SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission File Number 0-24424

CIMA LABS INC.

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value

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 [X] No [    ]

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [    ]

The aggregate market value of common stock held by non-affiliates of the registrant, based upon the last sale price of the common stock reported on the Nasdaq National Market tier of The Nasdaq Stock Market on June 30, 2003 was $382,690,252. Common stock outstanding at March 8, 2004 was 14,553,033 shares.

Table of Contents

PART I.

Forward-Looking Statements

     We make many statements in this Annual Report on Form 10-K under the captions Business, Properties, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Factors That Could Affect Future Results 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 under the caption 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, without limitation, statements relating to expected changes in operating revenues and income; the expected decline in other income; utilization of remaining tax assets; future expense levels; the adequacy and use of our capital resources; the timing of availability of our products and our competitors’ products; expected demand for products using our technologies; the expansion and adequacy of our production capacity and facilities; 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.

     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 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.

     We have registered “CIMA®,” “CIMA LABS INC.®,” “OraSolv®,” “OraVescent®,” “DuraSolv®” and “PakSolv®” as trademarks with the U.S. Patent and Trademark Office. We also use the trademarks “OraSolv®SR/CR,” “OraVescent®SL/BL” and “OraVescent®SS.” All other trademarks used in this report are the property of their respective owners. “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 registered trademark of Schwarz Pharma, Inc., “Alavert™” and “Dimetapp®” are trademarks of Wyeth. “Fazaclo™” is a trademark of Alamo Pharmaceuticals. “Allegra®” is a registered trademark of Aventis Pharmaceuticals Inc. “Actiq®” is a registered trademark of Anesta Corporation. “Claritin®” and “Reditabs®” are registered trademarks of Schering Corporation. “Maxalt®” is a registered trademark of Merck & Co., Inc. “Zyprexa®” is a registered trademark of Eli Lilly and Company. “Zydis®” is a registered trademark of R.P. Scherer Corporation. “FlashDose®” is a registered trademark of Biovail Corporation. “WOWTab®” is a registered trademark of Yamanouchi Pharma Technologies, Inc. “Flashtab®” is a registered trademark of Ethypharm. “OraQuick™” is a trademark of KV Pharmaceutical Company. “Pharmaburst™” is a trademark of SPI Pharma, Inc.

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ITEM 1. BUSINESS

Company Overview

     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 website is www.cimalabs.com. The information on our website is not incorporated into and is not intended to be a part of this report. We make available free of charge on or through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission. Unless the context otherwise indicates, all references to the “Registrant,” the “Company,” or “CIMA” in this Form 10-K relate to CIMA LABS INC.

     On August 5, 2003, the Company, aaiPharma Inc. (“aaiPharma”), Scarlet Holding Corporation, Scarlet MergerCo, Inc. and Crimson MergerCo, Inc. entered into an Agreement and Plan of Merger (the “CIMA/aaiPharma Agreement”). On November 3, 2003, CIMA terminated the CIMA/aaiPharma Agreement, and paid to aaiPharma a termination fee of $11.5 million as required by the agreement.

     Following the termination of the CIMA/aaiPharma Agreement, the Company, Cephalon, Inc., a Delaware corporation (“Cephalon”), and C MergerCo, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Cephalon (“C MergerCo”), entered into an Agreement and Plan of Merger, dated as of November 3, 2003 (the “CIMA/Cephalon Agreement”). Pursuant to the CIMA/Cephalon Agreement, Cephalon will acquire the Company through the merger of C MergerCo with and into CIMA, with the Company surviving as a wholly owned subsidiary of Cephalon (the “Merger”). In connection with the Merger, each outstanding share of the Company’s common stock will be converted into the right to receive $34.00 per share in cash. Each outstanding option to purchase the Company’s common stock, whether or not vested or exercisable, will be converted into the right to receive an amount of cash equal to $34.00 less the exercise price for such option. The completion of the Merger is subject to several customary closing conditions, including the approval of the CIMA/Cephalon Agreement by the Company’s stockholders and the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

     We are pursuing a dual operating strategy. Based on a collaborative business model, we develop and manufacture orally disintegrating versions of drugs for pharmaceutical company partners. The other part of our strategy is to develop proprietary products utilizing both our orally disintegrating technologies, as well as our OraVescent enhanced absorption, transmucosal drug delivery system. OraSolv and DuraSolv, our proprietary orally disintegrating technologies, are oral dosage forms that disintegrate quickly in the mouth without chewing or the need for water. We currently manufacture seven pharmaceutical brands utilizing our DuraSolv and OraSolv orally disintegrating technologies: three prescription brands and four over-the counter brands. The four over-the-counter brands include Triaminic Softchews for Novartis, Tempra FirsTabs for Bristol-Myers Squibb/MeadJohnson, and Alavert and Dimetapp ND for Wyeth; and the three prescription brands include AstraZeneca’s Zomig-ZMT and its equivalent for markets outside the U.S., Organon’s Remeron SolTab and its equivalent for markets outside the U.S., and NuLev for Schwarz Pharma, Inc.

     We believe that the attributes of our OraSolv and DuraSolv orally disintegrating technologies may enable consumers to receive medication in an oral dosage form that is more convenient than traditional tablet-based oral dosage forms. Both OraSolv and DuraSolv technologies are capable of incorporating taste masked active drug ingredients into tablets that have the following potential benefits:

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ease of administration;

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improved dosing compliance; and

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increased dosage accuracy compared to liquid formulations.

     We generate revenue from net sales of products we manufacture for pharmaceutical companies using our proprietary orally disintegrating 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 manufactured by us and sold by pharmaceutical companies under licenses from us. Net sales of products we manufacture for and the royalties we receive from Novartis for Triaminic Softchews and Wyeth for Alavert and Dimetapp ND brands are seasonal in nature, and can be affected by the strength and duration of the cough and cold and allergy seasons in the U.S., respectively.

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     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 may enable our pharmaceutical company partners to extend the life cycles of their products beyond existing patent expiration dates of those compounds. Our technologies may also provide benefits to the healthcare system more generally. For example, improved compliance with prescribed drug regimens can enhance therapeutic outcomes and potentially reduce overall costs.

     In addition to our proprietary OraSolv and DuraSolv orally disintegrating technologies, we are developing several new drug delivery technologies. We are developing new OraVescent drug delivery technologies that include OraVescent SL for drug delivery under the tongue (“sublingual”) and OraVescent BL for drug delivery between the gum and the cheek (“buccal”). An additional OraVescent technology, OraVescent SS, is designed for site-specific administration, which may allow an active drug ingredient to be transported to a specific part of the gastrointestinal tract where it is released for absorption. We originally designed and continue to design our OraVescent technologies to improve the transport of active drug ingredients across mucosal membranes in the oral cavity or the gastrointestinal tract. In addition, our microemulsion based technology, MicroSolv, is a proprietary technology that allows a microemulsion to be incorporated into a tablet form. This technology may improve the bioavailability (the rate at which a drug is absorbed or becomes available at the site of physiological activity after administration) of a wide range of active drug ingredients that may otherwise not be suitable for administration in a solid oral dosage form.

     Our first proprietary product, OraVescent Fentanyl, is being developed as a medication for breakthrough cancer pain. We expect that this product will be in Phase III clinical trials in 2004. This dosage form will be used in the buccal cavity, between the gum and cheek. We have licensed this product to Taiho Pharmaceuticals for the Japanese market.

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 a variety of therapeutic compounds, improving safety, efficacy, ease of 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 experts have noted that the global drug delivery market reached $51.0 billion in 2002 sales, with oral drug delivery technologies accounting for approximately 55% of sales.

     Orally disintegrating technology has recently emerged as an important type of drug delivery technology that enables tablets to disintegrate quickly in the mouth without the use of water or chewing. Our orally disintegrating technology may improve compliance with a prescribed drug regimen, as orally disintegrating medications are easier to swallow and may taste better than non-taste masked alternatives. In addition, orally disintegrating technology may improve dosing accuracy relative to liquid formulations. Finally, and most importantly, orally disintegrating technology may provide a significant commercial benefit, as studies we have conducted indicate that patients 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. Based on one industry source, prescription brands with annual worldwide sales estimated at $80.0 billion will lose patent protection by 2005. In order to maintain their revenues, many large pharmaceutical companies are defending against generic competition by enhancing existing drug products with innovative 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.

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     Direct-to-Consumer Marketing. In 2002, industry sources estimate that pharmaceutical companies spent approximately $2.9 billion in the U.S. on direct-to-consumer advertising of prescription medications, a modest increase from the $2.7 billion spent during the comparable period of 2001. We expect direct-to-consumer marketing and promotion spending by pharmaceutical companies to increase in the future. We also 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 orally disintegrating technology. 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 orally disintegrating and taste masking, that may 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 patients for convenient dosage forms and the needs of pharmaceutical companies for effective medications, differentiated products and accurate dosing methods. We have developed all of our orally disintegrating technologies internally. Our most developed technologies are our OraSolv and DuraSolv technologies. We currently manufacture seven pharmaceutical brands incorporating these technologies, of which three brands use our OraSolv technology and four brands use our DuraSolv technology. We are also developing innovative transmucosal oral drug delivery technologies. 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. Finally, we are developing MicroSolv, a microemulsion technology that allows a microemulsion to be incorporated into a tablet form. This technology may improve the bioavailability of a wide range of active drug ingredients that may otherwise not be suitable for administration in an oral dosage form.

Orally Disintegrating Technologies

     Our two primary orally disintegrating oral drug delivery technologies are OraSolv and DuraSolv. Our OraSolv technology incorporates active drug ingredients in orally disintegrating 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 also allows for a minimal portion of the tablet’s contents to be dedicated to effervescent and other orally disintegrating agents, allowing for high doses of taste masked active ingredients. Our DuraSolv technology uses higher compaction pressures to produce orally disintegrating tablets incorporating active drug ingredients in a more durable orally disintegrating tablet. Due to their greater durability, DuraSolv tablets are easier to handle and package, and may cost less to produce and package, than OraSolv tablets.

     OraSolv. Our OraSolv technology is an oral dosage form that combines taste masked drug ingredients with excipients (inert substances) to produce an orally disintegrating tablet system. The OraSolv tablet disintegrates quickly in the mouth without chewing or the need for water. To create our orally disintegrating tablets, we combine the taste masked active drug ingredients with orally disintegrating excipients, which can include a variety of flavoring, coloring and sweetening agents, all of which are generally recognized as safe, 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 particles of the drug into the saliva, forming a suspension of the drug in the saliva, which is then swallowed. The core U.S. patent for our OraSolv technology was granted in 1993.

     We may mask the taste of the active drug ingredients in our OraSolv products to prevent or minimize unpleasant tastes. The active drug ingredients are taste masked using a variety of coating techniques. The coating materials prevent the active drug ingredients in the OraSolv tablet from contacting the patient’s taste buds, yet allow for the immediate release of the active drug ingredients in the patient’s gastrointestinal tract. The taste masking process is effective with a wide variety of active drug ingredients, in both prescription and non-prescription products.

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     We have developed and manufacture several important OraSolv formulations, which include Triaminic Softchews for Novartis, Tempra FirsTabs for Bristol-Myers Squibb and Remeron SolTab and its equivalent for markets outside the U.S. for Organon. In addition, we are developing OraSolv formulations of Allegra for Aventis Pharmaceuticals, an undisclosed prescription product for Schering-Plough, Fazaclo for Alamo Pharmaceuticals, LLC and an undisclosed prescription product for an undisclosed partner.

     DuraSolv. The orally disintegrating and taste masking attributes of OraSolv are also available with our DuraSolv technology. DuraSolv is an orally disintegrating oral dosage system that we designed to improve manufacturing efficiency, provide more packaging options and reduce production costs. DuraSolv is a higher compaction, more durable, solid oral dosage system formulated to achieve the primary benefits of the OraSolv orally disintegrating 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 drug ingredient. Consumer testing by us and our pharmaceutical company partners has demonstrated high acceptability of this technology. The core U.S. patent for our DuraSolv technology was granted in 2000.

     We have developed and currently manufacture several important DuraSolv formulations, which include Alavert and Dimetapp ND for Wyeth, Zomig-ZMT and its equivalents marketed outside the U.S. for AstraZeneca and NuLev for Schwarz Pharma, Inc. In addition, we are developing seven new prescription products based on our DuraSolv orally disintegrating drug delivery system for Schwarz Pharma, Inc.

     Sustained Release. Our OraSolv and DuraSolv technologies may be combined with a sustained/controlled release formulation to create an orally disintegrating formulation of an sustained/controlled release product. We incorporate time-release beads into our tablets to formulate a sustained/controlled release of an active drug ingredient with the improved convenience of an orally disintegrating dosage form. To date, we have not commercialized a product incorporating our sustained release technology. However, in 2002, the U.S. Patent and Trademark Office issued a patent covering the use of OraSolv orally disintegrating technology and our proprietary sustained release drug delivery technology with the active ingredient potassium chloride. Potassium chloride is typically prescribed as an adjunct therapy for the side effects of the treatment of hypertension.

     PakSolv. PakSolv is our proprietary packaging system for soft tablets. PakSolv is a moisture and light-proof packaging system that is used for all of our OraSolv and some of our DuraSolv products. The U.S. Patent and Trademark Office issued two patents for our PakSolv packaging system in 2001.

Transmucosal Technologies

     Our proprietary OraVescent technologies are designed to increase absorption of active drug ingredients across the mucosal membranes lining the oral cavity, gastrointestinal tract and colon. The enhanced absorption characteristics of an OraVescent formulation may improve the safety and efficacy of some active drug ingredients. Since 2001, the U.S. Patent and Trademark Office has issued four patents for our OraVescent technologies. We also have several foreign patent applications pending for our OraVescent technologies.

Microemulsion Based Technology

     MicroSolv is a proprietary microemulsion based technology that allows a microemulsion to be incorporated into a tablet form. This technology may improve the bioavailability of a wide range of active drug ingredients that otherwise may not be suitable for administration in a solid oral dosage form. The U.S. Patent and Trademark Office issued a patent for our microemulsions technology in 2002. We are currently evaluating applications for this new technology.

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Business Strategy

     Our objective is to establish CIMA as a leader in orally disintegrating and other innovative oral drug delivery technologies. Our strategy to achieve this objective incorporates the following principal elements:

     Partner with pharmaceutical companies to develop, manufacture and market new products based on our technologies. Our core business is to pursue collaborative relationships that leverage the clinical, regulatory, and sales and marketing experience and capabilities of our pharmaceutical company partners, allowing us to focus on technology development and manufacturing. In these collaborative relationships, our partners pay us to develop new products for them based on our drug delivery technologies. We believe that pharmaceutical companies are attracted to our technologies for their significant advantages over our competition. Those advantages include rapid development timelines, excellent taste masking, applicability to a wide range of pharmaceutical compounds, enhanced convenience and other patient benefits, as well as our ability and experience in commercial production of products utilizing these technologies. 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 orally disintegrating drug delivery solution.

     Maximize the value of our drug delivery technologies by developing new products. Our proprietary products business is based on leveraging our technologies by actively identifying prescription products that could be differentiated or improved by incorporating our drug delivery technologies. We believe there are a large number of pharmaceutical products that are in the public domain or are about to lose patent protection that could benefit from our technologies. In these cases we may develop a new prescription product without a collaborative partner and ultimately seek FDA approval for what we believe will be promising applications of our drug delivery technologies and active drug ingredients. If our efforts are successful, we may license these new products to pharmaceutical companies with appropriate sales and marketing capabilities.

     Develop and commercialize new, innovative drug delivery technologies. We intend to develop new drug delivery technologies based on our expertise in orally disintegrating, taste masking and sustained release technologies. Our OraVescent and MicroSolv technologies represent an extension of this expertise, and we intend to continue developing these 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 for new technologies to enhance our ability to commercialize them.

     Enhance and expand our manufacturing capabilities. We believe our demonstrated ability to manufacture commercial quantities of products for multiple pharmaceutical company partners is a significant competitive advantage. In an effort to control our technologies and the quality of our products, we manufacture all of our products internally. We currently have two manufacturing lines at our Eden Prairie facility for product requiring blister packaging. On the basis of expected increased requirements for products that we manufacture for our current pharmaceutical partners, we have (1) added granulation capabilities and expanded taste masking capacity at our Eden Prairie facility, (2) received a third manufacturing line for product requiring blister packaging at our Eden Prairie facility, which we expect will be commissioned in the first half of 2004, and (3) installed a new manufacturing line at our Brooklyn Park facility for bottled product. After completion of these expansions and enhancements, we believe that our production capabilities will be adequate to meet our needs for the foreseeable future. We expect that these expansions and enhancements will help mitigate manufacturing risks, increase our manufacturing capacity and enhance our ability to market our products and services to pharmaceutical companies that require granulation or bottling capabilities. We are presently considering the addition of a fourth blister manufacturing line that could be used for the manufacture of potent substances in commercial quantities, as well as additional blister product capacity.

Collaborations With Pharmaceutical Company Partners

     Our core business is focused on entering into collaborative development, licensing and manufacturing supply agreements with pharmaceutical companies. These agreements provide that the collaborating pharmaceutical company is responsible for the clinical and regulatory efforts related to, as well as marketing and distributing, the developed products either worldwide or in specified markets or

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territories. Our collaborative agreements typically begin with a product feasibility 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 prior to being engaged by a pharmaceutical company and enter directly into development, manufacturing or license agreements for commercialization of those products.

     We currently have development and license agreements with AstraZeneca, Alamo Pharmaceuticals, Aventis Pharmaceuticals, Bristol-Myers Squibb, Organon, Novartis, Schering-Plough, Schwarz Pharma, Inc., Wyeth, and one undisclosed pharmaceutical company. In each of these agreements, we have received an up-front fee, which is typically 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 recognized revenue of approximately $27.0 million, $23.2 million and $14.3 million in 2003, 2002 and 2001, respectively, for up-front fees, milestone and development payments and royalties.

     We have manufacturing supply agreements with Organon for Remeron SolTab; Novartis for Triaminic Softchews; Wyeth for Alavert and Dimetapp ND; Schering-Plough for an undisclosed prescription product; Schwarz Pharma, Inc. for NuLev and seven undisclosed prescription products; Alamo Pharmaceuticals for Fazaclo; AstraZeneca for orally disintegrating dosage forms of Zomig; and an undisclosed pharmaceutical company for an undisclosed orally disintegrating prescription anti-inflammatory product. Due to the small production requirements for Tempra FirsTabs, we do not have, nor do we expect to enter into, a manufacturing supply agreement with Bristol-Myers Squibb. Generally, the supply agreements define (1) the terms by which we will manufacture and release for shipment a product for a pharmaceutical company partner, (2) obligations relating to payment for products and services, (3) the communication process, (4) expected production requirements and (5) other economic terms for product supply. These agreements generally have varying terms of duration ranging from three to ten years. In general, our pharmaceutical company partners direct our production and shipments. In the pharmaceutical industry, parties to manufacturing supply agreements 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 seven pharmaceutical brands using our orally disintegrating technologies for six major pharmaceutical company partners. Revenues from sales of our products to these manufacturers were approximately 65%, 50% and 55% of our total revenue in 2003, 2002 and 2001, respectively. We also receive revenue from royalties on product sales from these six pharmaceutical company partners, which were approximately 27%, 25% and 17% of our total revenue in 2003, 2002 and 2001, respectively. Finally, our revenue also includes product development fees and licensing revenue for development activities from a number of pharmaceutical companies, constituting approximately 8%, 25% and 28% of our total revenue in 2003, 2002 and 2001, respectively. See our financial statements and the related notes contained elsewhere in this report for details regarding our assets, our revenues, our profits and losses and the distribution of revenue by geographical area for each of the last three years.

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     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.

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For simplicity, products listed in the “Current Status” column are listed as either “In development” or “Commercially available.” It is possible that certain products shown as “In development” may have been approved for marketing by the FDA, but have not been announced as approved by our pharmaceutical company partner.

     The following paragraphs describe some of the material terms of our agreements with our pharmaceutical company partners. The following descriptions are subject to, and are qualified in their entirety by reference to, the text of the agreements to the extent we have filed them with the Securities and Exchange Commission.

Alamo Pharmaceuticals

     In March 2001, we entered into a product development, worldwide license and supply agreement for a DuraSolv formulation of an undisclosed prescription product for Alamo Pharmaceuticals. We subsequently amended this agreement to develop the product using our OraSolv technology. In February 2004, the FDA approved for marketing the product Fazaclo. Fazaclo contains the active ingredient clozapine, and is a prescription product indicated for the treatment of severely ill schizophrenic patients. Under the agreement, we receive license

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and product development fees, milestone payments upon achieving specific milestones, and will receive manufacturing revenues and royalties on any sales of the product. The license agreement expires upon expiration of all patents covered under the agreement, the first of which expires in the U.S. in 2010. However, the license agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 60 days. For the three years ended December 31, 2003, we recognized revenue of approximately $3.2 million in up-front fees and milestone and development payments attributable to our agreement with Alamo Pharmaceuticals. In 2003, these revenues represented approximately 1% of our total revenues.

AstraZeneca

     In May 1999, we entered into a definitive global license agreement with an affiliate of AstraZeneca for a DuraSolv formulation of AstraZeneca’s Zomig (zolmitriptan) tablets. 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. The license agreement expires upon expiration of all patents covered under the agreement, the first of which expires in the U.S. in 2018. However, the license agreement may be terminated by AstraZeneca for any reason after 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. If AstraZeneca fails to meet minimum sales requirements or to pay the difference between the royalty amount due on the minimum sales requirements and the royalty amount due on actual sales, we may convert AstraZeneca’s exclusive license into a non-exclusive license. In August 2001, we entered into a supply agreement with an affiliate of AstraZeneca, which expires on a country-by-country basis at the same time as the definitive global license agreement expires. Under the supply agreement, we receive payments for manufacturing orally disintegrating versions of Zomig. The supply agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 45 days of notice, or by CIMA in the event AstraZeneca commercializes another orally disintegrating formulation of Zomig (zolmitriptan) with a third party. In December 2003, AstraZeneca announced that U.S. distribution of Zomig will be handled by Medpointe, Inc. This distribution arrangement will have the effect of decreasing the sales base on which U.S. royalties to CIMA are computed. For the three years ended December 31, 2003, we recognized revenue of approximately $26.9 million in net sales of products, up-front fees, milestone and development payments, and royalties attributable to our agreements with AstraZeneca. In 2003, these revenues represented approximately 15% of our total revenues.

Aventis Pharmaceuticals

     In September 2002, we announced the signing of a product development and worldwide license agreement for an OraSolv formulation of Allegra (fexofenadine), a prescription non-sedating antihistamine. Under the agreement, we receive license and product development fees, milestone payments upon achieving specific milestones, and will receive royalties on sales of the product. The license agreement expires upon expiration of all patents covered under the agreement, the first of which expires in the U.S. in 2010. However, the license agreement may be terminated by Aventis for any reason after notice of 60 days, or 180 days if the product is being manufactured by CIMA, or by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 60 days. For the three years ended December 31, 2003, we recognized revenue of approximately $1.9 million in up-front fees and milestone and development payments attributable to our agreement with Aventis Pharmaceuticals. In 2003, these revenues represented less than 1% of our total revenues.

Bristol-Myers Squibb

     In June 1997, we entered into a multi-country, non-exclusive license agreement with Bristol-Myers Squibb, covering multiple products to be developed using our OraSolv technology. Tempra FirsTabs is the only product we developed under this agreement and no other new products are expected. The license agreement provides that upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 60 days, either party may terminate the agreement. In November 2000, we amended the license agreement to provide that Bristol-Myers Squibb may not terminate the license agreement before December 31, 2005, and afterwards

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may terminate for any reason by giving us 60 days written notice and paying us any royalty payments accruing through the termination date. We expect to continue to receive at least minimum royalty payments through 2005. We do not have a supply agreement with Bristol-Myers Squibb, but we receive payments for manufacturing Tempra FirsTabs. For the three years ended December 31, 2003, we recognized revenue of approximately $0.9 million in net sales of products and royalties attributable to our agreement with Bristol-Myers Squibb. In 2003, these revenues represented less than 1% of our total revenues.

Novartis

     In July 1998, we entered into a license and a supply agreement with Novartis Consumer Health, granting to Novartis exclusive rights to use our OraSolv technology with Novartis’ Triaminic Softchews non-prescription pediatric cold, cough and allergy product line in the U.S. and Canada. The license agreement, which was amended in April 2001, expires on a country-by-country basis upon the later of January 12, 2010 or the expiration of all patents covered by the agreement, the first of which expires in the U.S. in 2010. The July 1998 supply agreement was superseded by a new supply agreement in 2001, which has a term of five years and includes an automatic renewal provision subject to agreement on product pricing for the renewal periods. Under the supply agreement, we receive payments for manufacturing Triaminic Softchews. Novartis may terminate the supply agreement by providing 90 days notice to CIMA prior to the end of the initial five-year term or any renewal period. In addition, either of the license or the supply agreement may be terminated by either party upon the occurrence of a default event, such as a material breach, which 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. Under various individual product development agreements, which apply to specific Triaminic products, we receive product development payments. We also receive royalties on sales of Softchews products under the license agreement. For the three years ended December 31, 2003, we recognized revenue of approximately $21.8 million in net sales of products, development payments and royalties attributable to these agreements with Novartis. In 2003, these revenues represented about 7% of our total revenues.

Organon

     In December 1999, we entered into a definitive global license agreement with two affiliates of Akzo Nobel NV, Organon International AB and NV Organon, for an OraSolv formulation of Remeron (mirtazapine), a prescription anti-depression product. Under the license agreement, we receive license and product development fees, milestone payments upon achieving specific milestones, and royalties on any sales of the prescription product. The license agreement expires upon expiration of all patents covered under the agreement, the first of which expires in the U.S. in 2010. However, the license agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 90 days. In July 2000, we entered into a supply agreement with Organon Inc., a U.S. affiliate Akzo Nobel NV, which has an initial term of five years and automatic renewal provisions. Under the supply agreement, we receive payments for manufacturing Remeron SolTab. The supply agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 60 days of notice. For the three years ended December 31, 2003, we recognized revenue of approximately $53.8 million in net sales of products, up-front fees, milestone and development payments, and royalties attributable to these agreements with Organon. In 2003, these revenues represented more than 40% of our total revenues.

Schering-Plough

     In May 2002, we announced the signing of a product development, license and supply agreement for an OraSolv formulation of an undisclosed prescription product. Under the agreement and a subsequent amendment, we receive license and product development fees, milestone payments upon achieving specific milestones, and will receive manufacturing revenues and royalties on any sales of the prescription product. The agreement expires upon expiration of all patents covered under the agreement, the first of which expires in the U.S. in 2010. However, the agreement may be terminated by Schering-Plough for any reason after notice of 90 days, or 180 days if the product is being manufactured by CIMA, or by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 90 days. For the three years ended December 31, 2003, we recognized revenue of approximately $1.9 million in up-front fees and milestone and development payments attributable to our agreements with Schering-Plough. In 2003, these revenues represented less than 1% of our total revenues.

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Schwarz Pharma, Inc.

     In June 2000, we entered into an exclusive development, license and supply agreement with Schwarz Pharma, Inc. to develop and manufacture NuLev, our DuraSolv formulation of a hyoscyamine sulfate prescription product, which is used to treat irritable bowel syndrome and other conditions. The June 2000 agreement allows us, upon the failure of Schwarz Pharma, Inc. to meet minimum sales requirements, to convert Schwarz Pharma, Inc.’s exclusive license into a non-exclusive license. The June 2000 agreement expires upon the expiration of all patents covered by the agreement, the first of which expires in the U.S. in 2018. However, the June 2000 agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 60 days. Under the June 2000 agreement, we receive milestone payments upon achieving specific milestones as well as payments for manufacturing NuLev and royalties on Schwarz Pharma, Inc.’s sales of NuLev.

     In December 2001, we entered into an exclusive development, license and supply agreement with Schwarz Pharma, Inc. to develop and manufacture an additional seven undisclosed prescription products based primarily on our DuraSolv orally disintegrating drug delivery system. Based on confidentiality concerns of Schwarz Pharma, Inc., we previously agreed to keep confidential the identity of Schwarz Pharma, Inc. as a party to this agreement, and referred to Schwarz Pharma, Inc. as an unnamed pharmaceutical company in our filings and public statements prior to December 31, 2002. The expiration and termination provisions of the December 2001 agreement are comparable to the expiration and termination provisions of the June 2000 agreement. In addition, Schwarz Pharma, Inc. may unilaterally terminate the December 2001 agreement, in its entirety or in part, at any time prior to the market launch of any of the seven products or upon notice of 180 days after the market launch of any product. Under the December 2001 agreement, we receive license and product development fees, milestone payments upon achieving specific milestones, and will receive manufacturing revenues and royalties on any sales of the seven undisclosed prescription products.

     For the three years ended December 31, 2003, we recognized revenue of approximately $15.7 million in net sales of products, up-front fees, milestone and development payments, and royalties attributable to the June 2000 and December 2001 agreements with Schwarz Pharma, Inc. In 2003, these revenues represented about 7% of our total revenues. The December 2001 agreement with Schwarz Pharma, Inc. provides for license and product development fees and milestone payments in the aggregate amount of $15.0 million. This is the greatest amount of such fees and payments that we may receive under this agreement. We could receive a substantially smaller amount of fees and payments for many reasons, including if we fail to achieve certain milestones or if Schwarz Pharma, Inc. exercises its option to terminate the agreement. The aggregate amount of development fees and milestone payments set forth in the December 2001 agreement should not be viewed as guaranteed future payments.

Wyeth

     In January 2000, we entered into an exclusive development and license agreement and a supply agreement with Wyeth for a DuraSolv formulation of prescription loratadine, a non-sedating antihistamine. Under the January 2000 development and license agreement, we received

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development and milestone payments upon achieving specific milestones. Schering-Plough has several U.S. patents for loratadine, the active drug ingredient in both Claritin and Claritin Reditabs. In August 2002, a federal district court ruled that claims by Schering-Plough alleging that generic versions of loratadine violated Schering-Plough’s patent were not valid. This ruling permitted the production and sale of generic versions of loratadine after December 19, 2002. In November 2002, the FDA approved over-the-counter sales of prescription formulations of Claritin at their original prescription strengths. In response to the foregoing events, Wyeth desired to produce and sell an over-the-counter loratadine product instead of a prescription loratadine product. Because our January 2000 agreements with Wyeth related solely to development of a loratadine prescription product, we do not anticipate any additional revenues from those agreements.

     In anticipation of the events described above, in May 2002 we entered into a development and license agreement and a supply agreement with Wyeth for an over-the-counter version of Claritin Reditabs using our DuraSolv formulation. In December 2002, we announced that Wyeth received FDA approval of its New Drug Application for Alavert, an over-the-counter equivalent to Claritin Reditabs, using our DuraSolv formulation. In February 2003, Wyeth received its second FDA approval for its Abbreviated New Drug Application for a DuraSolv loratadine product, which is identical to Alavert, but was initially intended for the prescription market. The May 2002 development and license agreement expires upon the expiration of all patents covered by the agreement, the first of which expires in the U.S. in 2018. The May 2002 supply agreement expires in December 2012. However, both of these agreements may be terminated by Wyeth for any reason after a six month notice or by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 60 days. Under the May 2002 development and license agreement, we receive development payments and royalties on any sales of Alavert. Under the May 2002 supply agreement, we receive payments for manufacturing Alavert. In June 2003, Wyeth introduced an additional DuraSolv loratadine formulation for children under the Dimetapp ND brand.

     For the three years ended December 31, 2003, we recognized revenue of approximately $26.1 million in net sales of products, up-front fees, milestone and development payments and royalties attributable to the January 2000 and May 2002 agreements with Wyeth. In 2003, these revenues represented about 28% of our total revenues.

Undisclosed Pharmaceutical Company

     In June 2003, we entered into an exclusive license agreement and a supply agreement with an undisclosed pharmaceutical company for an orally disintegrating prescription anti-inflammatory product. Under the agreements, we receive license and product development fees, milestone payments upon achieving specific milestones, and will receive manufacturing revenues and royalties on any sales of the prescription product. The license agreement may be terminated by the undisclosed pharmaceutical company for any reason after notice of 30 days. In 2003, we recognized development revenues of approximately $289,000, or less than 1% of our total revenues.

Proprietary Product Development

     In addition to entering into collaborations with pharmaceutical companies, we also expect to leverage our oral drug delivery technologies by actively identifying promising applications using active drug ingredients that have already been successfully marketed by leading pharmaceutical companies. We are selecting, funding and developing products on an internal basis and will be responsible for securing FDA approvals for such products. We plan to sell or license the marketing rights to these products to pharmaceutical companies with the appropriate sales and marketing organizations. We believe this strategy represents an important opportunity for CIMA because it eliminates the need for a collaborative agreement before developing additional products for our product pipeline. Equally important, we expect to retain a greater proportion of the economic value of those proprietary products that we successfully develop.

     To date, we have considered five proprietary products based on major active drug ingredients that are either off-patent or expected to become off-patent within the next few years. These proprietary products fall within the therapeutic categories of anti-infectives, cardiovascular, gastrointestinal and pain.

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     We have completed Phase II clinical trials with OraVescent Fentanyl, a potential proprietary product for the treatment of breakthrough cancer pain. Our first study in humans compared our OraVescent BL formulation to a similar formulation without absorption enhancing characteristics and to Actiq, a commercially available prescription product. Actiq (oral transmucosal fentanyl citrate) is indicated for breakthrough cancer pain in patients already receiving, and tolerant to, opioid therapy for underlying, persistent cancer pain. We believe this first study in humans demonstrates OraVescent BL’s superior absorption enhancing characteristics across mucosal membranes when compared to Actiq and to the other formulation without absorption enhancing characteristics. Our second study in humans compared our OraVescent SL to our OraVescent BL formulation using the same active drug ingredient contained in Actiq. We believe this second study demonstrates a quicker onset of action with OraVescent SL when compared to our OraVescent BL formulation. Our third study in humans compared Actiq with OraVescent BL and OraVescent SL under simulated self-administration conditions. We believe preliminary results from the third study confirmed the results from our first two studies in humans. In November 2001, we participated in a pre-Investigational New Drug meeting with the FDA to discuss our OraVescent Fentanyl human data and a possible clinical development path. In 2002, we submitted our Investigational New Drug submission to the FDA, and we completed our first pharmacokinetic clinical study designed to compare OraVescent Fentanyl and Actiq at a low and high dosage level. In 2003, based on the outcome of these clinical studies, we continued formulation activities to optimize the product, conducted additional studies in humans and completed our assessment of the commercial manufacturability of this product. In 2004, we expect to conduct Phase III clinical trials to establish product safety and efficacy data to be used in an FDA submission requesting approval to commercialize this product.

     Fentanyl citrate, the active drug ingredient in our OraVescent Fentanyl product, is classified as Schedule II substance under the Controlled Substances Act. Therefore, this substance is regulated by the U.S. Drug Enforcement Agency, or DEA. Schedule I substances are considered to present the highest risk of substance abuse and Schedule V substances the lowest. In addition, regulations under the Occupational Safety and Health Act establish certain standards related to safety in handling and manufacturing potent substances, such as fentanyl citrate. Under these regulations, we believe fentanyl citrate would require a specialized manufacturing environment that prevents fentanyl citrate from coming in contact with humans. None of our existing production lines could be used to manufacture OraVescent Fentanyl, or any other product with a similar safety profile. We are presently assessing the feasibility of contracting with a third party manufacturer capable of manufacturing products containing potent substances or developing these capabilities internally. If we decide to manufacture OraVescent Fentanyl in our facilities, we will be required to add potent substance manufacturing capabilities that comply with these safety regulations, which could require capital expenditures in excess of $10.0 million.

     In April 2002, we announced the issuance of a patent by the U.S. Patent and Trademark Office for an orally disintegrating, sustained release potassium chloride product, which is typically prescribed as an adjunct therapy for the side effects of the treatment of hypertension. The patent covers the use of our OraSolv SR/CR orally disintegrating, sustained release drug delivery technology with the active ingredient potassium chloride. This is our first patent covering both an active ingredient and our drug delivery technology. We are currently evaluating potential business opportunities for a proprietary product based on this patent.

     Our progress to date on the three other proprietary products has not gone beyond the prototype phase, which includes acquiring active drug ingredients and preliminary planning. We expect to begin work on these three proprietary products when time and resources permit. These proprietary products are expected to incorporate active drug ingredients with one of our proprietary oral drug delivery technologies. However, the active drug ingredients for these three products are currently protected by U.S. patents registered to third parties, the first of which expires in early 2005.

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 18 issued U.S. patents and 19 issued foreign patents covering our technologies. The core U.S. and European patents relate to our orally disintegrating and taste masking technologies. We also have over 38 U.S. and foreign patent applications pending.

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     A description of our more important 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.

     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 Development

     Our research and product development efforts are focused on developing new product applications for our drug delivery technologies. As of December 31, 2003, we had 77 scientists and other technicians working on research and product development. We currently use our facility in Brooklyn Park, Minnesota as our research and development center and a second manufacturing site. During 2003, we completed the renovation and expansion of our Brooklyn Park research and development facility, which was begun in 2002, at a total capital cost of $19.4 million, exclusive of capital costs to add a second manufacturing site.

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

•

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

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

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

•

supporting our intellectual property portfolio development.

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     For the years ended December 31, 2003, 2002 and 2001, we spent approximately $13.5 million, $10.6 million and $6.2 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, although a larger portion of 2003 expenditures related to our proprietary product, OraVescent Fentanyl.

Business Development

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

     We pursue feasibility or pilot agreements with leading pharmaceutical companies to fund the development of new products incorporating our drug delivery technologies. If the new product development is successful, we generally enter into license and supply agreements.

Manufacturing

     Currently, our only blister packaging manufacturing facility is located at our headquarters in Eden Prairie, Minnesota. We have two production lines for product requiring blister packaging, which collectively have an estimated production capacity in excess of 500 million tablets a year. We are in the process of adding a third production line at our Eden Prairie facility, and expect the additional manufacturing line to be completed and commissioned in the first half of 2004. We have constructed a second manufacturing site at our Brooklyn Park facility, which was completed and commissioned in the fourth quarter of 2003, at a total capital cost of $7.6 million.

     In 2002, we commissioned a high shear granulation unit and a second coating unit at a total capital cost of $7.9 million. We expect that the high shear granulation unit, coupled with the additional coating unit, will enable us to develop, and ultimately commercialize, a broader range of prescription products. The products we are developing for Aventis Pharmaceuticals and Schering-Plough will require these additional manufacturing capabilities. In addition, we may require these capabilities in the future for those products we may develop that have taste masking challenges based on the particle size of the active drug ingredient or require a high dose of active drug ingredient relative to the desired tablet size.

     We currently purchase from single sources of supply, or our collaborative partners provide to us without charge, the active drug ingredients that are required to manufacture our products. The inactive drug ingredients and packaging materials used to manufacture our products are generally readily available from multiple suppliers. If we are unable to purchase adequate supply of active drug ingredients, inactive drug ingredients and packaging materials from our current suppliers, our manufacturing operations could be interrupted. We may be unable to identify alternative sources of supply, and even if we do identify alternative sources of supply, our manufacturing operations may be interrupted until we successfully complete a validated qualification process of those sources, obtain required regulatory approvals, and negotiate trading terms.

     We are assessing the feasibility of adding capacity for the manufacture of products containing potent substances, such as fentanyl citrate. In the event we decide to add such capacity, we estimate that the capital expenditure required to construct and install a manufacturing line for potent substances will exceed $10.0 million and take up to 24 months to fully implement. Our capital expenditure plans for 2004 currently include this investment.

     PakSolv, our proprietary packaging process, allows high-speed packing of soft tablets without breakage into specially designed protective, child resistant packages or standard blister packages. We believe that this technology, which has two issued patents, 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.

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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.

     Many of our pharmaceutical company partners face intense competition from manufacturers of generic drugs. Generic competition may reduce the demand and/or price for our partners’ products. Products that our pharmaceutical company partners produce may also be subject to regulatory actions that result in prescription products becoming available to consumers over-the-counter. Such a change could also reduce the demand and/or price for our partners’ products. Because we derive a significant portion of our revenue from manufacturing products for and receipt of royalties from our pharmaceutical company partners, a decline in the sales of products that we produce for our partners, whether as a result of the introduction of competitive generic products or other competitive factors, could have a material adverse effect on our revenues and profitability.

     Orally disintegrating tablet technologies that compete with our OraSolv and DuraSolv technologies include the Zydis technology developed by an affiliate of Cardinal Health, Inc., the WOWTab technology developed by Yamanouchi Pharma Technologies, the Flashtab technology developed by Ethypharm, the FlashDose technology developed by an affiliate of Biovail Corporation and OraQuick technology developed by KV Pharmaceutical Company. The Zydis technology is a fast dissolving oral drug delivery system based on a freeze-dried gelatin tablet. The WOWTab, Flashtab and OraQuick technologies are orally disintegrating tablet technologies that are similar to our DuraSolv tablet. The FlashDose technology is used in an orally disintegrating tablet, which is similar to our OraSolv tablet, but has not yet been commercialized with an FDA approved prescription product. Cardinal Health has commercialized its Zydis technology in several major prescription products in the U.S., including Claritin Reditabs, Maxalt-MLT and Zyprexa Zydis. KV Pharmaceutical Company has introduced its first OraQuick technology product in 2003 that is generically equivalent to Schwarz Pharma, Inc.’s NuLev, which we developed based on our DuraSolv technology. On March 17, 2003, CIMA and Schwarz Pharma, Inc. filed a complaint in federal district court against KV Pharmaceutical Company alleging infringement of one or more of our patents covering our DuraSolv technology. SPI Pharma, Inc., a wholly owned subsidiary of Associated British Foods plc, recently announced Pharmaburst, a specially engineered excipient system that is capable of rapid disintegration. There are other companies with excipient product capabilities as well. In addition, Eurand, a private specialty pharmaceutical company, recently announced that it has licensed an orally disintegrating drug delivery technology, which was expected to be fully integrated into Eurand’s business in the second half of 2003. We believe there may be other pharmaceutical companies that are developing orally disintegrating tablet technologies, such as film, which may compete with our technologies in the future.

     The principal competitive factors in the market for orally disintegrating tablet technologies are the ability to develop products in a rapid timeline, taste mask active drug ingredients while achieving targeted blood levels and efficiently produce commercial quantities of products. Additional competitive factors include packaging, dosage capacity, drug compatibility, cost, ease of manufacture, patient acceptance and required capital investment for manufacturing. We believe that our orally disintegrating 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 Cardinal Health Zydis’ formulation of the same active drug ingredient. We also sponsored an August 2001 study that measured migraine sufferers’ preferences between Zomig-ZMT, a CIMA DuraSolv formulation, and Maxalt-MLT, a Cardinal Health Zydis formulation. The 2001 study indicated that 70% of the study subjects preferred CIMA’s DuraSolv formulation, compared to 27% favoring the Zydis formulation. We also have orally disintegrating products available on the market in both bottles and blister packaging, which are the most widely used pharmaceutical packaging configurations.

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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 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 practices, 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 in connection with the introduction of new products we develop for them under a collaborative agreement. 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 facilities are registered with the FDA. We, or our partners who distribute, 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. In August 2003, the Minneapolis District Office completed an inspection of our facilities that focused on compliance with Good Manufacturing Practice regulations for manufacturers of pharmaceuticals. The FDA also conducted reviews under the Pre-Approval Inspection Program related to three of our pharmaceutical partners’ pending applications and collected profile samples. The FDA issued two Form 483s at the close of the inspection that listed seven objectionable conditions. We provided a formal response to the Minneapolis District office in September 2003 that described our correction of each condition identified in the 483s. We believe that the corrections we implemented are adequate and substantially complete. These corrective actions will be subject to verification and review at the next FDA inspection. 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 potentially subject to inspections by foreign regulatory authorities due to distribution of products we manufacture into markets outside the U.S.

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     The Controlled Substances Act imposes various registration, record-keeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products. A principal factor in determining the particular requirements of this act, if any, applicable to a product is its actual or potential abuse profile. A pharmaceutical product may be listed as a Schedule I, II, III, IV or V substance, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest. None of our current commercialized products are listed substances. However, fentanyl citrate, the active ingredient in OraVescent Fentanyl, is a Schedule II controlled substance. Schedule II substances are subject to strict handling and record keeping requirements and prescribing restrictions. In addition, should we successfully develop an OraVescent Fentanyl product that is approved for marketing by the FDA, we believe it is possible that it could be subject to state controlled substance regulation, and may be placed in more restrictive schedules in some states than those determined by the U.S. Drug Enforcement Agency.

     In addition to the statutes and regulations described above, we also are subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other federal, state and local regulations. 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 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 December 31, 2003, we had 273 full-time employees, with 159 engaged in manufacturing and quality assurance, 82 in research and development and 32 in executive management and administrative positions. 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.

ITEM 2. PROPERTIES

     Prior to March 2002, we leased our 75,000 square foot facility in Eden Prairie, Minnesota, which houses our corporate headquarters, manufacturing facility and warehouse space. In March 2002, we purchased this facility at a capital cost of approximately $5.7 million pursuant to the terms of an option under our lease. The facility currently contains two production lines, a granulation suite, two coating units and a warehouse. In 2003, we commenced the addition of a third production line and warehouse expansion at an estimated capital cost of $13.1 million. We ordered the production line equipment for this project in 2002, it was delivered late in the second half of 2003, and we expect to have it fully installed and commissioned in the first half of 2004. The warehouse expansion will add 18,000 square feet to our Eden Prairie facility and is expected to be completed in the first half of 2004.

     In August 2001, we purchased a 107,000 square foot facility in Brooklyn Park, Minnesota at a capital cost of approximately $5.2 million. This facility currently houses our research and product development center. In 2002, we commenced a $10.0 million capital expenditure program to expand the research and product development capabilities of this facility, which was completed in 2003 at a total capital cost of $19.4 million. The capital cost for this project exceeded our initial estimates by $9.4 million principally as a result of our decision to expand the Brooklyn Park facility from a 107,000 square foot to a 150,000 square foot facility in order to accommodate future growth. In 2003, we completed the addition of manufacturing capabilities to the Brooklyn Park facility, including a tablet press and a bottling line for products utilizing our DuraSolv orally disintegrating delivery system, at an capital cost of approximately $7.6 million. We ordered the production line equipment for this project in 2002, it was delivered in the first half of 2003, and commissioned in the fourth quarter of 2003.

     We believe that both of these facilities are adequate to meet our foreseeable requirements.

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ITEM 3. LEGAL PROCEEDINGS

     In September 2002, the Company and Schwarz Pharma, Inc. filed a complaint in the United States District Court for the Eastern District of Wisconsin against Breckenridge Pharmaceutical, Inc. and Ultimate Formulations, Inc. d/b/a Best Formulations. The complaint alleges that Breckenridge Pharmaceutical and Ultimate Formulations improperly marketed a product as being a rapidly dissolving tablet for irritable bowel syndrome. The Company manufactures NuLev, an orally disintegrating hyoscyamine sulfate (0.125 mg) product used to treat irritable bowel syndrome, for Schwarz Pharma, Inc. pursuant to an exclusive license agreement. The complaint asserts causes of action for violation of Section 43(a) of the Lanham Act, false advertising, misappropriation, unfair competition (all under Wisconsin state and federal law), copyright infringement and infringement of the Company’s patent covering its DuraSolv technology. The Company and Schwarz Pharma, Inc. are seeking a permanent injunction and monetary damages. Breckenridge Pharmaceutical and Ultimate Formulations have answered the complaint and have asserted a counterclaim for invalidity of the Company’s patent covering its DuraSolv technology and for interference with Breckenridge Pharmaceutical’s and Ultimate Formulations’ business relationships. Ultimate Formulations has been dismissed from this case on jurisdictional grounds. In August 2003, the court entered a preliminary injunction on behalf of the Company and Schwarz Pharma, Inc. with the consent of Breckenridge Pharmaceutical. The parties are conducting discovery.

     On March 17, 2003, the Company and Schwarz Pharma, Inc. filed a complaint in the United States District Court for the District of Minnesota against KV Pharmaceutical Company and its wholly owned subsidiary Ethex Corporation. The complaint alleges that KV Pharmaceutical and Ethex are manufacturing and selling orally disintegrating hyoscyamine sulfate (0.125 mg) tablets in violation of one of the Company’s patents covering its DuraSolv technology. The Company manufactures NuLev, an orally disintegrating hyoscyamine sulfate (0.125 mg) product, for Schwarz Pharma, Inc. pursuant to an exclusive license agreement. The Company and Schwarz are seeking an injunction against further infringement of the patent and compensatory damages. KV Pharmaceutical and Ethex have filed a counterclaim against the Company seeking a declaratory judgment that two of the Company’s patents are invalid, unenforceable, or not infringed. The court dismissed the counterclaim brought by KV Pharmaceutical and Ethex with respect to one of the Company’s patents. A motion for preliminary injunction filed by the Company and Schwarz was denied in March 2004. The parties are conducting discovery and trial is scheduled on or after October 1, 2004.

     On September 4, 2003, the Company and its directors were named as defendants in five putative class-action lawsuits filed in the Chancery Court of the State of Delaware. The lawsuits, which were filed by Joseph Eichenbaum, Joan Hartley, Jere McGuire, The Killen Group, Inc., and Howard Rose, purported holders of our common stock filing individually and on behalf of all holders of our common stock, generally allege that the defendants breached fiduciary duties in connection with the proposed merger with aaiPharma and with our board of directors’ response to the August 20, 2003 unsolicited proposal of Cephalon, Inc. to acquire CIMA. Among other things, the plaintiffs sought to enjoin completion of the merger with aaiPharma and to compel our board of directors to further consider Cephalon’s acquisition offer. The lawsuits were subsequently consolidated by order of the Court of Chancery on October 20, 2003. The time for the defendants to answer or move with respect to the consolidation action has not yet elapsed.

     On December 19, 2003, the Company was named as a defendant in a lawsuit filed in the United States District Court for the District of Minnesota. The lawsuit, which was filed by David A. Feste, a former Vice President, Chief Financial Officer and Secretary of CIMA, alleges that CIMA intentionally and negligently misrepresented its intention to pursue and engage in a transaction resulting in a change in control of the Company when negotiating an amendment to his employment agreement in conjunction with Mr. Feste’s resignation from the Company. Mr. Feste is seeking compensation under the change of control provisions in his original employment agreement.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     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.

Holders

     On March 8, 2004 the last reported sale price of our common stock was $30.96 per share. We had 64 stockholders of record and an estimated 4,100 beneficial owners of our common stock as of March 8, 2004.

Dividends

     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.

ITEM 6. SELECTED FINANCIAL DATA

     This section presents our historical financial data. You should read carefully the financial statements included in this Annual Report, including the notes to the financial statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations. The income statement data for the years ended December 31, 2003, 2002 and 2001 and the balance sheet data as of December 31, 2003 and 2002 have been derived from our financial statements that have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Annual Report on Form 10-K. The statement of operations data for the years ended December 31, 2000 and 1999 and the balance sheet data as of December 31, 2001, 2000 and 1999 have been derived from financial statements that have been audited by Ernst & Young LLP, and are not included elsewhere in this Annual Report. 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.

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Selected Financial Data

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ITEM 7. 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 the Selected Financial Data and our financial statements and related notes appearing elsewhere in this Annual Report. 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 the caption Factors That Could Affect Future Results and elsewhere in this report.

Overview

     We develop and manufacture pharmaceutical products based on our proprietary OraSolv and DuraSolv orally disintegrating technologies. We currently manufacture seven pharmaceutical brands utilizing our orally disintegrating technologies: three prescription and four over-the-counter brands, which are marketed by and under brand names of our pharmaceutical company partners. The four over-the-counter brands are Triaminic Softchews for Novartis, Tempra FirsTabs for a Canadian affiliate of Bristol-Myers Squibb, and Alavert and Dimetapp ND for Wyeth. The three prescription brands are Zomig-ZMT and its equivalent for markets outside the U.S. for AstraZeneca, Remeron SolTab and its equivalent for markets outside the U.S. for Organon and NuLev for Schwarz Pharma, Inc. We are currently developing other oral drug delivery technologies for ourselves and others. We operate within a single business segment, the development and manufacture of orally disintegrating and enhanced-absorption oral drug delivery systems. Our revenues are comprised of three components, including (1) product development fees and licensing revenues for development activities we conduct through collaborative agreements with pharmaceutical companies, (2) net sales of products we manufacture for pharmaceutical companies using our proprietary orally disintegrating technologies, and (3) royalties on the sales of products we manufacture, which are sold by pharmaceutical companies under licenses from us.

     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. Revenues from product sales and from royalties will fluctuate from quarter to quarter and from year to year depending on market conditions facing our pharmaceutical company partners and their actions. Among other factors, the following represent conditions of our pharmaceutical company partners that can affect us: 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.

     The following tables shows components of revenue, expenses, operating income, other income, tax expense (benefit) and net (loss) income as a percentage of total operating revenue for the years ending December 31:

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Critical Accounting Policies and Estimates

General

     The following discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Inventory Reserves

     We evaluate our need for inventory obsolescence reserves based on both a specific and general basis. Identified lots of finished goods and work-in-process which have either been on-hand for a period exceeding one month or which may have been identified for potential rejection are reserved for on a specific basis. Raw material inventories are evaluated for potential overstock conditions, and are specifically reserved if use is not expected to occur before expiration dates. We also maintain a reserve for items in inventory that may have the aforementioned issues but have not yet been specifically identified. For the year ended December 31, 2003, we have recorded an obsolescence reserve of $275,000 related to our inventory of $7.6 million.

Accounts Receivable Reserves

     We evaluate our need for accounts receivable reserves based on both a specific and general basis. Identified past due invoices are reviewed for collectibility, and specifically reserved as warranted. In addition, a reserve is maintained for receivables issues which have not yet been specifically identified. For the year ended December 31, 3003, we have recorded a reserve of $100,000 related to our accounts receivable of $14.8 million.

Revenue Recognition

     We recognize revenue in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, or SAB 101 as amended by SAB 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force 00-21 (EITF 00-21), Revenue Arrangements with Multiple Deliverables. SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an agreement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Revenues from our business activities are recognized from net sales of manufactured products upon shipment; from product development fees as the contracted services are rendered; from product development milestones upon completion of milestones; from nonrefundable up-front product development license fees as fees are amortized over the expected development term of the proposed products; and from royalties on the sales of products that we manufacture, which are sold by pharmaceutical companies under license from us. The determination of SAB 101 criteria (3) and (4) for each source of revenue is based on our judgments regarding the fixed nature and collectibility of each source of revenue.

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Deferred Taxes

     The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient taxable income in the United States, based on estimates and assumptions. We record a valuation allowance to reduce the carrying value of our net deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the requirements for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase net income in the period such determination is made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the net deferred tax asset would decrease net income in the period such determination is made. On a quarterly basis, we evaluate the realizability of our deferred tax assets and assess the requirements for a valuation allowance. For the year ended December 31, 2003, we have recorded a $5.0 million valuation allowance related to our net deferred tax assets of $19.0 million, compared to a valuation allowance of $6.4 million related to our net deferred tax assets of $17.8 million for the year ended December 31, 2002.

Results of Operations

Years Ended December 31, 2003, 2002 and 2001

     Operating Revenues. Our total operating revenues were $76.1 million in 2003, compared to $46.6 million in 2002 and $32.0 million in 2001. Operating revenues from AstraZeneca, Organon, and Wyeth, our three largest pharmaceutical company partners in 2003, together represented approximately 83%, 62% and 48% of our total revenues in 2003, 2002 and 2001, respectively. In 2003, Wyeth replaced Schwarz Pharma, Inc. as one of our three largest pharmaceutical company partners. Schwarz Pharma, Inc. accounted for approximately 7% and 18% of total operating revenues in 2003 and 2002, respectively. The increases in total operating revenues in each year were due to sequentially increasing sales of products we manufacture for, and royalties on sales by, our pharmaceutical company partners. For additional information, readers are directed to Note 11 to the financial statements included in this Annual Report.

     We are paid by our collaborative partners for the orally disintegrating products that we manufacture and ship to them. Generally, we respond to the product demand forecasts of our pharmaceutical company partners. Accordingly, sales of manufactured products to our pharmaceutical company partners may vary from period to period based on our partners’ demands. These activities resulted in net sales of orally disintegrating products of $49.1 million in 2003, compared to $23.4 million in 2002 and $17.8 million in 2001. The $25.7 million, or 110%, increase from 2002 to 2003 was due to an increase in shipments of over the counter products (to Wyeth, Novartis and Bristol-Myers Squibb) of $15.0 million, or 179%. This was primarily due to the full year effect of the introduction by Wyeth of Alavert and Dimetapp ND orally disintegrating tablets produced by us in the fourth quarter of 2002 (380% increase). Revenues from producing brand prescription products (for Organon, AstraZeneca and Schwarz Pharma, Inc.) increased by 71%, or $10.7 million, due to increased shipments to Organon (91% increase) and AstraZeneca (15% increase). The $5.6 million increase from 2001 to 2002 was primarily attributable to a net increase of $6.1 million in shipments of branded prescription products, which was partially offset by a net reduction in shipments of over-the-counter products that was caused by a year-over-year drop off in shipments of Triaminic Softchews.

     We are paid product development and licensing revenues for our activities performed under collaborative agreements with pharmaceutical companies. These activities resulted in product development fees and licensing revenues of $6.2 million in 2003, compared to $11.5 million in 2002 and $8.9 million in 2001. The decrease of $5.3 million from 2002 to 2003 reflects the variability in timing and pacing of product development projects. Amounts received in 2003 from Schwarz Pharma, Inc. and Aventis were $3.9 million less than in 2002, despite the related product development projects continuing to progress in 2003. The $2.6 million increase from 2001 to 2002 was primarily attributable to an increase in the number of collaborative projects in our product development portfolio, which included the achievement of certain milestones for Aventis and Schwarz Pharma, Inc.

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     We are paid royalties based on our collaborative partners’ sales of orally disintegrating products that we developed and manufactured. Our collaborative partners’ sales of CIMA manufactured orally disintegrating products amounted to approximately $440.3 million in 2003, up from nearly $236.0 million in 2002 and up from about $103.0 million in 2001. As a result, we recognized royalties of $20.9 million in 2003, compared to $11.7 million in 2002 and $5.4 million in 2001. The $9.2 million, or 78%, increase, in 2003 was driven by increases from our three largest partners AstraZeneca (30% increase), Organon (139% increase), and Wyeth (479% increase). The AstraZeneca and Organon increases reflect increased worldwide sales of Zomig and Remeron, respectively, while the Wyeth increase reflects a continuation of its late 2002 Alavert launch and a full year of sales activity in the U.S. The $6.3 million increase in royalties from 2001 to 2002 was attributable to strongly growing worldwide sales of orally disintegrating versions of Zomig and Remeron SolTab, as well as the U.S. market introduction of Alavert by Wyeth late in the fourth quarter of 2002.

     In 2004, we expect to close a transaction with Cephalon, Inc. under which CIMA will become a wholly owned subsidiary of Cephalon. This introduces a number of potential influences on our business and revenues.

     Overall for 2004, subject to the effect of the transaction with Cephalon, we expect revenues from our partner-based collaborative business to decline. There are three contributing factors leading to this expectation. First, our partner Wyeth launched Alavert late in 2002, with the effect of the launch carrying into early 2003, and Dimetapp ND in mid-2003. In addition to the impact of launch quantities on 2003 shipments, a significant portion of our shipments to Wyeth in the fourth quarter of 2003 were in bulk form which required final packaging for future sale in 2004. In 2004, we expect to once again begin providing Wyeth packaged product. It is our expectation that, as a result, Wyeth will not receive product for 2005 sale until early 2005. All these factors cause us to expect a decline in product shipments to Wyeth in 2004 compared with 2003. In addition, the long-anticipated introduction by Barr Laboratories of a generic competitor to our partner Organon’s Remeron SolTabs in the U.S. market took place during the fourth quarter of 2003. We anticipate that this increased competition for our partner will adversely affect our revenues. Finally, our partner AstraZeneca’s recently signed agreement to market Zomig through an independent distributor in the U.S. likely will have an adverse effect on our royalty revenue because the selling price on which we generate royalties will be lower. Over time we expect increased sales volume to offset the decrease in the royalty base. If the transaction with Cephalon is not closed as anticipated, we expect that we would sign a license and manufacturing agreement with a pharmaceutical company partner for our OraVescent Fentanyl product, which we expect will enter Phase III clinical trials in 2004, to support an FDA submission for marketing approval in early 2005. We expect that the development fees and milestone payments under such an agreement would have a positive effect on 2004 revenues, and would offset the decline noted earlier in this paragraph.

     Cost of goods sold. We incurred cost of goods sold of $34.6 million in 2003, compared to $18.5 million in 2002 and $15.8 million in 2001. The increase from 2002 to 2003 is due to the increased product demand from our pharmaceutical company partners, which led to our producing product on a 7-day, 24-hours per day manufacturing schedule for most of 2003. The $2.7 million increase from 2001 to 2002 was primarily due to manufacturing more of our orally disintegrating products ($2.5 million), except for Triaminic Softchews, and from higher indirect labor costs associated with the expansion of our manufacturing and quality control infrastructures ($775,000) offset by lower unit manufacturing costs ($900,000). We added capacity for producing bottled products in 2003, and expect to complete a blister package capacity expansion project in 2004. This capacity expansion, undertaken in anticipation of future growth requirements, will increase the overhead component of cost of goods sold until production volumes grow to full utilization.

     Research and product development expenses. We incurred research and product development expenses of $13.5 million in 2003, compared to $10.6 million in 2002 and $6.2 million in 2001. The $2.9 million increase in expenses in 2003 was due primarily to our continuing activities in support of our OraVescent Fentanyl product. These activities increased in 2003 as a result of transitioning from Phase II to Phase III safety and efficacy clinical trials for OraVescent Fentanyl. We continued to work on other projects under our collaborative agreements with our pharmaceutical company partners. Much of this activity was funded by our partners, and is reported as Product Development Fees and Licensing revenues. The $4.4 million increase from 2001 to 2002 was primarily due to an increase in the number of collaborative projects in our product development portfolio, including development activity for recent collaborative agreements with Aventis, Schering-Plough and Schwarz Pharma, Inc. ($1.7 million), higher payroll costs associated with increases in professional staffing levels ($2.0 million), and higher depreciation costs associated with the newly renovated R&D center ($500,000). We expect research and development costs to increase substantially in 2004 due to the Phase III safety and efficacy trials for OraVescent Fentanyl.

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     Selling, general and administrative expenses. We incurred selling, general and administrative expenses of $12.1 million in 2003, compared to $7.7 million in 2002 and $5.4 million in 2001. The $4.4 million increase from 2002 to 2003 was primarily comprised of an increase in legal costs related to patent infringement litigation we are pursuing ($1.1 million), management transition costs ($378,000), incentive payments earned by employees related to our performance ($616,000), business insurance costs ($365,000), efforts to comply with the Sarbanes-Oxley Act (approximately $100,000) and increased staffing and recruitment costs ($1.8 million). The $2.3 million increase from 2001 to 2002 was primarily due to increased recruiting and relocation costs ($200,000), corporate incentive payments ($900,000), higher levels of staffing and consulting in support of our computer and information systems ($350,000) and higher legal costs ($250,000). We expect selling, general and administrative expenses to be flat to a small increase in 2004.

     Merger-related expenses. We recognized $17.4 million of expenses related to merger discussions which ultimately led to our agreement to be acquired by Cephalon, Inc. These costs were comprised of a break-up fee related to a terminated merger with aaiPharma ($11.5 million), legal fees ($2.8 million), and investment banking fees and expenses ($2.2 million), with the remainder attributable to consulting services, filing fees, and other miscellaneous transaction-related expenses.

     Operating income. Due to merger expenses, we recognized an operating loss of $1.5 million in 2003, compared to operating income of $9.8 million in 2002 and $4.6 million in 2001. Excluding merger expenses of $17.4 million, we would have reported operating income of $15.9 million in 2003, an increase of 62% over 2002. Operating income excluding merger expenses is a non-GAAP (generally accepted accounting principles) financial measure, which management believes helps investors evaluate our operating results period-by-period. This operating improvement was the result of higher royalties from our pharmaceutical company partners ($9.1 million), increased sales of products to our pharmaceutical company partners (gross margin of $5.4 million), and improved gross profit on those product sales due to our operating at full manufacturing capacity for most of 2003 (gross margin of $4.2 million). These were offset by reduced product development and licensing revenues ($5.3 million) and increased research and development expenditures ($2.9 million) and selling, general and administrative expenditures ($4.4 million). The $5.2 million increase from 2001 to 2002 was due to growth in product sales volume (gross margin of $600,000), improved gross profit margins on product sales (gross margin of $2.4 million) and increased product development and licensing revenues ($2.6 million). These were partly offset by increased research and development expenditures ($4.4 million) and selling, general and administrative expenditures ($2.3 million).

     Other income, net. We recognized other income of $3.3 million in 2003, compared to $6.4 million in 2002 and $10.3 million in 2001. Other income consists primarily of investment income on invested funds and gains or losses on asset dispositions. The $3.1 million and $3.9 million decreases from 2002 to 2003, and 2001 to 2002, were both primarily due to the lower interest rates on funds reinvested during the year and the lower average balance of those funds in each year. In 2004, we expect other income to decrease to under $3.0 million primarily from the impact of lower interest rates on funds that we expect to reinvest during the year.

     Tax benefit. We recognized a tax expense of $3.7 million in 2003, compared to benefits of $2.4 million in 2002, and $104,000 in 2001. The $6.1 million decline in 2003 resulted partly from the recognition of $2.0 million in tax credits related to the utilization of all remaining net operating loss carryforwards, which offset the tax we would otherwise incur. The effective tax rate for 2003 is also influenced by the fact that the merger expenses incurred related to our merger agreement with Cephalon are not considered tax deductible for financial reporting purposes. Also, certain expenses related to the terminated aaiPharma transaction are also not considered tax deductible for financial reporting purposes. The $2.3 million increase of the tax benefit from 2001 to 2002 was due to the recognition of approximately $8.9 million in tax credits related to the utilization of net operating loss carryforwards. Operating income before merger expenses indicates that future taxable income will be available to use remaining net operating loss carryforwards. In 2004, we expect to have a full year effective tax rate of 37.5%, except on certain non-deductible merger-related expenses which cannot be estimated at this time.

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     Net operating loss carryforwards of $41.4 million expire over the years 2008 through 2018. Tax credit carryovers of $1.2 million expire over the years 2005 through 2008. Research tax credit carryovers of $1.7 million expire over the years 2004 through 2018.

     The following table reconciles net income (loss) per diluted share to pro forma net income per diluted share for 2003 and 2002. Pro forma net income is calculated by applying a normalized tax rate of 37.5% to our reported pre tax income (loss) for the year, adjusted for merger-related expenses. Pro forma net income and pro forma net income per share are non-GAAP (generally accepted accounting principals) financial measures. We provide the pro forma information below to give investors an additional means of measuring our performance and a consistent basis for comparing our results from 2003 and 2002.

Liquidity and Capital Resources

     During the past three years we have financed our operations to date primarily through our revenues from product sales, product development fees and licensing revenues and royalties. Negative cash flow from operations in 2003 was largely due to merger-related expenses, a non-recurring item, and should not have a significant impact on future cash flows. If our merger agreement with Cephalon is terminated, then the terminating party may, under certain circumstances, be required to pay termination fees and expenses of up to $16.3 million. Our payment or receipt of any termination fees could have a material impact on our cash flows.

     Working capital, which is defined as current assets less current liabilities, increased by $6.9 million from $83.7 million at December 31, 2002 to $90.6 million at December 31, 2003. The increase was due to the transfer of $39.1 million of non-current available-for-sale securities to current, offset by the use of $21.9 million for capital expenditures, a $3.3 million increase in inventories, and a $3.8 million increase in prepaid expenses due to insurance and clinical development costs. We invest excess cash in interest-bearing money market accounts and investment grade securities.

     During 2004, we plan to spend approximately $26.0 to $30.0 million to add capacity for the manufacture of products containing potent substances to our facility in Brooklyn Park, as well as to complete our capacity expansion and warehouse and office improvements to our Eden Prairie facility. In addition, we expect to fund additional product development activities, notably Phase III safety and efficacy clinical trials related to our proprietary OraVescent Fentanyl product. We may also acquire technologies that complement our current portfolio of oral drug delivery technologies. We believe that our cash and cash equivalents and available-for-sale 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.

     The following table provides a summary of our contractual obligations as of December 31, 2003:

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Factors That Could Affect Future Results

Certain statements made in this Annual Report on Form 10-K 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-K. You should also consider carefully the definitive proxy statement regarding our proposed transaction with Cephalon, Inc. when it becomes available because it will contain important information about the transaction. 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.

Our Business And Stock Price May Suffer Prior to Completion of, Or If We Do Not Complete, The Proposed Transaction With Cephalon.

     If the transaction with Cephalon is not completed, we could be subject to a number of factors that may adversely affect our business and stock price, including:

•

our day-to-day operations may be disrupted due to the substantial time and effort our management must devote to completing the transaction;

•

if the merger agreement is terminated under certain conditions, we may be required to pay Cephalon termination fees and expenses of up to $16.3 million;

•

the market price of our common stock may decline to the extent that the current market price of such shares reflects a market assumption that the transaction will be completed;

•

we must pay various costs related to the transactions, such as our legal, investment advisor and accounting fees; and

•

if our board of directors determines to seek another merger or business combination, we may not be able to find a partner willing to enter into a transaction with more favorable terms and conditions than that agreed to by Cephalon.

     The announcement of the planned transaction with Cephalon, and related uncertainty concerning our future, may make it more difficult for us to enter into long-term relationships with certain pharmaceutical company partners and other third parties, which could have an adverse effect on our revenues.

     Third parties with whom we currently have relationships may terminate or otherwise reduce the scope of their relationship with us in anticipation or as a result of the transaction. Speculation regarding the likelihood of the closing of the transaction with Cephalon could increase the volatility of the price of our common stock.

     We intend to comply with the securities and antitrust laws of the United States and any other jurisdiction in which the proposed transaction is subject to review. The reviewing authorities may seek to impose conditions before giving their approval or consent to the transaction. A delay in obtaining the necessary regulatory approvals will delay the completion of the transaction. In January 2004, the Federal Trade Commission (“FTC”) requested additional information relating to our merger with Cephalon. The request extends the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 during which the FTC is permitted to review a proposed transaction. We have not yet obtained any governmental or regulatory approvals required to complete the transaction. We may be unable to obtain these approvals or to obtain them within the timeframe contemplated by the merger agreement.

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

     Revenues from AstraZeneca, Organon, and Wyeth together represented approximately 83% and 62% of our total revenues in 2003 and 2002, respectively. 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 a significant portion 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.

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We Rely On Third Parties To Market, Distribute And Sell The Products Incorporating Our Drug Delivery Technologies, And Those Third Parties May Not Perform, Or The Sales Of Those Products May Be Affected By Factors Beyond The Control Of Those Third Parties.

     Our pharmaceutical company partners market and sell the products we develop and manufacture for them. If one or more of our pharmaceutical company partners fails to pursue or delays the development, registration or marketing of products incorporating our technology 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, 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 lower level of priority to the marketing of products that incorporate our drug delivery technologies. 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.

     For the year ended December 31, 2003, net sales from manufacturing and royalties from our partners’ sales of our top four products accounted for approximately 84% of our operating revenues. Our top four products are AstraZeneca’s Zomig-ZMT and its equivalent for markets outside the U.S., Organon’s Remeron SolTab and its equivalent for markets outside the U.S., Wyeth’s Alavert and Dimetapp ND, and Novartis’ Triaminic Softchews. We cannot be certain that these products will continue to be accepted in their markets. Specifically, the following factors, among others, could affect the level of market acceptance of Remeron SolTab and its non-U.S. equivalents, Zomig-ZMT and its non-U.S. equivalents, and Alavert and Dimetapp ND:

•

the perception of the healthcare community of their safety and efficacy, both in an absolute sense and relative to that of competing products;

•

unfavorable publicity regarding these products or similar products;

•

product price relative to other competing products or treatments;

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changes in government and third-party payor reimbursement policies and practices;

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regulatory developments affecting the manufacture, marketing or use of these products; and

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competition from generic pharmaceutical manufacturers.

If We Do Not Enter Into Additional Collaborative Agreements With Pharmaceutical Companies, We May Not Be Able To Achieve Sustained Profitability.

     We primarily 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 products incorporating our technology, our revenues and gross profits may be insufficient to allow us to achieve sustained profitability.

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

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

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additional commercial products that we develop with our pharmaceutical company partners may not be successful;

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

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

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our pharmaceutical company partners may exercise their rights to terminate their collaborative agreements with us.

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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 two production lines for product requiring blister packaging, which collectively have an estimated annualized production capacity in excess of 500 million tablets. In 2003, we began to add a third production line, which is expected to be completed and commissioned in the first half of 2004. We also installed a production line for bottled product at our Brooklyn Park facility, which was completed and commissioned in the fourth quarter of 2003. We estimate that our total annualized capacity for the production lines in Eden Prairie will increase from approximately 500 million to approximately 1.0 billion tablets. We estimate that the total annualized capacity of the production line in Brooklyn Park will be approximately 700 million bottled tablets. If we are unable to increase our production capacity as scheduled or if our partners significantly increase their requirements for product deliveries prior to completing the scheduled increases in capacity, we may be required to allocate our production capacity until we have completed these capacity improvements. If this should happen, 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.

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 63% in the year ended December 31, 2003, 46% in the year ended December 31, 2002, and 34% in the year ended December 31, 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 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 experience declines in profitability or incur losses.

Sales Of Our Pharmaceutical Company Partners’ Products May Decline As A Result Of Competition From Generic Prescription Products And Regulatory Actions That Could Switch A Prescription Product To An Over-The-Counter Product, Which May Result In A Decline In Our Revenues And Profitability.

     Many of our pharmaceutical company partners face intense competition from manufacturers of generic drugs. Generic competition may reduce the demand and/or price for our partners’ products. Products that our pharmaceutical company partners produce may also be subject to regulatory actions that result in prescription products becoming available to consumers over-the-counter. Such a change could also reduce the demand and/or price for our partners’ products. Because we derive a significant portion of our revenue from manufacturing products for and receipt of royalties from our pharmaceutical company partners, a decline in the sales of products that we produce for our partners, whether as a result of the introduction of competitive generic products or other competitive factors, could have a material adverse effect on our revenues and profitability.

     We developed and currently manufacture Remeron SolTab for Organon, an orally disintegrating formulation of Remeron, Organon’s standard tablet. Mylan Laboratories and Teva Pharmaceutical Industries announced in January 2002 that they received tentative approval from the FDA to sell standard mirtazapine tablets, which are generic substitutes for Organon’s Remeron tablets. In March 2002, Organon sued Teva and Mylan and seven other generic pharmaceutical companies for the infringement of Organon’s U.S. patent for Remeron, but on December 18, 2002, a federal district court ruled that the generic version of mirtazapine developed by Teva and Mylan did not infringe Organon’s patent covering Remeron. Although Organon has appealed this court’s ruling, it is unlikely that the appeals court will reverse or delay the trial court’s ruling. Teva launched its generic form of mirtazapine in the U.S. market in 2003. Other generic manufacturers, including Mylan Laboratories, launched generic versions of mirtazapine upon the June 2003 expiration of Teva’s 180-day marketing exclusivity period.

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In May 2002, Organon announced that it sued Barr Laboratories, Inc. for infringing its U.S. patent for Remeron SolTab (mirtazapine orally disintegrating tablets). Despite this suit, the U.S. market launch of generic orally disintegrating mirtazapine tablets developed by Barr Laboratories was announced on December 18, 2003. Organon’s market for Remeron SolTab may be affected negatively by the introduction of generic versions of standard or orally disintegrating mirtazapine tablets. The introduction of these generic tablets is expected to lower Organon’s revenues from Remeron SolTab. This would have an adverse effect on our revenues from selling product to Organon, and a reduction in royalty payments we receive from Organon based on its sales of the product in the U.S. In the future, there may be other generic entrants in this market as well.

     On January 15, 2003, KV Pharmaceutical Company announced that it would begin marketing hyoscyamine sulfate orally disintegrating tablets, 0.125 mg, a prescription anticholinergic/antispasmodic product, utilizing its OraQuick orally disintegrating tablet technology. This product is expected to be equivalent to and substitutable for NuLev, which we developed and manufacture for Schwarz Pharma, Inc. Due to the large number of variables, we are unable to predict the effect of such a product introduction by KV Pharmaceutical on our business. On March 17, 2003, CIMA and Schwarz Pharma, Inc. filed a lawsuit against KV Pharmaceutical Company and its wholly owned subsidiary Ethex Corporation, alleging that sales by them of orally disintegrating hyoscyamine sulfate violated CIMA’s patent covering its DuraSolv technology. For details regarding the lawsuit between KV Pharmaceutical and CIMA, see information under the caption Legal Proceedings contained elsewhere in this document.

     On January 27, 2003, Andrx Corporation and Perrigo Company announced that they have entered into a multi-year agreement for Andrx to supply Perrigo with Andrx’s over-the-counter orally disintegrating tablet formulation of loratadine, which is expected to be equivalent to and substitutable for Schering-Plough’s Claritin RediTabs and Wyeth’s Alavert and Dimetapp ND. Andrx has received FDA approval of its Abbreviated New Drug Application for an orally disintegrating tablet formulation of loratadine. We developed and manufacture Alavert and Dimetapp ND orally disintegrating tablets for Wyeth. Perrigo is one of the largest providers of store brand over-the-counter products in the U.S. In February 2003, Wyeth received its second FDA approval, an Abbreviated New Drug Application, for a DuraSolv loratadine product, which is identical to Alavert, but was initially intended for the prescription market. This second FDA approval of a DuraSolv loratadine product may prevent Andrx from receiving final FDA approval of its competitive orally disintegrating tablet formulation of loratadine, until a date no earlier than 180 days after Wyeth’s launch of Alavert on December 20, 2002. Due to the large number of variables, we are unable to predict the exact timing and effect of such a product introduction by the Perrigo Company on our business, although Andrx has announced that it began shipping this product to Perrigo prior to the end of 2003.

We May Experience Significant Delays In Expected Product Releases While We And Our Pharmaceutical Company Partners Seek Regulatory Approvals For The Products We Develop And Manufacture And, If Either Of Us 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, 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. In addition, prior to obtaining FDA approval for a product, the manufacturing facility for the product must be pre-approved by the FDA. Our failure to obtain FDA pre-approval of our manufacturing facilities could significantly delay or cause the rejection of FDA approval for products we and our pharmaceutical company partners intend to manufacture and sell. 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.

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     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. We cannot guarantee that any future inspections will proceed without any compliance issues requiring time and resources to resolve.

     On August 1, 2003 the Minneapolis District Office of the FDA completed an inspection of our facilities that focused on compliance with current Good Manufacturing Practice regulations for manufacturers of pharmaceuticals. The FDA also conducted reviews under the Pre-Approval Inspection program related to three of our partners’ pending applications and collected profile samples. The FDA issued two form 483s at the close of the inspection that listed seven objectionable conditions. We provided a formal response to the Minneapolis District Office on September 2, 2003 that described our correction of each condition identified in the 483s. Those corrective actions are subject to verification and review at the next FDA inspection and there can be no assurance that the corrective actions are adequate or that the FDA will not require further corrective action.

     Regarding the three pending applications that the Minneapolis District Office reviewed under the Pre-Approval Inspection program, the Minneapolis District Office issued a letter on August 22, 2003 documenting its District level approval recommendation to the FDA Center for Drug Evaluation and Research. The Minneapolis District Office’s recommendation is not binding on the FDA, and action by the FDA’s Center for Drug Evaluation and Research on our partners’ applications is required before approval is final. An approval recommendation by the Minneapolis District Office is a prerequisite to final approval by the FDA’s Center for Drug Evaluation and Research of an application.

We May Be Exposed To Liability Claims Associated With The Use Of Hazardous Materials And Chemicals.

     Our research and development and manufacturing activities involve the controlled use of hazardous materials and chemicals. Although we believe that our safety procedures for using, storing, handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of such an accident, we could be held liable for any resulting damages, and any liability could materially adversely affect our business, financial condition and results of operations. In addition, the federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous or radioactive materials and waste products may require us to incur substantial compliance costs that could materially adversely affect our business, financial condition and results of operations.

Our Products May Contain Controlled Substance And Or Potent Substances, The Supply And Manufacture Of Which May Be Limited Or Regulated By U.S. Government Agencies.

     The active ingredients in some of our current and proposed products, including OraVescent Fentanyl, are controlled substances under the Controlled Substances Act of 1970 and are regulated by the U.S. Drug Enforcement Agency. These products are subject to DEA and OSHA regulations relating to manufacturing, storage, distribution and physician prescription procedure. Products containing controlled substances may generate public controversy. Opponents of these products may seek restrictions on marketing and withdrawal of any regulatory approvals. In addition, these opponents may seek to generate negative publicity in an effort to persuade the medical community to reject these products. Political pressures and adverse publicity could lead to delays in, and increased expenses for, and limit or restrict the introduction and marketing of products containing controlled substances. Furthermore, the DEA could impose significant penalties and fines against us and our pharmaceutical company partners for violating the Controlled Substances Act and DEA regulations.

     In addition, we are required to obtain quotas of controlled substances through the DEA allocation process. If we were to obtain our quota in insufficient quantity to support our scheduled manufacturing need, we would not be able to satisfy customer demand. This could result in adverse effects on our relationship with our customers, as well as impair demand for our product.

     Regulations under the Occupational Safety and Health Act establish certain standards related to safety in handling and manufacturing potent substances, such as fentanyl citrate. Under these regulations, we believe that our production of fentanyl citrate would require a specialized manufacturing environment that prevents fentanyl citrate from coming in contact with humans. We may develop other products that would require a specialized manufacturing environment. Currently, none of our existing production lines in Eden Prairie or Brooklyn Park nor

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our planned production line in Eden Prairie are capable of manufacturing potent substances. In the event we pursue the development of our OraVescent Fentanyl product through regulatory submission or other potential products with a comparable safety profile to fentanyl, we will be required to identify a manufacturer with appropriate resources to manufacture potent substances or to develop those capabilities internally. We are presently assessing the feasibility of contracting with third party manufacturers that have these specialized manufacturing capabilities and of developing these capabilities internally. In the event we decide to manufacture OraVescent Fentanyl or other potent products in our facilities, we will be required to add potent substance manufacturing capabilities that comply with these safety regulations, which could require capital expenditures in excess of $10 million. If we choose not to invest in potent substance manufacturing capabilities, our future revenues may not grow as fast because we will be unable to compete in certain important therapeutic markets for our technologies.

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;

•

product promotion;

•

product manufacturing, including good manufacturing practices 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:

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issue warning letters;

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impose fines;

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seize products or order recalls;

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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;

•

delay pending marketing applications; and

•

initiate criminal prosecutions.

We Have A Single Manufacturing Facility For Product Requiring Blister Packaging And We May Lose Revenues And Be Unable To Maintain Our Relationships With Our Pharmaceutical Company Partners If We Lose Production Capacity for Blistered Product.

     We manufacture all our current products on two production lines in our Eden Prairie facility. All of our commercialized products, except for Schwarz Pharma, Inc.’s NuLev, are blister-packaged on one or both of our Eden Prairie production lines. 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 to 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. The production line we have added at our Brooklyn Park facility is dedicated to bottled product, which is important for products currently under development, but does not reduce the risk associated with loss of capacity for product requiring blister packaging.

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, some of whom are located outside the U.S., for some of our raw materials and packaging supplies. If these raw materials or packaging supplies were no longer available, or unexpectedly unavailable for a period of time, 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

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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, required regulatory approvals obtained, and trading terms with it negotiated. While we have identified alternative suppliers, we may not be able to engage them 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 and materially adversely affect our business, financial condition, and results of operations.

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:

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the potential technologies may fail clinical studies;

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

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

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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. Orally disintegrating 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 Pharma Technologies, the Flashtab technology developed by Ethypharm, the FlashDose technology developed by Fuisz Technologies Ltd., a wholly owned subsidiary of Biovail Corporation, and the OraQuick technology developed by KV Pharmaceutical Company. SPI Pharma, Inc., a wholly owned subsidiary of Associated British Foods plc, recently announced Pharmaburst, a specially engineered excipient system that is capable of rapid disintegration. In addition, Eurand, a private specialty pharmaceutical company, recently announced that it has licensed an orally disintegrating tablet drug delivery technology, which was expected to be fully integrated into Eurand’s business in the second half of 2003. 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 seventeen patents on our drug delivery and packaging systems in the U.S., which will expire beginning in 2010. We have 75 applications and granted patents in the U.S. and other major countries.

     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.

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     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.

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 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 orally disintegrating tablet technologies in early 1997. Accordingly, we have only a limited operating history and a small number of pharmaceutical company partners, 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 orally disintegrating tablet 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 such 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.

     We have accumulated aggregate net losses from inception of approximately $10.4 million. 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;

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

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our ability to increase our manufacturing capacity;

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the level of product and price competition;

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our ability to develop additional commercial applications for our products;

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our ability to control our costs; and

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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

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may be required to curtail any plans to develop or acquire new drug delivery technologies or may be required to 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:

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

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the progress of our research and product development programs;

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

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

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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 coughs, colds, and allergies. Our pharmaceutical company partners may choose not to market those products in off-seasons and our sales and profits may decline in those periods as a result. In 2003, operating revenues from Wyeth and Novartis, which included revenues related to Alavert and Dimetapp ND, an allergy medication, and Triaminic Softchews, a seasonal cough and cold product, represented approximately 35% of our total operating revenues. We may not be successful in developing a mix of products to reduce these seasonal variations.

If The Marketing Claims Asserted About Products Incorporating Our Technologies 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. Marketing claims are the basis for a product’s labeling, advertising and promotion. If our pharmaceutical company partners fail to obtain from the Division of Drug Marketing, Advertising and Communication acceptable marketing claims for a product incorporating our drug delivery technologies, our revenues from that product may be limited. The claims our pharmaceutical company partners are asserting about our drug delivery technologies, or the drug product itself, may not be approved by the Division of Drug Marketing, Advertising and Communication.

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 which 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 income statement 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

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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.

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, 2003, the closing sale price for our common stock ranged from $18.19 to $33.08. 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:

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fluctuations in our operating results;

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

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governmental regulations;

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

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

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

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litigation;

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the failure to consummate the proposed merger transaction between us and Cephalon;

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

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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:

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demand by consumers for the products we produce for our pharmaceutical company partners;

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new product introductions;

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

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pharmaceutical company ordering patterns;

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our production schedules;

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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;

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

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

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strategic transaction-related expenditures.

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Recent Accounting Pronouncements

     In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003, including interim periods. The adoption of EITF Issue No. 00-21 has had no material impact on our financial position or on our results of operations.

     In January 2003, the Financial Accounting Standard Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, or FIN No. 46. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after December 15, 2003. The adoption of FIN No. 46 did not have a material impact on the financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is subject to interest rate risks on cash, cash equivalents and available-for-sale securities. Our investments in fixed-rate debt securities, which are classified as available-for-sale at December 31, 2003, have remaining maturities ranging from 3 to 41 months and are exposed to the risk of fluctuating interest rates. Available-for-sale securities had a market value of $80.6 million at December 31, 2003, and represented 35% of our total assets. The primary objective of our investment activities is to preserve capital. We have not used derivative financial instruments in our investment portfolio.

     We performed a sensitivity analysis assuming a hypothetical 10% adverse movement in interest rates applicable to fixed rate investments maturing during the next twelve months that are subject to reinvestment risk. As of December 31, 2003, the analysis indicated that these hypothetical market movements would not have a material effect on our financial position, results of operations or cash flow. We have an agreement denominated in foreign currency to purchase assets for our manufacturing expansion, but we have entered into a foreign exchange contact to limit our exposure to fluctuating exchange rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Our financial statements as of December 31, 2003 and 2002 and for each of the years ended December 31, 2003, 2002 and 2001 begin on page F-1 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

     As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Steven B. Ratoff has served as our interim Chief Executive Officer since May 1, 2003, as a director of CIMA since March 1995 and as Chairman of the Board since March 2003. From February 2001 to December 2001, Mr. Ratoff was President, Chief Executive Officer and a director of MacroMed, Inc., a privately held drug delivery company. From December 1994 to January 2001, Mr. Ratoff was Executive Vice President and Chief Financial Officer of Brown-Forman Corporation, a consumer products company. Mr. Ratoff serves as a director of Inkine Pharmaceutical Company, Inc.

     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.

     James C. Hawley became our Vice President, Chief Financial Officer and Secretary on April 1, 2003. From 2000 to March 2003, Mr. Hawley was a Principal and Vice President of Manchester Companies, Inc., an investment banking and management advisory firm. From 1999 to 2000, Mr. Hawley served as Chief Executive Officer and a director of CARA Collision & Glass, a consolidator in the damaged vehicle repair business, that at the time Mr. Hawley assumed those positions was a financially distressed company and in June 2000 sought protection under Chapter 7 of the U.S. Bankruptcy Code while pursuing a liquidation strategy. From 1995 to 1998, Mr. Hawley served as President & Chief Executive Officer, as well as Executive Vice President of Operations and Finance, and a director of Harmony Brook Inc., a developer and marketer of water purification systems. From 1991 to 1994, Mr. Hawley served as Executive Vice President, as well as Vice President of Finance & Operations and Chief Financial Officer, of Orthomet Inc., a developer of implantable medical devices. Prior to 1991, Mr. Hawley spent 12 years at 3M Company in various positions culminating in his role as Group Controller of the Pharmaceutical and Dental Products Group.

     John F. Chappell has served as a director since October 2001. Mr. Chappell has been President of Eponym, Inc., a venture capital and consulting firm since 2000. From 1990 to 2000, he founded and served as Chairman of Plexus Ventures, a consulting firm for business development and strategic transactions. Prior to founding Plexus Ventures, Mr. Chappell served as Chairman, Worldwide Pharmaceuticals for SmithKline Beecham plc (now GlaxoSmithKline plc). Mr. Chappell serves as Chairman of the Board of Salix Pharmaceuticals, Ltd.

     Steven D. Cosler has served as a director of CIMA since October 2001. Mr. Cosler has served as President, since March 2001, and as Chief Executive Officer, since January 2002, of Priority Healthcare Corporation, a publicly traded specialty pharmacy and distribution company. From January 2000 to January 2002, Mr. Cosler was Chief Operating Officer of Priority Healthcare Corporation. From January 2000 to March 2001, Mr. Cosler was Executive Vice President of Priority Healthcare Corporation. From August 1997 to January 2000, Mr. Cosler was Executive Vice President, Pharmacy Division, of Priority Healthcare Corporation. Prior to that time, Mr. Cosler was Senior Vice President and General Manager of Priority Healthcare Services Corporation, a subsidiary of Bindley Western Industries, Inc. Mr. Cosler serves as a director of Priority Healthcare Corporation.

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     Terrence W. Glarner has served as a director of CIMA since July 1990 and served as the Chairman of the Board from April 1995 to March 2003. Mr. Glarner has been President of West Concord Ventures, Inc., a venture capital firm formed by Mr. Glarner, since 1993. He also consults with Norwest Venture Capital. Prior to forming West Concord Ventures, Mr. Glarner held various management positions, including President, with North Star Ventures, Inc. Mr. Glarner is a Chartered Financial Analyst. He serves as a director of Aetrium Incorporated, Datakey, Inc., FSI International, Inc., NVE Corporation, and several privately held companies.

     Joseph R. Robinson, Ph.D. has served as a director of CIMA since 1993. Dr. Robinson is a Professor of Pharmacy at the 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 MacroMed, Inc., a privately held drug delivery company. He also serves on the scientific advisory boards of several companies.

     John M. Siebert, Ph.D. has been a director of CIMA since May 1992. Dr. Siebert has been the President and Chief Executive Officer of CyDex, Inc., a drug delivery company, since May 2003. Dr. Siebert was our President and Chief Executive Officer from September 1995 to April 2003 and President and Chief Operating Officer from July 1995 to September 1995. 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 Bayer Corporation. Dr. Siebert has also been employed by E.R. Squibb & Sons, Inc., G.D. Searle & Co. and The Procter & Gamble Company.

     There are no family relationships between or among any of our executive officers or directors.

     Our Board of Directors has a standing Audit Committee. The current members of the Audit Committee are Terrence W. Glarner, John F. Chappell and Steven D. Cosler. Our Board of Directors has determined that at least one member of our Audit Committee, Terrence W. Glarner, is an “audit committee financial expert,” as that term is defined under Section 407 of the Sarbanes-Oxley Act of 2002 and the rules promulgated by the Securities and Exchange Commission in furtherance of Section 407. Each member of the Audit Committee is independent as that term is defined under the Nasdaq listing standards, Section 301 of the Sarbanes-Oxley Act of 2002 and the rules adopted by the Securities and Exchange Commission pursuant to the Sarbanes-Oxley Act of 2002.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Exchange Act requires CIMA’s directors and executive officers, and persons who own more than ten percent of a registered class of CIMA’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of CIMA. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish CIMA with copies of all Section 16(a) forms they file. Based solely on a review of the copies of the reports furnished to us and written representations from our directors and executive officers, we make the following disclosure: David A. Feste, John Hontz and each of our directors (excluding Steven B. Ratoff, who had no untimely reports) each filed 1 untimely report for 1 option grant.

Code of Ethics

     On February 16, 2004, the Company adopted a Code of Ethics applicable to the chief executive officer, chief financial officer, controller and other employees performing similar functions. A copy of the Code of Ethics is filed as Exhibit 14.1 to this Annual Report on Form 10-K and will be available on the Company’s website at www.cimalabs.com, or is available free of charge upon request. The Company intends to post on its website any amendments to, or waivers from, its Code of Ethics within five business days after the date of any such amendment or waiver.

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ITEM 11. EXECUTIVE COMPENSATION

Summary of Compensation

     The following table sets forth the cash and non-cash compensation for each of the three fiscal years ended December 31, 2003 earned by CIMA’s Chief Executive Officer and each of the other executive officers whose compensation in a fiscal year exceeded $100,000 (the “Named Executive Officers”):

Summary Compensation Table

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Stock Option Grants And Exercises

     The following tables show, for the year ended December 31, 2003, certain information regarding options granted to, exercised by and held at December 31, 2003 by the Named Executive Officers:

Option Grants in Last Fiscal Year

Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values

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Compensation of Directors

     Each of CIMA’s non-employee directors (excluding the Chairman of the Board) receives an annual retainer of $15,000, plus $1,500 for each Board meeting attended in person and $900 for each Board meeting attended via teleconference. CIMA’s non-employee Chairman of the Board receives an annual retainer of $20,000, plus $2,000 for attendance at each Board meeting. Each member of the Audit Committee receives $1,000 for attendance at each committee meeting, and the Chairman of the Audit Committee receives an additional $5,000 annual retainer. Each member of the Compensation Committee (excluding the Chairman) receives $1,000 for attendance at each committee meeting, and the Chairman of the Compensation Committee receives $1,500 for attendance at each committee meeting. Each member of the Governance and Nominating Committee (excluding the Chairman) receives $750 for attendance at each committee meeting, and the Chairman of the Governance and Nominating Committee receives $1,000 for attendance at each committee meeting. The members of the Board are also eligible for reimbursement of reasonable expenses incurred in connection with attendance at Board and committee meetings.

     In addition to the payments described above, non-employee directors are issued an option to purchase 20,000 shares of common stock upon becoming a director and an option to purchase 7,500 shares of common stock following each annual meeting of stockholders. Prior to October 4, 2001, non-employee directors automatically received the foregoing options pursuant to the 1994 Directors’ Stock Option Plan (the “Directors’ Plan”). Under the Directors’ Plan, each annual option grant for 7,500 shares of common stock is fully exercisable six months after the date of grant, has an exercise price set at 100% of the fair market value of common stock on the date of grant and has a ten-year term. On October 4, 2001, the Board discontinued making additional awards under the Directors’ Plan and the Non-Employee Directors’ Fee Option Grant Program, and since that date, options issued to non-employee directors have been made under the CIMA LABS INC. 2001 Stock Incentive Plan.

Employment Agreements

     Steven B. Ratoff, CIMA’s Interim Chief Executive Officer and Chairman of the Board, and CIMA are parties to an employment agreement that pays Mr. Ratoff a monthly base salary of $28,045. In addition, Mr. Ratoff is eligible for a cash incentive bonus of up to 70% of his base salary upon achievement of certain objectives. The employment agreement provides that, upon termination of Mr. Ratoff’s employment prior to the end of the term of the agreement for any reason other than for “cause,” Mr. Ratoff will continue to receive his base salary of $28,045 per month through the end of the term of the agreement. While the original term of Mr. Ratoff’s employment agreement expired on October 31, 2003, on October 20, 2003, the CIMA board of directors extended Mr. Ratoff’s employment agreement on a month-to-month basis.

     James C. Hawley, our Vice President, Chief Financial Officer and Secretary, and CIMA are parties to an employment agreement that pays Mr. Hawley an annual base salary of $200,000. In addition, Mr. Hawley is eligible for a cash incentive bonus of up to 50% of his annual base salary upon achievement of certain objectives. Under the employment agreement, if Mr. Hawley terminates his employment for “good reason” he is entitled to specified severance benefits that include (1) twelve months salary at his annual base rate, (2) a prorated bonus for the calendar year in which the termination occurs and (3) partial reimbursement of his COBRA payments. In addition, in July 2003, we orally agreed with Mr. Hawley (and, under the merger agreement, Cephalon will honor and observe this arrangement) that, following the completion of the merger, we will not terminate his employment for a period of 6 months, except for “cause” as defined in his employment agreement. After the 6-month period, if we terminate his employment for any reason other than for “cause,” Mr. Hawley will be entitled to the severance benefits that are described above. Additionally, if, at the time of Mr. Hawley’s termination, CIMA or Cephalon provides severance benefits to any of its employees that are more beneficial than the severance benefits provided to Mr. Hawley under his employment agreement (taking into account the position of the employees as compared to Mr. Hawley’s position), then he will be entitled to receive the severance benefits provided to such other employees, equitably adjusted to reflect Mr. Hawley’s position with us.

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     John Hontz has entered into an employment agreement with the Company whereby the Company agreed to employ Dr. Hontz as Chief Operating Officer of the Company until September 1, 2004, which was extended to September 1, 2005 by an amendment dated December 31, 2002 to Dr. Hontz’s employment agreement. Under the terms of the agreement, as amended, Dr. Hontz’s annual base salary was set at $220,000 as of September 1, 2000. Dr. Hontz receives annual salary increases of not less than 5% per year on September 1st for each year of the agreement. In addition, the agreement provides that Dr. Hontz will be paid a cash incentive bonus of up to 50% of his salary upon the Company’s achievement of certain objectives and is entitled to participate in all of the Company’s employee benefit programs. Pursuant to the agreement, the Company also issued to Dr. Hontz an incentive stock option to purchase 100,000 shares of common stock with the exercise price set at 100% of the fair market value on the date of grant. Dr. Hontz will receive twenty-four months of compensation following his termination of employment for any reason, other than his death or disability, a change of control of the Company or for cause as defined by his employment agreement. If the Company terminates Dr. Hontz’s employment as a result of a change of control of the Company or if Dr. Hontz resigns his employment within one year after a change of control of the Company because of (1) the elimination of Dr. Hontz’s position, (2) a requirement that Dr. Hontz relocate more than 100 miles or (3) a material diminution in Dr. Hontz’s responsibilities and duties, Dr. Hontz will receive twenty-four months of compensation reduced by 50% of any gross compensation earned in connection with any employment during that period. Pursuant to the agreement, the Company pays Dr. Hontz a car allowance of $650 per month. The agreement contains standard provisions regarding the protection of confidential information, a one-year covenant not to compete and a covenant not to recruit.

     John Siebert resigned as CIMA’s President and Chief Executive Officer effective April 30, 2003, but agreed to remain an employee through December 31, 2003 to facilitate the transition of his duties. CIMA and Dr. Siebert entered into a letter agreement dated April 4, 2003, which was amended and restated on June 23, 2003, to amend Dr. Siebert’s employment agreement. Under the letter agreement, Dr. Siebert was paid a monthly salary of $28,045 and received a car allowance of $650 per month through his termination on December 31, 2003. Dr. Siebert is also entitled to receive a cash bonus of $78,461, which will be paid at the same time as annual bonus payments are made to other CIMA management employees, but not later than March 31, 2004. The letter agreement provides that after termination of his employment, Dr. Siebert will receive (1) monthly payments of $28,045 for twelve months, and (2) group medical and dental insurance, with CIMA paying its portion of the monthly premiums as if Dr. Siebert was still an employee until the earlier of twelve months after termination of his employment or Dr. Siebert’s eligibility for dental or health insurance through a new employer.

     David Feste resigned as CIMA’s Vice President, Chief Financial Officer and Secretary effective March 31, 2003, but agreed to remain an employee of CIMA through June 30, 2003 to facilitate the transition of duties to Mr. Hawley. After Mr. Feste notified CIMA of his desire to resign, CIMA and Mr. Feste entered into a letter agreement on February 27, 2003 amending his employment agreement. Under the letter agreement, Mr. Feste is entitled to receive (1) monthly payments of $16,998 from July 1, 2003 through December 31, 2003, (2) group medical and dental insurance, with CIMA paying its portion of the monthly premiums as if Mr. Feste was still an employee, until the earlier of March 31, 2004 or Mr. Feste’s eligibility for dental or health insurance through a new employer and (3) a cash bonus of $25,496 to be paid during the first quarter of 2004. The letter agreement provides that after December 31, 2003 Mr. Feste is entitled to receive monthly payments of $16,998 until the earlier of March 31, 2004 or his employment with a new company. The letter agreement also modified Mr. Feste’s non-compete obligations to provide that he may not become an employee or owner of, or have certain other relationships with, any person or organization engaged in the design, development, manufacture, distribution, marketing or selling of pharmaceutical products using fast dissolve drug delivery technologies within the United States until June 30, 2004. CIMA ceased making payments to Mr. Feste under the letter agreement in connection with the lawsuit filed by Mr. Feste against CIMA in December 2003. For details regarding the lawsuit between Mr. Feste and CIMA, see information under the caption Legal Proceedings contained elsewhere in this Annual Report.

     If the merger with Cephalon is completed, each of our executive officers and directors who is a regular, full-time employee of CIMA may be entitled to severance payments pursuant to our severance policy. The severance policy applies to employees who lose their positions within two years following a change of control, which is defined to occur when there is a change in the identity of a majority of the members of our board of directors. If, as a result of the change of control, an employee’s employment is actually or constructively terminated (1) because the employee’s position is eliminated, (2) because continuing to work in the position would require the employee to transfer to a work location

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more than 100 miles from the employee’s then current location, or (3) as a result of the employee’s responsibilities being so substantially changed that the employee has been effectively removed from his position, then the employee will be entitled to varying severance benefits depending on his position and seniority. Under the severance policy, some of our executive officers and directors may become entitled to severance payments equaling twelve months salary and outplacement assistance up to $10,000 if their employment is terminated as a result of the merger with Cephalon.

Compensation Committee Interlocks and Insider Participation

     The Compensation Committee of the Board of Directors is comprised of independent non-employee directors and is responsible for, among other things, establishing and administering the Company’s policies involving the compensation of executive officers. Messrs. Chappell (Chairman), Cosler and Glarner and Dr. Robinson were members of the Compensation Committee during 2003. Mr. Cosler’s service on the Compensation Committee ended on May 21, 2003. Compensation Committee members have no interlocking relationships as defined by the SEC.

Equity Compensation Plan Information

     The following table provides information as of December 31, 2003 with respect to our Equity Incentive Plan, Non-Employee Directors’ Fee Option Grant Program, 1994 Directors’ Stock Option Plan, Employee Stock Purchase Plan and 2001 Stock Incentive Plan.

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Security Ownership of Certain Beneficial Owners and Management of CIMA

     The following table sets forth certain information known to CIMA with respect to beneficial ownership of CIMA’s common stock as of March 8, 2003, except as otherwise noted below, by (1) each stockholder known by CIMA to be the beneficial owner of more than 5% of CIMA’s common stock, (2) each director of CIMA, (3) CIMA’s chief executive officer and three other most highly compensated executive officers during the year ended December 31, 2003, and (4) all executive officers and directors as a group.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     We have entered into indemnity agreements with certain officers and directors, which provide, among other things, that we will indemnify these officers and directors for liabilities to the full extent permitted under Delaware law, subject to certain limitations.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees Paid to Independent Auditors

     For the last two fiscal years, we paid the following fees to Ernst & Young LLP, our independent auditors:

     The Audit Committee pre-approved 100% of the services described above. The Audit Committee has determined that the rendering of audit-related and tax services by Ernst & Young LLP is compatible with maintaining the auditors’ independence.

     The Audit Committee’s current practice on pre-approval of services performed by the independent auditors is to approve annually all audit services and, on a case-by-case basis, recurring permissible non-audit services to be provided by the independent auditors during the fiscal year. The Audit Committee reviews each non-audit service to be provided and assesses the impact of the service on the auditors’ independence. In addition, the Audit Committee may pre-approve other non-audit services during the year on a case-by-case basis.

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PART IV.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1). Financial Statements

(a)(2). Financial Statement Schedules

The following financial statement schedule should be read in conjunction with the Audited Financial Statements referred to under Item 15(a)(1) above. Financial statement schedules not included in this Form 10-K have been omitted because they are not applicable or the required information is shown in the Audited Financial Statement or Notes thereto.

(a)(3). Listing of Exhibits

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(b). Reports on Form 8-K

On October 16, 2003, the Company filed a Report on Form 8-K to report that it had received an unsolicited letter from a publicly held pharmaceutical company indicating an interest in pursuing a business combination with the Company.

On October 30, 2003, the Company filed a copy of a press release issued on October 30, 2003 on Form 8-K. The press release announced the Company’s third quarter earnings and contained non-GAAP financial disclosure. Pro forma financial information was provided.

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On November 4, 2003, the Company filed a Report on Form 8-K to report that it had terminated the Agreement and Plan of Merger, dated as of August 5, 2003, by and between aaiPharma Inc., a Delaware corporation, the Company, Scarlet Holding Corporation, a Delaware corporation, Scarlet Mergerco, Inc., a Delaware corporation, and Crimson Mergerco, Inc., a Delaware corporation, and had paid to aaiPharma a termination fee of $11.5 million pursuant to the Agreement and Plan of Merger. The Company also reported that it had entered into an Agreement and Plan of Merger, dated as of November 3, 2003, by and between the Company, Cephalon, Inc., a Delaware corporation, and C MergerCo, Inc., a Delaware corporation.

(c). Exhibits

See Item 15(a)(3) above.

(d). Financial Statement Schedules

See Item 15(a)(2) above.

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Eden Prairie, Minnesota, on the 12th day of March, 2004.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 12, 2004.

* James C. Hawley, pursuant to the Powers of Attorney executed by each of the directors above whose name is marked by a “*”, by signing his name hereto, does hereby sign and execute this Annual Report on Form 10-K on behalf of each of the directors in the capacities in which the name of each appears above.

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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, 2003 and 2002, and the related income statements, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

F-1

CIMA LABS INC.
BALANCE SHEETS
(in thousands, except per share data)