SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2001
	Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from            to

Commission File Number 0-24424

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

Delaware (State or other jurisdiction of incorporation or organization)	41-1569769 (I.R.S. Employer Identification Number)
10000 Valley View Road, Eden Prairie, MN 55344-9361 (Address of principal executive offices and zip code)	(952) 947-8700 (Registrant’s telephone number, including area code)

         Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

                  Yes     No  

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

Common Stock, $.01 par value	14,729,938
(Class)	(Outstanding at November 5, 2001)

INDEX

CIMA LABS INC.

	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets – September 30, 2001 and December 31, 2000.		3
Statements of Operations — Three and nine months ended September 30, 2001 and September 30, 2000.		4
Statements of Cash Flows — Nine months ended September 30, 2001 and September 30, 2000.		5
Notes to Financial Statements.		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		10
Item 3. Quantitative and Qualitative Disclosures about Market Risks.		24
PART II. OTHER INFORMATION
Items 1, 2, 3, 4 and 5 have been omitted since all items are inapplicable or answers negative.
Item 6. Exhibits and Reports on Form 8-K		25
Signature		26

CIMA and the CIMA logo are trademarks of CIMA. All other trademarks used in this report are the property of their respective owners. We have registered “CIMA®,” “CIMA LABS INC.®,” and “OraSolv®” as trademarks with the U.S. Patent and Trademark Office. We also use the trademarks “OraSolvSR™,” “DuraSolv™,” “PakSolv™,” “OraVescent™SL/BL” and “OraVescent™SS.” “Triaminic®” and “Softchews®” are trademarks of Novartis. “Zomig®,” “Zomig-ZMT™” and “Rapimelt™” are trademarks of AstraZeneca. “Remeron®” and “SolTab™” are trademarks of Organon. “Tempra®” is a registered trademark of a Canadian affiliate of Bristol-Myers Squibb. “FirsTabs™” is a trademark of Bristol-Myers Squibb. “NuLev™” is a trademark of Schwarz Pharma.

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TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
		Balance Sheets
		Statements of Operations
		Statements of Cash Flows
		Notes to Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risks
PART II — OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Supply Agreement, dated 8/31/01
Supply Agreement, dated 1/1/01
License Agreement #1, executed 9/2/01

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Balance Sheets
CIMA LABS INC.

		September 30,			December 31,
		2001			2000
		(Unaudited)			(See note)
Assets
Current assets:
	Cash and cash equivalents	$	19,567,075		$	91,587,716
	Available-for-sale securities		54,408,214			10,425,456
	Trade accounts receivable, net		7,785,268			7,679,617
	Interest receivable		2,325,748			970,997
	Inventories, net		2,963,854			1,381,476
	Prepaid expenses		236,196			226,908
Total current assets			87,286,355			112,272,170
Other assets:
	Available-for-sale securities		92,970,423			61,149,019
	All other, net		4,729,766			299,033
Total other assets			97,700,189			61,448,052
Property and equipment:
	Property, plant and equipment		35,493,678			23,268,688
	Accumulated depreciation		(9,290,310	)		(7,527,218	)
			26,203,368			15,741,470
Total assets		$	211,189,912		$	189,461,692
Liabilities and stockholders’ equity
Current liabilities:
	Accounts payable	$	1,823,366		$	976,576
	Accrued expenses		1,847,554			1,484,931
	Deferred revenue		95,833			75,000
Total current liabilities			3,766,753			2,536,507
Stockholders’ equity:
	Convertible preferred stock, $.01 par value; 5,000,000 shares authorized; -0- shares issued and outstanding		—			—
	Common Stock, $.01 par value; 60,000,000 shares authorized; 14,722,342 and 14,358,370 shares issued and outstanding		147,223			143,584
	Additional paid-in capital		235,605,048			228,631,594
	Accumulated deficit		(31,478,652	)		(41,990,951	)
	Accumulated other comprehensive income		3,149,540			140,958
Total stockholders’ equity			207,423,159			186,925,185
Total liabilities and stockholders’ equity		$	211,189,912		$	189,461,692

Note: The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying notes.

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Statements of Operations
CIMA LABS INC.
(Unaudited)

			For the Three Months Ended						For the Nine Months Ended
			September 30,			September 30,			September 30,			September 30,
			2001			2000			2001			2000
Revenues:
	Net sales		$	5,376,046		$	3,195,075		$	13,273,155		$	9,291,430
	Product development fees and licensing			1,971,880			1,983,676			5,883,197			6,374,889
	Royalties			1,469,448			187,500			3,675,859			1,166,500
				8,817,374			5,366,251			22,832,211			16,832,819
Operating expenses:
	Cost of goods sold			4,929,970			2,692,746			11,648,178			9,417,960
	Research and product development			1,550,867			1,267,697			4,400,916			3,484,806
	Selling, general and administrative			1,218,385			996,202			3,646,034			2,845,044
				7,699,222			4,956,645			19,695,128			15,747,810
Operating income				1,118,152			409,606			3,137,083			1,085,009
Other income:
	Investment income			2,686,047			220,360			7,573,770			502,906
	Other income (expense)			(828	)		(6,982	)		(2,074	)		(22,824	)
				2,685,219			213,378			7,571,696			480,082
Income before provision for income taxes				3,803,371			622,984			10,708,779			1,565,091
Provision for income taxes (benefit)				(38,439	)		—			196,482			—
Income before cumulative effect of a change in accounting principle				3,841,810			622,984			10,512,297			1,565,091
Cumulative effect of change in accounting principle				—			—			—			(799,337	)
Net income			$	3,841,810		$	622,984		$	10,512,297		$	765,754
Net income per share:
	Basic
		Income per share before cumulative effect of a change in accounting principle	$	.26		$	.06		$	.72		$	.15
		Loss per share from the cumulative effect of a change in accounting principle		.00			.00			.00			(.08	)
Net income per basic share			$	.26		$	.06		$	.72		$	.07
	Diluted
		Income per share before cumulative effect of a change in accounting principle	$	.24		$	.05		$	.68		$	.13
		Loss per share from the cumulative effect of a change in accounting principle		.00			.00			.00			(.06	)
Net income per diluted share			$	.24		$	.05		$	.68		$	.07
Weighted average number of shares:
	Basic			14,715,046			10,895,509			14,564,167			10,551,628
	Diluted			15,699,443			12,194,910			15,556,711			11,682,029

See accompanying notes.

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Statements of Cash Flows
CIMA LABS INC.

(Unaudited)

				For the Nine Months Ended
				September 30,
				2001			2000
Operating activities:
Net income				$	10,512,297		$	765,754
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization			1,857,910			1,253,517
		Income tax benefit on stock options exercised			4,100,000			—
		Deferred income taxes			(4,300,000	)		—
		Gain on sale of investment securities			(578,491	)		—
		Loss on impairment of assets			—			400,000
		Cumulative effect of a change in accounting principle			—			799,337
		Changes in operating assets and liabilities:
			Accounts receivable and other assets		(119,115	)		(3,389,001	)
			Interest receivable		(1,354,751	)		(3,836	)
			Inventories		(1,582,378	)		1,184,531
			Accounts payable		846,790			(1,519,120	)
			Accrued expenses and other		362,625			(407,122	)
			Deferred revenue		20,833			(574,337	)
Net cash provided by (used in) operating activities					9,765,720			(1,490,277	)
Investing activities:
	Purchases of property, plant and equipment				(12,224,989	)		(5,714,848	)
	Patents and trademarks				(221,376	)		(44,819	)
	Purchases of available-for-sale securities				(127,798,338	)		(10,292,220	)
	Sales of available-for-sale securities				55,581,249			5,919,222
Net cash used in investing activities					(84,663,454	)		(10,132,665	)
Financing activities:
	Stock option exercise proceeds				2,877,093			1,032,805
	Net proceeds from stock offerings				—			19,400,000
	Security deposits on leases				—			150,103
	Notes payable				—			(3,500,000	)
	Payments on capital lease obligations				—			(52,161	)
Net cash provided by financing activities					2,877,093			17,030,747
Increase (decrease) in cash and cash equivalents					(72,020,641	)		5,407,805
Cash and cash equivalents at beginning of period					91,587,716			2,480,698
Cash and cash equivalents at end of period				$	19,567,075		$	7,888,503

See accompanying notes.

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CIMA LABS INC.
Notes to Financial Statements
(Unaudited)

1. Basis of Presentation

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 the need for water. The Company develops applications for technologies that are licensed to pharmaceutical company partners. The Company currently manufactures and packages five pharmaceutical brands incorporating its proprietary fast-dissolve technologies. Revenues are comprised of three components: net sales of products it manufactures; product development fees and licensing revenues for development activities conducted through collaborative agreements with pharmaceutical companies; and royalties on the sales of products sold by pharmaceutical companies under license from the Company.

The accompanying unaudited financial statements 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 three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. For further information, you should refer to the audited financial statements and accompanying notes contained in our Annual Report on Form 10-K for the year ended December 31, 2000.

2. Use of Estimates

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

3. Cash Equivalents and Investments

The Company’s investments in available-for-sale securities are carried at fair value, with unrealized gains and losses included in accumulated other comprehensive income as a separate component of stockholders’ equity. As of September 30, 2001, the amortized cost and estimated market value of available-for-sale securities, all of which have contractual maturities of three years or less, are as follows:

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				Gross		Gross		Estimated
		Amortized		Unrealized		Unrealized		Market
		Cost		Gains		Losses		Value
As of September 30, 2001:
	Asset backed securities	$	27,708,884	$	596,128	$	—	$	28,305,012
	Corporate bonds and notes		70,264,268		2,069,005		—		72,333,273
	Euro notes		18,337,905		466,020		—		18,803,925
	Floating rate notes		27,918,040		20,457		2,070		27,936,427
Totals – September 30, 2001		$	144,229,097	$	3,151,610	$	2,070	$	147,378,637
As of December 31, 2000:
	Commercial paper	$	4,449,373	$	—	$	813	$	4,448,560
	Asset backed securities		23,217,006		71,690		—		23,288,696
	Corporate bonds and notes		35,445,721		158,688		10,541		35,593,868
	Euro notes		5,338,075		—		77,860		5,260,215
	Floating rate notes		1,998,791		—		31		1,998,760
	U.S. government securities		984,551		—		175		984,376
Totals – December 31, 2000		$	71,433,517	$	230,378	$	89,420	$	71,574,475

4. Income Per Share

Income per share for the three and nine months ended September 30, 2001 and 2000 are summarized in the following table:

		Three Months Ended				Nine Months Ended
		September 30,		September 30,		September 30,		September 30,
		2001		2000		2001		2000
Numerator:
	Net income	$	3,841,810	$	622,984	$	10,512,297	$	765,754
Denominator:
	Denominator for basic earnings per share – weighted average shares outstanding		14,715,046		10,895,509		14,564,167		10,551,628
	Effect of dilutive stock options		984,397		1,299,401		992,544		1,130,401
Denominator for diluted earnings per share – weighted average shares outstanding			15,699,443		12,194,910		15,556,711		11,682,029
Basic earnings per share		$	.26	$	.06	$	.72	$	.07
Diluted earnings per share		$	.24	$	.05	$	.68	$	.07

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5. Comprehensive Income

Comprehensive income consists of net income and net unrealized gains on available-for-sale securities.

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2001		2000		2001		2000
Net income	$	3,841,810	$	622,984	$	10,512,297	$	765,754
Unrealized gain on available-for-sale securities		1,341,554		—		3,008,582		—
Total comprehensive income	$	5,183,364	$	622,984	$	13,520,879	$	765,754

6. Inventories

Inventories are stated at the lower of cost (first in, first out) or fair market value.

	September 30, 2001		December 31, 2000
Raw materials	$	2,628,959	$	1,370,822
Work in process		19,482		10,654
Finished products		315,413		—
	$	2,963,854	$	1,381,476

7. Tax Expense

Provisions for income taxes for the three and nine month periods ended September 30, 2001, reflect provisions for non-U.S. withholding taxes on the Company’s royalty income paid from sources outside the U.S. and state franchise taxes. At December 31, 2000, the Company had a valuation reserve of $21.4 million and a net deferred tax asset of $21.4 million. As of September 30, 2001, the Company reduced its valuation reserve by $4.3 million to reflect its current estimate of realizable deferred tax assets related to net operating loss carryforwards.

8. Segment Information – Major Customers

The Company operates within a single segment: the development and manufacture of fast-dissolve and enhanced-absorption oral drug delivery systems. Revenues are comprised of three components: net sales of products utilizing the Company’s proprietary fast-dissolve technologies; product development fees and licensing revenues for development activities conducted by the Company through collaborative agreements with pharmaceutical companies; and royalties on the sales of products manufactured by the Company, which are sold by pharmaceutical companies under licenses from the Company. Less than 10 percent of the Company’s revenues are earned from activities conducted outside the United States.

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

	For the Three Months Ended						For The Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2001			2000			2001			2000
American Home Products		—	%		3	%		1	%		10	%
AstraZeneca		20			24			25			15
Bristol-Myers Squibb		2			4			1			3
Organon		20			40			25			26
Novartis		41			22			32			44
Schwarz Pharma		5			2			7			—
Other		12			5			9			2
Total		100	%		100	%		100	%		100	%

Trade accounts receivable at September 30, 2001, of approximately $7,785,000 were comprised primarily of the following customers: Organon (20%), Novartis (34%), AstraZeneca (22%), and Schwarz Pharma (6%).

9. Reclassifications

Certain prior period balances have been reclassified in order to conform with the presentation for the three and nine months ended September 30, 2001. These reclassifications have no impact on the net income or shareholders’ equity as previously reported.

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

Forward-Looking Statements

We make many statements in this Quarterly Report on Form 10-Q under the captions Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Factors That Could Affect Future Results and elsewhere, which 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, plan and other 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 Factors That Could Affect Future Results and elsewhere in this report. These forward-looking statements speak only as of the date of this report, 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 report.

These forward-looking statements include statements relating to the potential capacity of our second production line; expected growth in product sales in the fourth quarter of 2001; 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 report to conform these statements to actual results, except as required by law.

Overview

We develop and manufacture pharmaceutical products based on our proprietary OraSolv and DuraSolv technologies. We have agreements with several pharmaceutical companies regarding a variety of potential products, with an emphasis on prescription products. We currently manufacture five commercial pharmaceutical brands using our fast-dissolve technologies. These products include Triaminic Softchews for Novartis, Tempra FirsTabs for Bristol-Meyers Squibb, Remeron SolTab for Organon, NuLev for Schwarz Pharma and Zomig-ZMT and Zomig Rapimelt for AstraZeneca. 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. In addition, we are currently developing other drug delivery technologies.

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Revenues from product sales and from royalties will fluctuate from quarter to quarter and from year to year depending on, among other factors, demand for our products by patients, new product introductions, the seasonal nature of some of our products and pharmaceutical company ordering patterns. Revenues from product development fees and licensing revenue will fluctuate from quarter to quarter and from year to year depending on, among other factors, the number of new collaborative agreements that we enter into; the number of product development milestones we achieve under collaborative agreements, including making submissions to, and obtaining approvals from, the FDA for products in development; and the level of our development activity conducted for pharmaceutical companies under collaborative agreements.

During the first nine months of 2001, we completed the installation of a second production line, which we expect to more than double our manufacturing capacity. However, our new production line will not be fully operational until validation for each of our products is completed, which we expect to occur during the fourth quarter of 2001.

Results of Operations

Three and Nine Month Periods Ended September 30, 2001 and 2000

Operating Revenues. Total operating revenues for the third quarter ended September 30, 2001, were $8.8 million, an increase of $3.5 million, or 64%, over the same period in 2000, and for the first nine months of 2001, total operating revenues were $22.8 million, an increase of $6.0 million, or 36%, over same period in 2000. Operating revenues from AstraZeneca, Organon and Novartis, our three largest pharmaceutical company partners, together represented 81% and 82% of our total operating revenues in the third quarter and first nine months of 2001, respectively, compared to 86% and 85% for the corresponding periods in 2000. The increases in total operating revenue were due to higher manufacturing volumes of products we sell to, and royalties paid by, our pharmaceutical company partners, partially offset by lower product development fees and licensing revenue.

Revenues from net sales of products we manufacture for the third quarter of 2001 were $5.4 million, an increase of $2.2 million, or 68%, over the same period in 2000, and for the first nine months of 2001, net sales of products we manufacture were $13.3 million, an increase of $4.0 million, or 43%, over the same period in 2000. The third quarter increase was due primarily to increased shipments of Triaminic, Zomig-ZMT, Zomig Rapimelt and NuLev that offset decreased Remeron SolTab shipments. The decline in Remeron SolTab shipments primarily resulted from the completion of high-volume, pre-launch shipments made during the third quarter of 2000 for the Remeron SolTab launch. The increase for first nine months of this year was due primarily to increased shipments of Remeron SolTab, NuLev and Zomig-ZMT, which were introduced in the U.S. during the first half of 2001, as well as international shipments of Zomig Rapimelt. For the first nine months of 2001, 50% of our product sales came from branded prescription products compared to 28% in the corresponding period in 2000. We expect the percentage of product sales derived from branded prescription products to remain at or near 50% during the rest of 2001.

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Revenues from product development fees and licensing were $2.0 million for both the third quarter of 2001 and 2000, and for the first nine months of 2001, revenues from product development fees and licensing were $5.9 million, a decrease of $500,000, or 8%, from the same period in 2000. The decrease for the nine months ended September 30, 2001, was primarily due to lower amortization of deferred revenue for up-front license fees, partially offset by increased revenue from product development fees. For the nine month period ended September 30, 2001, revenues from product development fees and licensing included deferred revenue amortization of $229,000 compared to $1.2 million for the same period in 2000. Revenues from product development fees and licensing in subsequent quarters will depend on our success in signing new license and development agreements with pharmaceutical companies. We expect fourth quarter product development fees and licensing revenues to be higher due to an increased backlog of partner-funded development activities.

Revenues from royalties were $1.5 million in the third quarter of 2001, an increase of $1.3 million, or 684%, over the same period in 2000, and for the first nine months of 2001, royalty revenue was $3.7 million, an increase of $2.5 million, or 215%, over the same period in 2000. The royalty revenue increases were primarily due to strong European sales by AstraZeneca of Zomig Rapimelt, as well as U.S. launch sales of Zomig-ZMT, Remeron SolTab and NuLev. In the fourth quarter of 2001, we expect royalty revenue to exceed the third quarter 2001 levels due to AstraZeneca’s U.S. launch of 5.0 milligram strength Zomig-ZMT tablets and from the expected market growth of Zomig Rapimelt in Europe and Remeron SolTab in the U.S.

Cost of Goods Sold. Cost of goods sold increased to $4.9 million, or 83%, in the third quarter of 2001 from $2.7 million in the third quarter of 2000, and cost of goods sold in the first nine months of 2001 increased to $11.6 million, or 24%, from $9.4 million over the same period in 2000. The third quarter increase was principally due to higher production volumes over the same period in 2000 and a shift in our product mix to products that cost more to produce. Cost of goods sold increased for the first nine months of 2001 due mainly to higher production volumes over the same period in 2000.

Gross profits on product sales were $446,000 or 8% of net product sales in the third quarter of 2001 compared to $502,000 or 16% in last year’s third quarter, and were $1.6 million or 12% of net product sales in the first nine months of 2001, compared to a negative gross profit and gross profit margin in the same period in 2000. The decrease in this year’s third quarter gross profits and gross profit margin from last year’s third quarter was due mainly to decreased Remeron SolTab shipments and a shift to lower margin over-the-counter products. Over-the-counter products accounted for 64% of total product sales for the third quarter of 2001, compared to 31% for the third quarter of 2000. The improvement in gross profits and gross profit margin for the first nine months of 2001 was principally due to significant increases in production volumes of higher margin branded prescription products.

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Research and Product Development Expenses. Research and product development expenses were $1.6 million in the third quarter of 2001, an increase of $283,000, or 22%, over the same period in 2000, and for the first nine months of 2001, these expenses were $4.4 million, an increase of $916,000, or 26%, over the same period in 2000. The increases were due primarily to increased development activity for Organon, AstraZeneca, and partner-funded feasibility projects for potential new products, as well as additional development activities related to our OraVescent technology. In the fourth quarter of 2001, we expect research and product development expenses to increase modestly due to increased internal development of proprietary products.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1.2 million in the third quarter of 2001, an increase of $222,000, or 22%, over the same period in 2000, and for the first three quarters of 2001, these expenses were $3.6 million, an increase of $801,000, or 28%, over the same period in 2000. The increases were due primarily to costs associated with increased professional staffing and infrastructure improvements. In the fourth quarter of 2001, we expect selling, general and administrative expenses to increase moderately as we continue to make investments in infrastructure to support our anticipated growth.

Other Income (Expense). Other income was $2.7 million in the third quarter of 2001, an increase of $2.5 million over the same period in 2000, and for the first three quarters of 2001, other income was $7.6 million, an increase of $7.1 million, over the same period in 2000. Other income consists primarily of investment income comprised of interest earned on securities and gains realized on the sale of securities. The increases in other income were primarily due to higher levels of cash available for investment as a result of the completion of a private placement of equity in March 2000 and a public equity offering in November 2000. In the fourth quarter of 2001, we expect other income to be at or near third quarter levels.

Liquidity and Capital Resources

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

Working capital decreased from $109.7 million at December 31, 2000, to $83.5 million at September 30, 2001. The $26.2 million decrease in working capital was due primarily to the purchase of $31.8 million in available-for-sale securities that mature in more than one year and, as a result, are classified as other assets. In addition, we spent approximately $12.2 million making capital improvements to our manufacturing facility and purchasing our Brooklyn Park facility. The decrease in working capital was partially offset by increases in cash from operations and cash proceeds from the exercise of stock options. We invest excess cash in interest-bearing money market accounts and investment grade securities.

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We plan to spend approximately $15.0 to $20.0 million over the next twelve months to expand our Brooklyn Park research and development center and to complete other capital improvements. We are considering purchasing our Eden Prairie facility, which we currently lease. We also expect to fund the development of additional proprietary products using our OraSolv and DuraSolv technologies and may fund potential acquisitions of new technologies. In September of 2001, we announced a stock repurchase program that, depending on market conditions and other factors, may result in the use of up to an additional $20.0 million.

We believe that our cash and cash equivalents and marketable securities, together with expected revenues from operations, 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.

Factors That Could Affect Future Results

Certain statements made in this Quarterly Report on Form 10-Q are forward-looking statements based on our current expectations, assumptions, estimates and projections about our business and our industry. These forward-looking statements involve risks and uncertainties. Our business, financial condition and results of operations could differ materially from those anticipated in these forward-looking statements as a result of certain factors, as more fully described below and elsewhere in this Form 10-Q. You should consider carefully the risks and uncertainties described below, which are not the only ones facing our company. Additional risks and uncertainties also may impair our business operations.

The Loss Of One Of Our Major Customers Could Reduce Our Revenues Significantly.

Revenues from AstraZeneca, Organon and Novartis together represented approximately 82% of our total operating revenues for both the year ended December 31, 2000, and for the nine months ended September 30, 2001. 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

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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, Organon, Novartis and Schwarz Pharma.

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. The second production line has been installed and the required validation procedures have been completed for most, but not all, products. 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 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.

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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 operating revenues increased 79% and 36% for the year ended December 31, 2000, and for the nine month period ended September 30, 2001, respectively, 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, John Hontz, our Chief Operating Officer, or David Feste, our Chief Financial 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 employment agreements that run to January 1, 2004 with Dr. Siebert and Mr. Feste and an employment agreement that runs to September 1, 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

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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 Regulations 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.

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.

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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 lines in our Eden Prairie facility. If our existing production lines 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 lines, 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.

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.

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.

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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 eight patents on our drug delivery and packaging 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 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.

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Third Parties May Claim That Our Technologies, Or The Products In Which They Are Used, Infringe On Their Rights And We May Incur Significant Costs Resolving These Claims.

Third parties may claim that the manufacture, use or the sale of our drug delivery technologies infringe on 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, and royalties on, the sale of products incorporating our technology. 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 Our Stock May Fall.

Although we were profitable for the year ended December 31, 2000 and the quarter ended September 30, 2001, we have accumulated aggregate net losses from inception of approximately $42.0 and $31.5 million, respectively. If we are unable to sustain profitable operations in future periods, 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:

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• the demand for our products;

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

• 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 The Equity Interest Of An Investor.

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, 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. For full-year 2000 and the first nine months of 2001, operating revenues from Novartis, which included revenues related to Triaminic, a seasonal cold, cough and allergy product, represented 36% and 32%, respectively, of our total operating revenues. We may not be successful in developing a mix of products to reduce these seasonal variations.

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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 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.

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.

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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.

Our Stock Price Has Been Volatile 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 year ended December 31, 2000, the closing sale price for our common stock ranged from $12.13 to $72.13. For the nine months ended September 30, 2001, the closing sale price of our common stock ranged from $43.05 to $85.75. 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;

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

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

• the level of our spending on new drug delivery technology development and technology acquisition, and internal product development.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

The Company is subject to interest rate and foreign currency risks. Our investments in fixed-rate debt securities, which are classified as available-for-sale at September 30, 2001, have remaining maturities ranging from 3 to 36 months and thus are exposed to the risk of fluctuating interest rates. Available-for-sale securities had a market value of $147 million at September 30, 2001, and represented 70% of our total assets. From time to time, we may enter into foreign currency denominated contractual commitments to purchase assets for our manufacturing expansion, but we will also enter into forward foreign exchange contracts to limit our exposure to fluctuating exchange rates. At September 30, 2001, we did not have any contractual commitments denominated in a foreign currency.

We performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates to the underlying currency exposures described above and in interest rates applicable to fixed rate investments maturing during the next twelve months that are subject to reinvestment risk. As of September 30, 2001, the analysis indicated that these hypothetical market movements could have a material effect on our financial position, results of operations or cash flow in the range of $300,000 to $400,000 on an annualized basis.

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PART II — OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit	Description of Document	Method of Filing
3.1	Fifth Restated Certificate of Incorporation of CIMA LABS INC., as amended.(1)	Incorporated by Reference
3.2	Third Restated Bylaws.(2)	Incorporated by Reference
4.1	Form of Certificate for Common Stock.(3)	Incorporated by Reference
4.2	Amended and Restated Rights Agreement dated June 26, 2001, between the Registrant and Wells Fargo Bank Minnesota, N.A. as Rights Agent.(4)	Incorporated by Reference
10.1	Supply Agreement, dated August 31, 2001, between CIMA and AstraZeneca UK Limited.*	Filed herewith
10.2	Supply Agreement, dated January 1, 2001, and executed September 2, 2001, between Novartis Consumer Health, Inc. and CIMA.*	Filed herewith
10.3	License Agreement No. 1, executed September 2, 2001, by and between Novartis Consumer Health, Inc. and CIMA, amending that certain License Agreement dated July 1, 1998, between Novartis and CIMA. *	Filed herewith

(1)	Incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-8, filed June 13, 2001, 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 an exhibit to the Registrants Registration Statement on Form S-1, File No. 33-80194.
(4)	Incorporated by reference to Exhibit 1 to the Registrant’s Amendment No. 1 to Registration Statement on Form 8-A/A, filed July 18, 2001, File No. 0-24424.
*	Confidential information has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

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(b) Reports on Form 8-K

No reports on Form 8-K were filed for the quarter ended September 30, 2001.

SIGNATURE

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

		CIMA LABS INC. Registrant
Date  November 12, 2001	By	/s/ David A. Feste David A. Feste Chief Financial Officer (principal financial and accounting officer, duly authorized to sign on behalf of the Registrant)

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\

Exhibit Index

Exhibit	Description of Document	Method of Filing
3.1	Fifth Restated Certificate of Incorporation of CIMA LABS INC., as amended.(1)	Incorporated by Reference
3.2	Third Restated Bylaws.(2)	Incorporated by Reference
4.1	Form of Certificate for Common Stock.(3)	Incorporated by Reference
4.2	Amended and Restated Rights Agreement dated June 26, 2001, between the Registrant and Wells Fargo Bank Minnesota, N.A. as Rights Agent.(4)	Incorporated by Reference
10.1	Supply Agreement, dated August 31, 2001, between CIMA and AstraZeneca UK Limited.*	Filed herewith
10.2	Supply Agreement, dated January 1, 2001, and executed September 2, 2001, between Novartis Consumer Health, Inc. and CIMA.*	Filed herewith
10.3	License Agreement No. 1, executed September 2, 2001, by and between Novartis Consumer Health, Inc. and CIMA, amending that certain License Agreement dated July 1, 1998, between Novartis and CIMA.*	Filed herewith

(1)	Incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-8, filed June 13, 2001, 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 an exhibit to the Registrants Registration Statement on Form S-1, File No. 33-80194.
(4)	Incorporated by reference to Exhibit 1 to the Registrant’s Amendment No. 1 to Registration Statement on Form 8-A/A, filed July 18, 2001, File No. 0-24424.
*	Confidential information has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.