CIMA LABS INC, S-3, 2000-10-06

CIMA LABS INC
S-3, 2000-10-06
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

CIMA LABS INC.
(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S> <C>
DELAWARE 41-1569769
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification Number)
</TABLE>

10000 VALLEY VIEW ROAD
EDEN PRAIRIE, MINNESOTA 55344-9361
(952) 947-8700
(Address and Telephone Number of Principal Executive Offices)
------------------------

JOHN M. SIEBERT, PH.D.
CHIEF EXECUTIVE OFFICER
CIMA LABS INC.
10000 VALLEY VIEW ROAD
EDEN PRAIRIE, MINNESOTA 55344-9361
(952) 947-8700
(Name, Address, and Telephone Number of Agent for Service)
------------------------

Copies to:

<TABLE>
<S> <C>
GALE R. MELLUM, ESQ. AMY E. AYOTTE, ESQ.
KEYNA PIDCOCK SKEFFINGTON, ESQ. DORSEY & WHITNEY LLP
FAEGRE & BENSON LLP 220 SOUTH SIXTH STREET
2200 WELLS FARGO CENTER MINNEAPOLIS, MINNESOTA 55402
MINNEAPOLIS, MINNESOTA 55402 (612) 340-2600
(612) 336-3000 FAX (612) 340-2868
FAX (612) 336-3026
</TABLE>

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

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

If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

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, other than securities offered only in connection with dividend or interest
reinvestment plans, 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, 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>
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE OFFERING PRICE (1) REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 2,875,000 shares $49.97 $143,663,750 $37,928
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for the purpose of the registration fee pursuant to Rule
457(c) based on the average of the high and low sales prices per share of
the Registrant's Common Stock on September 29, 2000 as reported on the
Nasdaq National Market.
------------------------

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 WHICH 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2

The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission becomes effective. This
preliminary prospectus is not an offer to sell these securities nor does it
seek offers to buy these securities in any jurisdiction where the offer or
sale is not permitted.

SUBJECT TO COMPLETION, DATED OCTOBER 6, 2000

[CIMA LOGO]

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

2,500,000 SHARES
COMMON STOCK
--------------------------------------------------------------------------------

This is a public offering of common stock of CIMA LABS INC. We are offering
2,500,000 shares of common stock.

Our common stock trades on the Nasdaq National Market under the symbol "CIMA."
On October 5, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $55.63 per share.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSION CIMA LABS
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>

The underwriters may also purchase up to 180,000 additional shares from us and
195,000 shares from selling stockholders at the public offering price to cover
over-allotments.

DEUTSCHE BANC ALEX. BROWN
SG COWEN
FAHNESTOCK & CO. INC.

THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE> 3
INSIDE FRONT COVER GRAPHICS

PICTURE OF CIMA'S PRODUCTS

"Our Pipeline

<TABLE>
<CAPTION>
Clinical
Partner Product Application
------------ ------- -----------
<S> <C> <C> <C>

Prescription Products American Home Products Loratadine Allergy
AstraZeneca Zomig Rapimelt Migraine
N.V. Organon Remeron SolTab Depression
Schwarz Pharma Undisclosed Undisclosed

Over-the-Counter Bristol-Myers Squibb Tempra Pediatric pain relief
Novartis Triaminic Cough/cold"
</TABLE>

<PAGE> 4

SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should carefully read the
entire prospectus, including "Risk Factors" and the financial statements, before
making an investment decision.

We develop and manufacture fast dissolve and enhanced-absorption oral drug
delivery systems. OraSolv and DuraSolv, our proprietary fast dissolve
technologies, are oral dosage forms that dissolve quickly in the mouth without
chewing or water. We currently manufacture and package six commercial products
incorporating our proprietary fast dissolve technologies. These products include
four formulations of Triaminic Softchews for Novartis, Tempra FirsTabs for
Bristol-Myers Squibb and Zomig Rapimelt for AstraZeneca. The FDA is currently
reviewing submissions for approval of three additional products that we are
developing for our pharmaceutical company partners. The products currently under
review by the FDA are loratadine for American Home Products, Zomig Rapimelt for
AstraZeneca and Remeron SolTab for N.V. Organon.

We believe that the attributes of our OraSolv and DuraSolv fast dissolve
technologies may enable consumers in certain age groups or with limited ability
to swallow conventional tablets to receive medication in an oral dosage form
that is more convenient than traditional tablet-based oral dosages. Both OraSolv
and DuraSolv technologies are capable of incorporating taste masked active drug
ingredients into tablets that have the following potential benefits:

- ease of administration;

- improved dosing compliance; and

- increased dosage accuracy compared to liquid formulations.

We generate revenue from net sales of products we manufacture for
pharmaceutical companies using our proprietary fast dissolve technologies,
product development fees and licensing revenues for development activities we
conduct through collaborative agreements with pharmaceutical companies, and
royalties on the sales of products we manufacture, which are sold by
pharmaceutical companies under licenses from us.

Our proprietary technologies enable our pharmaceutical company partners to
differentiate their products from competing products. In addition to providing a
competitive advantage in the marketplace, our proprietary technologies also may
enable our pharmaceutical company partners to extend the product life cycles of
their patented drug compounds beyond existing patent expiration dates. Our
technologies may also provide benefits to the healthcare system more generally.
For example, improved compliance can enhance therapeutic outcomes and
potentially reduce overall costs. We currently have collaborative agreements
with American Home Products, AstraZeneca, Bristol-Myers Squibb, N.V. Organon,
Novartis and Schwarz Pharma.

In addition to our proprietary OraSolv and DuraSolv fast dissolve
technologies, we are developing several new drug delivery technologies. Our
OraSolv SR technology adds sustained release properties to the fast dissolve and
taste masking attributes of our OraSolv technology. We also are developing new
OraVescent drug delivery technologies that include OraVescent SL for drug
delivery under the tongue, and OraVescent BL for drug delivery between the gum
and the cheek. An additional technology, OraVescent SS, is designed for
site-specific administration, which may allow for an active drug ingredient to
be transported to a specific part of the gastrointestinal tract where it is
released for absorption. We designed the OraVescent technologies to improve the
transport of poorly absorbed active drugs across mucosal membranes in the oral
cavity or the gastrointestinal tract.

1
<PAGE> 5

THE OFFERING

Common stock offered by CIMA.... 2,500,000 shares
Common stock to be outstanding
upon completion of this
offering...................... 13,453,774 shares
Use of proceeds................. Expansion of our production capabilities and
facilities, drug delivery technology
development, working capital, general
corporate purposes and possible future
acquisitions.
Nasdaq National Market symbol... CIMA

The number of shares of common stock to be outstanding upon completion of
this offering is based on the number of shares outstanding as of September 30,
2000 and excludes:

- 1,826,778 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price of $10.74 per share; and

- 272,532 shares of common stock available for issuance under our stock
plans.
------------------

Unless otherwise indicated, the information in this prospectus assumes no
exercise of the underwriters' over-allotment option.

We were incorporated in Delaware in 1986. Our executive offices are located
at 10000 Valley View Road, Eden Prairie, Minnesota 55344-9361. Our telephone
number is (952) 947-8700 and our web site is www.cimalabs.com. The information
on our website is not incorporated into and is not intended to be a part of this
prospectus.

CIMA and the CIMA logo are trademarks of CIMA. All other trademarks used in
this prospectus are the property of their respective owners. We have registered
"CIMA(R)," "CIMA LABS INC.(R)," "OraSolv(R)," and "OraSolv(R)SR" as trademarks
with the U.S. Patent and Trademark Office. We also use the trademarks
"DuraSolv(TM)," "PakSolv(TM)," "OraVescent(TM)SL/BL" and "OraVescent(TM)SS".
Triaminic(R) and Softchews(R) are registered trademarks of Novartis. Zomig(R)
and Rapimelt(R) are registered trademarks of AstraZeneca. Remeron(R) and
SolTab(TM) are trademarks of N.V. Organon. Tempra(R) is a registered trademark
of Bristol-Myers Squibb Canada. FirsTabs(TM) is a trademark of Bristol-Myers
Squibb.

2
<PAGE> 6

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

<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------ -------------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Net sales.......................... $ 2,628 $ 1,097 $ 4,839 $ 1,434 $ 6,097
Product development fees and
licensing........................ 2,282 6,141 7,818 3,383 4,391
Royalties.......................... -- 374 735 194 979
-------- -------- -------- -------- --------
Total revenues......................... 4,910 7,612 13,392 5,011 11,467
-------- -------- -------- -------- --------
Operating expenses:
Cost of goods sold................. 4,376 4,476 7,546 2,968 6,725
Research and product development... 3,364 3,307 4,388 1,827 2,217
Selling, general and
administrative................... 3,487 3,138 2,836 1,444 1,849
-------- -------- -------- -------- --------
Total operating expenses............... 11,227 10,921 14,770 6,239 10,791
-------- -------- -------- -------- --------
Other income, net...................... 479 122 116 44 266
-------- -------- -------- -------- --------
Income (loss) before cumulative effect
of a change in accounting
principle............................ (5,838) (3,187) (1,262) (1,184) 942
Cumulative effect of a change in
accounting principle, net of income
taxes................................ -- -- -- -- (799)
-------- -------- -------- -------- --------
Net income (loss)...................... $ (5,838) $ (3,187) $ (1,262) $ (1,184) $ 143
======== ======== ======== ======== ========
Net income (loss) per share:
Basic
Net income (loss) per share before
cumulative effect of a change in
accounting principle............. $ (.61) $ (.33) $ (.13) $ (.12) $ .09
Net loss per share from cumulative
effect of a change in accounting
principle........................ -- -- -- -- (.08)
-------- -------- -------- -------- --------
Net income (loss) per basic share.... $ (.61) $ (.33) $ (.13) $ (.12) $ .01
======== ======== ======== ======== ========
Diluted
Net income (loss) per share before
cumulative effect of a change in
accounting principle............. $ (.61) $ (.33) $ (.13) $ (.12) $ .08
Net loss per share from cumulative
effect of a change in accounting
principle........................ -- -- -- -- (.07)
-------- -------- -------- -------- --------
Net income (loss) per diluted
share.............................. $ (.61) $ (.33) $ (.13) $ (.12) $ .01
======== ======== ======== ======== ========
Weighted average shares outstanding:
Basic................................ 9,519 9,610 9,615 9,610 10,376
Diluted.............................. 9,519 9,610 9,615 9,610 11,393
</TABLE>

<TABLE>
<CAPTION>
As of December 31, As of June 30, 2000
------------------------------ -------------------------
1997 1998 1999 Actual As Adjusted(1)
-------- -------- -------- -------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments................. $ 4,423 $ 2,723 $ 2,481 $ 15,695 $146,014
Total assets......................... 17,328 14,916 19,270 37,456 167,775
Accumulated deficit.................. (41,527) (44,715) (45,977) (45,834) (45,834)
Total stockholders' equity........... 15,837 12,656 11,574 31,647 161,966
</TABLE>

------------
(1) The as adjusted column reflects the sale of 2,500,000 shares of our common
stock in the public offering at an assumed public offering price of $55.63
per share, after deducting underwriting discounts and commissions and
estimated offering expenses.

3
<PAGE> 7

RISK FACTORS

Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before you decide
whether to buy our common stock. If any of the following risks actually occur,
our business, results of operations and financial condition could suffer
significantly. In any such case, the market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock.

RISKS RELATED TO OUR BUSINESS

THE LOSS OF ONE OF OUR MAJOR CUSTOMERS COULD REDUCE OUR REVENUES SIGNIFICANTLY.

Revenues from AstraZeneca, N.V. Organon and Novartis together represented
approximately 85% of our total revenues for the year ended December 31, 1999 and
for the six months ended June 30, 2000. The loss of any one of these customers
could cause our revenues to decrease significantly, resulting in losses from our
operations. If we cannot broaden our customer base, we will continue to depend
on a few customers for the majority of our revenues. We may be unable to
negotiate favorable business terms with customers that represent a significant
portion of our revenues. If we cannot, our revenues and gross profits may not
grow as expected and may be insufficient to allow us to achieve sustained
profitability.

WE RELY ON THIRD PARTIES TO MARKET, DISTRIBUTE AND SELL THE PRODUCTS
INCORPORATING OUR DRUG DELIVERY TECHNOLOGIES AND THOSE THIRD PARTIES MAY NOT
PERFORM.

Our pharmaceutical company partners market and sell the products we develop
and manufacture. If one or more of our pharmaceutical company partners fails to
pursue the marketing of our products as planned, our revenues and gross profits
may not reach our expectations, or may decline. We often cannot control the
timing and other aspects of the development of products incorporating our
technologies because our pharmaceutical company partners may have priorities
that differ from ours. Therefore, our commercialization of products under
development may be delayed unexpectedly. Because we incorporate our drug
delivery technologies into the oral dosage forms of products marketed and sold
by our pharmaceutical company partners, we do not have a direct marketing
channel to consumers for our drug delivery technologies. The marketing
organizations of our pharmaceutical company partners may be unsuccessful, or
they may assign a low level of priority to the marketing of our products that is
different from our priorities. Further, they may discontinue marketing the
products that incorporate our drug delivery technologies. If marketing efforts
for our products are not successful, our revenues may fail to grow as expected
or may decline.

IF WE DO NOT ENTER INTO ADDITIONAL COLLABORATIVE AGREEMENTS WITH PHARMACEUTICAL
COMPANIES, WE MAY NOT BE ABLE TO ACHIEVE SUSTAINED PROFITABILITY.

We depend upon collaborative agreements with pharmaceutical companies to
develop, test and obtain regulatory approval for, and commercialize oral dosage
forms of, active pharmaceutical ingredients using our drug delivery
technologies. The number of products that we successfully develop under these
collaborative agreements will affect our revenues. If we do not enter into
additional agreements in the future, or if our current or future agreements do
not result in successful marketing of our products, our revenues and gross
profits may be insufficient to allow us to achieve sustained profitability. We
currently have collaborative agreements with American Home Products,
AstraZeneca, Bristol-Myers Squibb, N.V. Organon, Novartis and Schwarz Pharma.

4
<PAGE> 8

We face additional risks related to our collaborative agreements, including
the risks that:

- any existing or future collaborative agreements may not result in
additional commercial products;

- additional commercial products that we may develop may not be successful;

- we may not be able to meet the milestones established in our current or
future collaborative agreements; and

- we may not be able to successfully develop new drug delivery technologies
that will be attractive in the future to potential pharmaceutical company
partners.

IF WE CANNOT INCREASE OUR PRODUCTION CAPACITY, WE MAY BE UNABLE TO MEET EXPECTED
DEMAND FOR OUR PRODUCTS AND WE MAY LOSE REVENUES.

We must increase our production capacity to meet expected demand for our
products. We currently have one production line and a second line is being
developed. If we are unable to increase our production capacity as scheduled, we
may be unable to meet expected demand for our products, we may lose revenues and
we may not be able to maintain our relationships with our pharmaceutical company
partners. Production lines in the pharmaceutical industry generally take 16 to
24 months to complete due to the long lead times required for precision
production equipment to be manufactured and installed, as well as the required
testing and validation process that must be completed once the equipment is
installed. We expect our second production line to be operational in the second
half of 2001, although we may experience difficulties that could delay our
ability to increase our manufacturing capacity. We may not be able to increase
our production capacity quickly enough to meet the requirements of our
pharmaceutical company partners with whom we are developing our drug delivery
technologies.

IF WE DO NOT PROPERLY MANAGE OUR GROWTH, WE MAY BE UNABLE TO SUSTAIN THE LEVEL
OF REVENUES WE HAVE ATTAINED OR EFFECTIVELY PURSUE ADDITIONAL BUSINESS
OPPORTUNITIES.

Our revenues increased 129% from the six months ended June 30, 1999 to the
six months ended June 30, 2000, placing significant strain on our management,
administrative and operational resources. If we do not properly manage the
growth we have recently experienced and expect in the future, our revenues may
decline or we may be unable to pursue sources of additional revenues. To
properly manage our growth, we must, among other things, implement additional
and improve existing administrative, financial and operational systems,
procedures and controls on a timely basis. We will also need to expand our
finance, administrative and operations staff. We may not be able to complete the
improvements to our systems, procedures and controls necessary to support our
future operations in a timely manner. We may not be able to hire, train,
integrate, retain, motivate and manage required personnel and may not be able to
successfully identify, manage and pursue existing and potential market
opportunities. Improving our systems and increasing our staff will increase our
operating expenses. If we fail to generate additional revenue in excess of
increased operating expenses in any fiscal period we may incur losses, or our
losses may increase in that period.

IF WE CANNOT ATTRACT AND RETAIN KEY PERSONNEL ON WHICH WE DEPEND, WE MAY NOT BE
ABLE TO EXECUTE OUR BUSINESS PLAN AS ANTICIPATED.

During our operating history, we have assigned many key responsibilities
within our company to a relatively small number of individuals. If we lose the
services of John Siebert, our Chief Executive Officer, or John Hontz, our Chief
Operating Officer, we may have difficulty executing our business plan in the
manner we currently anticipate. The competition for qualified personnel is
intense and the loss of services of key personnel could adversely affect our
business. We have an employment agreement that runs to January 1, 2004 with Dr.
Siebert

5
<PAGE> 9

and an employment agreement that runs to August 31, 2004 with Dr. Hontz. We do
not maintain key person life insurance for any of our key personnel.

WE MAY EXPERIENCE SIGNIFICANT DELAYS IN EXPECTED PRODUCT RELEASES WHILE OUR
PHARMACEUTICAL COMPANY PARTNERS SEEK REGULATORY APPROVALS FOR THE PRODUCTS WE
DEVELOP AND, IF THEY ARE NOT SUCCESSFUL IN OBTAINING THE APPROVALS, WE MAY BE
UNABLE TO ACHIEVE OUR ANTICIPATED REVENUES AND PROFITS.

The federal government, principally the U.S. Food and Drug Administration,
and state and local government agencies regulate all new pharmaceutical
products, including our existing products and those under development. Our
pharmaceutical company partners may experience significant delays in expected
product releases while attempting to obtain regulatory approval for the products
we develop. If they are not successful, our revenues and profitability may
decline. We cannot control, and our pharmaceutical company partners cannot
control, the timing of regulatory approval for the products we develop.

Applicants for FDA approval often must submit extensive clinical data and
supporting information to the FDA. Varying interpretations of the data obtained
from pre-clinical and clinical testing could delay, limit or prevent regulatory
approval of a drug product. Changes in FDA approval policy during the
development period, or changes in regulatory review for each submitted new drug
application, also may cause delays or rejection of an approval. Even if the FDA
approves a product, the approval may limit the uses or "indications" for which a
product may be marketed, or may require further studies. The FDA also can
withdraw product clearances and approvals for failure to comply with regulatory
requirements or if unforeseen problems follow initial marketing.

Manufacturers of drugs also must comply with applicable good manufacturing
practices requirements. If we cannot comply with applicable good manufacturing
practices, we may be required to suspend the production and sale of our
products, which would reduce our revenues and gross profits. We may not be able
to comply with the applicable good manufacturing practices and other FDA
regulatory requirements for manufacturing as we expand our manufacturing
operations.

If our products are marketed in foreign jurisdictions, we, and the
pharmaceutical company partners with whom we are developing our technologies,
must obtain required regulatory approvals from foreign regulatory agencies and
comply with extensive regulations regarding safety and quality. If approvals to
market our products are delayed, if we fail to receive these approvals, or if we
lose previously received approvals, our revenues would be reduced. We may be
required to incur significant costs in obtaining or maintaining foreign
regulatory approvals.

OUR COMMERCIAL PRODUCTS ARE SUBJECT TO CONTINUING REGULATION AND WE MAY BE
SUBJECT TO ADVERSE CONSEQUENCES IF WE FAIL TO COMPLY WITH APPLICABLE
REGULATIONS.

Even if our products receive regulatory approval, either in the U.S. or
internationally, we will continue to be subject to extensive regulatory
requirements. These regulations are wide-ranging and govern, among other things:

- adverse drug experience reporting regulations;

- product promotion;

- product manufacturing, including good manufacturing practice
requirements; and

- product changes or modifications.

6
<PAGE> 10

If we fail to comply or maintain compliance with these laws and
regulations, we may be fined or barred from selling our products. If the FDA
determines that we are not complying with the law, it can:

- issue warning letters;

- impose fines;

- seize products or order recalls;

- issue injunctions to stop future sales of products;

- refuse to permit products to be imported into, or exported out of, the
U.S.;

- totally or partially suspend our production;

- withdraw previously approved marketing applications; and

- initiate criminal prosecutions.

WE HAVE A SINGLE MANUFACTURING FACILITY AND WE MAY LOSE REVENUES AND BE UNABLE
TO MAINTAIN OUR RELATIONSHIPS WITH OUR PHARMACEUTICAL COMPANY PARTNERS IF WE
LOSE ITS PRODUCTION CAPACITY.

We manufacture all of the products that we produce on our existing
production line in our Eden Prairie facility. If our existing production line or
facility becomes incapable of manufacturing products for any reason, we may be
unable to meet production requirements, we may lose revenues and we may not be
able to maintain our relationships with our pharmaceutical company partners.
Without our existing production line, we would have no other means of
manufacturing products incorporating our drug delivery technologies until we
were able to restore the manufacturing capability at our facility or develop an
alternative manufacturing facility. Although we carry business interruption
insurance to cover lost revenues and profits in an amount we consider adequate,
this insurance does not cover all possible situations. In addition, our business
interruption insurance would not compensate us for the loss of opportunity and
potential adverse impact on relations with our existing pharmaceutical company
partners resulting from our inability to produce products for them. Although we
currently plan to build a second manufacturing facility to reduce this risk, we
may encounter unforeseen difficulties or delays in doing so.

WE RELY ON SINGLE SOURCES FOR SOME OF OUR RAW MATERIALS AND WE MAY LOSE REVENUES
AND BE UNABLE TO MAINTAIN OUR RELATIONSHIPS WITH OUR PHARMACEUTICAL COMPANY
PARTNERS IF THOSE MATERIALS WERE NOT AVAILABLE FROM THEIR CURRENT SOURCE.

We rely on single suppliers for some of our raw materials and packaging
supplies. If these raw materials or packaging supplies were no longer available
we may be unable to meet production requirements, we may lose revenues and we
may not be able to maintain our relationships with our pharmaceutical company
partners. Without adequate supplies of raw materials or packaging supplies, our
manufacturing operations may be interrupted until another supplier could be
identified, its products validated and trading terms with it negotiated. We may
not be able to identify an alternative supplier in a timely manner, or at all.
Furthermore, we may not be able to negotiate favorable terms with an alternative
supplier. Any disruptions in our manufacturing operations from the loss of a
supplier could potentially damage our relations with our pharmaceutical company
partners.

7
<PAGE> 11

IF WE CANNOT DEVELOP ADDITIONAL PRODUCTS, OUR ABILITY TO INCREASE OUR REVENUES
WOULD BE LIMITED.

We intend to continue to enhance our current technologies and pursue
additional proprietary drug delivery technologies. If we are unable to do so, we
may be unable to achieve our objectives of revenue growth and sustained
profitability. Even if enhanced or additional technologies appear promising
during various stages of development, we may not be able to develop commercial
applications for them because:

- the potential technologies may fail clinical studies;

- we may not find a pharmaceutical company to adopt the technologies;

- it may be difficult to apply the technologies on a commercial scale; or

- the technologies may be uneconomical to market.

IF WE CANNOT KEEP PACE WITH THE RAPID TECHNOLOGICAL CHANGE AND MEET THE INTENSE
COMPETITION IN OUR INDUSTRY, WE MAY LOSE BUSINESS.

Our success depends, in part, on maintaining a competitive position in the
development of products and technologies in a rapidly evolving field. If we
cannot maintain competitive products and technologies, our current and potential
pharmaceutical company partners may choose to adopt the drug delivery
technologies of our competitors. Fast dissolve tablet technologies that compete
with our OraSolv and DuraSolv technologies include the Zydis technology
developed by R.P. Scherer Corporation, a wholly-owned subsidiary of Cardinal
Health, Inc., the WOWTab technology developed by Yamanouchi Shaklee
Pharmaceuticals, the Flashtab technology developed by Laboratories Prographarm
and the FlashDose technology developed by Fuisz Technologies Ltd., a
wholly-owned subsidiary of Biovail Corporation. We also compete generally with
other drug delivery, biotechnology and pharmaceutical companies engaged in the
development of alternative drug delivery technologies or new drug research and
testing. Many of these competitors have substantially greater financial,
technological, manufacturing, marketing, managerial and research and development
resources and experience than we do and represent significant competition for
us.

Our competitors may succeed in developing competing technologies or
obtaining governmental approval for products before us. The products of our
competitors may gain market acceptance more rapidly than our products.
Developments by competitors may render our products, or potential products,
noncompetitive or obsolete.

IF WE CANNOT ADEQUATELY PROTECT OUR TECHNOLOGY AND PROPRIETARY INFORMATION, WE
MAY BE UNABLE TO SUSTAIN A COMPETITIVE ADVANTAGE.

Our success depends, in part, on our ability to obtain and enforce patents
for our products, processes and technologies and to preserve our trade secrets
and other proprietary information. If we cannot do so, our competitors may
exploit our innovations and deprive us of the ability to realize revenues and
profits from our developments. We have been granted seven patents on our drug
delivery systems in the U.S., which will expire beginning in 2010.

Any patent applications we may have made or may make relating to our
potential products, processes and technologies may not result in patents being
issued. Our current patents may not be valid or enforceable. They may not
protect us against competitors that challenge our patents, obtain patents that
may have an adverse effect on our ability to conduct business or are able to
circumvent our patents. Further, we may not have the necessary financial
resources to enforce our patents.

To protect our trade secrets and proprietary technologies and processes, we
rely, in part, on confidentiality agreements with our employees, consultants and
advisors. These agreements

8
<PAGE> 12

may not provide adequate protection for our trade secrets and other proprietary
information in the event of any unauthorized use or disclosure, or if others
lawfully develop the information.

THIRD PARTIES MAY CLAIM THAT OUR TECHNOLOGIES, OR THE PRODUCTS IN WHICH THEY ARE
USED, INFRINGE ON THEIR PROPRIETARY RIGHTS AND WE MAY INCUR SIGNIFICANT COSTS
RESOLVING THESE CLAIMS.

Third parties may claim that the manufacture, use or sale of our drug
delivery technologies infringe their patent rights. If such claims are asserted,
we may have to seek licenses, defend infringement actions or challenge the
validity of those patents in court. If we cannot obtain required licenses, are
found liable for infringement or are not able to have these patents declared
invalid, we may be liable for significant monetary damages, encounter
significant delays in bringing products to market or be precluded from
participating in the manufacture, use or sale of products or methods of drug
delivery covered by the patents of others. We may not have identified, or be
able to identify in the future, U.S. and foreign patents that pose a risk of
potential infringement claims.

We enter into collaborative agreements with pharmaceutical companies to
apply our drug delivery technologies to drugs developed by others. Ultimately,
we receive license revenues and product development fees, as well as revenues
from the sale of products incorporating our technology and royalties. The drugs
to which our drug delivery technologies are applied are generally the property
of the pharmaceutical companies. Those drugs may be the subject of patents or
patent applications and other forms of protection owned by the pharmaceutical
companies or third parties. If those patents or other forms of protection
expire, are challenged or become ineffective, sales of the drugs by the
collaborating pharmaceutical company may be restricted or may cease.

BECAUSE WE HAVE A LIMITED OPERATING HISTORY, POTENTIAL INVESTORS IN OUR STOCK
MAY HAVE DIFFICULTY EVALUATING OUR PROSPECTS.

We recorded the first commercial sales of products using our fast dissolve
technologies in early 1997. Accordingly, we have only a limited operating
history, which may make it difficult for you and other potential investors to
evaluate our prospects. The difficulty investors may have in evaluating our
prospects may cause volatile fluctuations, including decreases, in the market
price of our common stock as investors react to information about our prospects.
Since 1997, we have generated revenues from product development fees and
licensing arrangements, sales of products using our fast dissolve technologies
and royalties. We are currently making the transition from research and product
development operations with limited production to commercial operations with
expanding production capabilities in addition to research and product
development activities. Our business and prospects, therefore, must be evaluated
in light of the risks and uncertainties of a company with a limited operating
history and, in particular, one in the pharmaceutical industry.

IF WE ARE NOT PROFITABLE IN THE FUTURE, THE VALUE OF YOUR INVESTMENT IN OUR
STOCK MAY FALL.

We have accumulated aggregate net losses from inception through June 30,
2000, of approximately $45.8 million. If we are not profitable in the future,
the market price of our stock may fall. The costs for research and product
development of our drug delivery technologies and general and administrative
expenses have been the principal causes of our losses. Our ability to achieve
sustained profitable operations depends on a number of factors, many of which
are beyond our direct control. These factors include:

- the demand for our products;

- our ability to manufacture our products efficiently and with the required
quality;

9
<PAGE> 13

- our ability to increase our manufacturing capacity;

- the level of product and price competition;

- our ability to develop additional commercial applications for our
products;

- our ability to control our costs; and

- general economic conditions.

WE MAY REQUIRE ADDITIONAL FINANCING, WHICH MAY NOT BE AVAILABLE ON FAVORABLE
TERMS OR AT ALL AND WHICH MAY RESULT IN DILUTION OF YOUR EQUITY INTEREST.

We may require additional financing to fund the development and possible
acquisition of new drug delivery technologies and to increase our production
capacity beyond what is currently anticipated. If we cannot obtain financing
when needed, or obtain it on favorable terms, we may be required to curtail our
plans to develop and possibly to acquire new drug delivery technologies or limit
the expansion of our manufacturing capacity. We believe our cash and cash
equivalents, our net proceeds from this offering and expected revenues from
operations will be sufficient to meet our anticipated capital requirements for
the foreseeable future. However, we may elect to pursue additional financing at
any time to more aggressively pursue development of new drug delivery
technologies and expand manufacturing capacity beyond that currently planned.

Other factors that will affect future capital requirements and may require
us to seek additional financing include:

- the level of expenditures necessary to develop and, or, acquire new
products or technologies;

- the progress of our research and product development programs;

- the need to construct a larger than currently anticipated manufacturing
facility, or additional manufacturing facilities, to meet demand for our
products;

- results of our collaborative efforts with current and potential
pharmaceutical company partners; and

- the timing of, and amounts received from, future product sales, product
development fees and licensing revenue and royalties.

DEMAND FOR SOME OF OUR PRODUCTS IS SEASONAL, AND OUR SALES AND PROFITS MAY
SUFFER DURING PERIODS WHEN DEMAND IS LIGHT.

Certain non-prescription products that we manufacture for our
pharmaceutical company partners treat seasonal ailments such as colds, coughs
and allergies. Our pharmaceutical company partners may choose to not market
those products in off-seasons and our sales and profits may decline in those
periods as a result. In 1999, revenues from Novartis, which included revenues
related to Triaminic, a seasonal cold, cough and allergy product, represented
42% of our total revenues. We may not be successful in developing a mix of
products to reduce these seasonal variations.

IF THE MARKETING CLAIMS ASSERTED ABOUT OUR PRODUCTS ARE NOT APPROVED, OUR
REVENUES MAY BE LIMITED.

Once a drug product incorporating our technologies is approved by the FDA,
the Division of Drug Marketing, Advertising and Communication, the FDA's
marketing surveillance department within the Center for Drug Evaluation and
Research, must approve marketing claims asserted about it by our pharmaceutical
company partners. If our pharmaceutical company partners fail to

10
<PAGE> 14

obtain from the Division of Drug Marketing acceptable marketing claims for a
product incorporating our drug technology, our revenues from that product may be
limited. Marketing claims are the basis for a product's labeling, advertising
and promotion. The claims our pharmaceutical company partners are asserting
about our drug delivery technology, or the drug product itself, may not be
approved by the Division of Drug Marketing.

WE MAY FACE PRODUCT LIABILITY CLAIMS RELATED TO PARTICIPATION IN CLINICAL TRIALS
OR THE USE OR MISUSE OF OUR PRODUCTS.

The testing, manufacturing and marketing of products using our drug
delivery technologies may expose us to potential product liability and other
claims resulting from their use. If any such claims against us are successful,
we may be required to make significant compensation payments. Any
indemnification that we have obtained, or may obtain, from contract research
organizations or pharmaceutical companies conducting human clinical trials on
our behalf may not protect us from product liability claims or from the costs of
related litigation. Similarly, any indemnification we have obtained, or may
obtain, from pharmaceutical companies with whom we are developing our drug
delivery technologies may not protect us from product liability claims from the
consumers of those products or from the costs of related litigation. If we are
subject to a product liability claim, our product liability insurance may not
reimburse us, or be sufficient to reimburse us, for any expenses or losses we
may suffer. A successful product liability claim against us, if not covered by,
or if in excess of, our product liability insurance, may require us to make
significant compensation payments, which would be reflected as expenses on our
statement of operations and reduce our earnings.

RISKS RELATED TO THIS OFFERING

ANTI-TAKEOVER PROVISIONS OF OUR CORPORATE CHARTER DOCUMENTS, DELAWARE LAW AND
OUR STOCKHOLDERS' RIGHTS PLAN MAY AFFECT THE PRICE OF OUR COMMON STOCK.

Our corporate charter documents, Delaware law and our stockholders' rights
plan include provisions that may discourage or prevent parties from attempting
to acquire us. These provisions may have the effect of depriving our
stockholders of the opportunity to sell their stock at a price in excess of
prevailing market prices in an acquisition of us by another company. Our board
of directors has the authority to issue up to 5,000,000 shares of preferred
stock and to determine the rights, preferences and privileges of those shares
without any further vote or action by our stockholders. The rights of holders of
our common stock may be adversely affected by the rights of the holders of any
preferred stock that may be issued in the future. Additional provisions of our
certificate of incorporation and bylaws could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
common stock. These include provisions that limit the ability of stockholders to
call special meetings or remove a director for cause.

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, which 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. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, either alone or together with affiliates and associates, owns (or
within the past three years, did own) 15% or more of the corporation's voting
stock.

We also have a stockholders' rights plan, commonly referred to as a poison
pill, which makes it difficult, if not impossible, for a person to acquire
control of us without the consent of our board of directors.
11
<PAGE> 15

OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.

The trading price of our common stock has been, and is likely to continue
to be, highly volatile. The market value of your investment in our common stock
may fall sharply at any time due to this volatility. In the nine months ended
September 30, 2000, the closing sale price for our common stock ranged from
$12.13 to $52.06. In the year ended December 31, 1999, the closing sale price of
our common stock ranged from $2.53 to $13.50. The market prices for securities
of drug delivery, biotechnology and pharmaceutical companies historically have
been highly volatile. Factors that could adversely affect our stock price
include:

- fluctuations in our operating results;

- announcements of technological collaborations, innovations or new
products by us or our competitors;

- governmental regulations;

- developments in patent or other proprietary rights owned by us or others;

- public concern as to the safety of drugs developed by us or others;

- the results of pre-clinical testing and clinical studies or trials by us
or our competitors;

- litigation;

- decisions by our pharmaceutical company partners relating to the products
incorporating our technologies;

- actions by the FDA in connection with submissions related to the products
incorporating our technologies; and

- general market conditions.

OUR OPERATING RESULTS MAY FLUCTUATE, CAUSING OUR STOCK PRICE TO FALL.

Fluctuations in our operating results may lead to fluctuations, including
declines, in our stock price. Our operating results may fluctuate from quarter
to quarter and from year to year depending on:

- demand by consumers for the products we produce;

- new product introductions;

- the seasonal nature of the products we produce to treat seasonal
ailments;

- pharmaceutical company ordering patterns;

- our production schedules;

- the number of new collaborative agreements that we enter into;

- the number and timing of product development milestones that we achieve
under collaborative agreements; and

- the level of our development activity conducted for, and at the direction
of, pharmaceutical companies under collaborative agreements.

OUR MANAGEMENT WILL HAVE BROAD DISCRETION AS TO THE USE OF PROCEEDS OF THIS
OFFERING, AND THE EFFECTIVENESS OF OUR USE OF PROCEEDS MAY AFFECT THE PRICE OF
OUR COMMON STOCK.

Our management, including our board of directors, will have broad
discretion regarding how we use the net proceeds of the offering. Investors will
be relying on the judgment of management regarding the application of the
proceeds of the offering. The result and effectiveness of our use of proceeds
are uncertain.
12
<PAGE> 16

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make many statements in this prospectus under the captions Summary, Risk
Factors, Management's Discussion and Analysis of Financial Condition and Results
of Operations and Business and elsewhere that are forward-looking and are not
based on historical facts. These statements relate to our future plans,
objectives, expectations and intentions. We may identify these statements by the
use of words such as believe, expect, will, anticipate, intend and plan and
similar expressions. These forward looking statements involve a number of risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those we discuss in Risk Factors and elsewhere in this prospectus.
These forward-looking statements speak only as of the date of this prospectus,
and we caution you not to rely on these statements without considering the risks
and uncertainties associated with these statements and our business that are
addressed in this prospectus.

These forward-looking statements include statements relating to:

- the timing of the operation, and potential capacity, of our second
production line;

- expected growth in product sales in the second half of 2000;

- the expected construction of a second manufacturing facility;

- future expense levels;

- the timing of availability of products;

- expected demand for products using our technologies and the adequacy of
our production capacity; and

- future research and development activities relating to our current or new
technologies.

We are not under any duty to update any of the forward-looking statements
after the date of this prospectus to conform these statements to actual results
except as required by law.

Information regarding market and industry statistics contained in the
Business section is included based on information available to us that we
believe is accurate. It is generally based on academic and other publications
that are not produced for purposes of securities offerings or economic analysis.
We have not reviewed or included data from all sources and cannot assure you of
the accuracy of the data we have included.

13
<PAGE> 17

USE OF PROCEEDS

Our net proceeds from the sale of the 2,500,000 shares of common stock we
are offering are estimated to be $130.3 million ($149.9 million if the
underwriters' over-allotment option is exercised in full)assuming an offering
price of $55.63 per share and after deducting the underwriting discounts and
commissions and our estimated offering expenses.

We intend to use approximately $50.0 million of the net proceeds of the
offering for capital expenditures to meet future manufacturing requirements. We
expect these capital expenditures to include the construction of a second
manufacturing line in our Eden Prairie facility and a second production
facility. The amount that we actually spend on capital expenditures may vary
based on the demand for our products. We anticipate using the remainder of the
net proceeds of the offering for the development of new drug delivery
technologies and products, for working capital and for general corporate
purposes. We may also use a portion of the net proceeds to acquire businesses,
technologies or products that are complementary to our business. We have no
present plans, understandings or commitments in this regard. Our management has
broad discretion in determining how the proceeds of this offering will be
applied. Pending such uses, the net proceeds of this offering will be invested
in short-term, investment grade, interest-bearing securities.

DIVIDEND POLICY

We have never declared or paid any dividends. We anticipate that all of our
earnings, if any, will be retained for development of our business and we do not
anticipate paying any cash dividends in the foreseeable future.

PRICE RANGE OF COMMON STOCK

Our common stock is traded on the Nasdaq National Market under the symbol
CIMA. The following table presents, for the periods indicated, the range of high
and low closing sale prices for our common stock as reported on the Nasdaq
National Market.

<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
First Quarter............................................... $ 4.97 $ 3.13
Second Quarter.............................................. 4.75 3.19
Third Quarter............................................... 3.88 2.88
Fourth Quarter.............................................. 3.50 2.03
YEAR ENDED DECEMBER 31, 1999:
First Quarter............................................... 3.44 2.53
Second Quarter.............................................. 4.63 2.63
Third Quarter............................................... 8.38 4.63
Fourth Quarter.............................................. 13.50 6.00
YEAR ENDING DECEMBER 31, 2000:
First Quarter............................................... 25.25 12.13
Second Quarter.............................................. 20.69 12.56
Third Quarter............................................... 52.06 20.69
Fourth Quarter (through October 5, 2000).................... 59.25 55.63
</TABLE>

On October 5, 2000, the last reported sale price of our common stock was
$55.63 per share. We had 63 stockholders of record and an estimated 2,000
beneficial owners of our common stock as of September 30, 2000.

14
<PAGE> 18

CAPITALIZATION

The following table sets forth our actual capitalization as of June 30,
2000 and as adjusted to reflect the receipt of the net proceeds from our sale of
2,500,000 shares of common stock at an assumed public offering price of $55.63
per share in this offering, less the underwriting discounts and commissions and
estimated offering expenses.

<TABLE>
<CAPTION>
June 30, 2000
----------------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Long-term obligations, less current portion................. $ 3,578 $ 3,578
-------- --------
Stockholders' equity:
Preferred stock, $0.01 par value
Authorized shares -- 5,000,000 shares
Issued and outstanding -- -0- shares...................... -- --
Common stock, $0.01 par value
Authorized shares -- 20,000,000
Issued and outstanding shares --
Actual -- 10,858,639 shares
As Adjusted -- 13,358,639 shares.......................... 109 134
Additional paid-in capital.................................. 77,373 207,667
Accumulated deficit......................................... (45,834) (45,834)
-------- --------
Total stockholders' equity.................................. 31,648 161,967
-------- --------
Total capitalization........................................ $ 35,226 $165,545
======== ========
</TABLE>

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

The number of shares of common stock referred to above excludes 1,746,609
shares of common stock issuable upon exercise of options outstanding at June 30,
2000 at a weighted average exercise price of $7.62 per share issued under our
stock option plans.

15
<PAGE> 19

DILUTION

The net tangible book value of our common stock at June 30, 2000 was
approximately $31.4 million, or approximately $2.90 per share of common stock.
After giving effect to the sale of 2,500,000 shares of common stock in this
offering at an assumed price of $55.63 per share and after deduction of the
underwriting discount and estimated offering expenses, our net tangible book
value after the offering would have been approximately $161.8 million, or $12.11
per share.

Net tangible book value per share before the offering has been determined
by dividing net tangible book value (total tangible assets less total
liabilities) at June 30, 2000 by the number of shares of common stock
outstanding at June 30, 2000. The offering will result in an increase in net
tangible book value of $9.21 per share to existing investors and an immediate
dilution of $43.52 per share to new investors, or approximately 78% of the
assumed offering price of $55.63 per share. Dilution is determined by
subtracting net tangible book value per share after the offering from the
assumed public offering price. The following table illustrates this calculation
of per share dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $55.63
Net tangible book value per share as of June 30, 2000..... $2.90
Increase per share attributable to new investors.......... 9.21
-----
Net tangible book value per share after this offering....... 12.11
------
Dilution per share to new investors......................... $43.52
======
</TABLE>

These calculations do not assume exercise of stock options outstanding at
June 30, 2000. At June 30, 2000, there were 1,746,609 shares of common stock
issuable upon exercise of outstanding stock options at a weighted average
exercise price of $7.62 per share. To the extent that any of these options are
exercised, there will be further dilution to new investors.

16
<PAGE> 20

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

This section presents our historical financial data. You should read
carefully the financial statements included in this prospectus, including the
notes to the financial statements, and Management's Discussion and Analysis of
Financial Condition and Results of Operations. The statement of operations data
for the years ended December 31, 1997, 1998 and 1999 and the balance sheet data
as of December 31, 1998 and 1999 have been derived from our financial statements
that have been audited by Ernst & Young LLP, independent auditors, and are
included elsewhere in this prospectus. The statement of operations data for the
years ended December 31, 1995 and 1996 and the balance sheet data as of December
31, 1995, 1996 and 1997 have been derived from financial statements that have
been audited by Ernst & Young LLP, and are not included elsewhere in this
prospectus. The statement of operations data for the six months ended June 30,
1999 and 2000 and the balance sheet data as of June 30, 2000 have been derived
from our unaudited financial statements included elsewhere in this prospectus
and, in the opinion of management, include all material adjustments (consisting
of normal recurring adjustments) necessary for a fair presentation of the
results of operations for such periods and financial condition as of such dates.
Historical results are not necessarily indicative of future performance. See the
notes to the financial statements for an explanation of the method used to
determine the number of shares used in computing basic and diluted net income
(loss) per share.

<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
REVENUES:
Net sales............... $ 151 $ -- $ 2,628 $ 1,097 $ 4,839 $ 1,434 $ 6,097
Product development fees
and licensing......... 684 1,472 2,282 6,141 7,818 3,383 4,391
Royalties............... -- -- -- 374 735 194 979
-------- -------- -------- -------- -------- -------- --------
Total revenues............ 835 1,472 4,910 7,612 13,392 5,011 11,467
-------- -------- -------- -------- -------- -------- --------
OPERATING EXPENSES:
Cost of goods sold...... 240 -- 4,376 4,476 7,546 2,968 6,725
Research and product
development........... 6,505 5,403 3,364 3,307 4,388 1,827 2,217
Selling, general and
administrative........ 3,658 2,909 3,487 3,138 2,836 1,444 1,849
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses................ 10,403 8,312 11,227 10,921 14,770 6,239 10,791
-------- -------- -------- -------- -------- -------- --------
Other income, net......... 461 494 479 122 116 44 266
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
cumulative effect of a
change in accounting
principle............... (9,107) (6,346) (5,838) (3,187) (1,262) (1,184) 942
Cumulative effect of a
change in accounting
principle, net of income
taxes................... -- -- -- -- -- -- (799)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)......... $ (9,107) $ (6,346) $ (5,838) $ (3,187) $ (1,262) $ (1,184) $ 143
======== ======== ======== ======== ======== ======== ========
</TABLE>

17
<PAGE> 21

<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) per
share:
Basic
Net income (loss) per
share before
cumulative effect of
a change in
accounting
principle........... $ (1.16) $ (.72) $ (.61) $ (.33) $ (.13) $ (.12) $ .09
Net loss per share
from cumulative
effect of a change
in accounting
principle........... -- -- -- -- -- -- (.08)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per
basic share........... $ (1.16) $ (.72) $ (.61) $ (.33) $ (.13) $ (.12) $ .01
======== ======== ======== ======== ======== ======== ========
Diluted
Net income (loss) per
share before
cumulative effect of
a change in
accounting
principle........... $ (1.16) $ (.72) $ (.61) $ (.33) $ (.13) $ (.12) $ .08
Net loss per share
from cumulative
effect of a change
in accounting
principle........... -- -- -- -- -- -- (.07)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per
diluted share......... $ (1.16) $ (.72) $ (.61) $ (.33) $ (.13) $ (.12) $ .01
======== ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding:
Basic................... 7,822 8,827 9,519 9,610 9,615 9,610 10,376
Diluted................. 7,822 8,827 9,519 9,610 9,615 9,610 11,393
</TABLE>

<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------- As of
1995 1996 1997 1998 1999 June 30, 2000
------- -------- -------- -------- -------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments....... $ 3,559 $ 10,263 $ 4,423 $ 2,723 $ 2,481 $ 15,695
Total assets............... 15,519 22,065 17,328 14,916 19,270 37,456
Accumulated deficit........ (29,259) (35,660) (41,527) (44,715) (45,977) (45,834)
Total stockholders'
equity................... 14,282 21,021 15,837 12,656 11,574 31,647
</TABLE>

18
<PAGE> 22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and
results of operations should be read together with "Selected Financial Data" and
our financial statements and related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including but not limited to those set forth under "Risk
Factors" and elsewhere in this prospectus.

OVERVIEW

We develop and manufacture pharmaceutical products based on our proprietary
OraSolv and DuraSolv fast dissolve technologies. We currently have collaborative
agreements with six pharmaceutical companies regarding a variety of potential
products, with an emphasis on prescription products. We currently manufacture
six commercial products using our fast dissolve technologies. These products
include four formulations of Triaminic for Novartis, Tempra for Bristol-Myers
Squibb and Zomig for AstraZeneca. We are also currently developing other drug
delivery technologies. We operate within a single segment, the development and
manufacture of fast dissolve and enhanced-absorption oral drug delivery systems.
Our revenues are comprised of three components, including net sales of products
we manufacture for pharmaceutical companies using our proprietary fast dissolve
technologies, product development fees and licensing revenues for development
activities we conduct through collaborative agreements with pharmaceutical
companies, and royalties on the sales of products we manufacture, which are sold
by pharmaceutical companies under licenses from us.

Revenues from product sales and from royalties will fluctuate from quarter
to quarter and from year to year depending on, among other factors, demand by
consumers for the products we produce, new product introductions, the seasonal
nature of some of the products we produce to treat seasonal ailments,
pharmaceutical company ordering patterns and our production schedules. Our
ability to generate product sales and royalty revenues may be constrained by our
manufacturing capacity. We expect our second production line, now being
developed, to be operational in the second half of 2001. Revenues from product
development fees and licensing revenue will fluctuate depending on, among other
factors, the number of new collaborative agreements that we enter into, the
number and timing of product development milestones that we achieve under
collaborative agreements and the level of our development activity conducted for
pharmaceutical companies.

RESULTS OF OPERATIONS

SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 2000

Revenues. Our total revenues increased 129% from $5.0 million in the first
half of 1999 to $11.5 million in the first half of 2000. The increase of $6.5
million was due primarily to higher sales volume of commercial products. All
three components of total revenues increased for the first half of 2000 in
comparison to the same period in 1999.

Revenues from net sales of products using our drug delivery technologies
increased 325% from $1.4 million in the first half of 1999 to $6.1 million in
the first half of 2000. The increase of $4.7 million was due primarily to
increased shipments of Triaminic to Novartis. Triaminic accounted for 93% of
product sales in both the six-month period ended June 30, 1999 and the six-month
period ended June 30, 2000. We expect revenues from net sales of products using
our drug delivery technologies to increase in the second half of 2000.

Revenues from product development fees and licensing increased 30% from
$3.4 million for the first half of 1999 to $4.4 million for the first half of
2000. Licensing revenues in 1999

19
<PAGE> 23

are not directly comparable to 2000 due to a change in accounting policy for
up-front license fees resulting from the implementation of Securities and
Exchange Commission Staff Accounting Bulletin No. 101, or SAB 101. During the
first half of 2000, licensing revenues included milestone payments that were
earned under agreements with American Home Products and N.V. Organon. In
addition, we entered into a Development, License and Supply Agreement with
Schwarz Pharma during the second quarter of 2000 and received an up-front
license fee, which was deferred and will be recognized as revenue in the second
half of 2000. Licensing revenues for the six-month period ended June 30, 2000
include amortization of deferred revenue of $649,000 resulting from
implementation of SAB 101 in the second quarter of 2000. Product development
fees and licensing revenues in subsequent quarters will depend on our success in
signing new license and development agreements with pharmaceutical companies and
on expected FDA regulatory approvals for fast dissolving formulations of Remeron
and Zomig.

Revenues from royalties increased from $194,000 for the first half of 1999
to $1.0 million for the first half of 2000. The increase was due primarily to
increased sales of Triaminic by Novartis in the U.S., where it was introduced in
the second quarter of 1999, and sales by AstraZeneca of Zomig Rapimelt, which
was introduced in several countries in Europe during the third quarter of 1999.

Cost of goods sold. Cost of goods sold increased 127% from $3.0 million
for the first half of 1999 to $6.7 million for the first half of 2000. The
increase was due primarily to higher Triaminic unit volumes being manufactured
and shipped to Novartis and due to costs incurred to establish multi-shift
production capabilities. We expect cost of goods sold to increase as a result of
expected unit volume increases in subsequent quarters.

Gross profit margins on product sales were negative for the six-month
periods ended June 30, 1999 and June 30, 2000. Negative margins in the six-month
period ended June 30, 1999 related primarily to excess production capacity and
our sales of low-margin, over-the-counter products. Negative margins in the
six-month period ended June 30, 2000 related to both the weighting of
low-margin, over-the-counter products in our sales mix and costs incurred to
establish multi-shift production capabilities. Future gross profit margins will
depend primarily on the pricing of our products, our ability to effectively use
our manufacturing and plant capacity and changes in our product lines and mix of
products.

Research and product development expense. Research and product development
expenses increased 21% from $1.8 million for the first half of 1999 to $2.2
million for the first half of 2000. The increase was due primarily to increased
levels of product development activities and expenses related to an OraVescent
clinical trial, which commenced late in the first quarter of 2000. We expect
research and product development expenses to increase in subsequent quarters as
we continue to develop our drug delivery technologies.

Selling, general and administrative expense. Selling, general and
administrative expenses increased 28% from $1.4 million for the first half of
1999 to $1.8 million for the first half of 2000. The increase was due primarily
to marketing and related consulting costs associated with our business
development efforts. We expect selling, general and administrative expenses to
increase in subsequent quarters to support our expected increased production
levels and business activity.

Other income, net. Other income increased from $44,000 in the first half
of 1999 to $267,000 in the first half of 2000. Other income consists primarily
of interest income on invested funds, net of interest expense on bank lines,
loan agreements and capitalized leases. The increase in other income was due
primarily to higher balances of invested funds.

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<PAGE> 24

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

Revenues. Our total revenues were $4.9 million in 1997, compared to $7.6
million in 1998 and $13.4 million in 1999. Revenues from AstraZeneca, N.V.
Organon and Novartis together represented 30%, 72% and 85% of our total revenues
in 1997, 1998 and 1999, respectively. The increases in revenues in each year
were due primarily to increased development activity for new products that
resulted in significantly higher product development fees and licensing revenue.
In 1999, total revenues also increased due to higher sales volume of commercial
products.

Revenues from net sales of products using our drug delivery technologies
were $2.6 million in 1997, compared to $1.1 million in 1998 and $4.8 million in
1999. The decrease from 1997 to 1998 was due primarily to the decision by a
pharmaceutical company to discontinue U.S. distribution of a product line. The
increase from 1998 to 1999 was due primarily to increased shipments to Novartis
that began in the second quarter of 1999.

Product development fees and licensing revenues were $2.3 million in 1997,
compared to $6.1 million in 1998 and $7.8 million in 1999. The increase from
1997 to 1998 was due primarily to our increased development activity for
proposed new products and the achievement of development milestones for
Novartis, AstraZeneca and Schering-Plough. The increase from 1998 to 1999 was
due primarily to our increased development activity for proposed new products
and the achievement of development milestones for N.V. Organon and AstraZeneca.

We received no royalty revenue in 1997. Royalties were $374,000 in 1998,
compared to $735,000 in 1999. The increase from 1998 to 1999 was due to
increased sales by Novartis of Triaminic. Royalties paid by Bristol-Myers Squibb
in 1998 and 1999 on sales of Tempra were based on annual minimum contractual
payments, which are expected to expire in 2002.

Cost of goods sold. Cost of goods sold was $4.4 million in 1997, compared
to $4.5 million in 1998 and $7.5 million in 1999. Cost of goods sold from 1997
to 1998 was approximately the same even though production unit volumes
decreased, principally due to an increase in manufacturing overhead in 1998. The
increase from 1998 to 1999 was principally due to an increase in sales of
Triaminic products to Novartis.

Gross margins on product sales from 1997 through 1999 were negative because
we had significant excess production capacity.

Research and product development expense. Research and product development
expenses were $3.4 million in 1997, compared to $3.3 million in 1998 and $4.4
million in 1999. From 1997 to 1998, these expenses were consistent, as the level
of product development activities between years was comparable. The increase
from 1998 to 1999 was due primarily to increased development activity on fast
dissolve prescription products for N.V. Organon and American Home Products.

Selling, general and administrative expense. Selling, general and
administrative expenses were $3.5 million in 1997, compared to $3.1 million in
1998 and $2.8 million in 1999. The decline in these expenses year over year was
due primarily to a restructuring of management responsibilities, which began in
1996 and ended in 1999, resulting in a general reduction in management headcount
and related expenses.

Other income, net. Other income was $479,000 in 1997, compared to $122,000
in 1998 and $116,000 in 1999. Other income consists primarily of interest income
on invested funds, net of interest expense on bank lines, loan agreements and
capitalized leases. Other income has declined since 1997 as we used cash to fund
business operations and our level of invested funds decreased.

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<PAGE> 25

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations to date primarily through private and
public sales of equity securities and revenues from product sales, product
development fees and licensing revenues and royalties.

Working capital increased from $4.2 million at December 31, 1999 to $20.7
million at June 30, 2000. The increase was due primarily to the $19.4 million in
net proceeds we received from the private placement of 1,100,000 shares of our
common stock in March 2000, partially offset by approximately $4.9 million in
expenditures for capital improvements to our manufacturing facility. We invest
excess cash in interest-bearing money market accounts and investment grade
securities.

In December 1999, we received a $3.5 million unsecured loan from
AstraZeneca. We repaid the loan, with accrued interest of $153,000, in September
2000 and obtained a release from AstraZeneca of all further liabilities and
obligations under the agreement related to the loan.

We plan to spend approximately $6.0 to $8.0 million over the next twelve
months to complete various improvements to our Eden Prairie manufacturing
facility, including construction of a second production line. During the next
twelve months, we also expect to use a portion of the proceeds from this
offering to complete the planning for, and commence the construction of, a
second manufacturing and distribution facility. We expect this facility to be
operational in 2003. In addition, we expect to use a portion of the proceeds
from this offering to fund additional product development activities related to
our OraVescent technology, as well as to acquire new technologies. We believe
that our cash and cash equivalents and marketable securities, together with
expected revenues from operations and the net proceeds from this offering, will
be sufficient to meet our anticipated capital requirements for the foreseeable
future. However, we may require additional funds to support our working capital
requirements or for other purposes and may seek to raise such additional funds
through public or private equity financings or from other sources. We cannot be
certain that additional financing will be available on terms favorable to us, or
at all, or that any additional financing will not be dilutive.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 is effective for fiscal years beginning in 2000. We do not currently hold
derivative instruments or engage in hedging activities.

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<PAGE> 26

In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in
Financial Statements." SAB 101 requires that up-front license fees received from
research collaborators be recognized over the term of the agreement unless the
fee is in exchange for products delivered or services performed that represent
the culmination of a separate earnings process. We implemented SAB 101 in the
quarter ended on June 30, 2000. Implementation of SAB 101 was retroactive to
January 1, 2000. We reported a charge to earnings of $799,000 for the cumulative
effect of a change in accounting principle, which is included in income for the
six-month period ended June 30, 2000. The effect of the change on the six-month
period ended June 30, 2000 was to increase income before cumulative effect of
the change in accounting principle by $649,000 or $0.06 per diluted share. For
the six-month period ended June 30, 2000, we recognized $799,000 in revenue that
is included in the cumulative effect adjustment as of January 1, 2000.

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<PAGE> 27

BUSINESS

- ease of administration;

- improved dosing compliance; and

- increased dosage accuracy compared to liquid formulations.

We generate revenue from net sales of products we manufacture for
pharmaceutical companies using our proprietary fast dissolve technologies,
product development fees and licensing revenues for development activities we
conduct thorough collaborative agreements with pharmaceutical companies, and
royalties on the sales of products we manufacture, which are sold by
pharmaceutical companies under licenses from us.

In addition to our proprietary OraSolv and DuraSolv fast dissolve
technologies, we are developing several new drug delivery technologies. Our
OraSolv SR technology adds sustained release properties to the fast dissolve and
taste masking attributes of our OraSolv technology. We also are developing new
OraVescent drug delivery technologies that include OraVescent SL for drug
delivery under the tongue and OraVescent BL for drug delivery between the gum
and the cheek. An additional technology, OraVescent SS, is designed for
site-specific administration, which may allow for an active drug ingredient to
be transported to a specific part of the gastrointestinal tract where it is
released for absorption. We designed the OraVescent technologies to improve the
transport of poorly absorbed active drugs across mucosal membranes in the oral
cavity or the gastrointestinal tract.

INDUSTRY OVERVIEW

DRUG DELIVERY METHODS

Historically, pharmaceutical products were available primarily through two
delivery methods, oral dosage forms or injections. Recently, drug delivery
technologies have been developed for the enhanced delivery of a variety of
therapeutic compounds, improving safety, efficacy, ease of
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<PAGE> 28

patient use and patient compliance. In addition, drug delivery technologies can
be used to expand markets for existing products, as well as to develop new
products. Industry sources have estimated the total sales of branded products
using drug delivery technologies to be $40 billion in 1998, of which
approximately $22 billion were administered orally. These sources also predict
that the drug delivery market will grow at a compound annual growth rate of 10%
per year over the next five years.

Fast dissolve technology has recently emerged as an important type of drug
delivery technology that enables tablets to dissolve quickly in the mouth
without the use of water or chewing. Children and the elderly, as well as others
with certain physiological or medical conditions, frequently experience
difficulty in swallowing tablets. Although fast dissolve does not generally
affect speed of absorption, it may improve compliance with a prescribed drug
regimen, as fast dissolve medications are easier to swallow and may taste better
than non-taste masked alternatives. In addition, fast dissolve technology may
improve dosing accuracy relative to liquid formulations. Finally, and most
importantly, fast dissolve technology may provide a significant commercial
benefit, as studies we have conducted indicate that people often prefer it to
conventional tablets and other formulations.

TRENDS AFFECTING THE DRUG DELIVERY INDUSTRY

Several significant trends in the health care industry have important
implications for drug delivery companies. These trends include:

Drug Patent Expirations. Over the next five years, a number of branded
drugs with total 1999 sales exceeding $25 billion will lose patent protection.
In order to maintain their revenues, large pharmaceutical companies will seek to
defend against generic competition by enhancing existing drug products with drug
delivery technologies. These enhancements may include increased efficacy,
reduced side effects and more convenient administration. We believe that
pharmaceutical companies will use drug delivery systems to preserve or increase
market share, enhance therapeutic performance and, in some cases, extend product
life cycles.

Direct-to-Consumer Marketing. Pharmaceutical companies spent an estimated
$2 billion in the U.S. on direct-to-consumer marketing and promotion of
prescription medications in 1999 and are expected to increase that spending to
approximately $6 billion annually by 2005. We believe that the significant trend
towards direct-to-consumer marketing may focus consumers on patient-friendly
pharmaceutical products, including products that incorporate innovative drug
delivery technologies, such as fast dissolve. This focus may encourage
pharmaceutical companies to develop products incorporating these technologies.

Influence of Managed Care. Many managed care plans and other insurers
actively manage the costs of prescription drugs for their clients by monitoring
patient dosing compliance as well as the efficacy, quality and cost of
medications. Payors have demonstrated acceptance of drug delivery technologies,
such as fast dissolve and taste masking, that improve patient compliance.

OUR ORAL DRUG DELIVERY PRODUCTS AND TECHNOLOGIES

Our proprietary products and technologies focus on innovative oral drug
delivery methods that meet the needs of consumers for convenient and effective
medications and the needs of pharmaceutical companies for differentiated
products and accurate dosing methods. Our most developed technologies are our
OraSolv, OraSolv SR and DuraSolv fast dissolve drug delivery technologies. We
have developed all of our fast dissolve technologies internally. We currently
manufacture six products incorporating our proprietary fast dissolve
technologies, of which five products use our OraSolv technology and one product
uses our DuraSolv technology. We have entered into collaborations with
pharmaceutical companies to develop one additional product incorporating our
OraSolv technology and two additional products incorporating our DuraSolv
technology. We are also developing innovative transmucosal oral drug delivery
technologies.
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<PAGE> 29

These technologies include OraVescent SL for drug delivery under the tongue,
OraVescent BL for drug delivery between the gum and the cheek and OraVescent SS
for swallowable site-specific drug delivery in the gastrointestinal tract.

FAST DISSOLVE TECHNOLOGIES

Our two primary fast dissolve oral drug delivery technologies are OraSolv
and DuraSolv. Our OraSolv technology incorporates active drug ingredients in
lightly compacted fast dissolve tablets. The low level of compaction pressure
applied to OraSolv tablets allows larger amounts of taste masked active drug
ingredients to be compressed into the tablets without damage to the taste masked
active drug ingredients. The low level of compaction pressure applied to OraSolv
tablets also allows for a minimal portion of the tablet's contents to be
dedicated to effervescent and other fast dissolve agents, providing OraSolv
tablets with the capacity for high doses of taste masked active ingredients. Our
DuraSolv technology uses higher compaction pressures to produce fast dissolve
tablets incorporating active drug ingredients in a more durable fast dissolve
tablet. Due to their greater durability, DuraSolv tablets are easier to handle
and package, and may have a lower cost to produce, than OraSolv tablets.
DuraSolv is best suited for applications involving low doses of active drug
ingredients.

OraSolv. Our OraSolv technology is an oral dosage form that combines taste
masked drug ingredients with a fast dissolving, low-effervescence system. The
OraSolv tablet dissolves quickly in the mouth without chewing or the need for
water. We currently manufacture four OraSolv formulations of Triaminic Softchews
for Novartis and one OraSolv formulation of Tempra FirsTabs for Bristol-Myers
Squibb. In addition, we are developing an OraSolv formulation of N.V. Organon's
Remeron, which we expect will be approved in the fourth quarter of 2000 by the
FDA for marketing.

To create our fast dissolving tablets, we combine the taste masked active
drug ingredients with fast dissolving tablet materials, which can include a
variety of flavoring, coloring and sweetening agents, all of which are generally
recognized as safe materials, and commonly used tablet ingredients, such as
binding agents and lubricants. We add an effervescent system, composed of a dry
acid and a dry base, to the tablet formulation to cause a mild effervescent
reaction when the tablet contacts saliva. This reaction accelerates the
disintegration of the tablet through the release of carbon dioxide. As our
OraSolv tablet dissolves, it releases the coated particles of the drug into the
saliva, forming a suspension of the drug in the saliva, which is then swallowed.

We mask the taste of the active drug ingredients in our OraSolv products to
prevent or minimize unpleasant tastes. The active drugs are taste masked using a
variety of coating techniques. The coating materials prevent the active drug
substance in the OraSolv tablet from contacting the patient's taste buds, and
provide for the immediate or controlled release of the active ingredient in the
stomach. The taste masking process is effective with a wide variety of active
ingredients, in both prescription and non-prescription products.

DuraSolv. The fast dissolve, taste masking and sustained release
attributes of OraSolv are also available with our DuraSolv technology. DuraSolv
is a fast dissolve oral dosage system that we designed to improve manufacturing
efficiency and reduce production costs. DuraSolv is a higher compaction, more
durable, solid oral dosage system formulated to achieve the primary benefits of
the OraSolv fast dissolve dosage form. However, DuraSolv is capable of being
packaged in conventional packaging such as foil pouches or bottles at much
higher production rates and with lower packaging costs. DuraSolv is an
appropriate technology for drug products requiring lower levels of active
ingredient. Consumer testing by us and our pharmaceutical company partners has
demonstrated high acceptability of this technology. We recently were granted a
U.S. patent for the DuraSolv technology.

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<PAGE> 30

A DuraSolv formulation of AstraZeneca's Zomig Rapimelt is currently being
marketed in Europe. We expect the FDA to approve this product for marketing in
the U.S. in early 2001. In addition, we are currently developing DuraSolv
formulations of new products for American Home Products, AstraZeneca and Schwarz
Pharma.

Sustained Release. Our OraSolv SR technology combines OraSolv technology
with a sustained release formulation to extend the period of the drug's
effectiveness. In preparing OraSolv SR formulations, we incorporate time-release
beads into our tablets, to provide the benefits of a sustained or controlled
release of drug ingredients with the improved convenience of a fast dissolve
formulation that allows easy swallowing of the tablet. To date, we have not
commercialized a product incorporating our OraSolv SR technology.

PakSolv. PakSolv is our proprietary packaging system for soft, brittle
tablets. PakSolv is a light and moisture-proof packaging system that is used for
all of our OraSolv products. We have applied, and the U.S. Patent and Trademark
Office has allowed claims, for a patent for our PakSolv packaging system.

TRANSMUCOSAL TECHNOLOGIES

Our OraVescent technologies are based on an enhanced-absorption oral drug
delivery system intended to improve the transport of active drug ingredients
across mucosal membranes. These technologies may improve the bioavailability,
and accelerate the onset of action, of some drugs. We have conducted the first
human testing and have initiated two prototype projects with pharmaceutical
company partners using elements of these technologies. Our initial human
clinical study compared our OraVescent BL formulation to a similar formulation
without the absorption enhancing characteristics and to a currently marketed
formulation of the same active drug ingredient. We believe the preliminary
results of this study demonstrate OraVescent BL's superior absorption
characteristics across mucosal membranes when compared to the other two
formulations. We expect to perform additional human clinical testing in 2001
using the same active drug ingredient, as well as other active drug ingredients.
We have applied for several U.S. and foreign patents for our OraVescent
technologies. We have received two notices of allowance with respect to a U.S.
patent application for our OraVescent technologies.

BUSINESS STRATEGY

Our objective is to become a leader in fast dissolve and other innovative
oral drug delivery technologies. Our strategy to achieve this objective
incorporates the following principal elements:

Partner with pharmaceutical companies to market our technologies. We
pursue collaborative relationships that leverage the sales and marketing
capability of our pharmaceutical company partners, allowing us to focus on
technology development and manufacturing. We believe that pharmaceutical
companies are attracted to our technologies for their significant advantages
over our competition. Those advantages include excellent taste masking,
applicability to a wide range of pharmaceutical compounds, lower product cost,
enhanced convenience and other patient benefits. Our technologies also may
enable pharmaceutical companies to differentiate their products in the market,
facilitating the extension of product life cycles. By demonstrating the
advantages and benefits of our technologies through our collaborations with
leading pharmaceutical companies, we intend to establish our technology as the
preferred fast dissolve drug delivery solution.

Maximize the value of OraSolv and DuraSolv fast dissolve technologies. We
leverage our technologies by actively identifying and marketing to
pharmaceutical companies whose prescription products would benefit by
incorporating our fast dissolve technologies. We believe there are a large
number of pharmaceutical products that could benefit from our technologies.
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<PAGE> 31

At times, in an effort to expand the market for our technologies, we develop
what we believe will be promising applications using active ingredients that
have already been successfully marketed by leading pharmaceutical companies.
When these development efforts produce positive results, we market the new
formulation to the pharmaceutical companies.

Develop and commercialize new, innovative drug delivery technologies. We
intend to develop new drug delivery technologies based on our expertise in fast
dissolve and taste masking technologies. Our OraVescent technology represents an
extension of this expertise, and we will continue to develop this and other
novel drug delivery technologies. We also intend to acquire or license
attractive new technologies as we encounter such opportunities. In addition, we
will seek patents and other intellectual property protection to ensure our
ability to commercialize new technologies as we develop them.

Enhance and expand our manufacturing capabilities. In an effort to control
our technologies and the quality of our products, we manufacture all of our
products internally. We are currently adding a second manufacturing line to our
Eden Prairie facility in order to meet production requirements for our current
pharmaceutical company partners. On the basis of expected future partnerships
and associated volume requirements, we plan to develop a second state-of-the-art
manufacturing plant. Adding a second manufacturing site will help mitigate
manufacturing risks and will enhance our ability to market to potential
pharmaceutical company partners desiring dual-site production.

AGREEMENTS WITH PHARMACEUTICAL COMPANY PARTNERS

Our business development efforts focus on entering into development,
licensing and manufacturing supply agreements with pharmaceutical companies. Our
agreements provide that the collaborating pharmaceutical company is responsible
for marketing and distributing the developed products either worldwide or in
specified markets or territories. Our collaborative agreements typically begin
with a product prototyping phase. If successful, this phase may be followed by
an agreement to complete development of the product. We subsequently enter into
license and manufacturing supply agreements to commercialize the product. In
some cases, we may develop product prototypes internally and enter directly into
development, manufacturing or license agreements for commercialization of those
products.

We currently have development and license agreements with six
pharmaceutical company partners. In each of these agreements, we have received
an up-front fee, which is a non-refundable payment for future product
development activities. We have also received milestone and development payments
under each of these agreements for achieving certain product development
milestone events and for completing certain predetermined product development
activities, as defined in the agreements. In the aggregate for all of our
agreements with pharmaceutical companies, we were paid approximately $1.9
million, $6.3 million and $8.1 million in 1997, 1998 and 1999, respectively, for
up-front fees, milestone and development payments and royalties.

We have manufacturing supply agreements in place with Novartis for
Triaminic, American Home Products for loratadine and Schwarz Pharma for an
undisclosed product and we are negotiating manufacturing supply agreements with
N.V. Organon for Remeron and with AstraZeneca for Zomig. We do not have a
manufacturing supply agreement with Bristol-Myers Squibb for Tempra. Generally,
the supply agreements define the terms by which we will manufacture and release
for shipment a product for a pharmaceutical company partner and the obligations
both parties have relating to payment for products and services, as well as
defining the process of communicating and agreeing to expected production
requirements and other economic terms for product supply. These agreements have
varying terms of duration ranging from three to 10 years. In general, our
pharmaceutical company partners direct our production and shipments. In the
pharmaceutical industry, parties to manufacturing supply agreements

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generally consider these arrangements long-term due to the complexity and
lead-time required to qualify a new manufacturer with the FDA. The qualification
of a new manufacturer can take up to a year while the new manufacturer completes
scale-up, produces validation lots and implements stability programs. We do not
consider the backlog for our products to be significant.

We currently manufacture six commercial fast dissolve products for three
major pharmaceutical company partners. Revenue from sales of our products were
approximately 54%, 14% and 36% of our total revenue in 1997, 1998 and 1999,
respectively. Our revenue also includes product development fees and licensing
revenue for development activities, which were approximately 46%, 81% and 58% of
our total revenue in 1997, 1998 and 1999, respectively. We also receive revenue
from royalties on product sales, which were approximately 5% of our total
revenue in 1998 and 1999. We received no revenue from royalties on product sales
in 1997. Less than 10% of our total revenues in 1997, 1998 and 1999 were derived
from product development and licensing activities outside the U.S.

The table below sets forth the partner, product brand name or active
ingredient, therapeutic application, technology and current status for each of
our major collaborative agreements.

<TABLE>
<CAPTION>
Product
Pharmaceutical Brand Name
Company Partner or Active Ingredient Therapeutic Application Technology Current Status
--------------- -------------------- --------------------------- ---------- ---------------------------
<S> <C> <C> <C> <C>
American Home Loratadine Non-sedating antihistamine DuraSolv Regulatory submission
Products (generic prescription) accepted by the FDA
AstraZeneca Zomig Rapimelt Anti-migraine (branded DuraSolv Regulatory submission
prescription) accepted by the FDA and
commercially available in
Europe
Bristol-Myers Tempra FirsTabs Pediatric pain reliever OraSolv Commercially available in
Squibb (over-the-counter) Canada
N.V. Organon Remeron SolTab Anti-depression (branded OraSolv Regulatory submission
prescription) accepted by the FDA
Novartis Triaminic Softchews Pediatric cold, cough and OraSolv Commercially available in
allergy (over-the-counter) the U.S. and Canada
Schwarz Pharma Undisclosed Undisclosed (branded DuraSolv Under development
prescription)
</TABLE>

AMERICAN HOME PRODUCTS

In January 2000, we entered into an exclusive development and license
agreement and a supply agreement with an affiliate of American Home Products for
a fast dissolve formulation of loratadine, a prescription non-sedating
antihistamine product. Loratadine is the active drug compound in Claritin and
Claritin Reditabs, for which Schering Corporation has a U.S. patent that is
scheduled to expire in 2002. The FDA granted Schering market exclusivity for six
months beyond June 2002 and Schering is seeking an extension of its patent.
American Home Products is expected to market our DuraSolv formulation of
loratadine as a generic alternative to Claritin Reditabs in 2003, unless
Schering is successful in its efforts to secure extended exclusive rights to
market Claritin. Based on the anticipated life of our patents, we expect the
development and license agreement to expire in the U.S. market in 2018. The
supply agreement expires on the tenth anniversary of the first commercial
shipment of product. However, either agreement may be terminated by American
Home Products after a six month notice or by either party upon the occurrence of
a default event, such as a material breach of the agreement, that is not cured
by the defaulting party within 60 days. Under the development and license
agreement, we receive development and milestone payments upon achieving specific
milestones and will receive royalties on any sales of the prescription product.
Under the supply agreement, we receive payments based on our costs of
manufacturing the products. The U.S.

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regulatory submission for our DuraSolv formulation of loratadine was accepted
for filing by the FDA in the second quarter of 2000. For the three years ending
December 31, 1999, we received approximately $1.0 million in development
payments from American Home Products. Revenues from American Home Products
represented 7% of total revenues in 1999.

ASTRAZENECA

In September 1997, we entered into a development and license option
agreement with an affiliate of AstraZeneca to develop a fast dissolve
formulation of AstraZeneca's prescription anti-migraine drug, Zomig. Under the
agreement, we received product development and option fees. The development and
license option agreement terminated in May 1999 when we entered into a
definitive global license agreement with an affiliate of AstraZeneca. Under the
license agreement, which is exclusive for the class of anti-migraine compounds
of which Zomig is a member, we receive license and product development fees,
payments upon achieving specific milestones, and royalties on any sales of the
prescription product. Based on the anticipated life of our patents, we expect
the license agreement to expire for the U.S. market in 2018. However, the
license agreement may be terminated by AstraZeneca after a notice of 180 days or
by either party upon the occurrence of a default event, such as a material
breach of the agreement, that is not cured by the defaulting party within 30
days. In addition, we have the right to terminate the license agreement if
AstraZeneca fails to meet certain regulatory and commercialization obligations.
Upon the failure of AstraZeneca to meet minimum sales requirements, or to pay
the difference between the royalty amount due on the minimum sales requirement
and the royalty amount due on actual sales, we may convert AstraZeneca's
exclusive license into a non-exclusive license. In June 1999, the first European
regulatory approval of the DuraSolv formulation of AstraZeneca's Zomig Rapimelt
was received. In September 1999, AstraZeneca launched Zomig Rapimelt in Europe
and it has been approved for marketing in eleven European counties. The U.S.
regulatory submission for our DuraSolv formulation of Zomig Rapimelt was
accepted for filing by the FDA in the second quarter of 2000. For the three
years ending December 31, 1999, we received approximately $5.2 million in net
sales of products, up-front fees, milestone and development payments from
AstraZeneca. Revenues from AstraZeneca represented 18% of total revenues in
1999. We are currently negotiating a supply agreement with AstraZeneca.

BRISTOL-MYERS SQUIBB

In June 1997, we signed a multi-country, non-exclusive license agreement
with Bristol-Myers Squibb, covering multiple products to be developed using the
OraSolv technology. We began manufacturing commercial quantities of the OraSolv
dosage form of Tempra, Bristol-Myers Squibb's pediatric pain reliever, in 1997.
Mead Johnson, an affiliate of Bristol-Myers Squibb, introduced Tempra in Canada
during 1997. During 1998, Bristol-Myers Squibb decided to discontinue marketing
Tempra in the U.S., but expects to continue marketing Tempra in Canada through
Mead Johnson. In the fourth quarter of 1998, the license agreement was amended
to return to us the rights to pediatric pain relievers in the U.S. Bristol-Myers
Squibb may terminate the license agreement at anytime by giving us a notice of
60 days and paying us a termination fee equal to the minimum annual royalty
amount due for the year of termination less any royalty payments made during the
same year. Upon the occurrence of a default event, such as a material breach of
the agreement, that is not cured by the defaulting party within 40 days, either
party may terminate the agreement. We expect to continue to receive at least
minimum royalty payments in connection with sales in Canada through 2002. For
the three years ending December 31, 1999, we received approximately $3.9 million
in net sales of products, development payments, and royalties from Bristol-Myers
Squibb. Revenues from Bristol-Myers Squibb represented 4% of total revenues in
1999.

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<PAGE> 34

N.V. ORGANON

In December 1998, we entered into a development and license option
agreement with N.V. Organon, the pharmaceuticals business unit of Akzo Nobel. In
December 1999, after expiration of the development and license option agreement,
we entered into an exclusive license agreement with Organon International and
N.V. Organon for an OraSolv formulation of Remeron, a prescription
anti-depression product. The license agreement expires upon expiration of all
patents covered under the agreement. Based on the anticipated life of our
existing patents, we expect the license agreement to expire in the U.S. market
in 2010. The agreement may be terminated by either party upon the occurrence of
a default event, such as a material breach of the agreement, that is not cured
by the defaulting party within 90 days. In addition, we may terminate the
license agreement upon failure to enter into a supply agreement with N.V.
Organon by the end of December 2000. Under the agreement, we receive license and
product development fees, milestone payments upon achieving specific milestones,
and royalties on any sales of the prescription product. The U.S. regulatory
submission for the OraSolv formulation of Remeron was accepted for filing by the
FDA in the first quarter of 2000. For the three years ending December 31, 1999,
we received approximately $3.6 million in up-front fees, milestone and
development payments from N.V. Organon. Revenues from N.V. Organon represented
25% of total revenues in 1999. We are currently negotiating a supply agreement
with N.V. Organon.

NOVARTIS

In November 1997, we entered into a development and license option
agreement with Novartis Consumer Health, Inc. that covers the use of OraSolv
technology with the Novartis Triaminic non-prescription pediatric cold, cough
and allergy product line. We received option and product development fees in
exchange for the license option and development work. In July 1998, after
expiration of the development and license option agreement, we signed a license
and a supply agreement with Novartis which is exclusive for pediatric cold,
cough and allergy in the U.S. and Canada. In addition, the license agreement
includes an option for a second exclusive license covering additional products,
and the supply agreement includes an option for Novartis to manufacture the
product itself or through a third party. The license agreement expires on a
country by country basis upon the later of January 12, 2010 or the expiration of
all patents covered by the agreement. Based on the anticipated life of our
patents, we expect the license agreement to expire in the U.S. market in 2010.
The initial term of the supply agreement expires in 2001. Either agreement may
be terminated by either party upon the occurrence of a default event, such as a
material breach of the agreement, that is not cured by the defaulting party
within 90 days for the license agreement or within 60 days for the supply
agreement. In addition, Novartis may terminate the license agreement on or after
July 1, 2003, after giving us a notice of nine months and paying us a
termination fee of $200,000 plus all accrued amounts owed to us under the
agreement. We received product development and milestone payments upon achieving
specific milestones under the agreement, and will receive royalties on any sales
of Triaminic products. Novartis launched three Triaminic products nationally in
July 1999 and launched a fourth Triaminic product during the third quarter of
2000. Through December 31, 1999, we received approximately $9.7 million in net
sales of products, up-front fees, milestone and development payments, and
royalties from Novartis. Revenues from Novartis, which were principally product
sales, represented 42% of total revenues in 1999.

SCHWARZ PHARMA

In June 2000, we entered into an exclusive development, license and supply
agreement with Schwarz Pharma, Inc. to develop and manufacture a DuraSolv
formulation of an undisclosed prescription product for distribution in the U.S.
Under the agreement, we also

31
<PAGE> 35

granted Schwarz an option that, if exercised before December 31, 2000, requires
us to collaborate with Schwarz to develop one additional product. Upon the
failure of Schwarz Pharma to meet minimum sales requirements, we may convert
Schwarz Pharma's exclusive license into a non-exclusive license. Based on the
anticipated life of our patents, we expect the agreement to expire in the U.S.
in 2018. However, the agreement may be terminated by either party upon the
occurrence of a default event, such as a material breach of the agreement, that
is not cured by the defaulting party within 60 days. Under the agreement, we
will receive milestone payments upon achieving specific milestones and will
receive manufacturing revenue and royalties on sales of the prescription
product. A U.S. regulatory submission for our DuraSolv formulation of the
undisclosed prescription product is not required. We expect the product to be
commercially available in the U.S. during the first half of 2001. Through June
30, 2000, we have not earned any revenues under this agreement.

INTELLECTUAL PROPERTY

We actively seek, when appropriate, to protect our products and proprietary
information by means of U.S. and foreign patents, trademarks and contractual
arrangements. We hold seven issued U.S. patents and 14 issued foreign patents
covering our technologies. The core U.S. and European patents relate to our fast
dissolve and taste masking technologies. We also have 35 U.S. and foreign patent
applications pending.

A description of our issued U.S. patents and their dates of expiration are
set forth in the table below. The majority of these patents are
composition-of-matter patents. The actual scope of coverage for a patent is
governed by the specific claims applicable to the patent. The descriptions set
forth below are intended solely to identify patents relevant to various
technologies and are not intended to represent the scope of these patents.

<TABLE>
<CAPTION>
Patented Technologies Expiration Date
--------------------- ---------------
<S> <C>
Core OraSolv fast dissolve technology....................... 2010
The production of compressed effervescent and non-
effervescent tablets using a tableting aid developed by
us........................................................ 2010 and 2012
Effervescent pediatric vitamin and mineral supplement....... 2010
The formulation of a base coated, acid effervescent mixture
manufactured by 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............................................ 2013
Taste masking of micro-particles for oral dosage forms...... 2015
Core DuraSolv fast dissolve technology...................... 2018
</TABLE>

Our success will depend in part on our ability to obtain and enforce
patents for our products, processes and technology, to preserve our trade
secrets and other proprietary information and to avoid infringing the patents or
proprietary rights of others.

In addition to patents, we rely on trade secrets and proprietary know-how
to protect our products, processes and technologies. To protect our rights to
trade secrets and proprietary know-how, we require all employees, consultants
and advisors to sign confidentiality agreements that prohibit the disclosure or
use of confidential information to or by any third party. These agreements also
require disclosure and assignment to us of discoveries and inventions made by
these individuals while devoted to our activities.

RESEARCH AND PRODUCT DEVELOPMENT

Our research and product development efforts are focused on developing new
product applications for our drug delivery technologies and expanding our
technology platform to new

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<PAGE> 36

areas of drug delivery. As of September 30, 2000, we had 27 scientists and other
technicians working on research and product development.

Our research and product development personnel, support systems and
facilities are organized to develop drug delivery formulations from bench-scale
through full-scale commercial production under current good manufacturing
practice conditions. The key goals for our research and product development
efforts include:

- developing innovative drug delivery products and systems that fulfill
pharmaceutical companies' needs;

- developing, expanding and supporting systems to fulfill good
manufacturing practice production at commercial levels required by
pharmaceutical company partners;

- recruiting and training high-quality technical and scientific personnel;
and

- supporting our intellectual property portfolio development.

For the six months ended June 30, 1999 and 2000, we spent approximately
$1.8 million and $2.2 million, respectively, on research and product
development. For the years ended December 31, 1997, 1998 and 1999, we spent
approximately $3.4 million, $3.3 million and $4.4 million, respectively, on
research and product development. We estimate that most of these expenditures
were directly related to product development activities for which we received
fees and licensing revenues from our pharmaceutical company partners.

BUSINESS DEVELOPMENT

We market directly to leading pharmaceutical companies for products that we
believe would benefit from our fast dissolve technologies. Our strategy has been
to leverage the brand names, marketing and sales capabilities of these
pharmaceutical companies to maximize the value of our fast dissolve drug
delivery technologies. We build our credibility with major pharmaceutical
companies by speaking at technical seminars, publishing in technical journals
and hosting booths at pharmaceutical and drug delivery conferences.

We pursue agreements with leading pharmaceutical companies to fund the
development of new products incorporating our drug delivery technologies. Once
specific milestones have been met under these agreements, we generally enter
into license and supply agreements.

MANUFACTURING

Our primary manufacturing facility is located at our headquarters in Eden
Prairie, Minnesota. In 1996, we completed our first production line, which has
an estimated production capacity of 200 to 220 million tablets a year. We
anticipate that our production requirements in 2000 will use substantially all
of our existing capacity. We are developing a second production line using
state-of-the-art material transfer and blending systems and integrated
high-speed tableting and packaging operations, which we expect will at least
double our existing capacity to more than 500 million tablets. We have begun
construction of the second production line and expect to integrate it into our
operations in the second half of 2001. We currently anticipate spending
approximately $6.0 to $8.0 million in total for construction of the second
production line. In addition, we plan to construct a second manufacturing and
distribution facility. We expect this facility to more than double our
production capacity.

In November 1999, we started construction of a coating unit to provide
taste masked active ingredients for our pharmaceutical company partners. We
completed construction and placed the new coating unit into service in July
2000. We expect to commercialize our first coated active ingredient, Remeron, in
the fourth quarter of 2000 for N.V. Organon. We believe our in-house coating
capability will be a key factor in signing new agreements related to
prescription pharmaceutical drugs.

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<PAGE> 37

We currently purchase taste masked active drug ingredients for each of our
non-prescription products from single sources of supply. We expect to continue
to purchase taste masked active ingredients for our non-prescription products.
We believe that all other ingredients used in the manufacture of our products
are readily available from multiple suppliers or from our pharmaceutical company
partners.

PakSolv, our proprietary packaging process, allows high-speed packing of
soft, brittle tablets without breakage, into specially designed protective,
child resistant packages and normal blister packages. We believe that this
technology, which is the subject of two patent applications, gives us a
competitive advantage.

We plan our manufacturing cycles in advance of actual production in order
to address lead times our suppliers may require. We generally do not stock
significant quantities of raw materials for a product in excess of a partner's
orders nor do we manufacture finished product in excess of a partner's orders.

COMPETITION

Competition among pharmaceutical products and drug delivery systems is
intense. Our primary competitors for developing drug delivery systems and
manufacturing the products we develop include other drug delivery, biotechnology
and pharmaceutical companies. Many of these competitors have substantially
greater financial, technological, manufacturing, marketing, managerial and
research and development resources and experience than we have. Our products
compete not only with products employing advanced drug delivery systems, but
also with products employing conventional dosage forms. These competing products
may obtain governmental approval or gain market acceptance more rapidly than our
products. New drugs or future developments in alternative drug delivery
technologies also may provide therapeutic or cost advantages over our current or
future products.

Fast dissolve tablet technologies that compete with our OraSolv and
DuraSolv technologies include the Zydis technology developed by R.P. Scherer
Corporation, a wholly-owned subsidiary of Cardinal Health, Inc., the WOWTab
technology developed by Yamanouchi Shaklee Pharmaceuticals, the Flashtab
technology developed by Laboratories Prographarm and the FlashDose technology
developed by Fuisz Technologies Ltd., a wholly-owned subsidiary of Biovail
Corporation. The Zydis technology is a fast dissolving oral drug delivery system
based on a freeze-dried gelatin tablet. The WOWTab and Flashtab technologies are
fast dissolving technologies used in an oral fast dissolving tablet, which are
similar to our DuraSolv tablet. R.P. Scherer has commercialized its Zydis
technology in several major prescription products in the U.S., including
Claritin Reditabs. We believe that other pharmaceutical companies may be
developing fast dissolve tablet technologies, which may compete with our
technology in the future.

The principal competitive factors in the market for fast dissolving tablet
technologies are compatibility with taste masking techniques, dosage capacity,
drug compatibility, cost, ease of manufacture, patient acceptance and required
capital investment for manufacturing. We believe that our fast dissolving tablet
technologies compete favorably with respect to each of these factors. In a 1997
quantitative consumer study that we conducted, consumers generally preferred the
OraSolv formulation to the Zydis formulation of the same active drug ingredient.
We believe we also offer potential pharmaceutical company partners the largest
selection of oral fast dissolve drug delivery technologies.

GOVERNMENT REGULATION

Numerous governmental authorities in the U.S. and other countries
extensively regulate the activities of pharmaceutical manufacturers. In the
U.S., pharmaceutical products are subject to rigorous regulation by the Food and
Drug Administration. The Federal Food, Drug, and Cosmetic

34
<PAGE> 38

Act and other federal and state statutes and regulations govern, among other
things, the research, development, testing, manufacture, safety, storage, record
keeping, labeling advertising, promotion, marketing and distribution of
pharmaceutical products. If we fail to comply with the applicable requirements,
we may be subject to administrative or judicially imposed sanctions such as
warning letters, fines, injunctions, product seizures or recalls, total or
partial suspension of production, or FDA refusal to approve pending pre-market
approval applications or supplements to approved applications, as well as
criminal prosecution.

FDA approval generally is required before a new drug product may be
marketed in the U.S. Many over-the-counter, or OTC, drug products are exempt,
however, from the FDA's pre-marketing approval requirements. Whether or not
products require FDA approval, drug products remain subject to various ongoing
FDA regulations, including good manufacturing practice requirements, labeling
requirements and warning statements, advertising restrictions related to product
labeling and drug ingredient specifications. Products and their manufacturing
facilities are subject to FDA inspection, and failure to comply with applicable
regulatory requirements may lead to administrative or judicially imposed
penalties.

We expect that our pharmaceutical company partners will seek any required
FDA approvals in connection with the introduction of new products we develop for
them under a collaborative agreement. The FDA submission and approval process
may require significant commitments of our time and resources. The FDA approval
process may delay or prevent the marketing of our products. We cannot be sure
that approvals will be obtained, or that any such approvals will have the scope
necessary for successful commercialization of these products. Even after an
addendum or supplement to a new drug application is approved, existing FDA
procedures may delay initial product shipment and materially reduce the period
during which there is an exclusive right to exploit patented products or
technologies.

Prior to marketing a product internationally, we are likely to be required
to obtain foreign regulatory approval. Foreign approval procedures vary from
country to country and the time required for approval may result in delays in,
or ultimately prevent, the marketing of a product. We expect our pharmaceutical
company partners to obtain any necessary government approvals in foreign
countries. However, we may have to spend considerable amounts of time and
resources to support the submission and approval of these foreign filings. In
addition, our manufacturing facility may be subject to inspections by foreign
agencies, similar to the FDA, to allow for the marketing of our products in a
foreign country.

Our manufacturing facility is registered with the FDA. We must inform the
FDA of every drug product we have in commercial distribution and keep an updated
list of those drugs. Our manufacturing facility also is inspected by the FDA and
must comply with good manufacturing practices regulations at all times during
the manufacture and processing of drug products. The FDA completed inspections
of our Eden Prairie and Brooklyn Park facilities in August 2000, as part of the
pre-approval inspection process for three regulatory submissions currently under
review by the FDA. We were not cited for any significant shortcomings relating
to the pre-approval inspections nor were we cited for any significant
shortcomings in compliance with good manufacturing practices regulations. We
cannot guarantee that any future FDA inspections will proceed without any
compliance issues requiring time and resources to resolve. Our facilities also
must be inspected by, and we have received a license from, the Minnesota Board
of Pharmacy for the manufacture of drug products.

We are subject to regulation under various federal, state and local laws,
rules, regulations and policies regarding, among other things, occupational
safety, environmental protection, the use, generation, manufacture, storage, air
emission, effluent discharge, handling and disposal of certain regulated
materials and wastes, and product advertising and promotion. We believe that we
have complied with these laws and regulations in all material respects, and we
have not been required to take any action to correct any material noncompliance.
We do not currently

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<PAGE> 39

anticipate that any material capital expenditures will be required in order to
comply with these laws or that compliance with these laws will have a material
effect on our business or financial condition. We are unable to predict,
however, the impact on our business of any changes that may be made in these
laws or of any new laws or regulations that may be imposed in the future. We
cannot be sure that we will not be required to incur significant compliance
costs or be held liable for damages resulting from any violation of these laws
and regulations.

EMPLOYEES

As of September 30, 2000, we had 119 full-time employees, with 87 employees
in Eden Prairie and 32 in Brooklyn Park. Of these employees, 71 are engaged in
manufacturing, 27 in research and development and 21 in executive management and
office support. None of our employees is subject to a collective bargaining
agreement nor have we ever experienced a work stoppage. We believe our employee
relations are good.

FACILITIES

We lease a 75,000 square foot facility in Eden Prairie, Minnesota, a suburb
of Minneapolis, which houses our corporate headquarters, manufacturing facility
and warehouse space. This facility has adequate space for two production lines,
the second of which is under construction. The lease has an initial term
expiring on June 1, 2009. We have the option to extend the lease term for one
period of ten years with a minimum annual base rent (exclusive of real estate
taxes and maintenance fees) of $500,000 for the first five years and $550,000
for the second five years of the ten-year option term.

We also lease 32,000 square feet of office, research and development and
manufacturing space in Brooklyn Park, Minnesota. The lease expires in September
2001, but is renewable at our option for two additional five-year periods.

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<PAGE> 40

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth information regarding our executive officers
and directors as of September 30, 2000.

<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
John M. Siebert, Ph.D................... 60 President, Chief Executive Officer and Director
John Hontz, Ph.D........................ 44 Chief Operating Officer
David A. Feste.......................... 49 Vice President, Chief Financial Officer and
Secretary
Terrence W. Glarner(1)(2)............... 55 Chairman of the Board and Director
Steven B. Ratoff(1)(2).................. 56 Director
Joseph R. Robinson, Ph.D.(1)............ 60 Director
</TABLE>

------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee

John M. Siebert, Ph.D. has been our President and Chief Executive Officer
since September 1995 and has served as a director 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.

John Hontz, Ph.D. has been our Chief Operating Officer since January 2000.
From 1997 to January 2000, Dr. Hontz was our Vice President of Research and
Development. From 1995 to 1997, Dr. Hontz was senior Group Leader of Product
Development at Glaxo Wellcome plc, a pharmaceutical company. From 1987 to 1995,
Dr. Hontz was with Burroughs-Wellcome, which was acquired by Glaxo in 1995, most
recently as Section Head of Product Development.

David A. Feste has been our Vice President, Chief Financial Officer and
Secretary since March 2000. From 1995 to 1999, Mr. Feste was Vice President and
Chief Financial Officer for Orphan Medical, Inc., a pharmaceutical company. From
1992 to 1995, Mr. Feste was self-employed as a financial consultant. From 1985
to 1991, Mr. Feste was with Tonka Corporation, most recently as its Corporate
Vice President of Financial Services and Audit.

Terrence W. Glarner has served as a director since July 1990 and has served
as the Chairman of the Board of Directors since April 1995. Mr. Glarner has been
President of West Concord Ventures, Inc., a venture capital firm, since 1993. He
also consults with Norwest Venture Capital. Mr. Glarner was President of North
Star Ventures, Inc. from 1988 to 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., FSI International, Inc. and
Premis Corporation, as well as of several privately-held corporations.

Steven B. Ratoff has served as a director since March 1995. Mr. Ratoff has
been Executive Vice President and Chief Financial Officer of Brown-Forman
Corporation, a consumer products company, since 1994. From 1992 to 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 from 1990 to 1992. Mr. Ratoff
serves as a director of Inkine Pharmaceutical Company.

Joseph R. Robinson, Ph.D. has served as a director since January 1993. Dr.
Robinson is Professor of Pharmacy, University of Wisconsin at Madison. Dr.
Robinson is the past President of the Controlled Release Society and of the
American Association of Pharmaceutical Scientists. Dr. Robinson serves as a
director of Emisphere Technologies, Inc. He also serves on the scientific
advisory boards of several companies.
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<PAGE> 41

PRINCIPAL AND SELLING STOCKHOLDERS

The following table presents information regarding beneficial ownership of
our common stock as of September 30, 2000, held by each person known by us to be
the beneficial owner of more than 5% of our common stock, each executive
officer, each director, each selling stockholder and all executive officers and
directors as a group. The table also presents the same information as adjusted
to reflect the sale of shares offered hereby. In addition, the table provides
information with respect to the number of shares of common stock that certain of
our stockholders are obligated to sell if the underwriters exercise their
over-allotment option and the impact that this will have on those stockholders'
post-offering common stock holdings. In accordance with the rules of the SEC,
beneficial ownership includes the shares issuable pursuant to stock options that
are exercisable within 60 days of September 30, 2000. Shares issuable pursuant
to stock options are considered outstanding for computing the percentage of the
person holding the options but are not considered outstanding for computing the
percentage of any other person. The number of shares of common stock outstanding
after this offering includes the 2,500,000 shares of common stock being offered
for sale by us in this offering. The percentage of beneficial ownership for the
following table is based on 10,953,774 shares of common stock outstanding as of
September 30, 2000 and 13,453,774 shares of common stock outstanding after the
completion of this offering, assuming no exercise of the underwriters'
over-allotment option and 13,803,774 shares of common stock outstanding after
completion of this offering assuming full exercise of the underwriters'
over-allotment option. To our knowledge, except as indicated in the footnotes to
this table, the persons named in the table have sole voting and investment power
with respect to all shares of common stock.

<TABLE>
<CAPTION>
Assuming the Over-Allotment
Option is Exercised by the
Underwriters in Full
Shares Beneficially Shares Beneficially --------------------------------
Owned Prior to the Owned After the Shares Owned After
Offering Offering Shares the Offering
---------------------- ---------------------- to be ----------------------
Beneficial Owner Number Percentage Number Percentage Offered Number Percentage
---------------- --------- ---------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Franklin Resources, Inc.
777 Mariners Island Boulevard
San Mateo, California 94404(1).............. 1,088,000 9.9 1,088,000 8.1 -- 1,088,000 7.9
President and Fellows Of Harvard College
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, Massachusetts 02210(2).............. 646,900 5.9 646,900 4.8 -- 646,900 4.7
Capital Research and Management Company
And SMALLCAP World Fund, Inc.
333 South Hope Street
Los Angeles, California 90071(3)............ 617,200 5.6 617,200 4.6 -- 617,200 4.5
Douglas C. Floren
600 Steamboat Road
Greenwich, Connecticut 06830(4)............. 572,000 5.2 572,000 4.3 -- 572,000 4.1
Raymond A. Lipkin
161 Ferndale Avenue South
Wayzata, Minnesota 55391(5)................. 565,100 5.2 565,100 4.2 -- 565,100 4.1
John M Siebert, Ph.D.(6)..................... 385,166 3.4 385,166 2.8 40,000 345,166 2.4
David A. Feste(7)............................ 28,667 * 28,667 * 20,000 8,667 *
John Hontz, Ph.D.(8)......................... 138,999 1.3 138,999 1.0 40,000 98,999 *
Terrence W. Glarner(9)....................... 119,957 1.1 119,957 * 25,000 94,957 *
Steven B. Ratoff(10)......................... 120,855 1.1 120,855 * 35,000 85,855 *
Joseph R. Robinson, Ph.D.(11)................ 92,095 * 92,095 * 35,000 57,095 *
All executive officers and directors as a
group (6 persons)(12)....................... 885,739 7.6 885,739 6.2 195,000 690,739 4.8
</TABLE>

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<PAGE> 42

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

(1) The securities reported are beneficially owned by one or more open or
closed-end investment companies or other managed accounts, which are
advised by direct and indirect investment advisory subsidiaries of Franklin
Resources, Inc. The adviser subsidiaries may be deemed to be the beneficial
owner of the securities reported. Franklin Advisers, Inc. has sole voting
and dispositive power on the entire 1,088,000 shares. Charles B. Johnson
and Reupert H. Johnson, Jr. each own in excess of 10% of the outstanding
common stock of Franklin Resources. Franklin Resources, Charles B. Johnson
and Reupert H. Johnson, Jr. may be deemed to be the beneficial owner of
securities held by persons and entities advised by Franklin Resources.
Franklin Resources, Charles B. Johnson, Reupert H. Johnson, Jr. and each of
Franklin Resources' adviser subsidiaries disclaim any economic interest or
beneficial ownership in any of the securities reported. The information
relating to the beneficial ownership of Franklin Resources, Inc. has been
derived from the Schedule 13G filed by Franklin Resources, Charles B.
Johnson, Reupert H. Johnson, Jr. and Franklin Advisers, Inc. on August 10,
2000.

(2) The information relating to the beneficial ownership of President and
Fellows of Harvard College has been derived from the Schedule 13G filed by
President and Fellows of Harvard College on April 10, 2000.

(3) The information relating to the beneficial ownership of Capital Research
and Management Company and SMALLCAP World Fund, Inc. has been derived from
the Schedule 13G filed by Capital Research and Management Company and
SMALLCAP World Fund, Inc. on February 11, 2000.

(4) Includes shares held by DCF Advisers, L.L.C., DCF Partners, L.P. and DCF
Capital, L.L.C. The information relating to the beneficial ownership of
Douglas C. Floren, DCF Advisers, L.L.C., DCF Partners, L.P. and DCF
Capital, L.L.C. has been derived from the Schedule 13D filed by Douglas C.
Floren, DCF Advisers, L.L.C., DCF Partners, L.P. and DCF Capital, L.L.C. on
September 8, 2000.

(5) Includes (i) 15,000 shares held jointly with Mr. Lipkin's spouse; (ii)
56,500 shares held by Koloa Limited Partnership, a family partnership in
which Mr. Lipkin and his spouse are general partners; and (iii) 22,000
shares held by Mr. Lipkin on behalf of certain members of his family. Mr.
Lipkin disclaims beneficial ownership with respect to all but the 471,600
shares over which he has sole voting and dispositive power, 71,500 shares
held jointly with Mrs. Lipkin and his proportionate interest in the family
partnership. The information relating to the beneficial ownership of
Raymond A. Lipkin has been derived from the Schedule 13D filed by Raymond
A. Lipkin on September 5, 2000.

(6) Includes 339,166 shares that may be acquired within 60 days of September
30, 2000, pursuant to outstanding options. The shares to be offered will be
acquired pursuant to option exercises.

(7) Includes 28,667 shares that may be acquired within 60 days of September 30,
2000, pursuant to outstanding options. The shares to be offered will be
acquired pursuant to option exercises.

(8) Includes 132,499 shares that may be acquired within 60 days of September
30, 2000, pursuant to outstanding options. The shares to be offered will be
acquired pursuant to option exercises.

(9) Includes 89,517 shares that may be acquired within 60 days of September 30,
2000, pursuant to outstanding options.

(10) Includes 82,855 shares that may be acquired within 60 days of September 30,
2000, pursuant to outstanding options. The shares to be offered will be
acquired pursuant to option exercises.

(11) Includes 92,095 shares that may be acquired within 60 days of September 30,
2000, pursuant to outstanding options. The shares to be offered will be
acquired pursuant to option exercises.

(12) Includes 764,799 shares that may be acquired within 60 days of September
30, 2000, pursuant to outstanding options. Of the shares to be offered,
170,000 will be acquired pursuant to option exercises.

39
<PAGE> 43

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below have severally agreed to purchase from CIMA the
following respective number of shares of common stock at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this prospectus:

<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Deutsche Bank Securities Inc................................
SG Cowen Securities Corporation.............................
Fahnestock & Co. Inc........................................
---------
Total................................................ 2,500,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent, including the absence of any material adverse
change in our business and the receipt of certificates, opinions and letters
from us, our counsel and independent auditors. The underwriters have committed
to purchase all shares of common stock offered by this prospectus, other than
those covered by the over-allotment option described below, if any of the shares
are purchased.

The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and to dealers at a price that represents a concession not in excess
of $ per share under the public offering price. The underwriters may allow,
and these dealers may re-allow, a concession of not more than $ per share to
other dealers. After the public offering, the representatives of the
underwriters may change the offering price and other selling terms.

We and the selling stockholders have granted to the underwriters an option,
exercisable not later than 30 days after the date of this prospectus, to
purchase up to 180,000 additional shares of common stock from us, and up to
195,000 shares of common stock from the selling stockholders, at the public
offering price less the underwriting discounts and commissions, set forth on the
cover page of this prospectus. The underwriters may exercise this option only to
cover over-allotments made in connection with the sale of the common stock
offered hereby. To the extent that the underwriters exercise this option, each
of the underwriters will become obligated, subject to conditions, to purchase
approximately the same percentage of additional shares of common stock as the
number of shares of common stock to be purchased by it in the above tables bears
to the total number of shares of common stock offered hereby. We will be
obligated, pursuant to the option, to sell these additional shares of common
stock to the underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which the 2,500,000 shares are
being offered.

The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is expected to be 6% of the public offering price.
We have agreed to pay the underwriters the

40
<PAGE> 44

following fees, assuming either no exercise or full exercise by the underwriters
of the underwriters' over-allotment option:

<TABLE>
<CAPTION>
Without With
Exercise of Exercise of
Over-Allotment Over-Allotment
Per Share Option Option
--------- -------------- --------------
<S> <C> <C> <C>
Fees paid by CIMA LABS INC..................... $ $ $
Fees paid by the selling stockholders.......... $ $ $
</TABLE>

We estimate that our expenses for this offering, excluding underwriting
discounts and commissions, will be approximately $400,000. The selling
stockholders will not pay any of these expenses.

We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, and to contribute to payments the underwriters may be required to make
with regard to these potential liabilities.

We and all of our executive officers and directors have agreed not to
offer, sell, contract to sell, or otherwise dispose of any shares of common
stock, or options to acquire shares of common stock or securities exchangeable
for or convertible into shares of common stock during the 90 day period
following the date of this prospectus without the prior written consent of
Deutsche Bank Securities Inc., except, in our case, pursuant to our employee
benefit plans, qualified stock plans and other employee compensation plans
existing on the date of this prospectus and pursuant to currently outstanding
options and rights. Deutsche Bank Securities Inc. may give this consent at any
time without public notice.

The underwriters have advised us that they do not intend to confirm sales
to any account over which they exercise discretionary authority.

In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. Additionally, to cover these
over-allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
These transactions may be effected on the Nasdaq National Market or otherwise.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.

In connection with this offering, certain underwriters or their affiliates
may engage in passive market making transactions in the common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. Rule 103 permits passive market
making during the period when Regulation M would otherwise prohibit market
making activity by the participants in this offering. Passive market making
consists of displaying bids on the Nasdaq National Market limited by the bid
prices of independent market makers and making purchases limited by such prices
and effected in response to order flow. Rule 103 limits the net purchases by a
passive market maker on each day to a specified percentage of the passive market
maker's average daily trading volume in the common stock during a specified
period. The passive market maker must stop its passive market making
transactions for the rest of that day when such limit is reached. Passive market

41
<PAGE> 45

making may stabilize the market price of our common stock at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time.

In March 2000, we engaged Deutsche Bank Securities Inc., to act as the
placement agent in the private placement of 1,100,000 shares of our common stock
to a limited number of institutional investors. We paid Deutsche Bank Securities
Inc. a customary fee for its services in the private placement.

LEGAL MATTERS

Faegre & Benson LLP, Minneapolis, Minnesota, will provide us with an
opinion as to the validity of the common stock offered under this prospectus.
Dorsey & Whitney LLP, Minneapolis, Minnesota, will pass upon certain legal
matters related to the offering for the underwriters.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1998 and 1999 and for each of the three years in
the period ended December 31, 1999. We have included our financial statements in
this prospectus and elsewhere in the registration statement in reliance on Ernst
& Young LLP's report, given upon their authority as experts in accounting and
auditing.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We file reports, proxy statements and other information with the Securities
and Exchange Commission. You can read and copy these reports, proxy statements
and other information at the Commission's Public Reference Room located at 450
Fifth Street, N.W., Washington, D.C. 20549. Call (800) SEC-0330 for more
information on the Public Reference Room. The Commission maintains an Internet
site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Commission. The
site's address is "www.sec.gov."

We have filed a Registration Statement on Form S-3 under the Securities Act
with respect to this offering. For further information regarding us and our
common stock you should refer to the Registration Statement and its exhibits and
schedules.

INCORPORATION BY REFERENCE

The Commission allows us to "incorporate by reference" the information in
documents that we file with them. This means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus, and
information in documents that we file later with the Commission will
automatically update and supersede this information.

We incorporate by reference the documents listed below:

- Our Annual Report on Form 10-K, as amended, for the fiscal year ended
December 31, 1999 (including information specifically incorporated by
reference into our Form 10-K from our 2000 Annual Report to Stockholders
and our definitive Notice and Proxy Statement for our 2000 Annual Meeting
of Stockholders);

- Quarterly reports on Form 10-Q for the quarters ended March 31, 2000 and
June 30, 2000; and

42
<PAGE> 46

- The description of our Common Stock contained in our Registration
Statement on Form 8-A, dated September 11, 1990.

We also incorporate by reference into this prospectus all documents that we
file pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this prospectus and prior to the termination of this offering.

We will provide to each person, including any beneficial owner, to whom a
prospectus is delivered a copy of any or all of these documents (other than
exhibits unless the exhibits are specifically incorporated by reference into the
document), without charge, upon written or oral request to: CIMA LABS INC.,
10000 Valley View Road, Eden Prairie, MN 55344-9361, Attention: Secretary,
telephone (952) 947-8700.

Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus shall be deemed to be modified or
superseded for the purposes of this prospectus to the extent that a statement
contained in this prospectus or in any other subsequently filed document which
also is or is deemed to be incorporated by reference modifies or supersedes that
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this prospectus.

43
<PAGE> 47

CIMA LABS INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Cash Flows.................................... F-5
Statements of Changes in Stockholders' Equity............... F-6
Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE> 48

REPORT OF INDEPENDENT AUDITORS
Board of Directors
CIMA LABS INC.

We have audited the accompanying balance sheets of CIMA LABS INC. as of
December 31, 1999 and 1998, 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, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as 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, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
February 11, 2000, except for Note 9
as to which the date is March 17, 2000

F-2
<PAGE> 49

CIMA LABS INC.
BALANCE SHEETS

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------- AS OF
1998 1999 JUNE 30, 2000
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................... $ 2,722,590 $ 2,480,698 $ 9,775,295
Available-for-sale securities............... -- -- 5,919,222
Accounts receivable, net.................... 1,654,796 3,058,258 5,209,276
Inventories, net............................ 479,045 2,772,429 1,902,529
Prepaid expenses............................ 79,866 73,042 109,371
----------- ----------- -----------
Total current assets.......................... 4,936,297 8,384,427 22,915,693
Other assets:
Lease deposits.............................. 345,146 318,699 166,614
Patents and trademarks, net................. 204,648 207,243 192,359
----------- ----------- -----------
Total other assets............................ 549,794 525,942 358,973
Property, plant and equipment:
Construction in progress.................... 72,204 2,150,508 6,664,463
Equipment................................... 9,314,867 8,817,331 8,817,331
Leasehold improvements...................... 4,757,169 4,783,420 4,783,420
Furniture and fixtures...................... 604,204 604,204 604,204
----------- ----------- -----------
14,748,444 16,355,463 20,869,418
Less accumulated depreciation............... (5,318,107) (5,996,024) (6,687,809)
----------- ----------- -----------
9,430,337 10,359,439 14,181,609
----------- ----------- -----------
Total assets........................... $14,916,428 $19,269,808 $37,456,275
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 670,597 $ 2,402,726 $ 687,397
Accrued expenses............................ 835,043 1,229,179 1,317,939
Notes payable............................... -- 195,748 --
Advance royalties........................... 459,105 137,084 --
Current portion of long term debt........... -- 150,000 150,000
Current portion of lease obligations........ 64,998 71,485 74,968
----------- ----------- -----------
Total current liabilities..................... 2,029,743 4,186,222 2,230,304
Long term debt................................ -- 3,350,000 3,457,187
Lease obligations............................. 231,145 159,660 121,285
----------- ----------- -----------
Total liabilities............................. 2,260,888 7,695,882 5,808,776
Stockholders' equity:
Convertible preferred stock, $0.01 par
value:
5,000,000 shares authorized; none
outstanding.............................. -- -- --
Common stock, $0.01 par value:
20,000,000 shares authorized; 9,610,394,
9,646,241, and 10,858,639 shares issued
and outstanding at December 31, 1998 and
1999, and at June 30, 2000,
respectively............................. 96,104 96,462 108,586
Additional paid-in capital............... 57,274,274 57,454,661 77,373,340
Accumulated deficit...................... (44,714,838) (45,977,197) (45,834,427)
----------- ----------- -----------
Total stockholders' equity.................... 12,655,540 11,573,926 31,647,499
----------- ----------- -----------
Total liabilities and stockholders'
equity.............................. $14,916,428 $19,269,808 $37,456,275
=========== =========== ===========
</TABLE>

See accompanying notes.
F-3
<PAGE> 50

CIMA LABS INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Net sales....................... $ 2,628,069 $ 1,097,465 $ 4,839,511 $ 1,433,862 $ 6,096,355
Product development fees and
licensing..................... 2,282,166 6,140,894 7,817,846 3,382,605 4,391,213
Royalties....................... -- 373,764 735,107 193,967 979,000
----------- ----------- ----------- ----------- -----------
Total revenues.................... 4,910,235 7,612,123 13,392,464 5,010,434 11,466,568
----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of goods sold.............. 4,376,412 4,475,867 7,545,341 2,968,254 6,725,214
Research and product
development................... 3,363,544 3,307,582 4,388,902 1,826,968 2,217,109
Selling, general and
administrative................ 3,487,239 3,137,952 2,836,573 1,443,598 1,848,842
----------- ----------- ----------- ----------- -----------
Total operating expense........... 11,227,195 10,921,401 14,770,816 6,238,820 10,791,165
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest income, net............ 336,310 152,366 10,327 27,987 282,546
Other income (expense).......... 142,255 (30,567) 105,666 16,440 (15,842)
----------- ----------- ----------- ----------- -----------
478,565 121,799 115,993 44,427 266,704
----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative
effect of a change in accounting
principle....................... (5,838,395) (3,187,479) (1,262,359) (1,183,959) 942,107
Cumulative effect of a change in
accounting principle, net of
income taxes.................... -- -- -- -- (799,337)
----------- ----------- ----------- ----------- -----------
Net income (loss)................. $(5,838,395) $(3,187,479) $(1,262,359) $(1,183,959) $ 142,770
=========== =========== =========== =========== ===========
Net income (loss) per share:
Basic
Net income (loss) per share
before cumulative effect of
a change in accounting
principle................... $ (.61) $ (.33) $ (.13) $ (.12) $ .09
Net loss per share from
cumulative effect of a
change in accounting
principle................... -- -- -- -- (.08)
----------- ----------- ----------- ----------- -----------
Net income (loss) per basic
share......................... $ (.61) $ (.33) $ (.13) $ (.12) $ .01
=========== =========== =========== =========== ===========
Diluted
Net income per share before
cumulative effect of a
change in accounting
principle................... $ (.61) $ (.33) $ (.13) $ (.12) $ .08
Net loss per share from
cumulative effect of a
change in accounting
principle................... -- -- -- -- (.07)
----------- ----------- ----------- ----------- -----------
Net income (loss) per diluted
share......................... $ (.61) $ (.33) $ (.13) $ (.12) $ .01
=========== =========== =========== =========== ===========
Weighted average shares
outstanding:
Basic........................... 9,518,679 9,610,104 9,615,280 9,610,394 10,375,963
Diluted......................... 9,518,679 9,610,104 9,615,280 9,610,394 11,393,366
Pro forma amounts assuming the
accounting change were applied
retroactively (unaudited):
Net income (loss)............. $(6,257,851) $(3,955,980) $ (873,738) $ (622,044) $ 942,107
Net income (loss) per diluted
share....................... $ (.66) $ (.41) $ (.09) $ (.06) $ .08
Weighted average diluted
shares...................... 9,518,679 9,610,104 9,615,280 9,610,394 11,393,366
</TABLE>

See accompanying notes
F-4
<PAGE> 51

CIMA LABS INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1997 1998 1999 1999 2000
------------ ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss......................... $ (5,838,395) $(3,187,479) $(1,262,359) $(1,183,959) $ 142,770
Adjustment to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization................. 1,051,679 1,653,319 1,635,017 897,299 743,808
Loss on impairment of assets... -- -- 358,291 -- 400,000
Gain on sale of property, plant
and equipment................ -- 4,734 -- -- --
Cumulative effect of change in
accounting principle......... -- -- -- -- 799,337
Changes in operating assets and
liabilities:
Accounts receivable.......... (1,350,236) (56,982) (1,403,462) (666,404) (2,151,018)
Inventories.................. (96,032) 151,574 (2,293,384) (1,185,934) 869,900
Prepaid expenses............. (74,925) 66,939 6,824 (38,333) (36,329)
Accounts payable............. (135,658) 541,885 1,732,129 660,674 (1,715,329)
Accrued expenses............. 91,178 214,462 394,136 (43,739) (61,240)
Advance royalties............ 491,405 (282,300) (322,021) 9,229 (137,084)
Deferred revenue............. -- -- -- -- (649,337)
------------ ----------- ----------- ----------- ------------
Net cash used in operating
activities..................... (5,860,984) (893,848) (1,154,829) (1,551,167) (1,794,522)
------------ ----------- ----------- ----------- ------------
INVESTING ACTIVITIES
Purchases of property, plant and
equipment...................... (772,262) (406,686) (2,819,700) (420,478) (4,913,955)
Purchases of available-for-sale
securities..................... (29,469,496) -- -- -- (5,919,222)
Proceeds from maturities of
available-for-sale
securities..................... 33,789,358 3,277,300 -- -- --
Proceeds from sale of property,
plant and equipment............ -- 33,000 -- -- --
Patents and trademarks........... (111,470) (88,841) (105,305) (32,280) (37,139)
------------ ----------- ----------- ----------- ------------
Net cash (used in) provided by
investing activities........... 3,436,130 2,814,773 (2,925,005) (452,758) (10,870,316)
------------ ----------- ----------- ----------- ------------
FINANCING ACTIVITIES
Proceeds from exercises of stock
options........................ 654,582 5,700 180,745 -- 530,803
Net proceeds from stock
offering....................... -- -- -- -- 19,400,000
Proceeds from long term debt..... -- -- 3,500,000 -- --
Notes payable.................... -- -- 195,748 -- (88,561)
Security deposits on leases...... 250,000 (304,495) 26,447 -- 152,085
Payments on capital lease
obligations.................... -- (45,300) (64,998) -- (34,892)
------------ ----------- ----------- ----------- ------------
Net cash provided by (used in)
financing activities........... 904,582 (344,095) 3,837,942 -- 19,959,435
------------ ----------- ----------- ----------- ------------
Increase (decrease) in cash and
cash equivalents............... (1,520,272) 1,576,830 (241,892) (2,003,925) 7,294,597
Cash and cash equivalents at
beginning of period............ 2,666,032 1,145,760 2,722,590 2,722,590 2,480,698
------------ ----------- ----------- ----------- ------------
Cash and cash equivalents at end
of period...................... $ 1,145,760 $ 2,722,590 $ 2,480,698 $ 718,665 $ 9,775,295
============ =========== =========== =========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING
ACTIVITIES
Acquisition of equipment pursuant
to capital lease............... $ -- $ 341,443 $ -- $ -- $ --
</TABLE>

See accompanying notes.
F-5
<PAGE> 52

CIMA LABS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
---------- -------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DEC. 31, 1996.......... 9,411,589 $ 94,116 $56,586,958 $(35,659,942) $21,021,132
Stock options exercised......... 191,968 1,920 652,662 -- 654,582
Exercise of stock warrants...... 4,837 48 28,974 (29,022) --
Net loss........................ -- -- -- (5,838,395) (5,838,395)
---------- -------- ----------- ------------ -----------
BALANCE AT DEC. 31, 1997.......... 9,608,394 96,084 57,268,594 (41,527,359) 15,837,319
Stock options exercised......... 2,000 20 5,680 -- 5,700
Net loss........................ -- -- -- (3,187,479) (3,187,479)
---------- -------- ----------- ------------ -----------
BALANCE AT DEC. 31, 1998.......... 9,610,394 96,104 57,274,274 (44,714,838) 12,655,540
Stock options exercised......... 35,847 358 180,387 -- 180,745
Net loss........................ -- -- -- (1,262,359) (1,262,359)
---------- -------- ----------- ------------ -----------
BALANCE AT DEC 31, 1999........... 9,646,241 96,462 57,454,661 (45,977,197) 11,573,926
Issuance of common stock in
connection with a private
placement, net of offering
costs of $1,500,000........... 1,100,000 11,000 19,389,000 -- 19,400,000
Stock options exercised......... 112,398 1,124 529,679 -- 530,803
Net income...................... -- -- -- 142,770 142,770
---------- -------- ----------- ------------ -----------
BALANCE AT JUNE 30, 2000
(UNAUDITED)..................... 10,858,639 $108,586 $77,373,340 $(45,834,427) $31,647,499
========== ======== =========== ============ ===========
</TABLE>

See accompanying notes.
F-6
<PAGE> 53

CIMA LABS INC.

NOTES TO FINANCIAL STATEMENTS

1. BUSINESS ACTIVITY

CIMA LABS INC. (the "Company"), a Delaware corporation, develops and
manufactures fast-dissolve and enhanced-absorption oral drug delivery systems.
OraSolv and DuraSolv, the Company's leading proprietary fast-dissolve
technologies, are oral dosage forms incorporating taste-masked active drug
ingredients into tablets which dissolve quickly in the mouth without chewing or
water. The Company develops applications for technologies that are licensed to
pharmaceutical company partners. The Company currently manufactures and packages
six commercial products incorporating its proprietary fast-dissolve
technologies. Revenues are generated from license agreements, product
development fees, products manufactured using fast-dissolve technologies and
royalties.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents

The Company considers 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.

Patents and Trademarks

Costs incurred in obtaining patents and trademarks are amortized on a
straight-line basis over sixty months. Accumulated amortization was
approximately $625,000 at December 31, 1998, $728,000 at December 31,1999 and
$803,000 at June 30, 2000. 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 is stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives ranging from
three to twelve years. Depreciation expense was approximately $919,000 in 1997;
$1,538,000 in 1998; $1,533,000 in 1999; and $700,000 for the six months ended
June 30, 2000.

Inventories

Inventories, consisting of materials and packaging, are valued at a
standard cost method using the first-in first-out (FIFO) for inventory turn over
and control. Inventories are shown net of reserves for obsolescence of
approximately $157,000 at December 31, 1998, $537,000 at December 31, 1999 and
$160,000 at June 30, 2000.

Impairment of Long-Lived Assets

The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flow estimated to be generated by those assets are less than the assets'
carrying amount. During the year ended December 31, 1999, the Company recognized
approximately $358,000 of impairment losses on equipment no longer used in
operations with an original cost of $1,200,000. The cost and associated
accumulated depreciation have been removed from the equipment balances on the
accompanying December 31, 1999 balance sheet.

F-7
<PAGE> 54
CIMA LABS INC.

NOTES TO FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

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.

Stock-Based Compensation

The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

Income Taxes

Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between financial reporting and tax
bases of assets and liabilities.

Revenue Recognition

The Company recognizes revenues from product sales upon shipment; revenues
from product development fees as services are rendered and as milestones are
achieved; revenues from non-refundable up-front license fees upon signing the
related development and license agreement; and revenues from royalties are
accrued quarterly based on the sales made by a licensee.

In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in
Financial Statements." SAB 101 requires that up-front license fees received from
research collaborators be recognized over the term of the agreement unless the
fee is in exchange for products delivered or services performed that represent
the culmination of a separate earnings process. The Company implemented SAB 101
in its second quarter ended on June 30, 2000, retroactive to January 1, 2000.
The Company reported a charge to earnings of $799,337 for the cumulative effect
of a change in accounting principle, which is included in income for the
six-month period ended June 30, 2000. The effect of the change on the six-month
period ended June 30, 2000 was to increase income before cumulative effect of
the change in accounting principle $649,337 or $0.06 per diluted share. The pro
forma amounts presented in the income statement were calculated assuming the
accounting change was made retroactively to prior periods.

For the six months ended June 30, 2000, the Company recognized $799,337 in
revenue that is included in the cumulative effect adjustment as of January 1,
2000. The effect of that revenue in the six-month period ended June 30, 2000 was
to increase income by $799,337.

Research and Development Costs

For financial reporting purposes, all costs of research and development
activities are expensed as incurred.

F-8
<PAGE> 55
CIMA LABS INC.

NOTES TO FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is computed by dividing income (loss) by the
weighted average number of common shares outstanding during the period,
increased to include dilutive potential common shares issuable upon the exercise
of stock options that were outstanding during the period. For loss periods,
basic and diluted share amounts are identical, as the effect of potential common
shares is antidilutive.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)..... $(5,838,395) $(3,187,479) $(1,262,359) $(1,183,959) $ 142,770
=========== =========== =========== =========== ===========
Denominator:
Denominator for basic
earnings (loss) per
share -- weighted
average shares
outstanding......... 9,518,679 9,610,104 9,615,280 9,610,394 10,375,963
Effect of dilutive
stock options....... -- -- -- -- 1,017,403
----------- ----------- ----------- ----------- -----------
Denominator for diluted
earnings (loss) per
share -- weighted
average shares
outstanding........... 9,518,679 9,610,104 9,615,280 9,610,394 11,393,366
=========== =========== =========== =========== ===========
Basic earnings (loss)
per share............. $ (.61) $ (.33) $ (.13) $ (.12) $ .01
Diluted earnings (loss)
per share............. $ (.61) $ (.33) $ (.13) $ (.12) $ .01
</TABLE>

Reclassifications

Certain amounts presented in the 1998 and 1997 financial statements have
been reclassified to conform to the 1999 presentation.

Unaudited Interim Financial Statements

The accompanying unaudited financial statements as of June 30, 1999 and
2000 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. These financial statements do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals, which are considered
necessary for fair presentation have been included. Operating results for the
six month periods ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. Interim
financial information included in the accompanying footnotes is unaudited.

F-9
<PAGE> 56
CIMA LABS INC.

NOTES TO FINANCIAL STATEMENTS

3. NOTES PAYABLE AND LONG-TERM DEBT

Notes Payable

The Company had a $2,000,000 bank line of credit payable on demand expiring
July 14, 2000. Interest is paid at prime plus 2% (10.5% at December 31, 1999).
The line was secured by accounts receivable and inventory. In May 2000, the
Company terminated this bank line after repaying its obligations in full. The
Company paid $24,000 in interest for the year ended December 31, 1998, $60,000
in interest for the year ended December 31, 1999 and $7,000 for the six months
ended June 30, 2000.

Long-Term Debt

In December 1999, the Company entered into an agreement with one of its
pharmaceutical partners whereby the Company received a loan of $3,500,000.
Timing of the loan repayments is based upon royalties due to the Company from an
affiliate of the lender that signed a license agreement with the Company in May
1999. The Company shall pay the lender 50% of any royalty amount due per the
license agreement with the affiliate. The term of the loan is three years,
unless the loan repayments based on the royalty amounts due to the Company have
not yet covered the loan principal plus any unpaid interest. In such a case, the
loan will be extended in annual increments. Interest is payable on the
outstanding amount at LIBOR plus one half of one percent, accrues quarterly and
is added to the then outstanding balance. The loan becomes payable in full upon
the sale of the Company or a change in control, as defined in the agreement. If
the loan becomes payable in full, the affiliate shall withhold 100% of the
royalties due until the outstanding balance and any accrued interest are paid in
full. The Company does not expect to have any repayment obligations to the
lender before the second half of 2000. The Company paid approximately $120,000
in interest for the six months ended June 30, 2000.

4. INCOME TAXES

The Company's deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Significant components of deferred income taxes as of December
31, 1998 and 1999, and as of June 30, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------ ENDED JUNE 30,
1998 1999 2000
---------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred assets:
Net operating loss......................... $ 18,475 $ 18,731 $ 18,654
Accrued vacation........................... 75 86 92
Inventory reserve.......................... 63 217 65
-------- -------- --------
18,613 19,034 18,811
Deferred liability:
Depreciation and amortization.............. 625 524 550
-------- -------- --------
Net deferred income tax asset................ 17,988 18,510 18,261
Valuation allowance.......................... (17,988) (18,510) (18,261)
-------- -------- --------
Net deferred income taxes.................... $ -- $ -- $ --
======== ======== ========
</TABLE>

F-10
<PAGE> 57
CIMA LABS INC.

NOTES TO FINANCIAL STATEMENTS

4. INCOME TAXES -- (CONTINUED)

The Company may be subject to federal income taxes when operations become
profitable. The Company's tax operating loss carryforwards of approximately $46
million may 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 years 2001 to 2019.

5. LEASES

Operating Leases

The Company leases office, research and development and manufacturing
facilities in Brooklyn Park and Eden Prairie, Minnesota. The 75,000 square foot
Eden Prairie facility houses the general and administrative offices and the
manufacturing operation. The lease has an initial term expiring on June 1, 2009.
The rent payments will be recalculated on June 1, 2001 and 2006, based on a
market index. The Company has an option to extend the lease for one ten-year
period. The Company also has the option to renew this lease for two additional
five-year terms.

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:
2000........................................................ $ 629,160
2001........................................................ 640,460
2002........................................................ 459,030
2003........................................................ 380,460
2004........................................................ 380,460
Thereafter.................................................. 1,902,300
</TABLE>

Rent expense of operating leases, excluding operating expenses, for the
years ended December 31, 1997, 1998, and 1999 was $517,000, $519,000, $525,000,
respectively, and $262,000 and $262,000 for the six months ended June 30, 1999
and 2000, respectively.

Capital Leases

The Company has three leases between 48 and 60 months in length extending
through 2003 with Norwest Equipment Finance, Inc. The deposit balance for the
leases was $278,048 at December 31, 1999 and $125,963 at June 30, 2000,
respectively, and is reviewed on an annual basis each December and adjusted to
the balance required to secure the assets being leased. Future minimum lease
commitments for all capital leases with initial or remaining terms of one year
or more are as follows:

<TABLE>
<S> <C>
Year ending December 31:
2000........................................................ $ 90,499
2001........................................................ 90,499
2002........................................................ 75,644
2003........................................................ 9,986
----------
266,628
Less lease interest:........................................ (35,483)
----------
Total................................................ $ 231,145
==========
</TABLE>

F-11
<PAGE> 58
CIMA LABS INC.

NOTES TO FINANCIAL STATEMENTS

6. STOCK OPTIONS

The Company has an Equity Incentive Plan (the "Plan") under which options
to purchase up to 2,650,000 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.

The Company also has a Directors' Stock Option Plan which provides for the
granting of non-management directors of the Company options to purchase shares
of Common Stock. The maximum number of shares with respect to the non-management
directors plan which options may be granted is 410,000 shares.

Shares available and options granted for the Equity Incentive Plan are as
follows:

<TABLE>
<CAPTION>
NON- WEIGHTED
SHARES INCENTIVE QUALIFIED AVERAGE
AVAILABLE STOCK STOCK TOTAL EXERCISE PRICE
FOR GRANT OPTIONS OPTIONS OUTSTANDING PER SHARE
--------- --------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1996...... 367,480 765,859 340,569 1,106,428 $6.27
Granted..................... (390,700) 292,604 98,096 390,700 5.89
Forfeited................... 203,038 (166,575) (36,463) (203,038) 7.32
Exercised................... -- (149,217) (42,751) (191,968) 3.24
-------- -------- -------- ---------
Balance at Dec. 31, 1997...... 179,818 742,671 359,451 1,102,122 5.71
Granted..................... (492,679) 101,428 391,251 492,679 4.47
Reserved.................... 400,000 -- -- --
Forfeited................... 230,955 (156,259) (74,696) (230,955) 6.88
Exercised................... -- (2,000) -- (2,000) 2.85
-------- -------- -------- ---------
Balance at Dec. 31, 1998...... 318,094 685,840 676,006 1,361,846 5.08
Granted..................... (395,273) 330,596 64,677 395,273 6.51
Reserved.................... 250,000 -- -- --
Forfeited................... 279,024 (126,641) (152,383) (279,024) 5.01
Exercised................... -- (30,087) -- (30,087) 5.76
-------- -------- -------- ---------
Balance at Dec. 31, 1999...... 451,845 859,708 588,300 1,448,008 $5.47
======== ======== ======== =========
Exercisable:
December 31, 1997 506,460 $5.27
December 31, 1998 556,626 $5.21
December 31, 1999 649,137 $5.51
</TABLE>

F-12
<PAGE> 59
CIMA LABS INC.

NOTES TO FINANCIAL STATEMENTS

6. STOCK OPTIONS -- (CONTINUED)

The following table summarizes information about Equity Incentive Plan
options outstanding at December 31, 1999:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE NUMBER WEIGHTED
RANGE OF NUMBER CONTRACTUAL OUTSTANDING EXERCISABLE AVERAGE
EXERCISE PRICES OUTSTANDING LIFE PRICE AT 12/31/99 EXERCISE PRICE
--------------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.625 - $3.00.............. 125,745 8.6 years $2.77 14,419 $2.94
$3.01 - $4.00............... 254,625 8.0 years $3.79 237,300 $3.88
$4.01 - $5.00............... 356,000 8.0 years $4.42 104,000 $4.52
$5.01 - $7.00............... 312,033 6.0 years $5.81 162,168 $5.83
$7.01 - $8.00............... 98,125 6.0 years $7.76 68,750 $7.82
$8.01 - $10.1875............ 301,480 8.0 years $9.79 62,500 $9.02
---------
$2.00 - $10.1875............ 1,448,008 7.4 years $5.47 649,137 $5.51
========= =======
</TABLE>

Shares available and options granted for Directors Stock Option Plan are as
follows:

<TABLE>
<CAPTION>
WEIGHTED
NON- AVERAGE
QUALIFIED EXERCISE
SHARES AVAILABLE STOCK PRICE PER
FOR GRANT OPTIONS SHARE
---------------- --------- ---------
<S> <C> <C> <C>
Balance at Dec. 31, 1996............................... 147,500 202,500 7.93
Granted.............................................. (56,070) 56,070 3.92
Reserved............................................. 60,000 -- --
Forfeited............................................ -- -- --
Exercised............................................ -- -- --
------- -------
Balance at Dec. 31, 1997............................... 151,430 258,570 7.06
Granted.............................................. (37,860) 37,860 2.96
Forfeited............................................ -- -- --
Exercised............................................ -- -- --
------- -------
Balance at Dec. 31, 1998............................... 113,570 296,430 6.54
Granted.............................................. (40,960) 40,960 2.27
Forfeited............................................ 4,320 (4,320) 1.30
Exercised............................................ -- (5,760) 1.30
------- -------
Balance at Dec. 31, 1999............................... 76,930 327,310 $6.17
======= =======
</TABLE>

Options to purchase 445,086 common shares are available for grant under the
plans at June 30, 2000. At June 30, 2000 the weighted average remaining
contractual life of outstanding options was 7.4 years and 903,219 were
exercisable.

Options outstanding under the plans expire at various dates during the
period from March 2000 through December 2009. Exercise prices for options
outstanding as of December 31, 1999, ranged from $2.6250 to $10.1875 per share.
The weighted average fair values of options granted during the years ended
December 31, 1997, 1998 and 1999 were $5.64, $4.36, and $3.71 respectively. The
Company issued warrants to purchase 189,801 shares of its Common Stock at $6.00
per share. Of these warrants, 77,506 were exercised during 1996 and 4,837 during
1997. The remaining 107,458 warrants have expired.

F-13
<PAGE> 60
CIMA LABS INC.

NOTES TO FINANCIAL STATEMENTS

6. STOCK OPTIONS -- (CONTINUED)

The Company has elected to follow Accounting Principles Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1998, and 1999 respectively; risk-free interest rates of
5.70%, 5.00%, and 5.50%; volatility factor of the expected market price of the
Company's common stock of .682, .630, and .649; and a weighted-average expected
life of the option of 5 years.

In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options because
the Company's employee stock options have characteristics significantly
different from those of traded options and have vesting restrictions and because
changes in the subjective input assumptions can materially affect the fair value
estimates.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require input
of highly subjective assumptions.

During the initial phase-in period, the effects of applying Statement 123
for recognizing compensation cost may not be representative of the effects on
reported net loss or income for future years because the options in the Stock
Option Plans vest over several years and additional awards will be made in the
future.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Pro forma net loss (in thousands)................... $(6,477) $(4,240) $(2,433)
Pro forma net loss per common share, basic and
diluted........................................... $ (0.68) $ (0.44) $ (0.25)
</TABLE>

7. DEFINED CONTRIBUTION PLAN

The Company has a 401(k) plan (the "Plan"), which covers substantially all
employees of the Company. 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.

F-14
<PAGE> 61
CIMA LABS INC.

NOTES TO FINANCIAL STATEMENTS

7. DEFINED CONTRIBUTION PLAN -- (CONTINUED)

The 401(k) expense for the years ended December 31, 1997, 1998 and 1999,
and for the six months ended June 30, 2000 was $29,000, $36,000, $38,000 and
$30,000.

8. EMPLOYMENT AGREEMENT

The Company entered into an employment agreement with the current President
and Chief Executive Officer in 1997 to continue in said position. The agreement
includes provisions for compensation, stock options and bonuses based upon the
achievement of certain performance targets. The current agreement expires on
January 1, 2004.

9. SUBSEQUENT EVENT

In March, 2000, the Company completed a private placement of 1.1 million
shares of common stock at $19 per share, before commissions and expenses. The
offering provided approximately $19.4 million in net cash proceeds to the
Company.

10. SEGMENT INFORMATION -- MAJOR CUSTOMERS

The Company has adopted the SFAS 131, Disclosures of an Enterprise and
Related Information, in the year ended December 31, 1999. We operate within a
single segment: the development and manufacture of fast-dissolve and
enhanced-absorption oral drug delivery systems. Our revenues are comprised of
three components: net sales of products utilizing our proprietary fast-dissolve
technologies; product development fees and licensing revenues for development
activities we conduct through collaborative agreements with pharmaceutical
companies; and royalties on the sales of products we manufacture, which are sold
by pharmaceutical companies under licenses from us. Less than 10 percent of our
revenues are earned from activities conducted or products shipped outside the
United States.

Revenues as a percentage of total revenues from major customers are as
follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
-------------------- JUNE 30,
1997 1998 1999 2000
---- ---- ---- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
AstraZeneca.............................................. 15% 26% 18% 11%
Bristol-Myers Squibb..................................... 57 8 4 3
N.V. Organon............................................. - 2 25 20
Novartis................................................. 15 44 42 54
Schering-Plough.......................................... 5 17 - -
Other.................................................... 8 3 11 12
--- --- --- ---
Total............................................. 100% 100% 100% 100%
--- --- --- ---
</TABLE>

F-15
<PAGE> 62

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED
IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES
OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR COMMON STOCK.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.............................. 1
Risk Factors......................... 4
Special Note Regarding Forward-
Looking Statements................. 13
Use of Proceeds...................... 14
Dividend Policy...................... 14
Price Range of Common Stock.......... 14
Capitalization....................... 15
Dilution............................. 16
Selected Financial Data.............. 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
Business............................. 24
Management........................... 37
Principal and Selling Stockholders... 38
Underwriting......................... 40
Legal Matters........................ 42
Experts.............................. 42
Where you Can Find Additional
Information........................ 42
Incorporation by Reference........... 42
Index to Financial Statements........ F-1
</TABLE>

[CIMA LOGO]
2,500,000 SHARES

COMMON STOCK
DEUTSCHE BANC ALEX. BROWN

SG COWEN

FAHNESTOCK & CO. INC.
PROSPECTUS

, 2000
<PAGE> 63

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. None of these expenses will be borne by
the selling stockholders. All amounts are estimates except the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 37,928
NASD filing fee............................................. 14,867
Nasdaq National Market listing fee.......................... 17,500
Legal fees and expenses..................................... 210,000
Accounting fees and expenses................................ 20,000
Blue Sky fees and expenses.................................. 1,000
Transfer agent fees and expenses............................ 10,000
Printing and engraving expenses............................. 80,000
Miscellaneous............................................... 8,705
--------
Total..................................................... $400,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

CIMA LABS INC. ("CIMA LABS") is a Delaware corporation. Section 145 of the
General Corporation Law of the State of Delaware ("Delaware Law") contains
detailed provisions on indemnification of directors and officers of a Delaware
corporation against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with certain litigation.

CIMA LABS' Fifth Restated Certificate of Incorporation (the "Certificate"),
together with CIMA LABS' Third Restated Bylaws (the "Bylaws" and together with
the Certificate, the "Corporate Documents") provide for indemnification of
directors and officers. CIMA LABS' Corporate Documents provide that CIMA LABS
will indemnify each director, officer, employee or agent of CIMA LABS or any
individual serving in such a capacity with another business entity at CIMA LABS'
request (an "Indemnitee") to the full extent permitted by Delaware Law, as now
enacted or hereinafter amended, against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such Indemnitee in connection therewith. CIMA LABS' Corporate
Documents provide that expenses incurred by a director, officer or employee in
defending an action, suit or proceeding shall be paid by CIMA LABS in advance of
the final disposition of such action upon receipt of an undertaking by or on
behalf of such person that he will repay such amount if it is ultimately
determined that he is not entitled to be indemnified by CIMA LABS. Delaware Law
provides that the indemnification provisions of the statute shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.

CIMA LABS has entered into agreements with its directors and certain of its
officers, which agreements may require CIMA LABS to indemnify such directors and
officers against certain liabilities that may arise by reason of their status or
service as directors or officers, to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified and to
obtain directors and officers insurance to the extent available on reasonable
terms.

II-1
<PAGE> 64

The directors and officers of CIMA LABS are covered by an insurance policy
indemnifying them against certain civil liabilities, including liabilities under
the federal securities laws, which might be incurred by them in such capacity.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1 Form of Underwriting Agreement (to be filed by amendment).
4.1 Fifth Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Registrant's Form 10-K for
the year ended December 31, 1994 (File No. 0-24424)).
4.2 Third Restated Bylaws (incorporated by reference to the
corresponding exhibit number of the Company's Form 10-Q for
the period ended June 30, 1999 (File No. 0-24424)).
4.3 Rights Agreement dated March 14, 1997, between the
Registrant and Norwest Bank Minnesota, N.A. as Rights Agent
(incorporated by reference to Exhibit 2 to the Company's
Form 8-K, filed March 25, 1997 (File No. 0-24424)).
5 Opinion of Faegre & Benson LLP.
23.1 Consent of Faegre & Benson LLP (included in Exhibit 5 to
this Registration Statement).
23.2 Consent of Ernst & Young LLP.
24 Powers of Attorney (included on page II-3 of this
Registration Statement).
</TABLE>

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
and Exchange Act of 1934 (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the registration
statement 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.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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 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 Act and will be governed by the final adjudication of
such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant

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<PAGE> 65

pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time it was
declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, 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.

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<PAGE> 66

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Eden Prairie, State of Minnesota, on October 6, 2000.
CIMA LABS INC.
By /s/ JOHN M. SIEBERT
------------------------------------
John M. Siebert, Ph.D.
President and Chief Executive
Officer

POWER OF ATTORNEY

Each of the undersigned hereby appoints John M. Siebert, Ph.D. and David A.
Feste, and each of them (with full power to act alone), as attorneys and agents
for the undersigned, with full power of substitution, for and in the name, place
and stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, any and all amendments
and exhibits to this Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, as amended, and any and all applications, instruments
and other documents to be filed with the Securities and Exchange Commission
pertaining to the registration of the securities covered hereby, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary or desirable.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons, representing a
majority of the Board of Directors, in the capacities indicated on October 6,
2000.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN M. SIEBERT President, Chief Executive Officer (Principal
--------------------------------------------- Executive Officer) and Director
John M. Siebert, Ph.D.

/s/ DAVID A. FESTE Chief Financial Officer (Principal Financial and
--------------------------------------------- Accounting Officer) and Secretary
David A. Feste

/s/ TERRENCE W. GLARNER Director
---------------------------------------------
Terrence W. Glarner

/s/ STEVEN B. RATOFF Director
---------------------------------------------
Steven B. Ratoff

/s/ JOSEPH R. ROBINSON Director
---------------------------------------------
Joseph R. Robinson
</TABLE>

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<PAGE> 67

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT METHOD OF FILING
------- ----------------------- ------------------------
<C> <S> <C>
1 Form of Underwriting Agreement. To be Filed by Amendment
4.1 Fifth Restated Certificate of Incorporation.(1) Incorporated by
Reference
4.2 Third Restated Bylaws.(2) Incorporated by
Reference
4.3 Rights Agreement dated March 14, 1997, between the Incorporated by
Registrant and Norwest Bank Minnesota, N.A. as Rights Reference
Agent.(3)
5 Opinion of Faegre & Benson LLP. Filed Electronically
23.1 Consent of Faegre & Benson LLP (included in Exhibit 5). Filed Electronically
23.2 Consent of Ernst & Young LLP. Filed Electronically
24 Powers of Attorney (included on Page II-3 of this Filed Electronically
Registration Statement).
</TABLE>

------------
(1) Incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-K for
the year ended December 31, 1994, File No. 0-24424.

(2) Incorporated by reference to Exhibit 3.2 to the Registrant's Form 10-Q for
the period ended June 30, 1999, File No. 0-24424.

(3) Incorporated by reference to Exhibit 2 to the Registrant's Current Report of
Form 8-K, filed March 25, 1997, File No. 0-24424.

II-5