994 174,231 -- 126,429(14) --
1993 32,500 -- 165,000 --
Roy A. Hoff(15) ........................................... 1995 126,440 -- -- 146,306(16)
Former President 1994 123,750 41,325 49,512 1,367(7)
1993 100,000 -- 25,000 1,000(7)
</TABLE>

- ------------
(1) The bonus amounts are comprised of bonuses paid at the discretion of the
Compensation Committee pursuant to the Company's executive bonus plan other
than Dr. Siebert's bonus, which was paid pursuant to his employment
agreement.

(2) Although the Company's Amended and Restated Stock Option and Stock Award
Plan (the "Plan") permits awards of stock options, restricted stock, stock
appreciation rights, performance awards and other long-term incentive
awards, no awards other than stock options have been made to date to any of
the Named Executive Officers.

(3) Dr. Siebert has been employed as the Company's President since July 1,
1995, as Chief Executive Officer since September 9, 1995 and as Chief
Financial Officer since April 17, 1996.

(4) Includes the grant of an option to purchase 7,500 shares of Common Stock
under the Directors' Plan prior to such time as Dr. Siebert became an
employee of the Company.

(5) Consists of $34,486 of relocation expenses, $1,260 of life insurance
premiums paid by the Company, and $13,750 of director's fees paid prior to
Dr. Siebert becoming an employee of the Company.

(6) Consists of $1,635 of Company matching contributions under the Company's
401(k) retirement plan and $292 of life insurance premiums paid by the
Company.

(7) Consists of Company matching contributions under the Company's 401(k)
retirement plan.

(8) Consists of $546 of Company matching contributions under the Company's
401(k) retirement plan and $202 of life insurance premiums paid by the
Company.

(9) Consists of relocation expenses.

(10) Consists of $1,486 of Company matching contributions under the Company's
401(k) retirement plan and $282 of life insurance premiums paid by the
Company.

(11) Dr. Sarabia's employment with the Company began in July 1993.

(12) Mr. Wall served as the Company's Chief Executive Officer from October 1,
1993 until April 24, 1995.

(13) Consists of $150,000 severance payment and $70,000 in consulting fees
following termination.

(14) Such option was canceled on April 24, 1995 with respect to 50,715 of the
shares subject thereto.

(15) Mr. Hoff served as the Company's President and as a director of the Company
until August 31, 1995.

(16) Consists of $145,000 severance payment and $1,306 of Company matching
contributions under the Company's 401(k) retirement plan.

35
<PAGE>
STOCK OPTION GRANTS AND EXERCISES

The Company grants options to its executive officers under its Equity
Incentive Plan. As of March 31, 1996, options to purchase a total of 1,064,618
shares were outstanding under the Equity Incentive Plan and options to purchase
250,952 shares remained available for grant thereunder.

The following tables show for the fiscal year ended December 31, 1995,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS EMPLOYEES IN FISCAL BASE PRICE --------------------
NAME GRANTED(#) YEAR(2) ($/SH)(3) EXPIRATION DATE 5%($) 10%($)
- ------------------------------- ----------- ------------------- ------------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
John M. Siebert, Ph.D.(4)...... 180,000 37.7% $ 4.000 6/30/2005 $ 452,804 $1,147,495
Robert Z. Arnold(5)............ 25,000 5.2% 7.625 10/24/2005 119,883 303,807
Brian M. Jones(5).............. 25,000 5.2% 7.625 10/24/2005 119,883 303,807
Rafael E. Sarabia, Ph.D.(5).... 20,000 4.2% 7.625 10/24/2005 95,906 243,046
Randall J. Wall................ -- -- -- -- -- --
Roy A. Hoff.................... -- -- -- -- -- --
</TABLE>

- ------------
(1) Reflects the value of the stock option on the date of grant assuming (i)
for the 5% column, a five-percent annual rate of appreciation in the
Company's Common Stock over the ten-year term of the option and (ii) for
the 10% column, a ten-percent annual rate of appreciation in the Company's
Common stock over the ten-year term of the option, in each case without any
discounting to net present value and before income taxes associated with
the exercise. Actual gains, if any, on stock option exercises depend on the
future performance of the Company's Common Stock and the continued
employment of the Named Executive Officer through the vesting period and
exercise period. These amounts represent assumed rates of appreciation
only, based on Securities and Exchange Commission Rules, and may not
necessarily be indicative of a results obtained.

(2) Based on options to purchase 477,750 shares of the Company's Common Stock
granted in 1995.

(3) All options were granted at the fair market value at the date of grant.

(4) Option vests as to 60,000 shares on July 1, 1995; 60,000 shares on July 1,
1996; and 60,000 shares on July 1, 1997. Excludes a grant of 7,500 shares
granted to Dr. Siebert on June 7, 1995 (prior to becoming an employee of
the Company) under the Directors' Plan at an exercise price of $4.75. Such
options vested six months after the date of grant.

(5) Options vest over a 4 year period at the rate of 25% per year. The option
will fully vest upon change of control as defined in the stock option
agreement, unless the acquiring company substitutes similar options.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES YEAR-END(#) FISCAL YEAR-END($)(2)
ACQUIRED ON VALUE ---------------------------- --------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ------------- ------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John M. Siebert.............. -- -- 90,000 132,500 $ 166,875 $ 247,500
Robert Z. Arnold............. -- -- 68,125 69,375 175,000 15,000
Brian M. Jones............... -- -- 17,500 77,500 43,750 131,250
Rafael E. Sarabia............ -- -- 16,250 48,750 45,625 76,875
Randall J. Wall.............. 165,000 $ 430,313 75,716 -- -- --
Roy A. Hoff.................. 12,500 32,813 62,507 24,756 118,303 --
</TABLE>

- ------------
(1) Fair market value of the Company's Common Stock on the date of exercise
minus the exercise price of the options.

(2) Fair market value of the Company's Common Stock at December 31, 1995
($6.00) minus the exercise price of the options.

EMPLOYMENT AGREEMENTS

The Company entered into an employment agreement (the "Employment
Agreement") with John Siebert to employ Dr. Siebert as President and Chief
Operating Officer of the Company for three years

36
<PAGE>
beginning July 1, 1995. Under the terms of the Employment Agreement, Dr. Siebert
receives an annual salary of $220,000 with annual increases of 5% per year. In
addition, the Employment Agreement provides that Dr. Siebert will be paid a cash
incentive bonus of up to 50% of his salary upon the Company's achievement of
certain objectives. In the case of a change of control of the Company, Dr.
Siebert will receive a minimum cash bonus of $100,000 per year for each year
remaining under the Employment Agreement for which he has not already received a
bonus. Dr. Siebert also received a stock option to purchase 180,000 shares of
Common Stock with one-third vesting upon the execution of the Employment
Agreement and the remaining amounts vesting in one-third increments at each
anniversary date of the Employment Agreement. Pursuant to the Employment
Agreement the Company also paid Dr. Siebert's relocation expenses, paid him a
relocation bonus of $25,000, and pays Dr. Siebert a car allowance of $650 per
month. The Employment Agreement contains standard provisions regarding the
protection of confidential information, a one-year covenant not to compete and a
covenant not to recruit.

Mr. Jones has an agreement with the Company pursuant to which he is entitled
to receive three months' salary as severance pay should the Company terminate
his employment without cause.

CERTAIN TRANSACTIONS

In January 1994, St. Paul Fire and Marine, Quantum Partners LDC and Mr.
Randall Wall purchased shares of Preferred Stock convertible into 14,285,
617,440 and 3,571 shares of Common Stock, respectively, at an as converted price
of $7.00 per share resulting in aggregate proceeds from these investors of
approximately $4,447,000. Quantum Partners has the right to require the Company
to register shares pursuant to the Securities Act. See "Description of Capital
Stock -- Registration Rights."

Musket Research, of which Mr. Musket is the President and sole stockholder,
acted as the Company's sales agent in connection with the private placement of
Preferred Stock in January 1994. Musket Research received $484,000 in
compensation pursuant to this arrangement, 75% of which was paid in cash and 25%
in shares of Preferred Stock convertible into 17,274 shares of Common Stock.

On April 23, 1995, the Company and Mr. Wall entered into a consulting
agreement (the "Wall Agreement") pursuant to which Mr. Wall resigned as Chairman
of the Board and Chief Executive Officer of the Company and as a member of its
Board on April 24, 1995. From April 24, 1995 through May 31, 1996, Mr. Wall is
serving as a consultant to the Company on such matters as may be requested by
the Company. Pursuant to the Wall Agreement, (i) Mr. Wall received a lump sum
cash payment of approximately $155,500 on April 24, 1995, (ii) the Company
agreed to pay Mr. Wall $140,000 of consulting fees, payable $10,000 on April 24,
1995 and $10,000 on the first day of each calendar month during the balance of
the consulting term, plus $3,000 per day for each day of service in excess of
seven days in any calendar month or 47 days over the term of the Agreement,
(iii) a stock option held by Mr. Wall to purchase an aggregate of 50,715 shares
of the Company's Common Stock, at an exercise price of $9.00 per share, will
continue to vest in accordance with its original vesting schedule but will
terminate on May 31, 1998 unless exercised prior to such date, (iv) an option,
exercisable at $9.00 per share, to purchase 50,715 shares of Common Stock was
canceled, (v) an option, exercisable at $9.00 per share, to purchase 25,000
shares of Common Stock, the exercisability of which previously depended upon the
attainment by the Company or Mr. Wall of certain performance goals, was amended
to provide that it would vest on January 1, 1996 and terminate unless exercised
on or before May 31, 1998 and (vi) Mr. Wall retained his options to purchase an
aggregate of 165,000 shares of Common Stock at an exercise price of $3.00 per
share. The Company and Mr. Wall also agreed to release each other from certain
claims. In addition, Mr. Wall agreed to certain non-competition and
non-solicitation provisions during the term of the Wall Agreement.

On August 31, 1995, the Company and Roy Hoff entered into a letter agreement
(the "Hoff Agreement") pursuant to which Mr. Hoff resigned as President of the
Company and as a member of its Board of Directors on August 31, 1995. From
August 31, 1995 through August 31, 1998, Mr. Hoff is serving as a consultant to
the Company on such matters as may be requested by the Company. Pursuant to the
Agreement, (i) Mr. Hoff received a lump sum cash payment of $145,000 on
September 1, 1995 as consulting fees paid in advance for such consulting
services, (ii) Mr. Hoff receives reimbursement for medical insurance

37
<PAGE>
coverage through August 31, 1998, but only if Mr. Hoff is not covered by medical
insurance from another source, (iii) the vesting of a stock option held by Mr.
Hoff to purchase an aggregate of 6,250 shares of the Company's Common Stock at
an exercise price of $3.00 per share, originally scheduled to vest on July 9,
1996, was accelerated to vest on August 31, 1995, (iv) the exercisability of a
stock option to purchase 12,500 shares of Common Stock was extended to be
exercisable until August 31, 1998, and (v) Mr. Hoff received $9,530 as
reimbursement for expenses he incurred in connection with developing an
agreement for the Company. The Company and Mr. Hoff also agreed to release each
other from certain claims. In addition, Mr. Hoff agreed to certain
non-competition and non-solicitation provisions during the term of the Hoff
Agreement.

Dr. Siebert became the Company's President and Chief Operating Officer on
July 1, 1995 and, in connection therewith, entered into an employment agreement
with the Company as more fully described under "Management -- Employment
Agreements." On September 9, 1995 the Company appointed Dr. Siebert Chief
Executive Officer and on April 17, 1996, Chief Financial Officer.

Mr. Jones, Senior Vice President, Operations, has an agreement with the
Company pursuant to which he is entitled to receive three months' salary as
severance pay should the Company terminate his employment without cause.

The Company has entered into indemnity agreements with certain officers and
directors which provide, among other things, that the Company will indemnify
such officer or director for such liabilities permitted under the Delaware
General Corporation Law (the "Delaware Law") to the fullest extent permitted
under the Delaware Law, subject to certain limitations.

38
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of April 22, 1996, and as adjusted to reflect
the sale of shares of Common Stock offered hereby, by: (i) each director; (ii)
each of the executive officers named in the Summary Compensation Table employed
by the Company in that capacity on April 22, 1996; (iii) all executive officers
and directors of the Company as a group; (iv) all those known by the Company to
be beneficial owners of more than five percent of its Common Stock; and (v) the
Selling Stockholders.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1)
------------------------- NUMBER OF AFTER OFFERING(2)
NUMBER OF PERCENT OF SHARES -----------------------
BENEFICIAL OWNER SHARES TOTAL OFFERED NUMBER PERCENT
- ---------------------------------------------------------------- ---------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
President and Fellows of Harvard College
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, Massachusetts 02210.................................... 1,139,600 14.5% -- 1,139,600 12.9%

Entities affiliated with INVESCO PLC(3)
11 Devonshire Square
London EC2M 4YR
England........................................................ 844,599 10.8 -- 844,599 9.5

Entities affiliated with North Star Ventures(4)
601 Second Avenue
Minneapolis, Minnesota 55402................................... 748,960 9.5 243,915 505,045 5.7

Quantum Partners LDC(5)
c/o George Soros
Soros Fund Management
888 Seventh Avenue, 33rd Floor
New York, New York 10106....................................... 692,440 8.8 502,011 190,429 2.2

Entities affiliated with St. Paul Venture Capital, Inc.(6)
8500 Normandale Lake Blvd.
Suite 1940
Bloomington, MN 55437.......................................... 642,480 8.1 243,915 398,565 4.5

Investment Advisers Inc.
3700 First Bank Place
Minneapolis, Minnesota 55440................................... 545,100 6.9 -- 545,100 6.2

Roy and Margaret Hoff(7)
15601 Sheridan Spur
Wayzata, Minnesota 55391....................................... 212,744 2.7 52,848 159,896 1.8

PathFinder Venture Capital
Fund II Limited Partnership(8)
c/o Brian Johnson
7300 Metro Boulevard, Suite 585
Minneapolis, Minnesota 55439................................... 201,487 2.6 163,820 37,667 *

Entities affiliated with The Winton Company(9)
80 South 8th Street, #1910
Minneapolis, Minnesota 55402................................... 194,252 2.5 149,233 45,019 *
</TABLE>

39
<PAGE>

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1)
------------------------- NUMBER OF AFTER OFFERING(2)
NUMBER OF PERCENT OF SHARES -----------------------
BENEFICIAL OWNER SHARES TOTAL OFFERED NUMBER PERCENT
- ---------------------------------------------------------------- ---------- ------------- ----------- ---------- -----------
FBS Small Business Investment Co.
<S> <C> <C> <C> <C> <C>
Limited Partnership
Attn: Richard Rinkoff
First Bank Place East
601 2nd Avenue South
Minneapolis, Minnesota 55402................................... 127,427 1.6 103,605 23,822 *

John M. Siebert, Ph.D.(10)...................................... 92,500 1.2 -- 92,500 1.0

Robert Z. Arnold(11)............................................ 81,250 1.0 -- 81,250 *

Arnhold & S. Bleichroeder Inc.
45 Broadway
New York, New York 10006....................................... 50,000 * 40,653 9,347 *

Brian M. Jones(12).............................................. 35,000 * -- 35,000 *

Rafael E. Sarabia, Ph.D.(13).................................... 22,500 * -- 22,500 *

Terrence W. Glarner(14)......................................... 48,706 * -- 48,706 *

David B. Musket(15)............................................. 62,274 * -- 62,274 *

Steven B. Ratoff(16)............................................ 27,500 * -- 27,500 *

Joseph R. Robinson, Ph.D.(17)................................... 32,500 * -- 32,500 *

Jerry A. Weisbach, Ph.D.(18).................................... 40,000 * -- 40,000 *

All executive officers and directors as a group (9
persons)(19)................................................... 442,230 5.4 -- 442,230 4.8
</TABLE>

- ---------
* Less than one percent.

(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "Commission"). Unless otherwise indicated in
the footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the stockholders named in this
table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
7,847,599 shares outstanding on April 22, 1996, adjusted as required by
rules promulgated by the Commission.

(2) Applicable percentages are based on 8,847,599 shares outstanding on April
22, 1996, adjusted as required by rules promulgated by the Commission, and
excludes the exercise of the Underwriters' over-allotment option.

(3) Consists of shares held by investment companies for which wholly-owned
subsidiaries of INVESCO PLC act as investment advisers. INVESCO PLC
therefore may be deemed to share voting and investment power with respect to
these shares. Includes 466,666 shares held by the Invesco Strategic
Portfolios, Inc. -- Health Sciences Portfolio, 333,333 shares held by the
Global Health Sciences Fund and 44,600 shares held by the Health Sciences
Fund.

(4) Represents 476,863 shares held by North Star Ventures II, Inc. ("North Star
II"); 232,835 shares held by North Star Ventures III ("North Star III");
17,400 shares issuable pursuant to warrants held by North

40
<PAGE>
Star II and 21,862 shares issuable pursuant to warrants held by North Star
III, in each case exercisable within 60 days. Gerald Rauenhorst is the sole
common shareholder of North Star II and is a general partner of North Star
III and, as such, may be deemed to beneficially own such shares.

(5) Quantum Partners LDC ("Quantum"), pursuant to an investment advisory
contract, has granted sole voting and dispositive power to Soros Fund
Management, the sole proprietorship of George Soros. As a result, Mr. Soros
may be deemed to be the beneficial owner of the shares of stock held by
Quantum.

(6) Consists of 587,412 shares held by St. Paul Fire and Marine Insurance
Company, a wholly-owned subsidiary of The St. Paul Companies, Inc., 585
shares held by The St. Paul Companies, Inc. and 54,483 shares issuable upon
the exercise of warrants held by St. Paul Fire and Marine Insurance Company
exercisable within 60 days. All of the shares issuable pursuant to the
exercise of warrants are being sold in this offering. St. Paul Venture
Capital, Inc. is a wholly-owned subsidiary of St. Paul Fire and Marine
Insurance Company.

(7) Includes 62,507 shares which may be acquired within 60 days pursuant to
outstanding options.

(8) The Company has agreed to allow Pathfinder Venture Capital Fund II Limited
Partnership to sell 37,667 shares of Common Stock as part of the
Underwriters' over-allotment option.

(9) Includes 86,948 shares held by Reynolds Creek Limited Partnership, 30,612
shares held by Table River Limited Partnership ("Table River"), 27,500
shares held by Kelsey Lake Limited Partnership, 21,344 shares held Kerry
Lakes Limited Partnership ("Kerry Lakes"), 17,143 shares held by Winton
Associates, a Limited Partnership, 3,794 shares issuable pursuant to
warrants held by Table River and 7,001 shares issuable pursuant to warrants
held by Kerry Lakes, in each case exercisable within 60 days.

(10) Consists of 92,500 shares which may be acquired within 60 days pursuant to
outstanding options.

(11) Consists of 81,250 shares which may be acquired within 60 days pursuant to
outstanding options.

(12) Consists of 35,000 shares which may be acquired within 60 days pursuant to
outstanding options.

(13) Consists of 22,500 shares which may be acquired within 60 days pursuant to
outstanding options.

(14) Includes 17,500 shares which may be acquired pursuant to outstanding
options and 1,636 shares which may be acquired pursuant to outstanding
warrants, in each case within 60 days.

(15) Includes 27,500 shares which may be acquired within 60 days pursuant to
outstanding options and 10,000 shares held in an IRA for Mr. Musket's
benefit.

(16) Includes 17,500 shares which may be acquired within 60 days pursuant to
outstanding options.

(17) Consists of 32,500 shares which may be acquired within 60 days pursuant to
outstanding options.

(18) Consists of 40,000 shares which may be acquired within 60 days pursuant to
outstanding options.

(19) Includes an aggregate of 367,886 shares issuable upon exercise of warrants
and options exercisable within 60 days. See footnotes 10 through 18.

41
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement, of which this Prospectus is a part.

The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock,
par value $0.01 per share.

COMMON STOCK

At March 31, 1996 there were 7,840,099 shares of Common Stock outstanding
and no shares of Preferred Stock outstanding.

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors and, as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone.

Subject to preferences that may be applicable to any then outstanding shares
of Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board out of funds legally available
therefor. See "Dividend Policy." In the event of liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding shares of Preferred Stock. Holders of Common
Stock have no preemptive rights and no right to convert their Common Stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.

PREFERRED STOCK

The Board has the authority, without further action by the stockholders, to
issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of such series, without any further vote or action by the
stockholders. The issuance of Preferred Stock could adversely affect the voting
power of holders of Common Stock and the likelihood that such holders will
receive dividend payments and payments upon liquidation may have the effect of
delaying, deferring or preventing a change in control of the Company, which
could have a depressive effect on the market price of the Company's Common
Stock. The Company has no present plan to issue any shares of Preferred Stock.

OPTIONS AND WARRANTS

As of March 31, 1996, there were outstanding under the Company's stock
option plans options to purchase an aggregate of 1,215,334 shares of Common
Stock at exercise prices ranging from $2.80 to $10.13. These options expire
between August 17, 1997, and October 25, 2005.

As of March 31, 1996 there were outstanding warrants to purchase an
aggregate of 106,467 shares of Common Stock at an exercise price of $6.00 per
share. Each warrant contains provisions for the adjustment of the exercise price
and the aggregate number of shares issuable upon exercise of the warrants under
certain circumstances, including stock dividends, stock splits, reorganizations,
reclassifications, consolidations and certain dilutive sales of common stock
below the then existing exercise price. All such warrants are exercisable
immediately and expire at various times through January 15, 1997.

REGISTRATION RIGHTS

Following the offering, holders of approximately 115,429 shares of Common
Stock and the holders of the warrants described in the previous paragraph,
representing 106,467 shares of the Common Stock (collectively, the "Registrable
Securities"), have registration rights pursuant to various agreements with the
Company. All such holders of Registrable Securities have waived their
registration rights in connection with this offering. Under these agreements, if
the Company proposes to register any of its securities under the Securities Act,
holders of the Registrable Securities are entitled, subject to certain
restrictions and exceptions, to include their Registrable Securities in such
registration. The underwriters of any such offering have

42
<PAGE>
the right, in certain circumstances and subject to certain conditions, to limit
the number of shares included in the offering. The Company is required to bear
all registration and selling expenses (other than underwriters' discounts and
commissions) in such offering. In addition, under the registration rights
agreements, holders of Registrable Securities are entitled under certain
circumstances to demand that the Company prepare and file a registration
statement under the Securities Act at its expense and require the Company to use
its best efforts to effect such registration, subject to certain conditions and
limitations. Finally, holders of Registrable Securities may require the Company
to file additional registration statements on Form S-3, subject to certain
conditions and limitations.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware Law,
an anti-takeover law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the stockholder. For purposes of Section 203, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's voting
stock.

The Company's Bylaws provide that each director is to be elected annually.
Candidates for directors shall be nominated only by the Board or by a
stockholder who gives written notice to the Company at least 30 days but no more
than 90 days before the annual meeting. In addition, the Company's Bylaws
provide that any business conducted at the annual meeting of stockholders shall
be brought before the meeting by the Board in compliance with Rule 14a-8 under
the Securities Exchange Act of 1934 or by a stockholder of record who gives not
less than 30 nor more than 90 days prior written notice to the Company. The
Company may have such number of directors as determined from time to time by the
Board, which currently consists of six members. Between stockholder meetings,
the Board may appoint new directors to fill vacancies or newly created
directorships. The Certificate does not provide for cumulative voting at
stockholder meetings for election of directors. Stockholders controlling more
than 50% of the outstanding Common Stock can elect the entire Board, while
stockholders controlling 49% of the outstanding Common Stock may not be able to
elect any directors. A director may be removed from office only for cause by the
affirmative vote of a majority of the combined voting power of the then
outstanding shares of stock entitled to vote generally in the election of
directors.

The Company's Bylaws also provide that the authorized number of directors
may be changed only by resolution of the Board. Delaware Law and these charter
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company, which could have a depressive
effect on the market price of the Company's Common Stock.

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Company's Certificate of Incorporation provides that, to the fullest
extent permitted under Delaware Law, a director of the Company will not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. These provisions eliminate a director's personal
liability for monetary damages resulting from a breach of fiduciary duty, except
in certain circumstances involving certain wrongful acts, such as (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware Law, or (iv) for any transaction from which the director derives an
improper personal benefit. These provisions do not limit or eliminate the rights
of the Company or any stockholder to seek non-monetary relief, such as an
injunction or rescission, in the event of a breach of director's fiduciary duty.
These provisions will not alter a directors liability under federal securities
laws. The Company's Bylaws also contain provisions indemnifying the directors
and officers of the Company to the fullest extent permitted by the Delaware Law.
The Company believes that these provisions will assist the Company in attracting
and retaining qualified individuals to serve as directors.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock of the Company is
Norwest Bank Minnesota, N.A.

43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, based on the number of shares outstanding
as of March 31, 1996, the Company will have outstanding an aggregate of
8,840,099 shares of Common Stock (9,047,825 if the Underwriters' over-allotment
option is exercised in full), of which 2,500,000 shares are being offered hereby
and of which all but 115,429 shares of Common Stock will be freely tradeable in
the public market, subject in certain cases to lock-up agreements as described
below. Certain volume resale restrictions are imposed by the Securities Act with
respect to 115,429 shares of Common Stock referenced above, which restrictions
will expire in January 1997; however, such 115,429 shares have been registered
on a Form S-3 registration statement and may be sold without such restrictions.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
(as such term is defined in Rule 144) for at least two years, including a person
who may be deemed an affiliate of the Company, is entitled to sell within any
three month period a number of shares of Common Stock that does not exceed the
greater of 1% of the then outstanding shares of Common Stock of the Company and
the average weekly trading volume of the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding such sale. Sales under Rule 144
are further subject to certain restrictions relating to the manner of sale,
notice and the availability of current public information about the Company. A
person who is not an affiliate of the Company at any time during the 90 days
preceding a sale and who has beneficially owned shares of Common Stock for at
least three years, is entitled to sell such shares without regard to the volume
limitations, manner of sale provisions, notice or other requirements of Rule
144. However, the transfer agent may require an opinion of counsel that a
proposed sale of shares comes within the terms of Rule 144 prior to effecting a
transfer of such shares. Such opinion, if appropriate, will be provided at the
expense of the Company.

In addition, under the Company's Equity Incentive Plan, the Company has
issued options to purchase Common Stock at prices which are below current market
and may issue options to purchase additional shares of Common Stock in the
future. At March 31, 1996, options to purchase 1,050,334 shares of Common Stock
were outstanding, of which options to purchase 474,136 were immediately
exercisable. Rights to acquire an additional 515,236 shares of Common Stock were
available for future grants under the Equity Incentive Plan (including an
increase in the amount authorized under the Equity Incentive Plan of 250,000
shares subject to stockholder approval). The Company has filed a registration
statement on Form S-8 to permit the shares acquired upon exercise of these
options (other than those subject to stockholder approval) to be freely
tradable.

Under the Company's 1994 Directors' Stock Option Plan (the "Directors'
Plan"), the Company has issued options to purchase Common Stock at prices which
are below current market. Such options are granted pursuant to automatic grants
to non-employee directors. At March 31, 1996, options to purchase 165,000 shares
of Common Stock were outstanding, of which options to purchase 105,000 were
immediately exercisable. Rights to acquire an additional 185,000 shares of
Common Stock were available for future grants under the Directors' Plan.

On March 31, 1996, warrants to purchase 106,467 shares of Common Stock were
outstanding and exercisable. See "Description of Capital Stock -- Options and
Warrants."

The Company, subject to certain exceptions, and its officers, directors and
certain stockholders holding an aggregate of approximately 2,990,207 shares of
Common Stock after this offering, have entered into lock-up agreements with the
Underwriters pursuant to which such stockholders have agreed not to sell or
otherwise dispose of any shares of Common Stock for a period of 90 days after
the date of this Prospectus without the prior written consent of Volpe, Welty &
Company. Upon expiration of the lockup period, these shares will be eligible for
immediate sale, subject in certain cases to volume and other limitations under
Rule 144. See "Underwriting."

No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Sales of substantial numbers of shares of Common
Stock could adversely affect prevailing market prices.

44
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of such Underwriters,
for whom Volpe, Welty & Company and Rodman & Renshaw, Inc. are acting as
representatives (together, the "Representatives"), has severally agreed to
purchase from the Company and the Selling Stockholders, the respective number of
shares of Common Stock set forth opposite its name below:

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Volpe, Welty & Company.....................................................
Rodman & Renshaw, Inc......................................................

-----------------
Total..................................................................
-----------------
-----------------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates and opinions from the Company and its counsel. The nature of the
Underwriters' obligation is such that they are committed to purchase all shares
of Common Stock offered hereby if any of such shares are purchased.

The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the public
at the offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession of not in excess of $ per
share, of which $ may be reallocated to other dealers. After the offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company and the Selling Stockholders as set forth on the
cover page of this Prospectus.

The Company and a Selling Stockholder have granted the Underwriters an
option for 30 days after the date of this Prospectus to purchase, at the
offering price, less the underwriting discounts and commissions as set forth on
the cover page of this Prospectus, up to 337,333 and 37,667 additional shares of
Common Stock, respectively, at the same price per share as the Company and the
Selling Stockholders receive for the 2,500,000 shares of Common Stock offered
hereby, solely to cover over-allotments, if any. If the Underwriters exercise
their over-allotment option, the Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares of Common Stock to be purchased by each of them, as shown
in the foregoing table, bears to the 2,500,000 shares of Common Stock offered
hereby. The Underwriters may exercise such option only to cover the
over-allotments in connection with the sale of the 2,500,000 shares of Common
Stock offered hereby.

Each of the Company's directors and officers, and certain other security
holders of the Company, have agreed not to offer, sell, contract to sell or
otherwise dispose of Common Stock or securities convertible into or exchangeable
for, or any rights to purchase or acquire, Common Stock for a period of 90 days
following the Effective Date, without the prior written consent of Volpe, Welty
& Company. The Company also has agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for, or any rights to purchase or acquire, Common Stock for
a period of 90 days following the date of this Prospectus without the prior
written consent of Volpe, Welty & Company, except for the granting of options or
the sale of stock pursuant to the Company's Option Plan. Volpe, Welty & Company,
in its discretion, may waive the foregoing restrictions in whole or in part,
with or without a public announcement of such action.

The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

45
<PAGE>
In general, the rules of the Securities and Exchange Commission (the
"Commission") will prohibit the Underwriters from making a market in the Common
Stock during the "cooling off" period immediately preceding the commencement of
sales in the offering. The Commission has, however, adopted exemptions from
these rules that permit passive market making under certain conditions. These
rules permit an underwriter to continue to make a market subject to the
conditions, among others, that its bid not exceed the highest bid by a market
maker not connected with the offering and that its net purchases on any one
trading day not exceed prescribed limits. Pursuant to these exemptions, certain
Underwriters, selling group members (if any) or their respective affiliates may
have engaged in passive market making in the Company's Common Stock during the
cooling off period.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection with
this offering, including liabilities under the Securities Act, or to contribute
payments that the Underwriters may be required to make in respect thereof.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward Castro Huddleson & Tatum, Palo Alto,
California. Certain legal matters will be passed upon for the Underwriters by
Heller Ehrman White & McAuliffe, San Francisco, California. Robert L. Jones, a
partner at Cooley Godward Castro Huddleson & Tatum, is the Secretary of the
Company.

EXPERTS

The financial statements of CIMA LABS INC. as of December 31, 1994 and 1995
and for each of the three years in the period ended December 31, 1995 and for
the period December 12, 1986 (inception) to December 31, 1995, included in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon (which contains an
explanatory paragraph with respect to substantial doubt about the Company's
ability to continue as a going concern and management's plans described in Note
11 to the financial statements), appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
auditing and accounting.

The information relating to the patents and proprietary rights of the
Company has been reviewed by Lerner, David, Littenberg, Krumholz & Mentlik,
attorneys at law, Westfield, New Jersey. Such information is included in
reliance upon information provided by Lerner, David, Littenberg, Krumholz &
Mentlik upon the authority of such firm as experts in patents and proprietary
information.

ADDITIONAL INFORMATION

A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the
New York Regional Office located at 7 World Trade Center, 13th Floor, New York,
New York 10048, and the Chicago Regional Office located at Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661-2511 and copies of all
or any part thereof may be obtained from the Public Reference Branch of the
Commission upon the payment of certain fees prescribed by the Commission.

46
<PAGE>
CIMA LABS INC.
FINANCIAL STATEMENTS
CONTENTS

<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2

Balance Sheets....................................................................... F-3

Statements of Operations............................................................. F-4

Statement of Changes in Stockholders' Equity......................................... F-5

Statements of Cash Flows............................................................. F-6

Notes to Financial Statements........................................................ F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors
CIMA LABS INC.

We have audited the accompanying balance sheets of CIMA LABS INC. (a
development stage company) as of December 31, 1994 and 1995, and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995, and for the
period from December 12, 1986 (inception) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CIMA LABS INC. at December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, and the period from
December 12, 1986 (inception) to December 31, 1995, in conformity with generally
accepted accounting principles.

As discussed in Note 11 to the financial statements, the Company's deficit
accumulated during the development stage and recurring losses from operations
raise substantial doubt about its ability to continue as a going concern. The
Company intends to obtain additional capital through a financing transaction to
permit it to continue its operations. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

ERNST & YOUNG LLP

Minneapolis, Minnesota
January 26, 1996

F-2
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- ------------- MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 2,912,150 $ 3,558,743 $ 2,516,596
Short-term investments............................................ 10,743,182 -- --
Accounts receivable, less allowance of $100,000 -- 1994; $0 --
1995 and March 31, 1996.......................................... 537,866 212,971 373,622
Inventories....................................................... 322,247 324,610 95,778
Prepaid expenses.................................................. 211,176 287,279 262,631
------------- ------------- -------------
Total current assets................................................ 14,726,621 4,383,603 3,248,627
Other assets:
Lease deposits.................................................... 290,650 290,650 290,650
Patents and trademarks, net of amortization ($156,074 -- 1994;
$248,846 -- 1995 and $259,730 -- March 31, 1996)................. 262,924 262,244 251,361
------------- ------------- -------------
553,574 552,894 542,011
Property, plant and equipment:
Construction in progress.......................................... 6,057,961 278,770 390,529
Equipment......................................................... 5,157,689 7,659,448 7,659,448
Leasehold improvements............................................ 921,499 4,572,586 4,572,586
Furniture and fixtures............................................ 250,899 551,032 551,032
------------- ------------- -------------
12,388,048 13,061,836 13,173,595
Less accumulated depreciation..................................... (2,546,072) (2,479,688) (2,600,263)
------------- ------------- -------------
9,841,976 10,582,148 10,573,332
------------- ------------- -------------
Total assets........................................................ $ 25,122,171 $ 15,518,645 $ 14,363,970
------------- ------------- -------------
------------- ------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 1,406,983 $ 291,868 $ 566,006
Accrued expenses.................................................. 910,966 695,127 905,082
Advance royalties................................................. 250,000 250,000 250,000
------------- ------------- -------------
Total current liabilities........................................... 2,567,949 1,236,995 1,721,088
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares -- 0.............................. -- -- --
Common Stock, $.01 par value:
Authorized shares -- 20,000,000
Issued and outstanding shares -- 7,527,788 -- 1994; 7,821,974 --
1995 and 7,840,099 -- March 31, 1996........................... 75,278 78,201 78,401
Additional paid-in capital........................................ 42,537,340 43,462,921 43,557,737
Deficit accumulated during the development stage.................. (20,058,396) (29,259,472) (30,993,256)
------------- ------------- -------------
Total stockholders' equity.......................................... 22,554,222 14,281,650 12,642,882
------------- ------------- -------------
Total liabilities and stockholders' equity.......................... $ 25,122,171 $ 15,518,645 $ 14,363,970
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

See accompanying notes.

F-3
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 12,
1986
YEAR ENDED DECEMBER 31, (INCEPTION)
---------------------------------- TO DECEMBER
1993 1994 1995 31, 1995
---------- ---------- ---------- ------------- THREE MONTHS ENDED PERIOD FROM
MARCH 31, DECEMBER 12,
------------------------ 1986
1995 1996 (INCEPTION)
----------- ----------- TO MARCH 31,
1996
(UNAUDITED) (UNAUDITED) -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Net sales.................. $1,857,135 $1,450,675 $ 151,074 $13,750,884 $ 11,297 $ -- $13,750,884
Research and development
fees...................... 271,779 452,945 496,637 2,496,735 214,808 341,858 2,838,593
Licensing revenue.......... 95,831 714,665 187,500 1,377,996 -- 50,000 1,427,996
---------- ---------- ---------- ------------- ----------- ----------- -------------
2,224,745 2,618,285 835,211 17,625,615 226,105 391,858 18,017,473
Costs and expenses:
Cost of goods sold......... 2,843,896 2,799,179 240,038 17,831,415 59,104 -- 17,831,415
Research and product
development............... 1,856,932 3,548,938 6,504,528 15,120,291 2,292,490 1,375,946 16,496,237
Selling, general and
administrative............ 1,207,535 2,972,453 3,658,572 14,735,034 1,018,684 783,702 15,518,736
---------- ---------- ---------- ------------- ----------- ----------- -------------
5,908,363 9,320,570 10,403,138 47,686,740 3,370,278 2,159,648 49,846,388
Other income (expense):
Interest income............ 89,950 473,037 453,737 1,535,259 169,589 39,385 1,574,644
Interest expense........... (84,380) (20,678) (5,989) (913,393) -- -- (913,393)
Other income (expense)..... (1,577) 37,891 13,084 273,768 (3,173) (5,379) 268,389
---------- ---------- ---------- ------------- ----------- ----------- -------------
3,993 490,250 460,832 895,634 166,416 34,006 929,640
---------- ---------- ---------- ------------- ----------- ----------- -------------
Net loss and deficit
accumulated during the
development stage........... $(3,679,625) $(6,212,035) $(9,107,095) $(29,165,491) ($2,977,757) ($1,733,784) $(30,899,275)
---------- ---------- ---------- ------------- ----------- ----------- -------------
---------- ---------- ---------- ------------- ----------- ----------- -------------
Net loss per share:
Primary.................... $ (2.07) $ (1.82) $ (1.16) $ (12.80) $ (.39) $ (.22) $ (13.94)
Fully diluted.............. $ (.78) $ (.95) $ (1.16) $ (7.79) $ (.39) $ (.22) $ (8.02)
Weighted average shares
outstanding:
Primary.................... 1,778,370 3,413,176 7,821,974 2,278,099 7,541,105 7,824,365 2,216,529
Fully diluted.............. 4,726,985 6,504,946 7,821,974 3,742,427 7,541,105 7,824,365 3,852,849
</TABLE>

See accompanying notes.

F-4
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sale of Common Stock to founders at $.09 per share on
December 12, 1986....................................... -- $ -- 500,000 $ 5,000 $ 40,000
Issuance of stock warrant.............................. -- -- -- -- 50
Net loss for the period from December 12, 1986
(inception) to December 31, 1986...................... -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1986............................. -- -- 500,000 5,000 40,050
Issuance of Convertible Preferred Stock at $2.78 per
share in five closing dates between May and December
1987.................................................. 899,275 8,993 -- -- 2,491,007
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1987............................. 899,275 8,993 500,000 5,000 2,531,057
Issuance of Convertible Preferred Stock at $5.60 per
share in April 1988................................... 357,132 3,571 -- -- 1,996,429
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1988............................. 1,256,407 12,564 500,000 5,000 4,527,486
Issuance of Convertible Preferred Stock at $5.60 per
share in June 1989, net of offering costs of
$29,594............................................... 767,854 7,679 -- -- 4,262,726
Issuance of stock warrants............................. -- -- -- -- 200
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1989............................. 2,024,261 20,243 500,000 5,000 8,790,412
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1990............................. 2,024,261 20,243 500,000 5,000 8,790,412
Stock options exercised................................ -- -- 5,000 50 13,950
Exercise of stock warrants............................. -- -- 35,971 360 99,639
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1991............................. 2,024,261 20,243 540,971 5,410 8,904,001
Issuance of Convertible Preferred Stock at $6.00 per
share in May 1992, net of offering costs of
$401,900.............................................. 1,558,319 15,583 -- -- 8,932,455
Stock options exercised................................ -- -- 24,331 243 61,889
Conversion of Preferred Stock to Common Stock.......... (633,989) (6,340) 633,989 6,340 --
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1992............................. 2,948,591 29,486 1,199,291 11,993 17,898,345
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1993............................. 2,948,591 29,486 1,199,291 11,993 17,898,345
Issuance of Convertible Preferred Stock at $7.00 per
share in January 1994, net of offering costs of
$531,762.............................................. 1,214,282 12,143 -- -- 7,956,087
Conversion of Convertible Preferred Stock.............. (4,162,873) (41,629) 4,162,873 41,629 --
Issuance of Common Stock at $9.00 per share in August
1994, net of offering costs of $2,071,371............. -- -- 2,050,000 20,500 16,358,132
Stock options exercised................................ -- -- 108,482 1,085 284,843
Exercise of stock warrants............................. -- -- 7,142 71 39,933
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1994............................. -- -- 7,527,788 75,278 42,537,340
Stock options exercised................................ -- -- 278,487 2,766 831,763
Exercise of stock warrants............................. -- -- 15,699 157 93,818
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1995............................. -- -- 7,821,974 78,201 43,462,921
Stock options exercised................................ -- -- 18,125 200 94,816
Net loss for the period................................ -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at March 31, 1996 (unaudited).................... -- $ -- 7,840,099 $ 78,401 $43,557,737
---------- ----------- --------- ----------- -----------
---------- ----------- --------- ----------- -----------

<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------- -----------
<S> <C> <C>
Sale of Common Stock to founders at $.09 per share on
December 12, 1986....................................... $ -- $ 45,000
Issuance of stock warrant.............................. -- 50
Net loss for the period from December 12, 1986
(inception) to December 31, 1986...................... (1,679) (1,679)
------------- -----------
Balance at December 31, 1986............................. (1,679) 43,371
Issuance of Convertible Preferred Stock at $2.78 per
share in five closing dates between May and December
1987.................................................. -- 2,500,000
Net loss for the year.................................. (714,125) (714,125)
------------- -----------
Balance at December 31, 1987............................. (715,804) 1,829,246
Issuance of Convertible Preferred Stock at $5.60 per
share in April 1988................................... -- 2,000,000
Net loss for the year.................................. (1,825,173) (1,825,173)
------------- -----------
Balance at December 31, 1988............................. (2,540,977) 2,004,073
Issuance of Convertible Preferred Stock at $5.60 per
share in June 1989, net of offering costs of
$29,594............................................... -- 4,270,405
Issuance of stock warrants............................. -- 200
Net loss for the year.................................. (1,747,306) (1,747,306)
------------- -----------
Balance at December 31, 1989............................. (4,288,283) 4,527,372
Net loss for the year.................................. (1,881,779) (1,881,779)
------------- -----------
Balance at December 31, 1990............................. (6,170,062) 2,645,593
Stock options exercised................................ -- 14,000
Exercise of stock warrants............................. -- 99,999
Net loss for the year.................................. (2,314,688) (2,314,688)
------------- -----------
Balance at December 31, 1991............................. (8,484,750) 444,904
Issuance of Convertible Preferred Stock at $6.00 per
share in May 1992, net of offering costs of
$401,900.............................................. -- 8,948,038
Stock options exercised................................ -- 62,132
Conversion of Preferred Stock to Common Stock.......... -- --
Net loss for the year.................................. (1,681,986) (1,681,986)
------------- -----------
Balance at December 31, 1992............................. (10,166,736) 7,773,088
Net loss for the year.................................. (3,679,625) (3,679,625)
------------- -----------
Balance at December 31, 1993............................. (13,846,361) 4,093,463
Issuance of Convertible Preferred Stock at $7.00 per
share in January 1994, net of offering costs of
$531,762.............................................. -- 7,968,230
Conversion of Convertible Preferred Stock.............. -- --
Issuance of Common Stock at $9.00 per share in August
1994, net of offering costs of $2,071,371............. -- 16,378,632
Stock options exercised................................ -- 285,928
Exercise of stock warrants............................. -- 40,004
Net loss for the year.................................. (6,212,035) (6,212,035)
------------- -----------
Balance at December 31, 1994............................. (20,058,396) 22,554,222
Stock options exercised................................ -- 834,529
Exercise of stock warrants............................. (93,981) (6)
Net loss for the year.................................. (9,107,095) (9,107,095)
------------- -----------
Balance at December 31, 1995............................. (29,259,472) 14,281,650
Stock options exercised................................ -- 95,016
Net loss for the period................................ (1,733,784) (1,733,784)
------------- -----------
Balance at March 31, 1996 (unaudited).................... $(30,993,256) $12,642,882
------------- -----------
------------- -----------
</TABLE>

See accompanying notes.

F-5
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 12,
1986
YEAR ENDED DECEMBER 31, (INCEPTION) TO
-------------------------------------- DECEMBER 31,
1993 1994 1995 1995
----------- ------------ ----------- -------------- THREE MONTHS ENDED MARCH
31,
--------------------------
1995 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................. $(3,679,625) $ (6,212,035) $(9,107,095) $(29,165,491) $(2,977,757) $(1,733,784)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 556,677 667,483 582,760 3,414,224 135,957 147,030
Preferred stock issued for accrued
interest........................... -- -- -- 141,448 -- --
Gain on sale of property, plant and
equipment.......................... -- (9,242) (44,028) (53,270) -- --
Changes in operating assets and
liabilities:
Accounts receivable............... 8,738 (195,812) 324,895 (212,971) 266,356 (160,651)
Inventories....................... 94,465 (108,270) (2,363) (324,610) (159,144) 228,832
Other current assets.............. 31,432 (125,502) (76,103) (287,279) (37,840) 24,648
Accounts payable.................. (98,538) 1,259,884 (1,115,115) 291,863 (503,890) 274,138
Accrued expenses.................. (53,949) 735,710 (215,839) 695,127 (237,872) 209,955
Advance royalties................. -- -- -- 250,000 -- --
----------- ------------ ----------- -------------- ------------ ------------
Net cash used in operating
activities........................... (3,140,800) (3,987,784) (9,652,888) (25,250,959) (3,514,190) (1,009,832)

INVESTING ACTIVITIES
Purchases of and deposits on property,
plant and equipment.................. (845,242) (7,529,697) (1,620,518) (14,146,060) (680,224) (111,759)
Purchases of short-term investments... -- (11,727,864) (6,819,276) (18,547,140) (5,360,001) --
Proceeds from sale of property, plant
and equipment........................ -- 37,500 434,383 471,883 -- --
Proceeds from maturities of short-term
investments.......................... -- 984,682 17,562,458 18,547,140 10,743,182 --
Patents and trademarks................ (62,570) (176,332) (92,089) (511,743) (13,334) (15,572)
----------- ------------ ----------- -------------- ------------ ------------
Net cash (used in) provided by
investing activities................. (907,812) (18,411,711) 9,464,958 (14,185,920) 4,689,623 (127,331)

FINANCING ACTIVITIES
Net proceeds from issuance of stock:
Common Stock........................ -- 16,704,564 834,523 17,746,752 57,241 95,016
Preferred Stock..................... -- 7,968,230 -- 25,458,690 -- --
Borrowings under line of credit....... -- -- -- 450,000 -- --
Payment on line of credit............. -- -- -- (450,000) -- --
Lease financing of equipment.......... -- -- -- 2,441,650 -- --
Security deposits on leases........... 38,774 (278,125) -- (290,650) -- --
Proceeds from issuance of notes
payable and warrants................. -- -- -- 1,923,950 -- --
Payments on notes payable............. -- -- -- (1,823,700) -- --
Payments on capital leases............ (292,331) (260,747) -- (2,441,650) -- --
Organization costs.................... -- -- -- (19,420) -- --
----------- ------------ ----------- -------------- ------------ ------------
Net cash (used in) provided by
financing activities................. (253,557) 24,133,922 834,523 42,995,622 57,241 95,016
----------- ------------ ----------- -------------- ------------ ------------
Increase (decrease) in cash and cash
equivalents.......................... (4,302,169) 1,734,427 646,593 3,558,743 1,232,674 (1,042,147)
Cash and cash equivalents at beginning
of period............................ 5,479,892 1,177,723 2,912,150 -- 2,912,150 3,558,743
----------- ------------ ----------- -------------- ------------ ------------
Cash and cash equivalents at end of
period............................... $ 1,177,723 $ 2,912,150 $ 3,558,743 $ 3,558,743 $4,144,824 $2,516,596
----------- ------------ ----------- -------------- ------------ ------------
----------- ------------ ----------- -------------- ------------ ------------
Supplemental schedule of noncash
investing and financing activities:
Note payable exchanged for issuance
of Preferred Stock................. $ -- $ -- $ -- $ 1,517,500 $ -- $ --
Preferred Stock issued for note
receivable......................... $ -- $ -- $ -- $ 50,000 $ -- $ --

DECEMBER 12,
1986
(INCEPTION) TO
MARCH 31, 1996

<S> <C>
OPERATING ACTIVITIES
Net loss.............................. $(30,899,275)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 3,561,254
Preferred stock issued for accrued
interest........................... 141,448
Gain on sale of property, plant and
equipment.......................... (53,270)
Changes in operating assets and
liabilities:
Accounts receivable............... (373,622)
Inventories....................... (95,778)
Other current assets.............. (262,631)
Accounts payable.................. 566,001
Accrued expenses.................. 905,082
Advance royalties................. 250,000
--------------
Net cash used in operating
activities........................... (26,260,791)
INVESTING ACTIVITIES
Purchases of and deposits on property,
plant and equipment.................. (14,257,819)
Purchases of short-term investments... (18,547,140)
Proceeds from sale of property, plant
and equipment........................ 471,883
Proceeds from maturities of short-term
investments.......................... 18,547,140
Patents and trademarks................ (527,315)
--------------
Net cash (used in) provided by
investing activities................. (14,313,251)
FINANCING ACTIVITIES
Net proceeds from issuance of stock:
Common Stock........................ 17,841,768
Preferred Stock..................... 25,458,690
Borrowings under line of credit....... 450,000
Payment on line of credit............. (450,000)
Lease financing of equipment.......... 2,441,650
Security deposits on leases........... (290,650)
Proceeds from issuance of notes
payable and warrants................. 1,923,950
Payments on notes payable............. (1,823,700)
Payments on capital leases............ (2,441,650)
Organization costs.................... (19,420)
--------------
Net cash (used in) provided by
financing activities................. 43,090,638
--------------
Increase (decrease) in cash and cash
equivalents.......................... 2,516,596
Cash and cash equivalents at beginning
of period............................ --
--------------
Cash and cash equivalents at end of
period............................... $ 2,516,596
--------------
--------------
Supplemental schedule of noncash
investing and financing activities:
Note payable exchanged for issuance
of Preferred Stock................. $ 1,517,500
Preferred Stock issued for note
receivable......................... $ 50,000
</TABLE>

See accompanying notes.

F-6
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED WITH RESPECT TO MARCH 31, 1996 AND
THE THREE-MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)

1. DEVELOPMENT STAGE COMPANY
CIMA LABS INC. is a development stage company formed on December 12, 1986 to
develop and market certain effervescent delivery technologies and focused
initially on liquid effervescents. Initial sales commenced on January 28, 1988
and have been derived principally from manufacturing of liquid effervescent and
other products for third parties. In September 1992, patent claims were allowed
on the Company's OraSolv technology and the Company began to emphasize
development of products using this new technology.

The Company's strategy is to enter into collaborative arrangements with
pharmaceutical and other healthcare companies to develop OraSolv products to be
marketed by its corporate partners. The Company's future profitability is,
therefore, dependent upon the Company's ability to develop products that meet
the requirements of its corporate partners and upon the marketing efforts of
these corporate partners. Although the Company believes these partners will have
an economic motivation to market these products vigorously, the amount and
timing of resources to be devoted to marketing are not within the control of the
Company. These partners independently could make material marketing and other
commercialization decisions which could adversely affect the Company's future
revenues. Failure of these partners to market the Company's products
successfully could have a material adverse effect on the Company's financial
condition and result of operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of
ninety days or less when purchased to be cash equivalents. Cash equivalents are
carried at cost which approximates fair market value.

SHORT-TERM INVESTMENTS

Company investments are comprised of debt securities and are classified as
available for sale. These securities are carried at cost which approximates fair
value. Realized gains and losses and declines in value judged to be other than
temporary are included in other income.

PATENTS AND TRADEMARKS

Costs incurred in obtaining patents and trademarks are amortized on a
straight-line basis over sixty months. The Company periodically reviews its
patents and trademarks for impairment in value. Any adjustment from the analysis
is charged to operations.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets
ranging from 3 to 15 years. Leasehold improvements are amortized over the
shorter of the term of the lease or life of the asset.

INVENTORIES

Inventories are valued at cost under the first-in, first-out (FIFO) method
which is not in excess of market.

IMPAIRMENT OF LONG-LIVED ASSETS

In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF", which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets'

F-7
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO MARCH 31, 1996 AND
THE THREE-MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement No.
121 in the first quarter of fiscal 1996 and, based on current circumstances,
does not believe the effect of adoption will be material.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

INCOME TAXES

Taxes are provided based on earnings reported for financial statement
purposes. Deferred income taxes are provided for temporary differences between
financial reporting and tax bases of assets and liabilities under the liability
method.

REVENUE RECOGNITION

Sales of product are recorded upon shipment. Research and development fees
are recognized as the services are provided. Revenues from license agreements
are recorded when obligations under the agreement have been substantially
completed. Royalties are recorded when earned.

NET LOSS PER COMMON SHARE

The primary net loss per share is computed using the weighted average number
of shares of common stock and common stock equivalents, if dilutive, outstanding
during the periods presented. The fully diluted loss per share is presented
using the "if converted" method and reflects the impact of the conversion of the
preferred stock to common stock at the beginning of the earliest period
presented or at the date of issuance, if later. For periods prior to July 1994
(the initial public offering), the loss per share amounts give effect to the
application of Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin ("SAB") No. 83. Pursuant to SAB No. 83, common stock issued by the
Company at prices less than the initial public offering price during the twelve
months immediately preceding the initial public offering, plus the common stock
equivalent shares granted at exercise prices less than the initial public
offering price during the same period, have been included in the calculation of
shares used in the calculation of net loss per share as if they were outstanding
for all periods prior to the initial public offering.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform to the 1996 classifications.

INTERIM FINANCIAL INFORMATION

The accompanying financial statements as of March 31, 1996 and for the
three-month periods ended March 31, 1995 and 1996 are unaudited. In the opinion
of the management of the Company, these financial statements reflect all
adjustments, consisting only of normal and recurring adjustments, necessary for
a fair presentation of the financial statements. The results of operations for
the three-month period ended March 31, 1996 are not necessarily indicative of
the results that may be expected for the full year ending December 31, 1996.

3. SHORT-TERM INVESTMENTS
At December 31, 1994, short-term investments, including $1,491,293
classified as cash equivalents, consisted of U.S. Treasury securities and
obligations of U.S. Government agencies.

F-8
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO MARCH 31, 1996 AND
THE THREE-MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)

4. INVENTORIES
Principal classifications of inventories were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1995 MARCH 31, 1996
---------- ---------- --------------
<S> <C> <C> <C>
Materials and packaging.............................. $ 287,346 $ 324,610 $ 95,778
Work-in-process...................................... 22,456 -- --
Finished goods....................................... 12,445 -- --
---------- ---------- -------
$ 322,247 $ 324,610 $ 95,778
---------- ---------- -------
---------- ---------- -------
</TABLE>

5. INCOME TAXES
Deferred income taxes are due to temporary differences between the carrying
values of certain assets and liabilities for financial reporting and income tax
purposes. Significant components of deferred income taxes as of December 31,
1994 and 1995 are as follows:

<TABLE>
<CAPTION>
1994 1995
------------- --------------
<S> <C> <C>
Deferred assets:
Net operating loss........................................... $ 7,268,421 $ 11,899,425
UNICAP....................................................... 27,069 31,163
Accrued vacation............................................. 48,708 61,288
Inventory reserve............................................ 70,000 132,883
Accounts receivable allowance................................ 35,000 --
Other accruals............................................... 51,450 101,218
------------- --------------
7,500,648 12,225,977
Deferred liability:
Depreciation and amortization................................ 542,224 492,440
------------- --------------
Net deferred income tax assets................................. 6,958,424 11,733,537
Valuation allowance............................................ (6,958,424) (11,733,537)
------------- --------------
Net deferred income taxes...................................... $ -- $ --
------------- --------------
------------- --------------
</TABLE>

The Company will be subject to federal income taxes when operations become
profitable. The Company's tax operating loss carryforwards of approximately
$29,663,562 can be carried forward to offset future taxable income, limited due
to changes in ownership under the net operating loss limitation rules, and
expire in the year 2010.

6. CONVERTIBLE PREFERRED STOCK
In January 1994, the Company obtained proceeds of $8.5 million in additional
equity financing. A total of 1,214,282 shares of Series E Convertible Preferred
Stock at $7.00 per share were issued in two closings. The Series E Convertible
Preferred Stock was convertible into Common Stock at $7.00 per share and had
similar terms and conditions to the other series of Preferred Stock. Along with
Series D Preferred Stockholders, Series E Preferred Stockholders had liquidation
preference over the remainder of the Preferred Stockholders.

A Board member acted as the Company's sales agent in connection with the
issuance of the Series E Convertible Preferred Stock in January 1994 and
received $484,000 in compensation. Seventy-five percent of the amount was
payable in cash and the remaining twenty-five percent was paid in stock.

F-9
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO MARCH 31, 1996 AND
THE THREE-MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)

6. CONVERTIBLE PREFERRED STOCK (CONTINUED)
The Convertible Preferred Stock outstanding at December 31, 1993, which
consisted of 265,286 shares of Series A, 357,132 shares of Series B, 767,854
shares of Series C, and 1,558,319 shares of Series D, as well as the Series E
described above, were converted to Common Stock concurrently with the closing of
the initial public offering by the Company in August 1994.

7. LEASES
The Company leases office and manufacturing facilities in Brooklyn Park and
Eden Prairie, Minnesota. The Brooklyn Park facility is leased under a
non-cancelable operating lease expiring in September 1998. In addition to base
rent, the Company pays a pro rata portion of the operating expenses of the
facilities. The Company's facilities in Eden Prairie are under a sub-lease
agreement which provides for escalating rent payments. As part of securing the
sub-lease, the Company obtained a $500,000 stand-by letter of credit from a
bank. A $250,000 certificate of deposit was pledged as collateral for the letter
of credit. The certificate of deposit is included in lease deposits in the
balance sheet.

Future minimum lease commitments for all operating leases with initial or
remaining terms of one year or more are as follows:

<TABLE>
<S> <C>
Year ending December 31:
1996.......................................................... $ 482,100
1997.......................................................... 500,850
1998.......................................................... 483,450
1999.......................................................... 412,500
2000.......................................................... 375,000
Thereafter.................................................... 1,800,000
---------
$4,053,900
---------
---------
</TABLE>

Rent expense on operating leases, excluding operating expenses, for the
years ended December 31, 1993, 1994 and 1995 was $189,000, $375,000 and
$414,600, respectively.

8. STOCK OPTIONS AND WARRANTS
The Company has a Stock Option and Stock Award Plan ("the Plan") under which
options to purchase up to 1,750,000 shares of Common Stock may be granted to
employees, consultants and others. The Compensation Committee, established by
the Board of Directors, establishes the terms and conditions of all stock option
grants, subject to the plan and applicable provisions of the Internal Revenue
Code. The options expire ten years from the date of grant and are usually
exercisable in annual increments ranging from 25% to 33% beginning one year from
the date of grant.

F-10
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO MARCH 31, 1996 AND
THE THREE-MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)

8. STOCK OPTIONS AND WARRANTS (CONTINUED)
Shares available and options granted are as follows:

<TABLE>
<CAPTION>
SHARES INCENTIVE RANGE IN
AVAILABLE STOCK NON-QUALIFIED OPTION PRICE PER
FOR GRANT OPTIONS STOCK OPTIONS TOTAL SHARE
---------- ---------- ------------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993............ 481,047 505,468 163,485 668,953 $ 2.00 to $ 3.00
Reserved.............................. 600,000 -- -- --
Granted............................... (612,016) 595,944 16,072 612,016 3.50 to 10.125
Forfeited............................. 28,231 (28,231) -- (28,231) 2.80 to 3.00
Exercised............................. -- (57,496) (50,986) (108,482) 2.00 to 3.00
---------- ---------- ------------- ----------
Balance at December 31, 1994............ 497,262 1,015,685 128,571 1,144,256 2.80 to 10.125
Granted............................... (477,750) 477,750 -- 477,750 4.75 to 7.625
Forfeited............................. 180,724 (175,061) (34,999) (210,060) 2.80 to 10.125
Exercised............................. -- (269,915) (8,572) (278,487) 2.80 to 3.50
---------- ---------- ------------- ----------
Balance at December 31, 1995............ 200,236 1,048,459 85,000 1,133,459 $ 2.80 to $10.125
---------- ---------- ------------- ----------
---------- ---------- ------------- ----------
Exercisable:
December 31, 1993..................... 264,003 $ 2.00 to $ 3.00
December 31, 1994..................... 298,163 2.80 to 3.50
December 31, 1995..................... 253,152 2.80 to 9.00
</TABLE>

The Company has a Directors' Stock Option Plan (the "Plan") which provides
for the granting to non-management directors of the Company options to purchase
shares of Common Stock. The maximum number of shares with respect to which
options may be granted under this Plan is 350,000 shares. As of December 31,
1995, options to purchase 165,000 shares of Common Stock have been granted at
prices ranging from $4.75 to $9.00 per share. To date, none of these options
have been exercised.

In connection with a bridge financing in 1989, the Company issued warrants
to purchase 7,365 shares of its Common Stock at $5.60 per share. Of these,
warrants to purchase 7,142 shares were exercised in April 1994. The remaining
warrants expired in the same month.

In connection with $950,000 of bridge financing in 1991 and $467,500 of
bridge financing in 1992, the Company issued warrants to purchase an aggregate
of 189,801 shares of its Common Stock at $6.00 per share. The warrants are
exercisable at various dates from January 1996 to January 1997.

In connection with an equipment lease agreement entered into during 1991,
the Company issued warrants to purchase 37,917 shares of Series D Preferred
Stock at $6.00 per share. The warrants were exercised in a cashless transaction
in January 1995.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION." The Company has not determined the impact of the new statement on
its financial statements. The Company currently accounts for its options under
the provisions of Accounting Standards Board Opinion No. 25, "Accounting for
Stock Issued to Employees."

F-11
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO MARCH 31, 1996 AND
THE THREE-MONTH PERIODS ENDED MARCH 31, 1995 AND 1996)

9. DEFINED CONTRIBUTION PLAN
The Company established a 401(k) plan (the "Plan") effective January 1993.
All personnel employed on January 1, 1993 were eligible to participate in the
Plan. Others become eligible to participate at age 21 with six months of
service.

Contributions to the Plan are made through employee wage deferrals and
employer matching contributions. The employer matching contribution percentage
is discretionary and determined each year. In addition, the Company may
contribute two discretionary amounts; one to non-highly compensated individuals
and another to all employees. To qualify for the discretionary amounts, an
employee must be employed by the Company on the last day of the Plan year or
have been credited with a minimum of 500 hours of service during the Plan year.

The 401(k) expense for the years ended December 31, 1993, 1994 and 1995 was
$14,078, $16,289 and $28,335, respectively.

10. STOCK SPLIT
The Company's Board of Directors and stockholders approved a 1-for-2 reverse
stock split that was effective upon the closing of the initial public offering
in July 1994. All share and per share information has been adjusted to give
effect to the stock split in the financial statements.

11. GOING CONCERN
Net losses since the Company's inception have resulted in an accumulated
deficit balance of $29,259,472 at December 31, 1995. The Company's ability to
continue as a going concern and the realization of its assets and orderly
satisfaction of its liabilities are dependent on obtaining additional funds from
outside sources and generating sufficient working capital from operations. The
Company is currently exploring financing alternatives and anticipates completing
a financing transaction in 1996. The Company believes that the successful
completion of a financing transaction will satisfy its cash requirements for the
next twelve months. However, there can be no assurance that the Company will be
successful in completing a financing transaction.

F-12
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES,
OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.

-------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 5
The Company.................................... 11
Use Of Proceeds................................ 11
Price Range of Common Stock.................... 12
Dividend Policy................................ 12
Capitalization................................. 13
Dilution....................................... 13
Selected Financial Data........................ 14
Management's Discussion And Analysis Of
Financial Condition And Results Of
Operations.................................... 15
Business....................................... 18
Management..................................... 32
Certain Transactions........................... 37
Principal and Selling Stockholders............. 39
Description Of Capital Stock................... 42
Shares Eligible For Future Sale................ 44
Underwriting................................... 45
Legal Matters.................................. 46
Experts........................................ 46
Additional Information......................... 46
Index To Financial Statements.................. F-1
</TABLE>

2,500,000 SHARES

[CIMA LOGO]

COMMON STOCK

---------
PROSPECTUS
, 1996
-------------

VOLPE, WELTY & COMPANY

RODMAN & RENSHAW, INC.

- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts are estimates except for
the registration fee and the NASD filing fee.

<TABLE>
<S> <C>
Registration fee.................................................. $ 6,907
NASD filing fee................................................... 2,488
Nasdaq additional listing fee..................................... 17,500
Blue sky qualification fees and expenses.......................... 10,000
Printing and engraving expenses................................... 70,000
Legal fees and expenses........................................... 175,000
Accounting fees and expenses...................................... 35,000
Transfer agent, registrar and custodian fees...................... 3,000
Miscellaneous..................................................... 115,105
---------
Total......................................................... $ 435,000
---------
---------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws provide
that the Registrant will indemnify its directors, executive officers, other
officers, employees and agents to the fullest extent permitted by Delaware law.

The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty of
care to the Registrant and its stockholders. These provisions do not eliminate
the directors' duty of care and, in appropriate circumstances, equitable
remedies such an injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.

The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement, will provide for indemnification by the Underwriters and their
controlling persons, on the one hand, and of the Registrant and its controlling
persons on the other hand, for certain liabilities arising under the Securities
Act or otherwise.

II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since March 31, 1993, the Registrant has sold and issued the following
unregistered securities to the following persons on the dates indicated (share
issuances in 1994 do not reflect the 1-for-2 reverse stock split which occurred
in July 1994):

<TABLE>
<C> <S> <C> <C> <C>
(i) Various accredited investors, 1/7/94 2,282,000 shares of Series E $7,986,997
including one director, an officer Convertible Preferred Stock
and two 5% stockholders of the
Company
(ii) Various accredited investors, 1/18/94 146,571 shares of Series E $ 512,999
including one affiliate of a Convertible Preferred Stock
director and one 5% stockholder
(iii) Four accredited investors, 4/14/94 14,287 shares of Common Stock $ 46,004
including one 5% stockholder issued upon exercise of Warrants
(iv) David B. Musket 5/5/94 10,000 shares of Common Stock $ 15,000
issued upon exercise of stock
option
(v) One accredited investor 1/26/95 31,398 shares of Common Stock $ 93,965
issued upon cashless exercise of
Warrants
(vi) One accredited investor 2/14/95 15,699 shares of Common Stock $ 227,502
issued upon cashless exercise of
Warrants
</TABLE>

The sales and issuances of securities described in paragraphs (i), (ii),
(iii), (v) and (vi) above were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) of the Securities Act. The purchasers
acquired these shares for their own account and not with a view toward the
distribution thereof. The sales and issuances of securities described in
paragraph (iv) above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 of the Securities Act.

Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities so long as appropriate. All recipients
either received adequate information about the Registrant or had access, through
employment or other relationships, to such information.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The following is a list of exhibits filed as a part of this Registration
Statement:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Fifth Restated Certificate of Incorporation of the Company. (1)
3.2 Second Restated Bylaws of the Company. (1)
4.1 Form of Certificate for Common Stock. (2)
5.1 Opinion of Cooley Godward Castro Huddleson & Tatum, counsel to the Company, as to legality (including
consent of such firm).
10.1 Consulting Agreement, dated April 24, 1995, between the Company and Randall J. Wall. (3)(4)
10.2 Preferred Stock Purchase Agreement (Series C Convertible), dated April 15, 1992, as amended. (2)
10.3 Preferred Stock Purchase Agreement (Series D Convertible), dated January 2, 1994, as amended. (2)
10.4 Preferred Stock Purchase Agreement (Series E Convertible), dated January 7, 1994. (2)
10.5 Real Property Lease, dated July 2, 1987, between Stuebner Properties and the Company, as amended. (2)
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
10.6 Letter Agreement, dated February 1, 1995, between the Company and Ronnie J. Spivey Ph.D. (3)(5)
<C> <S>
10.7 Employment Agreement, dated July 1, 1995, between the Company and John M. Siebert, Ph.D. (3)(6)
10.8 Real Property Lease, dated January 6, 1994, between The Principal Mutual Life Insurance Company and the
Company. (2)
10.9 Real Property Sublease, dated February 16, 1994, between Braun's Fashion, Inc. and the Company,
including Prime Lease as amended and Consent, Non-Disturbance and Prime Lessor's Agreement dated
February 22, 1994. (2)
10.10 Real Property Lease, dated March 10, 1994, between Village Plaza, Inc. and the Company. (2)
10.11 Amended and Restated Stock Option and Stock Award Plan. (2)(3)
10.12 1994 Directors' Stock Option Plan. (2)(3)
10.13 Employment Agreement, dated October 13, 1993, between the Company and Randall J. Wall, as amended.
(2)(3)
10.14 Form of Employment Agreement. (2)(3)
10.15 Letter Agreement, dated December 23, 1992, between the Company and Dr. Jerry A. Weisbach, as amended.
(2)(3)
10.16 Form of Confidentiality Agreement (for discussions with other companies). (2)
10.17 Form of Visitor's Agreement. (2)
10.18 License Agreement, dated January 28, 1994, between the Company and SRI International. (2)
10.19 Agreement, dated April 8, 1994, between the Company and Beecham Group plc. (2)
10.20 License Agreement and Supply Agreement, dated August 15, 1991, between the Company and Merck & Co., Inc.
(2)
10.21 License Agreement and Supply Agreement, dated October 12, 1994, by and between Pfizer Inc. and the
Company. (7)
10.22 Option and Development Agreement, dated May 19, 1994, between the Company and Sterling Winthrop, Inc.
(2)
10.23 License and Development Agreement, dated April 15, 1994, between the Company and Glaxo Group Limited.
(2)
10.24 Formulation Agreement, dated August 1, 1992, between the Company and Monsanto Company. (2)
10.25 Supply Agreement, dated April 18, 1990, between the Company and P. Leiner Nutritional Products, Inc. (2)
10.26 Supply Agreement, dated February 13, 1992, between the Company and Northhampton Medical, Inc. (2)
10.27 Form of Director and Officer Indemnification Agreement. (2)(3)
10.28 License Agreement, dated April 22, 1996, between the Company and SmithKline Beecham. (8)
11.1 Statement of Calculation of Net Loss Per Share.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Cooley Godward Castro Huddleson & Tatum (reference is made to Exhibit 5.1).
23.3 Consent of Lerner, David, Littenberg, Krumholz & Mentlik.
24.1 Powers of Attorney. (8)
27 Financial Data Schedule.
</TABLE>

(1) Incorporated herein by reference to the correspondingly numbered exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.

II-3
<PAGE>
(2) Incorporated herein by reference to the correspondingly numbered exhibit to
the Registrant's Registration Statement on Form S-1, File No. 33-80194.

(3) Items that are management contracts or compensatory plans or arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.

(4) Incorporated herein by reference to Exhibit 10.25 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.

(5) Incorporated by reference from Exhibit 10.20 to Registrant's Registration
Statement on Form S-1 (amended to Form S-3), Registration No. 33-93616.

(6) Incorporated by reference from Exhibit 99.1 to Registrant's Registration
Statement on Form S-3, Registration No. 33-93616.

(7) Incorporated by reference from Exhibit 10 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994, File No. 0-24424.

(8) Previously filed.

(b) Financial Statement Schedule:

Schedule II -- Valuation and Qualifying Accounts.

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will governed by the final adjudication of such issue.

The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act, the information omitted from the form of
prospectus filed as part of the registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of the registration statement as of the time it was declared effective, and
(2) for the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
BONA FIDE offering thereof.

II-4
<PAGE>
SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, in the City of Eden
Prairie, State of Minnesota, on May 8, 1996.

CIMA LABS INC.

By: ____/s/ JOHN M. SIEBERT, PH.D.____
John M. Siebert, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER

IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT NO. 1 TO REGISTRATION STATEMENT WAS SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES STATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------ ---------------------------------------------- ---------------

<S> <C> <C>
/s/ JOHN M. SIEBERT Chief Executive Officer and Director
-------------------------------------- (Principal executive officer; principal
John M. Siebert financial and accounting officer) May 8, 1996

*
-------------------------------------- Director
Terrence W. Glarner May 8, 1996

*
-------------------------------------- Director
David B. Musket May 8, 1996

*
-------------------------------------- Director
Steven B. Ratoff May 8, 1996

*
-------------------------------------- Director
Joseph R. Robinson May 8, 1996

*
-------------------------------------- Director
Jerry A. Weisbach May 8, 1996

*By: /s/ JOHN M. SIEBERT
--------------------------------------
John M. Siebert
ATTORNEY-IN-FACT
</TABLE>

II-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE

We have audited the financial statements of CIMA LABS INC. as of December
31, 1994 and 1995, and for each of the three years in the period ended December
31, 1995, and have issued our report thereon dated January 26, 1996 (included
elsewhere in this Registration Statement). Our audits also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
January 26, 1996

S-1
<PAGE>
CIMA LABS INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND LESS BALANCE AT
DESCRIPTION YEAR EXPENSES DEDUCTIONS END OF YEAR
- ------------------------------------------------------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts.......................... $ -- $ 100,000 $ -- $ 100,000
Obsolescence reserve..................................... -- -- -- --
------------ ----------- ----------- -----------
Total...................................................... $ -- $ 100,000 $ -- $ 100,000
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Year ended December 31, 1995:
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts.......................... $ 100,000 $ (100,000) $ -- $ --
Obsolescence reserve..................................... -- 332,207 -- 332,207
------------ ----------- ----------- -----------
Total...................................................... $ 100,000 $ 232,207 $ -- $ 332,207
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>

S-2
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
1.1 Form of Underwriting Agreement.
3.1 Fifth Restated Certificate of Incorporation of the Company. (1)
3.2 Second Restated Bylaws of the Company. (1)
4.1 Form of Certificate for Common Stock. (2)
5.1 Opinion of Cooley Godward Castro Huddleson & Tatum, counsel to the Company, as to legality
(including consent of such firm).
10.1 Consulting Agreement, dated April 24, 1995, between the Company and Randall J. Wall. (3)(4)
10.2 Preferred Stock Purchase Agreement (Series C Convertible), dated April 15, 1992, as amended. (2)
10.3 Preferred Stock Purchase Agreement (Series D Convertible), dated January 2, 1994, as amended. (2)
10.4 Preferred Stock Purchase Agreement (Series E Convertible), dated January 7, 1994. (2)
10.5 Real Property Lease, dated July 2, 1987, between Stuebner Properties and the Company, as amended.
(2)
10.6 Letter Agreement, dated February 1, 1995, between the Company and Ronnie J. Spivey Ph.D. (3)(5)
10.7 Employment Agreement, dated July 1, 1995, between the Company and John M. Siebert, Ph.D. (3)(6)
10.8 Real Property Lease, dated January 6, 1994, between The Principal Mutual Life Insurance Company
and the Company. (2)
10.9 Real Property Sublease, dated February 16, 1994, between Braun's Fashion, Inc. and the Company,
including Prime Lease as amended and Consent, Non-Disturbance and Prime Lessor's Agreement dated
February 22, 1994. (2)
10.10 Real Property Lease, dated March 10, 1994, between Village Plaza, Inc. and the Company. (2)
10.11 Amended and Restated Stock Option and Stock Award Plan. (2)(3)
10.12 1994 Directors' Stock Option Plan. (2)(3)
10.13 Employment Agreement, dated October 13, 1993, between the Company and Randall J. Wall, as
amended. (2)(3)
10.14 Form of Employment Agreement. (2)(3)
10.15 Letter Agreement, dated December 23, 1992, between the Company and Dr. Jerry A. Weisbach, as
amended. (2)(3)
10.16 Form of Confidentiality Agreement (for discussions with other companies). (2)
10.17 Form of Visitor's Agreement. (2)
10.18 License Agreement, dated January 28, 1994, between the Company and SRI International. (2)
10.19 Agreement, dated April 8, 1994, between the Company and Beecham Group plc. (2)
10.20 License Agreement and Supply Agreement, dated August 15, 1991, between the Company and Merck &
Co., Inc. (2)
10.21 License Agreement and Supply Agreement, dated October 12, 1994, by and between Pfizer Inc. and
the Company. (7)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----------
10.22 Option and Development Agreement, dated May 19, 1994, between the Company and Sterling Winthrop,
Inc. (2)
<S> <C> <C>
10.23 License and Development Agreement, dated April 15, 1994, between the Company and Glaxo Group
Limited. (2)
10.24 Formulation Agreement, dated August 1, 1992, between the Company and Monsanto Company. (2)
10.25 Supply Agreement, dated April 18, 1990, between the Company and P. Leiner Nutritional Products,
Inc. (2)
10.26 Supply Agreement, dated February 13, 1992, between the Company and Northhampton Medical, Inc. (2)
10.27 Form of Director and Officer Indemnification Agreement. (2)(3)
10.28 License Agreement, dated April 22, 1996, between the Company and SmithKline Beecham. (8)
11.1 Statement of Calculation of Net Loss Per Share.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Cooley Godward Castro Huddleson & Tatum (reference made to Exhibit 5.1).
23.3 Consent of Lerner, David, Littenberg, Krumholz & Mentlik.
24.1 Powers of Attorney. (8)
27 Financial Data Schedule.
</TABLE>

(1) Incorporated herein by reference to the correspondingly numbered exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.

(2) Incorporated herein by reference to the correspondingly numbered exhibit to
the Registrant's Registration Statement on Form S-1, File No. 33-80194.

(3) Items that are management contracts or compensatory plans or arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.

(4) Incorporated herein by reference to Exhibit 10.25 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.

(5) Incorporated by reference from Exhibit 10.20 to Registrant's Registration
Statement on Form S-1 (amended to Form S-3), Registration No. 33-93616.

(6) Incorporated by reference from Exhibit 99.1 to Registrant's Registration
Statement on Form S-3, Registration No. 33-93616.

(7) Incorporated by reference from Exhibit 10 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994, File No. 0-24424.

(8) Previously filed.

<PAGE>

Exhibit 1.1

2,500,000 Shares(1)

CIMA LABS INC.

Common Stock

UNDERWRITING AGREEMENT

May , 1996

Volpe, Welty & Company
Rodman & Renshaw, Inc.
As Representatives of the several Underwriters
c/o Volpe, Welty & Company
One Maritime Plaza, 11th Floor
San Francisco, California 94111

Dear Sirs and Madams:

CIMA LABS INC., a Delaware corporation (the "Company"), proposes to issue
and sell 1,000,000 shares of its authorized but unissued Common Stock, $.01
par value (the "Common Stock"), and the stockholders of the Company named in
Schedule II hereto (collectively, the "Selling Securityholders") propose to
sell an aggregate of 1,500,000 shares of Common Stock of the Company
(collectively, the "Firm Shares"). The Company and a Selling Securityholder
propose to grant to the Underwriters (as defined below) an option to purchase
up to an aggregate of 375,000 additional shares of Common Stock (the
"Optional Shares" and, with the Firm Shares, collectively, the "Shares").
The Common Stock is more fully described in the Registration Statement and
the Prospectus hereinafter mentioned.

The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Shares by the several
underwriters, for whom you are acting, named in Schedule I hereto (collectively,
the "Underwriters," which term shall also include any underwriter purchasing
Shares pursuant to Section 3(b) hereof). You represent and warrant that you
have been authorized by each of the other Underwriters to enter into this
Underwriting Agreement (the "Agreement") on its behalf and to act for it in the
manner herein provided.

- -----------------
(1)Plus an option to purchase from the Company and a Selling Securityholder up
to an aggregate of 375,000 additional shares to cover over-allotments.

<PAGE>

SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the several Underwriters as of the date hereof
and as of each Closing Date (as defined below) that:

(a) The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-4174), including the
related preliminary prospectus, for the registration under the Securities Act of
1933, as amended (the "Securities Act"), of the Shares. Copies of such
registration statement and of each amendment thereto, if any, including the
related preliminary prospectus (meeting the requirements of Rule 430A of the
rules and regulations of the Commission) heretofore filed by the Company with
the Commission have been delivered to you.

The term "Registration Statement" as used in this Agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective,
and any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the shares (a "Rule 462(b)
registration statement"), and, in the event of any amendment thereto after
the effective date of such registration statement (the "Effective Date"),
shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Shares first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in
the Registration Statement) and, in the event of any supplement or amendment
to such prospectus after the Effective Date, shall also mean (from and after
the filing with the Commission of such supplement or the effectiveness of
such amendment) such prospectus as so supplemented or amended. The term
Preliminary Prospectus as used in this Agreement shall mean each preliminary
prospectus included in the Registration Statement and printed and generally
distributed prior to the time the Registration Statement becomes effective.

The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to
be delivered to you copies of each Preliminary Prospectus and has consented
to the use of such copies for the purposes permitted by the Securities Act.

(b) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement
and the Prospectus and as being conducted, and is duly qualified as a foreign
corporation and in good standing in all jurisdictions in which the character of
the property owned or leased or the nature of the business transacted by it
makes qualification necessary, except where the failure to be so qualified would
not have a material adverse effect on the business, properties, condition
(financial or otherwise) or results of operations of the Company (a "Material
Adverse Effect").

(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity. The Company is in possession of and
operating in compliance with all material authorizations, licenses, permits,
consents, certificates and orders material to the conduct of its business as
described in the Prospectus, all of which are valid and in full force and
effect.

(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any material
adverse change in the business, properties, condition (financial or otherwise)
or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, other than as set forth in the
Registration Statement and the

-2-

<PAGE>

Prospectus, and since such dates, except in the ordinary course of business,
the Company has not entered into any material transaction not referred to in
the Registration Statement and the Prospectus.

(e) The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any later date on which Optional
Shares are to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the Commission thereunder (the "Rules and Regulations"). On
the Effective Date, the Registration Statement did not contain any untrue
statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading. The Prospectus, as of its date did not, and on the
Closing Date and any later date on which Optional Shares are to be purchased
will not, contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
Section 1(e) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.

(f) The Company has authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus as of the date
specified therein. The issued and outstanding shares of Common Stock have
been duly authorized and validly issued, are fully paid and nonassessable,
have been issued in compliance with all federal and state securities laws,
and were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities. Except as disclosed in
or contemplated by the Prospectus and the financial statements of the Company
and the related notes thereto included in the Prospectus, the Company has no
outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into,
or any contracts or commitments to issue or sell, shares of its capital stock
or any such options, rights, convertible securities or obligations. The
description of the Company's stock option, stock bonus and other stock plans
or arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents the
information required by the Securities Act and the Rules and Regulations to
be shown with respect to such plans, arrangements, options and rights.

(g) The Shares are duly authorized, are (or, in the case of Shares to be
sold by the Company, will be, when issued and sold to the Underwriters as
provided herein) validly issued, fully paid and nonassessable and conform in all
material respects to the description thereof in the Prospectus. No further
approval or authority of the stockholders of the Company or the Board of
Directors of the Company will be required for the transfer and sale of the
Shares to be sold by the Selling Securityholders or the issuance and sale of the
Shares to be sold by the Company as contemplated herein.

(h) The Shares to be sold by the Selling Securityholders are listed and
duly admitted to trading on the Nasdaq National Market and, prior to the
Closing Date, the Shares to be issued and sold by the Company will be
authorized for listing on the Nasdaq National Market upon official notice of
issuance.

(i) The Shares to be sold by the Company will be sold free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest,
and will conform in all material respects to the description thereof contained
in the Prospectus. No preemptive right, co-sale right, right of first refusal
or other similar right to subscribe for or purchase securities of the Company
exists with respect to the issuance and sale of the Shares by the Company
pursuant to this Agreement. No stockholder of

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<PAGE>

the Company has any right which has not been waived, or complied with, to
require the Company to register the sale of any shares owned by such
stockholder under the Securities Act in the public offering contemplated by
this Agreement.

(j) The Company has full corporate power and authority to enter into
this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization, moratorium,
laws affecting creditors' rights generally and except as to those provisions
relating to indemnity or contribution for liabilities arising under federal
and state securities laws. The making and performance of this Agreement by
the Company and the consummation of the transactions contemplated hereby (i)
will not violate any provision of the Certificate of Incorporation, Bylaws or
other organizational documents of the Company and (ii) will not conflict
with, result in a breach or violation of, or constitute, either by itself or
upon notice or the passage of time or both, a default under (A) any
agreement, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument to which the Company is a party or by which the
Company or any of its properties may be bound or affected, or (B) any statute
or any authorization, judgment, decree, order, rule or regulation of any
court or any regulatory body, administrative agency or other governmental
body applicable to the Company or any of its properties, except in each case,
where violation, conflict, breach or default would not have a Material
Adverse Effect. No consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental body that
has not already been obtained is required for the execution and delivery of
this Agreement or the consummation of the transactions contemplated by this
Agreement, except for compliance with the Securities Act, the blue sky laws
applicable to the public offering of the Shares by the several Underwriters
and the clearance of such offering with the National Association of
Securities Dealers, Inc. ("NASD").

(k) The financial statements and schedules of the Company and the
related notes thereto included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the
respective dates of such financial statements and schedules, and the results
of operations and cash flows of the Company for the respective periods
covered thereby. Such statements, schedules and related notes have been
prepared in accordance with generally accepted accounting principles applied
on a consistent basis throughout the periods specified, as certified by the
independent accountants named in Section 10(f) of this Agreement. No other
financial statements or schedules are required to be included in the
Registration Statement. The financial data set forth in the Prospectus under
the captions "Capitalization" and "Selected Financial Data" fairly present
the information set forth therein on the basis stated in the Registration
Statement.

(l) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The representations and warranties given by the Company and its
officers to its independent public accountants for the purpose of supporting the
letters referred to in Section 10(f) are true and correct.

(m) The Company is not (i) in violation or default of any provision of its
Certificate of Incorporation, Bylaws or other organizational documents, or (ii)
in a breach of or default with respect to any provision of any agreement,
judgment, decree, order, mortgage, deed of trust, lease, franchise,

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<PAGE>

license, indenture, permit or other instrument to which it is a party or by
which it or any of its properties are bound, except in each case, where
violation, breach or default would not have a Material Adverse Effect.

(n) There are no contracts or other documents required to be described in
the Registration Statement or to be filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof.

(o) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or threatened to which the
Company is or is threatened to be made a party or of which property owned or
leased by the Company is or is threatened to be made the subject, which
actions, suits or proceedings could, individually or in the aggregate,
prevent or adversely affect the transactions contemplated by this Agreement
or result in a Material Adverse Effect, and no labor disturbance by the
employees of the Company exists or, to the knowledge of the Company, is
imminent which could have a Material Adverse Effect. The Company is not a
party or subject to the provisions of any material injunction, judgment,
decree or order of any court, regulatory body, administrative agency or other
governmental body. Except as disclosed in the Prospectus, there are no
material legal or governmental actions, suits or proceedings pending or, to
the Company's knowledge, threatened against any executive officers or
directors of the Company.

(p) The Company has good and marketable title to all the properties and
assets reflected as owned in the financial statements hereinabove described
(or elsewhere in the Prospectus), subject to no lien, mortgage, pledge,
charge or encumbrance of any kind except (i) those, if any, reflected in such
financial statements (or elsewhere in the Prospectus), or (ii) those which
are not material in amount to the Company and do not adversely affect the use
made and proposed to be made of such property by the Company. The Company
holds its leased properties under valid and binding leases. Except as
disclosed in the Prospectus, the Company owns or leases all such properties
as are necessary to its operations as now conducted or as proposed to be
conducted.

(q) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company has not (A)
incurred any liabilities or obligations, indirect, direct or contingent, or
(B) entered into any oral or written agreement or other transaction, which in
the case of (A) or (B) is not in the ordinary course of business; (ii) the
Company has not sustained any material loss or interference with its business
or properties from fire, flood, windstorm, accident, or other calamity,
whether or not covered by insurance; (iii) the Company has not paid or
declared any dividends or other distributions with respect to its capital
stock and the Company is not in default in the payment of principal or
interest on any outstanding debt obligations; (iv) there has not been any
change in the capital stock of the Company (other than upon the sale of the
Shares hereunder or upon the exercise of any options or warrants disclosed in
the Prospectus); (v) there has not been any material increase in the short-
or long-term debt of the Company; and (vi) there has not been any material
adverse change or any development involving or which may reasonably be
expected to involve a prospective Material Adverse Effect.

(r) The Company is conducting business in compliance with all applicable
laws, rules and regulations of the jurisdictions in which it is conducting
business, except where the failure to be so in compliance would not have a
Material Adverse Effect.

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<PAGE>

(s) The Company has filed all federal, state and foreign income and
franchise tax returns required to have been filed as of the date hereof, and
all such tax returns are complete and correct in all material respects, and
the Company has not failed to pay any taxes which were required to have been
paid as of the date hereof pursuant to said returns or any assessments with
respect thereto. The Company has no knowledge of any tax deficiency which
has been or is likely to be threatened or asserted against the Company.

(t) The Company has not distributed, and will not distribute prior to
the later to occur of (i) completion of the distribution of the Shares, or
(ii) the expiration of any time period within which a dealer is required
under the Securities Act to deliver a prospectus relating to the Shares, any
offering material in connection with the offering and sale of the Shares
other than the Prospectus, the Registration Statement and any other materials
permitted by the Securities Act and consented to by the Underwriters.

(u) The Company maintains insurance of the types and in the amounts
generally deemed adequate for its business, including, but not limited to,
directors' and officers' insurance, insurance covering real and personal
property owned or leased by the Company against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, all of
which insurance is in full force and effect. The Company has not been refused
any insurance coverage sought or applied for, and the Company has no reason
to believe that it will not be able to renew its existing insurance coverage
as and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would
not materially adversely affect the business, properties, condition
(financial or otherwise) or results of operations of the Company.

(v) Neither the Company nor, to the best of the Company's knowledge, any
of its employees or agents has at any time during the last five years (i)
made any unlawful contribution to any candidate for foreign office, or failed
to disclose fully any contribution in violation of law, or (ii) made any
payment to any foreign, federal or state governmental officer or official or
other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.

(w) The Company has not taken and will not take, directly or indirectly,
any action designed to or that might be reasonably expected to cause or
result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.

(x) The Company has caused (i) each of its executive officers and
directors as set forth in the Prospectus and (ii) each stockholder listed on
Schedule III hereto, to furnish to the Underwriters an agreement in form and
substance satisfactory to Volpe, Welty & Company pursuant to which each such
party has agreed that during the period of 90 days after the date the
Registration Statement becomes effective, without the prior written consent
of Volpe, Welty & Company, such party will not offer, sell, contract to sell,
make any short sale, pledge or otherwise dispose of, directly or indirectly,
any shares of the Company's Common Stock, options to acquire Common Stock or
securities convertible into or exchangeable for, or any other rights to
purchase or acquire, the Company's Common Stock other than pursuant to the
exercise or conversion of outstanding options, warrants or convertible
securities; provided, however, that bona fide gift transactions and transfers
by a partnership to its partners or by a corporation to its stockholders may
be permitted if the transferee enters into a lock-up agreement in
substantially the same form covering the remainder of the lock-up period.

(y) Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba.

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<PAGE>

(z) Except as specifically disclosed in the Prospectus, (i) the Company
owns all patents, trademarks, trademark registrations, service marks,
service mark registrations, trade names, copyrights, licenses, inventions,
trade secrets and rights described in the Prospectus as being owned by it or,
to the knowledge of the Company, necessary for the conduct of its
business; (ii) to the knowledge of the Company, the Company is not infringing
on any trademark, trade name rights, patent rights, copyrights, licenses,
trade secret or other similar rights of others; and (iii) to the knowledge of
the Company, no claims have been made or are overtly threatened against the
Company regarding trademark, trade name, patent, copyright, license, trade
secret or other infringement, in each of cases (ii) or (iii) which could have
a Material Adverse Effect.

(aa) Except as disclosed in the Prospectus, (i) the Company is in
compliance in all material respects with all rules, laws and regulation
relating to the use, treatment, storage and disposal of toxic substances and
protection of health or the environment ("Environmental Laws") which are
applicable to its business, (ii) the Company has not received any notice from
any governmental authority of any asserted claim under Environmental Laws,
(iii) to the knowledge of the Company, no facts currently exist that will
require the Company to make future material capital expenditures to comply
with Environmental Laws and (iv) to the knowledge of the Company, no property
which is or has been owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (42 U.S.C.
Section 9601, ET SEQ.), or otherwise designated as a contaminated site under
applicable state or local law.

(ab) The Company is not an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.

(ac) The Company has filed all forms, reports and documents with the
Commission required to be filed by it pursuant to the Exchange Act or the
Securities Act (such filings, the "SEC Filings"), all of which have complied
in all material respects with the applicable requirements of the Securities
Act and the Exchange Act. None of the SEC Filings, including, without
limitation, any financial statements or schedules included therein, at the
time filed, or as subsequently amended, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Each of the
balance sheets (including the related notes) included in the SEC Filings
fairly presented the consolidated financial position of the Company as of the
respective dates thereof and the other related statements (including the
related notes) included therein fairly presented the results of operations
and the cash flows of the Company for the respective fiscal periods, in
accordance with generally accepted accounting principles consistently
applied, except as otherwise noted therein, and subject, in the case of
unaudited interim financial statements, to normal year-end audit adjustments
and the absence of complete notes.

(ad) The Company's manufacturing facility has been registered with Food
and Drug Administration ("FDA"). The Company is in compliance with all
applicable FDA and state requirements and regulations, including regulations
promulgated by the FDA setting forth current Good Manufacturing Practice
requirements, except where the failure so to comply would not have a Material
Adverse Effect. The Company's manufacturing facility has been licensed by
the State of Minnesota.
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<PAGE>

SECTION 2. REPRESENTATIONS AND WARRANTIES, AND COVENANTS, OF THE
SELLING SECURITYHOLDERS.

Each of the Selling Securityholders, severally and not jointly,
represents and warrants and covenants to the several Underwriters as of the
date hereof and as of each Closing Date hereinafter mentioned that:

(a) Such Selling Securityholder has good and marketable title to the
Shares to be sold by such Selling Securityholder hereunder, free and clear of
all liens, encumbrances, equities, security interests and claims whatsoever,
with full right and authority to deliver the same hereunder, subject, in the
case of each Selling Securityholder, to the rights of Norwest Bank Minnesota,
N.A., as Custodian (the "Custodian"), and that upon the delivery of and payment
for such Shares hereunder, the several Underwriters will receive good and
marketable title thereto, free and clear of all liens, encumbrances, equities,
security interests and claims whatsoever.

(b) Certificates in negotiable form for the Shares to be sold by such
Selling Securityholder have been placed in custody with the Custodian under a
Custody Agreement for delivery under this Agreement; such Selling
Securityholder specifically agrees that the Shares represented by the
certificates so held in custody for such Selling Securityholder are subject
to the interests of the several Underwriters and the Company, that the
arrangements made by such Selling Securityholder for such custody, including
the Power of Attorney provided for in such Custody Agreement, are to that
extent irrevocable, and that the obligations of such Selling Securityholder
shall not be terminated by any act of such Selling Securityholder or by
operation of law, whether by the death or incapacity of such Selling
Securityholder (or, in the case of a Selling Securityholder that is not an
individual, the dissolution or liquidation of such Selling Securityholder) or
the occurrence of any other event; if any such death, incapacity,
dissolution, liquidation or other such event should occur before the delivery
of such shares hereunder, certificates for the Shares shall be delivered by
the Custodian in accordance with the terms and conditions of this Agreement
as if such death, incapacity, dissolution, liquidation or other event had not
occurred, regardless of whether the Custodian shall have received notice of
such death, incapacity, dissolution, liquidation or other event.

(c) Such Selling Securityholder has full power and authority to enter
into this Agreement and the Custody Agreement and perform the transactions
contemplated hereby and thereby. This Agreement and the Custody Agreement
have been duly authorized, executed and delivered by or on behalf of such
Selling Securityholder and the form of such Custody Agreement has been
delivered to you.

(d) The making and performance of this Agreement and the Custody
Agreement and the consummation of the transactions contemplated hereby and
thereby will not result in a breach or violation by such Selling
Securityholder of any of the terms or provisions of, or constitute a default
by such Selling Securityholder under, any indenture, mortgage, deed of trust,
trust (constructive or other), loan agreement, lease, franchise, license or
other agreement or instrument to which such Selling Securityholder is a party
or by which such Selling Securityholder or any of its properties is bound,
any statute, or any judgment, decree, order, rule or regulation of any court
or governmental agency or body applicable to such Selling Securityholder or
any of its properties.

(e) Such Selling Securityholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Shares.

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<PAGE>

SECTION 3. PURCHASE OF THE SHARES BY THE UNDERWRITERS.

(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and
sell 1,000,000 of the Firm Shares to the several Underwriters, each Selling
Securityholder agrees to sell to the several Underwriters the number of the
Firm Shares set forth in Schedule II opposite the name of such Selling
Securityholder, and each of the Underwriters agrees to purchase from the
Company and the Selling Securityholders the respective aggregate number of
Firm Shares set forth opposite its name in Schedule I. The price at which
such Firm Shares shall be sold by the Company and the Selling Securityholders
and purchased by the several Underwriters shall be $____ per share. The
obligation of each Underwriter to the Company and each of the Selling
Securityholders shall be to purchase from the Company and the Selling
Securityholders that number of Firm Shares which represents the same
proportion of the total number of Firm Shares to be sold by each of the
Company and the Selling Securityholders pursuant to this Agreement as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto represents of the total number of shares of the Firm Shares
to be purchased by all Underwriters pursuant to this Agreement, as adjusted
by you in such manner as you deem advisable to avoid fractional shares. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in Sections 3(b) and (c), the agreement of each
Underwriter is to purchase only the respective number of shares of the Firm
Shares specified in Schedule I.

(b) If for any reason one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 9 or 10 hereof) to purchase and pay
for the number of Shares agreed to be purchased by such Underwriter or
Underwriters, you shall immediately give notice thereof to the non-defaulting
Underwriters, and the non-defaulting Underwriters shall have the right within 24
hours after the receipt by you of such notice to purchase, or procure one or
more other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the Shares which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of Shares which each non-defaulting Underwriter is
otherwise obligated to purchase under this Agreement shall be automatically
increased on a pro rata basis to absorb the remaining shares and portion which
the defaulting Underwriter or Underwriters agreed to purchase; provided,
however, that the non-defaulting Underwriters shall not be obligated to purchase
the portion which the defaulting Underwriter or Underwriters agreed to purchase
if the aggregate number of such Shares exceeds 10% of the total number of Shares
which all Underwriters agreed to purchase hereunder. If the total number of
Shares which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Securityholders shall have the right, within 24 hours
next succeeding the 24-hour period above referred to, to make arrangements with
other underwriters or purchasers satisfactory to you for purchase of such Shares
and portion on the terms herein set forth. In any such case, either you or the
Company and the Selling Securityholders shall have the right to postpone the
Closing Date determined as provided in Section 5 hereof for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
Section 5 in order that any necessary changes in the Registration Statement, the
Prospectus or any other documents or arrangements may be made. If neither the
non-defaulting Underwriters nor the Company and the Selling Securityholders
shall make arrangements within the 24-hour periods stated above for the purchase
of all of the Shares which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company or the Selling
Securityholders to any non-defaulting Underwriter and without any liability on
the part of any non-defaulting Underwriter to the Company or the Selling

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<PAGE>

Securityholders. Nothing in this Section 3(b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect
of any default of such Underwriter under this Agreement.

(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally
and not jointly, up to an aggregate of 337,333 Optional Shares from the
Company and a Selling Securityholder as designated on Schedule II grants an
option to the several Underwriters to purchase up to an aggregate of 37,667
Optional Shares from such Selling Securityholder, in each case at the same
price per share as the Underwriters shall pay for the Firm Shares. Said
option may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters and may be exercised in whole or in part at any
time, but only once, on or before the 30th day after the date of this
Agreement upon written or telegraphic notice by you to the Company and the
Attorney-in-fact for such Selling Securityholder setting forth the aggregate
number of Optional Shares as to which the several Underwriters are exercising
the option. Delivery of certificates for the Optional Shares, and payment
therefor, shall be made as provided in Section 5 hereof. The number of
Optional Shares to be purchased by each Underwriter shall be the same
percentage of the total number of Optional Shares to be purchased by the
several Underwriters as such Underwriter is purchasing of the Firm Shares, as
adjusted by you in such manner as you deem advisable to avoid fractional
shares.

SECTION 4. OFFERING BY UNDERWRITERS.

(a) The terms of the public offering by the Underwriters of the Shares
to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the public offering and increase or decrease the concessions and
discounts to dealers as they may determine.

(b) The information (insofar as such information relates to the
Underwriters) set forth in the last paragraph on the front cover page and
under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus constitutes the only information furnished by
the Underwriters to the Company for inclusion in the Registration Statement,
any Preliminary Prospectus, and the Prospectus, and you on behalf of the
respective Underwriters represent and warrant to the Company that the
statements made therein are correct.

SECTION 5. DELIVERY OF AND PAYMENT FOR THE SHARES.

(a) Delivery of certificates for the Firm Shares and the Optional Shares
(if the option granted by Section 3(c) hereof shall have been exercised not
later than 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date), and payment therefor, shall be made at the
office of Cooley Godward Castro Huddleson and Tatum, Five Palo Alto Square,
3000 El Camino Real, Palo Alto, California at 7:00 a.m., San Francisco time,
on the fourth business day after the date of this Agreement, or at such time
on such other day, not later than seven full business days after such fourth
business day, as shall be agreed upon in writing by the Company and you. The
date and hour of such delivery and payment (which may be postponed as
provided in Section 3(b) hereof) are herein called the "Closing Date".

(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding
the Closing Date, delivery of certificates for the shares of Optional Shares,
and payment therefor, shall be made at the office of Cooley Godward Castro
Huddleson and Tatum, Five Palo Alto Square, 3000 El Camino Real, Palo Alto,
California at 7:00 a.m., San Francisco time, on the third business day after
the exercise of such option.

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(c) Payment for the Shares purchased from the Company shall be made to
the Company or its order, and payment for the Shares purchased from the
Selling Securityholders shall be made, in the discretion of the Underwriters,
to them or to the Custodian, for the account of the Selling Securityholders,
in each case by federal funds wire transfer. Such payment shall be made upon
delivery of certificates for the Shares to you for the respective accounts of
the several Underwriters (including without limitation by "full-fast"
electronic transfer by Depository Trust Company) against receipt therefor
signed by you. Certificates for the Shares to be delivered to you shall be
registered in such name or names and shall be in such denominations as you
may request at least one business day before the Closing Date, in the case of
Firm Shares, and at least one business day prior to the purchase thereof, in
the case of the Optional Shares. Such certificates will be made available to
the Underwriters for inspection, checking and packaging at the offices of the
agent of Volpe, Welty & Company's clearing agent, Bear Sterns Securities
Corp., on the business day prior to the Closing Date or, in the case of the
Optional Shares, by 3:00 p.m., New York time, on the business day preceding
the date of purchase.

It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Optional
Shares are purchased for the account of such Underwriter. Any such payment by
you shall not relieve such Underwriter from any of its obligations hereunder.

SECTION 6. COVENANTS OF THE COMPANY. The Company covenants and agrees
as follows:

(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at
the time of effectiveness of the Registration Statement in reliance on Rule
430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been
advised and furnished with a copy or to which you shall have reasonably
objected in writing or which is not in compliance with the Securities Act or
the rules and regulations of the Commission.

(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement
or for supplement to the Prospectus or for any additional information, (ii)
the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement, (iii) the institution or notice of intended
institution of any action or proceeding for that purpose, (iv) the receipt by
the Company of any notification with respect to the suspension of the
qualification of the shares for sale in any jurisdiction or (v) the receipt
by it of notice of the initiation or threatening of any proceeding for such
purpose. The Company will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be
issued, to obtain the withdrawal thereof at the earliest possible moment.

(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together
with, in each case, all exhibits thereto unless previously furnished to you)
and will also deliver to you, for distribution to the Underwriters, a
sufficient number of additional conformed copies of each of the foregoing
(but without exhibits) so that one copy of each may be distributed to each
Underwriter, (ii) as promptly as possible deliver to you and send to the
several Underwriters, at such office or offices as you may designate, as many
copies of the Prospectus as you may reasonably request and (iii) thereafter
from time to time during the period in which a prospectus is required by law
to be delivered by an Underwriter or dealer, likewise send to the
Underwriters as many additional copies of the Prospectus and as many copies
of any

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<PAGE>

supplement to the Prospectus and of any amended prospectus, filed by the
Company with the Commission, as you may reasonably request for the purposes
contemplated by the Securities Act.

(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the
light of the circumstances existing at the time it is delivered to a
purchaser of the shares, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended prospectus so that
the Prospectus as so supplemented or amended will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances
existing at the time such Prospectus is delivered to such purchaser, not
misleading. If, after the public offering of the shares by the Underwriters
and during such period, the Underwriters shall propose to vary the terms of
offering thereof among the Underwriters or members of a selling group by
reason of changes in general market conditions or otherwise, you will advise
the Company in writing of the proposed variation, and, if in the opinion
either of counsel for the Company or of counsel for the Underwriters such
proposed variation requires that the Prospectus be supplemented or amended,
the Company will forthwith prepare and file with the Commission a supplement
to the Prospectus or an amended prospectus setting forth such variation. The
Company authorizes the Underwriters and all dealers to whom any of the shares
may be sold by the several Underwriters to use the Prospectus, as from time
to time amended or supplemented, in connection with the sale of the shares in
accordance with the applicable provisions of the Securities Act and the
applicable rules and regulations thereunder for such period.

(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.

(f) The Company will cooperate, when and as requested by you, in the
qualification of the shares for offer and sale under the securities or blue
sky laws of such jurisdictions as you may reasonably designate and, during
the period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, in keeping such qualifications in good standing under
said securities or blue sky laws; provided, however, that the Company shall
not be obligated to file any general consent to service of process or to
qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. The Company will, from time to time, prepare and file such
statements, reports and other documents as are or may be required to continue
such qualifications in effect for so long a period as you may reasonably
request for distribution of the shares.

(g) During a period of three years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.

(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.

(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the NASD of the Registration Statement, any Preliminary
Prospectus

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<PAGE>

and the Prospectus, (ii) the furnishing to the Underwriters and the persons
designated by them of copies of any Preliminary Prospectus and of the several
documents required by Section 6(c) to be so furnished, (iii) the preparation,
printing and filing of all supplements and amendments to the Prospectus
referred to in Section 6(d), (iv) the furnishing to you and the Underwriters
of the reports and information referred to in Section 6(g) and (v) the
printing and issuance of stock certificates, including the transfer agent's
fees. The Selling Securityholders will pay any transfer taxes incident to
the transfer to the Underwriters of the Shares being sold by the Selling
Securityholders.

(j) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including
reasonable counsel fees and disbursements and cost of printing memoranda for
the Underwriters) paid by or for the account of the Underwriters or their
counsel in qualifying the shares under state securities or blue sky laws and
in the review of the offering by the NASD.

(k) The provisions of Sections 6(i) and (j) are intended to relieve the
Underwriters from the payment of the expenses and costs which the Company
hereby agrees to pay and shall not affect any agreement which the Company may
make, or may have made, for the sharing of any such expenses and costs.

(l) The Company hereby agrees that, without the prior written consent of
Volpe, Welty & Company, the Company will not, for a period of 90 days
following the date the Registration Statement becomes effective, offer, sell,
contract to sell or otherwise dispose of, directly or indirectly, any shares
of Common Stock or any options to acquire shares of Common Stock or
securities convertible into or exchangeable or exercisable for or any other
rights to purchase or acquire Common Stock other than pursuant to the
exercise or conversion of outstanding options, warrants or convertible
securities. The foregoing sentence shall not apply to (A) the Shares to be
sold to the Underwriters pursuant to this Agreement, (B) shares of Common
Stock issued by the Company upon the exercise of options granted under the
option plans of the Company (the "Option Plans") or upon the exercise of
warrants outstanding as of the date hereof, all as described in footnote (1)
to the table under the caption "Capitalization" in the Preliminary
Prospectus, and (C) options to purchase Common Stock granted under the Option
Plans.

(m) The Company is familiar with the Investment Company Act of 1940, as
amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of
1940, as amended, and the rules and regulations thereunder.

(n) The Company agrees to maintain directors' and officers' insurance in
the amount of not less than $1,000,000 for a period of two years from the
date of this Agreement.

SECTION 7. INDEMNIFICATION AND CONTRIBUTION.

(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several,
to which such indemnified parties or any of them may become subject under the
Securities Act, the Exchange Act, or the common law or otherwise, and the
Company agrees to reimburse each such Underwriter and controlling person for
any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities

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<PAGE>

or in connection with any investigation or inquiry of, or other proceeding
which may be brought against, the respective indemnified parties, in each
case arising out of or based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus
or the Prospectus (as amended or as supplemented if the Company shall have
filed with the Commission any amendment thereof or supplement thereto) or the
omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that (1) the
indemnity agreements of the Company contained in this Section 7(a) shall not
apply to any such losses, claims, damages, liabilities or expenses if such
statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to
the Company by or on behalf of any Underwriter for use in any Preliminary
Prospectus or the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto, (2) the indemnity agreement
contained in this Section 7(a) with respect to any Preliminary Prospectus
shall not inure to the benefit of any Underwriter from whom the person
asserting any such losses, claims, damages, liabilities or expenses purchased
the shares which are the subject thereof (or to the benefit of any person
controlling such Underwriter) if at or prior to the written confirmation of
the sale of such Common Stock a copy of the Prospectus (or the Prospectus as
amended or supplemented) was not sent or delivered to such person and the
untrue statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented). The indemnity agreements of the Company contained in this
Section 7(a) and the representations and warranties of the Company contained
in Section 1 hereof shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any indemnified party
and shall survive the delivery of and payment for the Shares.

(b) Subject to the provisions of Section 7(g), the Selling Securityholders
severally agree to indemnify and hold harmless each Underwriter and each person
(including each partner or officer thereof) who controls any Underwriter within
the meaning of Section 15 of the Securities Act from and against any and all
losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise, and the Selling
Securityholders agree to reimburse each such Underwriter and controlling person
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that each Selling Securityholder shall only be liable under this Section 7(b)
with respect to (A) information pertaining to such Selling Securityholder
furnished by or on behalf of such Selling Securityholder expressly for use in
any Preliminary Prospectus or the Registration

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<PAGE>

Statement or the Prospectus or any such amendment thereof or supplement
thereto or (B) facts that would constitute a breach of any representation or
warranty of such Selling Securityholder set forth in Section 2 hereof. The
indemnity agreements of the Selling Securityholders contained in this Section
7(b) and the representations and warranties of the Selling Securityholders
contained in Section 2 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the
Shares.

(c) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of
Section 15 of the Securities Act, and the Selling Securityholders from and
against any and all losses, claims, damages or liabilities, joint or several,
to which such indemnified parties or any of them may become subject under the
Securities Act, the Exchange Act, or the common law or otherwise and to
reimburse each of them for any legal or other expenses (including, except as
otherwise hereinafter provided, reasonable fees and disbursements of counsel)
incurred by the respective indemnified parties in connection with defending
against any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) (A) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (including the
Prospectus as part thereof and any Rule 462(b) registration statement) or any
post-effective amendment thereto (including any Rule 462(b) registration
statement) or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading or (B) any untrue statement or alleged untrue
statement of a material fact contained in the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any
amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, if such statement or omission was made in reliance upon and in
conformity with information furnished as herein stated or otherwise furnished
in writing to the Company by or on behalf of such indemnifying Underwriter
for use in the Registration Statement or the Prospectus or any such amendment
thereof or supplement thereto or (ii) the failure of the indemnifying
Underwriter to deliver a Preliminary Prospectus or a Prospectus if required
by law to have been delivered. The indemnity agreement of each Underwriter
contained in this Section 7(c) shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the
Shares.

(d) Each party indemnified under the provisions of Sections 7(a), (b)
and (c) agrees that, upon the service of a summons or other initial legal
process upon it in any action or suit instituted against it or upon its
receipt of written notification of the commencement of any investigation or
inquiry of or proceeding against it in respect of which indemnity may be
sought on account of any indemnity agreement contained in such sections, it
will promptly give written notice (the "Notice") of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such sections shall be
available to any party who shall fail so to give the Notice if the party to
whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related
and was prejudiced by the failure to give the Notice, but the omission so to
notify such indemnifying party or parties of any such service or notification
shall not relieve such indemnifying party or parties from any liability which
it or they may have to the indemnified party for contribution or otherwise
than on account of such indemnity agreement. Any indemnifying party shall be
entitled at its own expense to participate in the defense of any action, suit
or proceeding against, or investigation or inquiry of, an indemnified party.
Any indemnifying party shall be entitled, if it so elects within a reasonable
time after receipt of the Notice by giving written notice

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<PAGE>

(the "Notice of Defense") to the indemnified party, to assume (alone or in
conjunction with any other indemnifying party or parties) the entire defense
of such action, suit, investigation, inquiry or proceeding, in which event
such defense shall be conducted, at the expense of the indemnifying party or
parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided,
however, that (i) if the indemnified party or parties reasonably determine
that there may be a conflict between the positions of the indemnifying party
or parties and of the indemnified party or parties in conducting the defense
of such action, suit, investigation, inquiry or proceeding or that there may
be legal defenses available to such indemnified party or parties different
from or in addition to those available to the indemnifying party or parties,
then counsel for the indemnified party or parties shall be entitled to
conduct the defense to the extent reasonably determined by such counsel to be
necessary to protect the interests of the indemnified party or parties and
(ii) in any event, the indemnified party or parties shall be entitled to have
counsel chosen by such indemnified party or parties participate in, but not
conduct, the defense. If, within a reasonable time after receipt of the
Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under Sections 7(a) through (d) for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding, except
that (A) the indemnifying party or parties shall bear the reasonable legal
and other expenses incurred in connection with the conduct of the defense as
referred to in clause (i) of the proviso to the preceding sentence (but only
for one such counsel) and (B) the indemnifying party or parties shall bear
such other expenses as it or they have authorized to be incurred by the
indemnified party or parties. If, within a reasonable time after receipt of
the Notice, no Notice of Defense has been given, the indemnifying party or
parties shall be responsible for any reasonable legal or other expenses
incurred by the indemnified party or parties in connection with the defense
of the action, suit, investigation, inquiry or proceeding.

(e) If the indemnification provided for in this Section 7 is unavailable
or insufficient to hold harmless an indemnified party under Section 7(a), (b)
or (c), then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in Section 7(a), (b) or (c), (i) in such proportion as is
appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriters on the other shall be deemed
to be in the same respective proportions as the total net proceeds from the
offering of the shares received by the Company and the Selling
Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Shares. Relative fault
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.

The parties agree that it would not be just and equitable if contributions
pursuant to this Section 7(e) were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this Section 7(e). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this Section 7(e) shall be deemed to include any legal or other expenses

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reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this Section 7(e). Notwithstanding the provisions of
this Section 7(e), no Underwriter shall be required to contribute any amount
in excess of the underwriting discount applicable to the Shares purchased by
such Underwriter. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 7(e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.

Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will promptly
give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or
parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise (except as specifically provided in Section 7(d)).

(f) No indemnifying party will, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
indemnified party or any person who controls such indemnified party within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act is a party to such claim, action, suit or proceeding) unless such
settlement, compromise or consent includes an unconditional release of such
indemnified party and each such controlling person from all liability arising
out of such claim, action, suit or proceeding.

(g) The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties contained in Section 2 hereof
and under the indemnity and reimbursement agreements contained in the
provisions of this Section 7 and Section 8 hereof shall be limited to an
amount equal to the amount of the proceeds received with respect to the
Shares sold by such Selling Securityholder. The Company and the Selling
Securityholders may agree, as among themselves and without limiting the
rights of the Underwriters under this Agreement, as to the respective amounts
of such liability for which they each shall be responsible.

SECTION 8. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a monthly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in Section 7(a) of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
obligations under this Section 8 and the possibility that such payments might
later be held to be improper; provided, however, that (i) to the extent any
such payment is ultimately held to be improper, the persons receiving such
payments shall promptly refund them and (ii) such persons shall provide to
the Company, upon request, reasonable assurances of their ability to effect
any refund, when and if due.

SECTION 9. TERMINATION. This Agreement may be terminated by you at any
time prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders pursuant to and in accordance with Section 10, or if
after the date of this Agreement trading in the Common Stock shall have been
suspended, or if there shall have occurred (i) the engagement in hostilities or
an escalation of major hostilities by the United States or the declaration of
war or a national emergency by the United States on or after the date hereof,
(ii) any outbreak of hostilities or other national or international calamity

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<PAGE>

or crisis or change in economic or political conditions if the effect of such
outbreak, calamity, crisis or change in economic or political conditions in
the financial markets of the United States or the Company's industry sector
would, in the Underwriters' reasonable judgment, make the offering or
delivery of the shares impracticable, (iii) suspension of trading in
securities generally or a material adverse decline in value of securities
generally on the New York Stock Exchange, the American Stock Exchange, or the
Nasdaq National Market, or limitations on prices (other than limitations on
hours or numbers of days of trading) for securities on either such exchange
or system, (iv) the enactment, publication, decree or other promulgation of
any federal or state statute, regulation, rule or order of, or commencement
of any proceeding or investigation by, any court, legislative body, agency or
other governmental authority which in the Underwriters' reasonable opinion
materially and adversely affects or will materially or adversely affect the
business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking
of any action by any federal, state or local government or agency in respect
of its monetary or fiscal affairs which in the Underwriters' reasonable
opinion has a material adverse effect on the securities markets in the United
States. If this Agreement shall be terminated pursuant to this Section 9,
there shall be no liability of the Company or the Selling Securityholders to
the Underwriters and no liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless the
Underwriters from all costs or expenses incident to the performance of the
obligations of the Company and the Selling Securityholders under this
Agreement, including all costs and expenses referred to in Sections 6(i) and
(j) hereof.

SECTION 10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters to purchase and pay for the shares shall be subject
to the performance by the Company and by the Selling Securityholders of all
their respective obligations to be performed hereunder at or prior to the
Closing Date or any later date on which Optional Shares are to be purchased,
as the case may be, and to the following further conditions:

(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.

(b) The legality and sufficiency of the sale of the Shares hereunder and
the validity and form of the certificates representing the shares, all
corporate proceedings and other legal matters incident to the foregoing, and
the form of the Registration Statement and of the Prospectus (except as to
the financial statements contained therein), shall have been approved at or
prior to the Closing Date by Heller Ehrman White & McAuliffe, counsel for the
Underwriters.

(c) You shall have received from Cooley Godward Castro Huddleson &
Tatum, counsel for the Company, counsel for each of the Selling
Securityholders, and Lerner, David, Littenberg, Krumholz & Mentlik, patent
counsel for the Company, opinions, addressed to the Underwriters and dated
the Closing Date, covering the matters set forth in Annex A, Annex B and
Annex C hereto, respectively, and if Optional Shares are purchased at any
date after the Closing Date additional opinions from each such counsel,
addressed to the Underwriters and dated such later date, confirming that the
statements expressed as of the Closing Date in such opinions remain valid as
of such later date.

(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct, and neither the Registration Statement nor the Prospectus
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, respectively, not misleading; (ii)
since the Effective Date, no event has occurred which should have been set
forth in a supplement or amendment to the Prospectus which has

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<PAGE>

not been set forth in such a supplement or amendment; (iii) since the
respective dates as of which information is given in the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein, there has not been any material adverse change
or any development involving a prospective material adverse change in or
affecting the business, properties, financial condition or results of
operations of the Company, whether or not arising from transactions in the
ordinary course of business, and, since such dates, except in the ordinary
course of business, the Company has not entered into any material transaction
not referred to in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein; (iv) the
Commission has not issued any order preventing or suspending the use of the
Prospectus or any Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending the
effectiveness of the Registration Statement has been issued; and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act; (v) the Company does not have any
material contingent obligations which are not disclosed in the Registration
Statement and the Prospectus; (vi) there are not any pending or known
threatened legal proceedings to which the Company is a party or of which
property of the Company is the subject which are material and which are not
disclosed in the Registration Statement and the Prospectus; (vii) there are
not any franchises, contracts, leases or other documents which are required
to be filed as exhibits to the Registration Statement which have not been
filed as required; (viii) the representations and warranties of the Company
herein are true and correct in all material respects as of the Closing Date
or any later date on which Optional Shares are to be purchased, as the case
may be; and (ix) there has not been any material change in the market for
securities in general or in political, financial or economic conditions from
those reasonably foreseeable as to render it impracticable in your reasonable
judgment to make a public offering of the shares, or a material adverse
change in market levels for securities in general (or those of companies in
particular) or financial or economic conditions which render it inadvisable
to proceed.

(e) You shall have received on the Closing Date and on any later date on
which Optional Shares are purchased a certificate, dated the Closing Date or
such later date, as the case may be and signed by the President and Chief
Financial Officer of the Company in his capacity as such, stating that he has
carefully examined the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein and any
supplements or amendments thereto, and that the statements included in
clauses (i) through (iii) and clauses (v) through (viii) of Section 10(d) are
true and correct and that the statement included in clause (iv) of Section
10(d) is, to the best of his knowledge, true and correct.

(f) You shall have received from Ernst & Young LLP, a letter or letters,
addressed to the Underwriters and dated the Closing Date and any later date
on which Optional Shares are purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder
and based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (the "Original Letter"),
but carried out to a date not more than three business days prior to the
Closing Date or such later date on which Optional Shares are purchased (i)
confirming, to the extent true, that the statements and conclusions set forth
in the Original Letter are accurate as of the Closing Date or such later
date, as the case may be and (ii) setting forth any revisions and additions
to the statements and conclusions set forth in the Original Letter which are
necessary to reflect any changes in the facts described in the Original
Letter since the date of the Original Letter or to reflect the availability
of more recent financial statements, data or information. The letters shall
not disclose any change, or any development involving a prospective change,
in or affecting the business or properties of the Company which, in your sole
judgment, makes it impractical or inadvisable to proceed with the public
offering of the shares or the purchase of the Optional Shares as contemplated
by the Prospectus.

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<PAGE>

(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in Section 6(f) hereof.

(h) Prior to the Closing Date, the shares to be issued and sold by the
Company shall have been duly authorized for listing by Nasdaq National Market
upon official notice of issuance.

(i) On or prior to the Closing Date, you shall have received from (i)
each of the Company's executive officers and directors as set forth in the
Prospectus and (ii) each stockholder listed on Schedule III hereto an
agreement in form and substance satisfactory to Volpe, Welty & Company,
stating that such party will not for a period of 90 days after the date the
Registration Statement became effective, without the prior written consent of
Volpe, Welty & Company, offer, sell, contract to sell, make any short sale,
pledge or otherwise dispose of, directly or indirectly, any shares of Common
Stock, options to acquire Common Stock or securities convertible into or
exchangeable for, or any other rights to purchase or acquire Common Stock
other than pursuant to the exercise or conversion of outstanding options,
warrants or convertible securities; provided, however, that bona fide gift
transactions and transfers by a partnership to its partners or by a
corporation to its stockholders may be permitted if the transferee enters
into a lock-up agreement in substantially the same form covering the
remainder of the lock-up period.

All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Heller Ehrman White & McAuliffe, counsel for the
Underwriters, shall be reasonably satisfied that they comply in form and
scope.

In case any of the conditions specified in this Section 10 shall not be
fulfilled on or before the Closing Date, this Agreement may be terminated by
you by giving notice to the Company and to the Selling Securityholders. Any
such termination shall be without liability of the Company or the Selling
Securityholders to the Underwriters and without liability of the Underwriters
to the Company or the Selling Securityholders; provided, however, that (i) in
the event of such termination, the Company agrees to indemnify and hold
harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in
Sections 6(i) and (j) hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company or
the Selling Securityholders to perform any agreement herein, to fulfill any
of the conditions herein (other than under Section 10(d)(ix)), or to comply
with any provision hereof other than by reason of a default by any of the
Underwriters, the Company will reimburse the Underwriters severally upon
demand for all out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been incurred by them in connection
with the transactions contemplated hereby.

SECTION 11. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling
Securityholders to deliver the shares shall be subject to the conditions that
(a) the Registration Statement shall have become effective and (b) no stop
order suspending the effectiveness thereof shall be in effect and no
proceedings therefor shall be pending or threatened by the Commission.

In case either of the conditions specified in this Section 11 shall not
be fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be
without liability of the Company and the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless

-20-

<PAGE>

the Underwriters from all costs or expenses incident to the performance of
the obligations of the Company and the Selling Securityholders under this
Agreement, including all costs and expenses referred to in Sections 6(i) and
(j) hereof.

SECTION 12. PERSONS ENTITLED TO BENEFIT OF THIS AGREEMENT. This
Agreement shall inure to the benefit of the Company, the Selling
Securityholders and the several Underwriters and, with respect to the
provisions of Section 7 hereof, the several parties (in addition to the
Company, the Selling Securityholders and the several Underwriters)
indemnified under the provisions of said Section 7, and their respective
personal representatives, successors and assigns. Nothing in this Agreement
is intended or shall be construed to give to any other person, firm or
corporation any legal or equitable remedy or claim under or in respect of
this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser,
of any of the shares from any of the several Underwriters.

SECTION 13. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Volpe, Welty &
Company, One Maritime Plaza, 11th Floor, San Francisco, California 94111,
Attention: William J. Dawson with a copy to Victor A. Hebert, Heller Ehrman
White & McAuliffe, 333 Bush Street, San Francisco, California 94104; and if
to the Company or the Selling Securityholders, shall be mailed, telegraphed
or delivered to the Company at the Company's office, 10000 Valley View Road,
Eden Prairie, Minnesota 55344, Attention: John M. Siebert, Ph.D. with a copy
to Robert L. Jones, Cooley Godward Castro Huddleson & Tatum, Five Palo Alto
Square, 3000 El Camino Real, Palo Alto, California 94306. All notices given
by telegraph shall be promptly confirmed by letter.

SECTION 14. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and
effect regardless of (a) any termination of this Agreement, (b) any
investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of the Company or the Selling Securityholders or
their respective directors or officers, and (c) delivery and payment for the
Shares under this Agreement; provided, however, that if this Agreement is
terminated prior to the Closing Date, the provisions of Section 6(l) hereof
shall be of no further force or effect.

SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision
hereof. If any Section, paragraph or provision of this Agreement is for any
reason determined to be invalid or unenforceable, there shall be deemed to be
made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.

SECTION 16. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining
to conflicts of laws) of the State of California.

SECTION 17. GENERAL. This Agreement constitutes the entire agreement of
the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof. This Agreement may be executed in
several counterparts, each one of which shall be an original, and all of
which shall constitute one and the same document.

In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be
amended

-21-

<PAGE>

or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Securityholders and you.

Any person executing and delivering this Agreement as Attorney-in-fact
for the Selling Securityholders represents by so doing that he has been duly
appointed as Attorney-in-fact by such Selling Securityholder pursuant to a
validly existing and binding Power of Attorney which authorizes such
Attorney-in-fact to take such action. Any action taken under this Agreement
by any of the Attorneys-in-fact will be binding on all of the Selling
Securityholders.

-22-

<PAGE>

If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon
it will become a binding agreement among the Company and the several
Underwriters, including you, all in accordance with its terms.

Very truly yours,

CIMA LABS INC.

By:
----------------------------------
Title:
-------------------------------

THE SELLING SECURITYHOLDERS

By:
----------------------------------
Attorney-in-fact

The foregoing Underwriting
Agreement is hereby confirmed
and accepted by us in San
Francisco, California as of
the date first above written.

VOLPE, WELTY & COMPANY
RODMAN & RENSHAW, INC.

Acting for ourselves and as
Representatives of the several
Underwriters named in the
attached Schedule I

By: Volpe, Welty & Company

By:
--------------------------
Its: Partner

-23-

<PAGE>

SCHEDULE I

UNDERWRITERS

<TABLE>
<CAPTION>
Number of
Shares
to be
Underwriters Purchased
- ----------------------------------------------------------------
<S> <C>
Volpe, Welty & Company . . . . . . . . . . . . . . . .

Rodman & Renshaw, Inc. . . . . . . . . . . . . . . . .

Total. . . . . . . . . . . . . . . . . . . . . . . ----------

</TABLE>

I-1

<PAGE>
SCHEDULE II

SELLING SECURITYHOLDERS

Name Number of
of Selling Securityholders Shares
to be Sold
- --------------------------------------------------------------------
<S> <C>
Northstar Ventures II, Inc. and Northstar Ventures III
(collectively). . . . . . . . . . . . . . . . . . . . 243,915

Quantum Partners LDC.. . . . . . . . . . . . . . . . . 502,011

St. Paul Fire and Marine Insurance Company . . . . . . 243,915

Roy and Margaret Hoff. . . . . . . . . . . . . . . . . 52,848

Pathfinder Venture Capital Fund II Limited
Partnership . . . . . . . . . . . . . .. . . . . . . 163,820

Reynolds Creek Limited Partnership . . . . . . . . . . . 70,693

Table River Limited Partnership. . . . . . . . . . . . . 24,889

Kelsey Lake LTD Partnership. . . . . . . . . . . . . . . 22,359

Kerry Lake Company . . . . . . . . . . . . . . . . . . . 17,354

Winton Associates. . . . . . . . . . . . . . . . . . . . 13,938

FBS Small Business Investment Co. Limited Partnership*. . 103,605

Arnhold & S. Bleichroeder Inc. . . . . . . . . . . . . . . 40,653
---------

Total. . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000

</TABLE>
* Participating in the over-allotment option.

II-1

<PAGE>

SCHEDULE III

SECURITYHOLDERS SUBJECT TO LOCKUP AGREEMENTS

Northstar Ventures II, Inc.

Northstar Ventures III

Quantum Partners LDC

St. Paul Fire and Marine Insurance Company

Roy and Margaret Hoff

Pathfinder Venture Capital Fund II Limited Partnership

Reynolds Creek Limited Partnership

Table River Limited Partnership

Kelsey Lake LTD Partnership

Kerry Lake Company

Winton Associates

FBS Small Business Investment Co. Limited Partnership

Arnhold & S. Bleichroeder Inc.

INVESCO PLC

III-1

<PAGE>

ANNEX A

MATTERS TO BE COVERED IN THE OPINION OF COOLEY GODWARD CASTRO HUDDLESON &
TATUM, COUNSEL FOR THE COMPANY

(i) The Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction where the conduct of
its business or its ownership or leasing of property requires such
qualification, except to the extent the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company.

(ii) The authorized, issued and outstanding capital stock of the
Company as of March 31, 1996 is as set forth under the caption
"Capitalization" in the Prospectus; the Company Shares and, to the best of
such counsel's knowledge, the shares of Common Stock outstanding prior to the
issuance of the Company Shares, have been duly authorized and validly issued
and are fully paid and nonassessable.

(iii) No preemptive rights of, or right of refusal or co-sale
rights in favor of, stockholders exist with respect to the Company Shares, or
the issue and sale thereof, pursuant to (i) the Company's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation") or
Amended and Restated Bylaws (the "Bylaws") or (ii) any instrument, document,
contract or agreement filed as an exhibit to the Registration Statement (such
instruments, documents, contracts and agreements being referred to
collectively as the "Specified Documents").

(iv) The Registration Statement has become effective under the
Securities Act, and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or preventing the
use of the Prospectus has been issued and no proceedings for that purpose
have been instituted or are pending or threatened by the Commission.

(v) The Registration Statement and the Prospectus (except for the
financial statements and schedules included therein, as to which such counsel
expresses no opinion) comply as to form in all material respects with the
requirements of the Securities Act and the rules and regulations thereunder.

(vi) The statements in the Prospectus in answers to Items 9 and 10
(insofar as it relates to such counsel) of Form S-1, insofar as such
statements constitute summaries of the legal matters or documents referred to
therein, fairly present in all material respects the information called for
with respect to such legal matters and documents.

(vii) To the best of such counsel's knowledge, there are no
franchises, leases, contracts, agreements or documents of a character
required to be disclosed in the Registration Statement or Prospectus or to be
filed as exhibits to the Registration Statement which are not disclosed or
filed, as required.

(viii) To the best of such counsel's knowledge, there is no action,
proceeding or investigation pending or overtly threatened against the Company
which is required to be described in the Prospectus which is not described as
required.

A-1

<PAGE>

(ix) The Underwriting Agreement has been duly and validly
authorized, executed and delivered by the Company, and is a valid and binding
agreement of the Company and is enforceable against the Company in accordance
with its terms, except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and except as to those provisions
relating to indemnity or contribution for liabilities arising under the
Securities Act as to which such counsel expresses no opinion.

(x) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, the Underwriting
Agreement will not contravene any provision of applicable law, which
singularly or in the aggregate would have a Material Adverse Effect, and will
not contravene any provision of the Certificate of Incorporation or Bylaws of
the Company or any of the Specified Documents, or, to the best of such
counsel's knowledge, any judgement, order or decree of any governmental body,
agency or court having jurisdiction over the Company.

(xi) To the best of such counsel's knowledge, no holders of
securities of the Company have rights which have not been waived to the
registration of shares of Common Stock or other securities because of the
filing of the Registration Statement by the Company or the offering
contemplated thereby.

(xii) No consent, approval, authorization or order of or
qualification with any governmental body or agency is required for the
performance by the Company of its obligations under the Underwriting
Agreement, except such as may be required by the securities or Blue Sky laws
of the various states or by the bylaws and rules of the National Association
of Securities Dealers, Inc. in connection with the offer and sale of the
Shares by the Underwriters.

(xiii) The Selling Stockholder Shares are listed and duly admitted to
trading on the Nasdaq National Market, and the Company Shares will be duly
authorized for listing by the Nasdaq National Market upon official notice of
issuance.

************

In the course of the preparation of the Registration Statement and the
Prospectus, such counsel has participated in discussions and conferences with
officers of the Company and with representatives of its independent public
accountants as well as with the Underwriters and their counsel during which
successive drafts of the Registration Statement and the Prospectus were
reviewed, and such counsel has also reviewed and discussed with various of
such persons materials submitted for use in the Registration Statement, the
Prospectus and certain other data and information furnished in support of the
statements made therein. While such counsel has not independently verified,
are not passing upon and assume no responsibility for the accuracy,
completeness or fairness of the Registration Statement or the Prospectus such
counsel advises you that nothing has come to such counsel's attention which
would lead such counsel to believe that the Registration Statement as of its
effective date contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, as of its date and
as of the date hereof, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading
(except, in each case, for the financial statements, schedules and other
financial and statistical information derived therefrom, as to which such
counsel expresses no view).

___________________________________

A-2

<PAGE>

Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or of the States of California
and Delaware, upon opinions of local counsel satisfactory in form and scope
to counsel for the Underwriters. Copies of any opinions so relied upon shall
be delivered to the Representative and to counsel for the Underwriters and
the foregoing opinion shall also state that counsel knows of no reason the
Underwriters are not entitled to rely upon the opinions of such local
counsel.

A-3

<PAGE>

ANNEX B

MATTERS TO BE COVERED IN THE OPINION OF COUNSEL
FOR EACH SELLING SECURITYHOLDER

(i) The Underwriting Agreement and the Custody Agreement between the
Selling Securityholders and Norwest Bank Minnesota, N.A. as Custodian, have
been duly executed and delivered by or on behalf of the Selling
Securityholder and the Power of Attorney referred to in such Custody
Agreement has been duly executed and delivered by the Selling Securityholder;

(ii) the Underwriting Agreement, the Custody Agreement and the Power of
Attorney are valid and binding agreements of the Selling Securityholder
enforceable in accordance with their terms except as enforceability may be
limited by general equitable principles, bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors' rights
generally and except with respect to those provisions relating to indemnity
or contribution for liabilities under the Securities Act, as to which no
opinion need be expressed, and the Selling Securityholder has full legal
right and authority to enter into the Underwriting Agreement, the Custody
Agreement and the Power of Attorney and to sell, transfer and deliver in the
manner provided in the Underwriting Agreement the Shares to be sold by such
Selling Securityholder thereunder;

(iii) the transfer and sale by the Selling Securityholder of the Shares to
be sold by the Selling Securityholder as contemplated by the Underwriting
Agreement, the Power of Attorney and the Custody Agreement will not conflict
with, result in a breach of, or constitute a default under any agreement or
instrument known to such counsel to which the Selling Securityholder is a
party or by which the Selling Securityholder or any of its properties may be
bound, or any applicable law or regulation, or so far as is known to such
counsel, order, writ, injunction or decree of any jurisdiction, court or
governmental instrumentality body;

(iv) good and marketable title to the Shares to be sold by the Selling
Securityholder under the Underwriting Agreement, free and clear of all liens,
encumbrances, equities, security interests and claims, will be transferred to
the Underwriters who have severally purchased such Shares under the
Underwriting Agreement, assuming for the purpose of this opinion that the
Underwriters purchase the same in good faith without notice of any adverse
claims; and

(v) to the knowledge of such counsel, there are no rights of first
refusal or rights of co-sale which exist with respect to the Shares being
sold by the Selling Securityholder.

B-1

<PAGE>

ANNEX C

MATTERS TO BE COVERED IN THE OPINION OF LERNER, DAVID, LITTENBERG, KRUMHOLZ &
MENTLIK, PATENT COUNSEL FOR THE COMPANY

Such counsel are familiar with the technology used by the Company in its
business and the manner of its use thereof to the extent that such technology
and manner of use are described in the Registration Statement and the
Prospectus and in the patents and patent applications of the Company, and
only to such extent. Such counsel have read the Registration Statement and
the Prospectus, including particularly the portions of the Registration
Statement and the Prospectus referring to patents, trade secrets, trademarks,
service marks or other proprietary information or materials and:

(i) such counsel have no reason to believe that the Registration
Statement or the Prospectus (A) contains any untrue statement of a material
fact with respect to patents, trade secrets, trademarks, service marks or
other proprietary information or materials owned or used by the Company, or
the manner of its use thereof, or any allegation on the part of any person
that the Company is infringing any patent rights, trade secrets, trademarks,
service marks or other proprietary information or materials of any such
person or (B) omits to state any material fact relating to patents, trade
secrets, trademarks, service marks or other proprietary information or
materials owned or used by the Company, or the manner of use thereof, or any
allegation of which such counsel have knowledge, that is necessary to be
stated in the Registration Statement or the Prospectus to make the statements
therein not misleading;

(ii) to the best of such counsel's knowledge there are no legal or
governmental proceedings pending relating to patent rights, trade secrets,
trademarks, service marks or other proprietary information or materials of
the Company (apart from the Company's EX PARTE prosecution of patent,
trademark and service mark applications), and to the best of such counsel's
knowledge no such proceedings are threatened or contemplated by governmental
authorities or others;

(iii) to the best of such counsel's knowledge, the Company is not
infringing or otherwise violating any patents, trade secrets, trademarks,
service marks or other proprietary information or materials, of others, and to
the best of such counsel's knowledge there are no infringements by others of any
of the Company's patents, trade secrets, trademarks, service marks or other
proprietary information or materials which in the judgment of such counsel could
affect materially the use thereof by the Company; and

(iv) to the best of such counsel's knowledge, the Company owns or
possesses sufficient licenses or other rights to use all patents, trade
secrets, trademarks, service marks or other proprietary information or
materials necessary to conduct the business now being or proposed to be
conducted by the Company as described in the Prospectus.

C-1

<PAGE>

Exhibit 5.1

[Letterhead of Cooley Godward]

ROBERT L. JONES
DIRECT: (415) 843-5034
INTERNET: [email protected]

May 8, 1996

CIMA LABS INC.
10000 Valley View Road
Eden Prairie, Minnesota 55344-9361

Ladies and Gentlemen:

You have requested our opinion with respect to certain matters in connection
with the filing by CIMA LABS INC. (the "Company") of a Registration Statement
on Form S-1 (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission") covering an underwritten public offering of up
to 2,875,000 shares of Common Stock (together with such number of shares of
Common Stock as may additionally be registered pursuant to Rule 462 ("Rule
462") under the Securities Act of 1933, as amended, the "Common Stock").

In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws, and
the originals or copies certified to our satisfaction of such records,
documents, certificates, memoranda and other instruments as in our judgment
are necessary or appropriate to enable us to render the opinion expressed
below, (ii) assumed that the shares of Common Stock will be sold by the
Underwriters at a price established by the Pricing Committee (the "Pricing
Committee") of the Board of Directors of the Company, (iii) assumed that the
Company received the consideration for the shares of outstanding Common Stock
being sold by the Selling Stockholders in accordance with the resolutions
authorizing the issuance of such shares, (iv) assumed that the Company will
receive the exercise price for any shares of Common Stock to be sold by
Selling Stockholders pursuant to the exercise of warrants and (v) assumed
that the total number of shares of Common Stock which will be sold by the
Company pursuant to the Registration Statement and any related registration
statement filed pursuant to Rule 462 will be established by the Pricing
Committee and will not exceed 1,200,000 shares, plus an additional 500,000
shares to cover over-allotments, if any.

On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the Registration
Statement and related Prospectus, will be validly issued, fully paid and
nonassessable.

<PAGE>

CIMA LABS INC.
May 8, 1996
Page 2

We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included on the Registration Statement, to the filing of this opinion
as an exhibit to the Registration Statement, and to the incorporation by
reference to this opinion and consent in any post-effective amendments and
registration statements filed pursuant to Rule 462.

Very truly yours,

COOLEY GODWARD CASTRO
HUDDLESON & TATUM

By /s/ Robert L. Jones
---------------------
Robert L. Jones

<PAGE>
EXHIBIT 11.1 -- STATEMENT RE: COMPUTATION OF LOSS PER SHARE

<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 12, PERIOD FROM
1986 THREE MONTHS ENDED DECEMBER 12,
YEAR ENDED DECEMBER 31 (INCEPTION) TO MARCH 31 1986
---------------------------------- DECEMBER 31, ---------------------- (INCEPTION) TO
1993 1994 1995 1995 1995 1996 MARCH 31, 1996
---------- ---------- ---------- --------------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
PRIMARY
Average shares
outstanding................ 1,199,291 3,123,636 7,821,974 1,795,533 7,541,105 7,824,365 1,747,005
Net effect of dilutive stock
options--based on the
treasury stock method using
average market price or the
ending market price if
higher (see Note A
below)..................... 579,079 289,540 -- 482,566 -- -- 469,524
---------- ---------- ---------- --------------- ---------- ---------- ---------------
Total....................... 1,778,370 3,413,176 7,821,974 2,278,099 7,541,105 7,824,365 2,216,529
---------- ---------- ---------- --------------- ---------- ---------- ---------------
---------- ---------- ---------- --------------- ---------- ---------- ---------------
Net loss.................... $(3,679,625) $(6,212,035) $(9,107,095) $ (29,165,491) $(2,977,757) $(1,733,784) $ (30,899,275)
---------- ---------- ---------- --------------- ---------- ---------- ---------------
---------- ---------- ---------- --------------- ---------- ---------- ---------------
Per share amount............ $ (2.07) $ (1.82) $ (1.16) $ (12.80 ) $ (0.39) $ (0.22) $ (13.94 )
---------- ---------- ---------- --------------- ---------- ---------- ---------------
---------- ---------- ---------- --------------- ---------- ---------- ---------------

FULLY DILUTED
Average shares
outstanding................ 4,147,882 6,215,406 7,821,974 3,259,861 7,541,105 7,824,365 3,383,325
Net effect of dilutive stock
options--based on the
treasury stock method using
average market price or the
ending market price if
higher (see Note A
below)..................... 579,079 289,540 -- 482,566 -- -- 469,524
---------- ---------- ---------- --------------- ---------- ---------- ---------------
Total....................... 4,726,961 6,504,946 7,821,974 3,742,427 7,541,105 7,824,365 3,852,849
---------- ---------- ---------- --------------- ---------- ---------- ---------------
---------- ---------- ---------- --------------- ---------- ---------- ---------------
Net loss.................... $(3,679,625) $(6,212,035) $(9,107,095) $ (29,165,491 ) $(2,977,757) $(1,733,784) $ (30,899,275 )
---------- ---------- ---------- --------------- ---------- ---------- ---------------
---------- ---------- ---------- --------------- ---------- ---------- ---------------
Per share amount............ $ (.78) $ (.95) $ (1.16) $ (7.79 ) $ (.39) $ (.22) $ (8.02 )
---------- ---------- ---------- --------------- ---------- ---------- ---------------
---------- ---------- ---------- --------------- ---------- ---------- ---------------
</TABLE>

Note A--Represents shares required by the provisions of Staff Accounting
Bulletin No. 83 for "cheap stock" issued prior to the Company's initial public
offering in July 1994.

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the reference to our firm under the caption "Experts" and
to the use of our reports dated January 26, 1996, in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-4174) and related Prospectus of CIMA
LABS INC. for the registration of its Common Stock.

/s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
May 7, 1996

<PAGE>
EXHIBIT 23.3

CONSENT OF PATENT COUNSEL

We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-1 No. 333-4174) and related Prospectus of CIMA
LABS INC. for the registration of shares of its common stock, and to the
incorporation by reference to this consent in any post-effective amendments and
registration statements filed pursuant to Rule 462.

LERNER, DAVID, LITTENBERG,
KRUMHOLZ & MENTLIK

BY: /s/ MARCUS J. MILLET

--------------------------------------

MARCUS J. MILLET

Westfield, New Jersey
May 6, 1996

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REGISTRATION STATEMENT ON FORM S-1 (REG. NO. 333-4174) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 3,558,743 2,516,596
<SECURITIES> 0 0
<RECEIVABLES> 212,971 373,622
<ALLOWANCES> 0 0
<INVENTORY> 324,610 95,778
<CURRENT-ASSETS> 4,383,603 3,248,627
<PP&E> 13,061,836 13,173,595
<DEPRECIATION> (2,479,688) (2,600,263)
<TOTAL-ASSETS> 15,518,645 14,363,970
<CURRENT-LIABILITIES> 1,236,995 1,721,088
<BONDS> 0 0
0 0
0 0
<COMMON> 78,201 78,401
<OTHER-SE> 14,203,449 12,564,481
<TOTAL-LIABILITY-AND-EQUITY> 15,518,645 14,363,970
<SALES> 151,074 0
<TOTAL-REVENUES> 835,211 391,858
<CGS> 240,038 0
<TOTAL-COSTS> 10,163,100 2,159,648
<OTHER-EXPENSES> 0 5,379
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,989 0
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,107,095) (1,733,784)
<EPS-PRIMARY> (1.16) (.22)
<EPS-DILUTED> (1.16) (.22)

</TABLE>