Edgar Filing: ATRIX LABORATORIES INC

Filed Pursuant to Rule 424(b)(2)
Registration No. 333-55634

Prospectus Supplement

(To Prospectus dated June 5, 2001)

3,000,000 SHARES

[ATRIX LABORATORIES, INC. LOGO]

ATRIX LABORATORIES, INC.
COMMON STOCK
------------------------------

We are offering 3,000,000 shares of our common stock. All of the shares of
common stock offered under this prospectus supplement are being offered by us.
------------------------------

Our common stock is traded on the Nasdaq National Market under the symbol
"ATRX". The last reported sale price of our common stock on the Nasdaq National
Market on August 8, 2001 was $24.16 per share.

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

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE S-5 OF THIS PROSPECTUS SUPPLEMENT.
------------------------------

PER SHARE TOTAL
--------- -----

Offering Price........................................ $23.00 $69,000,000
Discounts and Commissions to Underwriters............. $ 1.38 $ 4,140,000
Offering Proceeds to Atrix............................ $21.62 $64,860,000

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the related prospectus is truthful or completed. Any
representation to the contrary is a criminal offense.

We have granted the underwriters the right to purchase up to an additional
450,000 shares of common stock to cover any over-allotments. The underwriters
can exercise this right at any time within thirty days after the offering. The
underwriters expect to deliver the shares of common stock to investors on or
about August 14, 2001.

BANC OF AMERICA SECURITIES LLC U.S. BANCORP PIPER JAFFRAY

CIBC WORLD MARKETS

GRUNTAL & CO., L.L.C.
------------------------------

August 8, 2001

TABLE OF CONTENTS

PAGE
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PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................... S-1
Risk Factors................................................ S-5
Use of Proceeds............................................. S-12
Price Range of Common Stock................................. S-12
Dividends................................................... S-12
Capitalization.............................................. S-13
Selected Consolidated Financial Data........................ S-14
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. S-16
Business.................................................... S-24
Management.................................................. S-36
Underwriting................................................ S-39
Legal Matters............................................... S-41
Experts..................................................... S-41
Where You Can Find More Information......................... S-41
Incorporation of Certain Information by Reference........... S-42
Index to the Consolidated Financial Statements.............. F-1
PROSPECTUS
About this Prospectus....................................... 1
Where You Can Find More Information......................... 1
Atrix Laboratories, Inc..................................... 2
Recent Developments......................................... 2
Risk Factors................................................ 2
Use of Proceeds............................................. 3
Description of Capital Stock................................ 3
Plan of Distribution........................................ 9
Legal Matters............................................... 10
Experts..................................................... 10

You should rely only on the information contained in this prospectus
supplement or incorporated by reference in the accompanying prospectus. We have
not, and the underwriters have not, authorized anyone to provide you with
different information. We are not making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information contained in or incorporated by reference in this prospectus
supplement and the accompanying prospectus are accurate as of any date other
than the date on the front of this prospectus supplement.

The prospectus (including the documents incorporated by reference in the
prospectus) that accompanies this prospectus supplement contains important
information regarding this offering, and we urge you to read both the prospectus
and this prospectus supplement in full to obtain material information concerning
the shares and an investment in the shares.

Information contained in our web site does not constitute part of this
prospectus supplement or the accompanying prospectus.

Atridox(R), Atrigel(R), Atrisone(R), Leuprogel(TM), BEMA(TM), SMP(TM),
MCA(TM) and BCP(TM) are our trademarks. Block Drug Corporation, a wholly owned
subsidiary of GlaxoSmithKline, plc, owns the trademark Atrisorb(R) in the United
States and Canada. This prospectus supplement also includes trademarks of other
companies.
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3

FORWARD-LOOKING STATEMENTS

This prospectus supplement contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that address, among other things, our strategy,
the anticipated development of our products, our anticipated use of proceeds,
our projected capital expenditures and liquidity, our development of additional
revenue sources, our development and expansion in international markets, and
market acceptance of our products. We intend for these forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statement contained in the Private Securities Litigation Reform Act of 1995, and
we are including this statement for purposes of complying with these safe harbor
provisions. We have based these forward-looking statements on our current
expectations and projections about future events. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and other factors, some of which are beyond our control, are difficult to
predict and could cause actual results to differ materially from those expressed
or forecasted in the forward-looking statements. These risks and uncertainties
include those described in "Risk Factors" and elsewhere in this prospectus
supplement.

We use words such as "believe," "expect," "anticipate," "intend," "plan,"
"estimate," "should," "likely," "potential," "seek" and variations of these
words and similar expressions to identify forward-looking statements. You should
not place undue reliance on these forward-looking statements, which reflect our
management's view only as of the date of this prospectus supplement. Except as
required by law, we do not undertake any obligation to update these statements
or publicly release the result of any revision to the forward-looking statements
that we may make to reflect events or circumstances after the date of this
prospectus supplement or to reflect the occurrence of unanticipated events.

MARKET DATA

Market data and forecasts used in this prospectus supplement, including,
for example, estimates of growth in the biotechnology and pharmaceutical
industries, have been obtained from independent industry sources. We have not
independently verified the data obtained from these sources, and we cannot
assure you of the accuracy or completeness of the data. Forecasts and other
forward-looking information obtained from these sources are subject to the same
qualifications and additional uncertainties accompanying any estimates of future
market size.

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PROSPECTUS SUPPLEMENT SUMMARY

This summary highlights certain information contained elsewhere in this
prospectus supplement and the accompanying prospectus. You should read the
following summary together with the more detailed information regarding our
company and the common stock being sold in this offering, especially the risks
of investing in our common stock discussed under the caption "Risk Factors."

ATRIX LABORATORIES, INC.

We are an emerging specialty pharmaceutical company focused on advanced
drug delivery. We have five patented drug delivery technologies that allow for
parenteral, transmucosal and topical delivery of active pharmaceutical compounds
including proteins and peptides. We have a diverse portfolio of products
including proprietary oncology, pain management and dermatology products. We
undertake late stage clinical development for our product candidates ourselves
and license these products to marketing partners for commercialization. In
addition, we license our technologies to major pharmaceutical and biotechnology
companies. Our significant strategic alliances for marketing and commercializing
our drug delivery technologies include Sanofi-Synthelabo Inc. and MediGene AG.
Our significant strategic alliances for developing new chemical entities and
life cycle management products include Elan International Services, Ltd., or
Elan, Pfizer Inc. and Geneva Pharmaceuticals, Inc.

Our most advanced pharmaceutical product candidate is Leuprogel, which
contains leuprolide acetate, a leutinizing hormone-releasing agonist, in our
proprietary Atrigel drug delivery system. In March 2001, we submitted a New Drug
Application, or NDA, for our Leuprogel One-month product for the palliative
treatment of advanced prostate cancer, and the United States Food and Drug
Administration, or FDA, has accepted the NDA for review. We recently completed
the Phase III clinical trial for our Leuprogel Three-month product and have
completed enrollment of the Phase III clinical trial for our Leuprogel
Four-month product. We are preparing an NDA for the Leuprogel Three-month
product and we expect to submit the NDA to the FDA in the second half of 2001.
We expect to submit an NDA for the Leuprogel Four-month product in the second
quarter of 2002. We currently have a Leuprogel Six-month product in preclinical
development. According to IMS Health's Global Services Midas database, the
global market for hormonal prostate cancer drugs was approximately $2.4 billion
in 1999.

The Leuprogel products utilize our proprietary Atrigel drug delivery system
to provide for the sustained release of leuprolide acetate for periods ranging
from one to six months. The Atrigel drug delivery system consists of
biodegradable polymers dissolved in biocompatible carriers that form an implant
after injection into the body. Pharmaceuticals may be blended into this liquid
delivery system at the time of manufacturing or, depending upon the product, may
be added later by the physician at the time of use.

The Phase III clinical study for our Leuprogel One-month product consisted
of 117 patients and yielded results that demonstrated a six-month mean
testosterone level of 6.2 ng/dL, well below the medical castration level of 50
ng/dL required by the FDA and the recommended National Comprehensive Cancer
Network standard of 20 ng/dL. In addition, the mean prostate specific antigen,
or PSA, level at six months was reduced to less than 3.2 ng/mL. Throughout the
course of treatment, no patient's testosterone levels rose above the medical
castration level of 50 ng/dL, which is referred to as a breakthrough. No patient
had a serious treatment-related adverse event. The data from our Leuprogel
Three-month clinical study, which consisted of 117 patients, are very similar to
the Leuprogel One-month product results. Mean testosterone levels were reduced
to approximately 10 ng/dL and the mean PSA level was reduced to 1.7 ng/mL, with
only one occurrence of testosterone breakthrough; however, the patient's
testosterone level was below the FDA suppression level following the second
injection. No patient had a serious treatment-related adverse event. Additional
advantages offered to the patient by our Leuprogel products are a smaller needle
and a subcutaneous, rather than more painful intramuscular, injection delivery.

In December 2000, we entered into an exclusive North American marketing
agreement with Sanofi-Synthelabo, a major international pharmaceutical company,
for our Leuprogel One-month, Three-month and Four-month products. Under the
terms of the agreement, we will manufacture the Leuprogel products and

S-1
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receive an agreed upon transfer price from Sanofi-Synthelabo as well as
royalties from sales. To date, we have received a total of $11 million in
up-front license fees and milestone payments and can receive up to an additional
$34 million upon achievement of milestones and approvals.

In April 2001, we entered into an exclusive European marketing agreement
with MediGene, a biotechnology company based in Germany, for our Leuprogel
One-month, Three-month and Four-month products. Under the terms of the
agreement, we will manufacture the Leuprogel products and we will receive
additional payments for certain clinical, regulatory and sales milestones and
royalties from sales. To date, we have received $2 million in license fees and
can receive up to an additional $14 million upon achievement of milestones and
approvals.

We are developing Atrisone, our proprietary product for the treatment of
acne and the itching associated with healing burn wounds. Atrisone incorporates
dapsone with our proprietary Solvent Microparticle, or SMP, drug delivery
system. Dapsone is a potent antibiotic with a separate anti-inflammatory
activity, which reduces inflammation associated with acne. When given orally,
dapsone is used for the treatment of such diseases as leprosy, malaria and
dermatitis herpetiformis, an autoimmune skin disease. The goal for Atrisone is
topical application to the acne lesion so as to reduce any potential side
effects. The SMP technology consists of a two-stage system designed to provide
topical delivery of highly water-insoluble drugs, such as dapsone, to the skin.
After topical application, the blood levels of dapsone are 500 to 1,000 fold
less than those found when the compound is given orally, thus reducing the
potential for systemic side effects.

In April 2001, we began enrollment for the first of two Phase III clinical
trials for the Atrisone product. The first Phase III clinical trial consists of
500 patients and its endpoints are the reduction of inflammatory lesions,
non-inflammatory lesions and total lesions. An additional endpoint of the trial
is the global acne assessment, or the qualitative assessment of the patient's
improvement after using the drug. The data from this Phase III trial are
expected to be available by the first quarter of 2002. Based on the results of
these data, we expect to begin a second Phase III clinical trial in the first
quarter of 2002. According to IMS data, the U.S. market for topical products to
treat acne was $600 million in 2000, with the combined oral and topical market
at more than $1 billion.

Our Bioerodible Mucoadhesive, or BEMA, drug delivery system is a
proprietary polymer-based system designed to deliver local or systemic levels of
drugs rapidly across oral or vaginal mucosal tissues. The semi-soft multi-layer
BEMA disc adheres readily to the mucosal tissue, where it softens further and
erodes away in approximately 10 to 20 minutes. The BEMA system is versatile and
is able to incorporate a wide variety of drugs, including proteins and peptides.
Preclinical studies have shown that the BEMA technology rapidly (approximately
15 minutes) delivers drugs to the systemic circulation, with sustained levels to
six hours. We plan to begin Phase I safety and pharmacokinetic clinical trials
for several compounds in late 2001 and early 2002.

Our primary objective is to be a leading specialty pharmaceutical company
focused on advanced drug delivery. Key elements to our strategy include:

- expanding our portfolio of products through internal development,

- maximizing the value of products by entering into late stage
collaborative relationships,

- licensing our technologies to major pharmaceutical and biotechnology
companies,

- pursuing acquisitions of complementary drug delivery technologies, and

- acquiring or in-licensing proprietary compounds.

Our principal executive offices are located at 2579 Midpoint Drive, Fort
Collins, Colorado 80525. Our telephone number is (970) 482-5868.

S-2
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THE OFFERING

Common stock offered by us.... 3,000,000 shares

Common stock to be outstanding
after the offering............ 18,204,402 shares

Use of proceeds............... We will use the net proceeds from this offering
to broaden our technologies, supplement our
product pipeline, further our current product
development efforts and for working capital and
general corporate purposes. We may use a
portion of the net proceeds to acquire
complementary assets, technologies and
businesses.

Nasdaq National Market
symbol........................ "ATRX"

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

The number of shares of our common stock outstanding after the offering is
based on 15,204,402 shares of common stock outstanding as of June 30, 2001 and
does not include the following:

- 2,916,496 shares of common stock subject to outstanding options as of
June 30, 2001 at a weighted average exercise price of $11.28 per share,

- 1,013,649 shares of common stock issuable upon the exercise of warrants
outstanding as of June 30, 2001 at a weighted exercise price of $17.94
per share, and

- 1,354,056 additional shares reserved for future issuance under our stock
option and stock incentive plans.

Unless otherwise noted, all information in this prospectus supplement
assumes that the underwriters will not exercise their option to purchase
additional shares of our common stock to cover over-allotments.

S-3
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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table presents our summary consolidated financial data as of
and for the periods indicated. The summary consolidated balance sheet data as of
June 30, 2001 is presented on an actual basis and as adjusted to reflect the
sale of 3,000,000 shares of common stock offered by us in this offering at a
public offering price of $23.00 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses and giving effect to
the application of the net proceeds.

SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ ----------------------
1996 1997 1998 1999 2000 2000 2001
-------- ------- ------- -------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Net sales and royalties...................... $ 636 $ 1,895 $ 3,451 $ 4,542 $ 6,156 $ 2,821 $ 2,576
Contract research and development revenue.... 1,004 854 622 1,093 2,009 760 3,433
Licensing, marketing rights and milestone
revenue.................................... -- 7,100 17,000 -- 1,878 937 1,509
-------- ------- ------- -------- -------- -------- --------
Total revenue.......................... 1,640 9,849 21,073 5,635 10,043 4,518 7,518
-------- ------- ------- -------- -------- -------- --------
Operating expense:
Cost of goods sold........................... 364 1,533 2,250 1,974 2,644 1,123 1,043
Research and development..................... 10,092 11,545 12,189 15,555 16,735 7,330 13,104
Purchased in-process research and
development................................ -- -- 3,050 -- -- -- --
Administrative and marketing................. 3,872 2,027 2,507 4,300 4,386 2,212 2,702
-------- ------- ------- -------- -------- -------- --------
Total operating expense................ 14,328 15,105 19,996 21,830 23,766 10,665 16,849
-------- ------- ------- -------- -------- -------- --------
Income (loss) from operations.................. (12,688) (5,256) 1,077 (16,195) (13,723) (6,147) (9,331)
Other income (expense):
Equity in loss of joint venture.............. -- -- -- -- (12,239) -- (1,517)
Investment income............................ 1,204 1,726 3,966 2,720 1,959 888 1,456
Interest expense............................. -- (307) (3,575) (3,062) (2,582) (1,296) (491)
Debt conversion expense...................... -- -- -- -- -- -- (2,048)
Other........................................ 51 (30) 13 (8) 89 78 (23)
-------- ------- ------- -------- -------- -------- --------
Net other income (expense)............. 1,255 1,389 404 (350) (12,773) (330) (2,623)
-------- ------- ------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary item and cumulative effect of
change in accounting principle............... (11,432) (3,867) 1,482 (16,545) (26,496) (6,477) (11,954)
Income tax -- current expense.................. -- -- (48) -- -- -- --
-------- ------- ------- -------- -------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.................................... (11,432) (3,867) 1,433 (16,545) (26,496) (6,477) (11,954)
Extraordinary gain (loss) on extinguished
debt......................................... -- -- 257 3,275 80 -- (288)
Cumulative effect of change in accounting
principle.................................... -- -- -- -- (20,612) (20,612) --
-------- ------- ------- -------- -------- -------- --------
Net income (loss) before preferred stock
dividends.................................... (11,432) (3,867) 1,690 (13,270) (47,028) (27,089) (12,242)
Accretion of dividend on preferred stock....... -- -- -- -- (383) -- (430)
-------- ------- ------- -------- -------- -------- --------
Net income (loss) applicable to common stock... $(11,432) $(3,867) $ 1,690 $(13,270) $(47,411) $(27,089) $(12,672)
======== ======= ======= ======== ======== ======== ========
Basic and diluted earnings per common share:
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.................................. $ (1.13) $ (.35) $ .13 $ (1.46) $ (2.23) $ (.56) $ (.82)
Extraordinary item........................... -- -- .02 .29 -- -- (.02)
Cumulative effect of change in accounting
principle.................................. -- -- -- -- (1.73) (1.80) --
-------- ------- ------- -------- -------- -------- --------
Net income (loss) before preferred stock
dividends.................................... (1.13) (.35) .15 (1.17) (3.96) (2.36) (.84)
Accretion of dividend on preferred stock....... -- -- -- -- (.03) -- (.03)
-------- ------- ------- -------- -------- -------- --------
Net income (loss) applicable to common stock... $ (1.13) $ (.35) $ .15 $ (1.17) $ (3.99) $ (2.36) $ (.87)
======== ======= ======= ======== ======== ======== ========
Basic and diluted weighted average shares
outstanding.................................. 10,147 11,134 11,270 11,327 11,884 11,458 14,655
======== ======= ======= ======== ======== ======== ========

AS OF JUNE 30, 2001
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)

CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $55,798 $120,308
Total assets................................................ 75,240 139,750
Long-term obligations....................................... 37,748 37,748
Shareholders' equity........................................ 29,462 93,972

S-4
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RISK FACTORS

You should carefully consider the following risk factors and the other
information contained in this prospectus supplement and the accompanying
prospectus before purchasing shares of our common stock. Investing in our common
stock involves a high degree of risk. If any of the events described in the
following risk factors occur, our business and financial condition could be
seriously harmed. In addition, the trading price of our common stock could
decline due to the occurrence of any of such events, and you may lose all or
part of your investment.

WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE FUTURE LOSSES.

Since our inception, our focus has been to invest significant time and
money into research and development of new and innovative products. Because of
our time and financial commitments to these new products, we have operated at a
loss for four of the previous five years. Furthermore, our research and
development activities may result in additional operating losses for the
foreseeable future. We cannot assure you that any particular product will ever
be approved or achieve market penetration.

To support our research and development of certain product candidates, we
may rely on agreements with collaborators, licensors or others that provide
financial and clinical support. If any of these agreements were terminated or
substantially modified, we may incur additional losses. In addition, our ability
to achieve profitability will depend on our ability to obtain regulatory
approval and successful commercialization of our products. We cannot assure you
that we will be able to achieve revenue growth or profitability.

WE MUST OBTAIN DOMESTIC AND FOREIGN REGULATORY APPROVAL OF OUR PRODUCT
CANDIDATES, WHICH REQUIRES A SIGNIFICANT AMOUNT OF TIME AND MONEY.

We must obtain approval from the FDA to manufacture and market
pharmaceutical products in the United States. Other countries have similar
requirements. The process that pharmaceutical products must undergo to get this
approval includes preclinical testing and clinical trials to demonstrate safety
and efficacy, and the process is expensive and time consuming.

FDA approval can be delayed, limited or denied for many reasons, including:

- a product candidate may be found to be unsafe or ineffective,

- the FDA may interpret data from preclinical testing and clinical trials
differently and less favorably than the way we interpret it,

- the FDA might not approve our manufacturing processes or facilities,

- the FDA may change its approval policies or adopt new regulations that
may negatively affect or delay our ability to bring a product to market,
and

- a product candidate may not be approved for all the indications we
requested and thus our markets may be limited.

In addition, the process of obtaining approvals in foreign countries is
also subject to delay and failure for similar reasons. Any delay in, or failure
to receive, approval will have a material adverse effect on our business and
financial condition.

We are also required to comply with the FDA's current Good Manufacturing
Practice, or GMP, regulations. GMP regulations include requirements relating to
quality control, quality assurance and maintenance of records and documentation.
Manufacturing facilities are subject to inspection by the FDA and must be
approved before we can use them in the commercial manufacturing of our products.
If we or our contract manufacturers are unable to comply with the applicable GMP
requirements and other FDA regulatory requirements, our business may be harmed.

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CLINICAL TRIALS ARE EXPENSIVE AND THEIR OUTCOME IS UNCERTAIN.

Before obtaining regulatory approvals for the commercial sale of any
products, we or our partners must demonstrate through preclinical testing and
clinical trials that our product candidates are safe and effective for use in
humans. Some of our product candidates are in the early stage of development. We
spend and will continue to spend a significant amount of financial resources
conducting preclinical testing and clinical trials.

Completion of clinical trials may take several years or more and the length
of time can vary substantially. Our initiation and rate of completion of
clinical trials may be delayed by many factors, including:

- our inability to recruit patients at a sufficient rate,

- the failure of clinical trials to demonstrate a product candidate's
efficacy,

- our inability to follow patients adequately after treatment,

- our inability to predict unforeseen safety issues,

- our inability to manufacture sufficient quantities of materials for
clinical trials,

- the potential for unforeseen governmental or regulatory delays,

- lack of sufficient financial resources, and

- inability to satisfy FDA requirements which may result in the clinical
trials being repeated.

In addition, the results from preclinical testing and early clinical trials
do not always predict results of later clinical trials. A number of new drugs
have shown encouraging results in early clinical trials, but subsequently failed
to establish sufficient safety and efficacy data to obtain necessary regulatory
approvals. If a product candidate fails to demonstrate safety and efficacy in
clinical trials, this failure may delay development of other product candidates
and hinder our ability to conduct related preclinical testing and clinical
trials. As a result of these failures, we may also be unable to find additional
collaborators or to obtain additional financing. Our business and financial
condition may be materially adversely affected by any delays in, or termination
of, our clinical trials.

Furthermore, to market our products outside the United States, our products
are subject to additional clinical trials and approvals even though the products
have been approved in the United States. To meet any additional requirements
that might be imposed by foreign governments, we may incur additional costs that
will inhibit our profitability. If the approvals are not obtained or will be too
expensive to obtain, foreign distribution may not be feasible, which could harm
our business.

OUR FUTURE PROFITABILITY DEPENDS ON THE DEVELOPMENT OF NEW PRODUCTS.

We currently have a variety of new products in various stages of research
and development and are working on possible improvements, extensions or
reformulations of some existing products. These research and development
activities, as well as the clinical testing and regulatory approval process,
which must be completed before commercial quantities of these products can be
sold, will require significant commitments of personnel and financial resources.
Delays in the research, development, testing and approval processes will cause a
corresponding delay in revenue generation from those products. Regardless of
whether they are ever released to the market, the expense of such processes will
have already been incurred.

We reevaluate our research and development efforts regularly to assess
whether our efforts to develop a particular product or technology are
progressing at the rate that justifies our continued expenditures. On the basis
of these reevaluations, we have abandoned in the past, and may abandon in the
future, our efforts on a particular product or technology. We cannot assure you
that any product we are researching or developing will ever be successfully
released to the market. If we fail to take a product or technology from the
development stage to market on a timely basis, we may incur significant expenses
without a near-term financial return.

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WE RELY HEAVILY ON OUR RELATIONSHIPS WITH OUR COLLABORATORS, AND IF WE FAIL TO
MAINTAIN SUCH RELATIONSHIPS, IF THE COLLABORATORS DO NOT PERFORM SATISFACTORILY
OR IF DISPUTES ARISE BETWEEN US AND A COLLABORATOR, OUR BUSINESS COULD BE
HARMED.

We form strategic relationships with collaborators to help us develop,
commercialize and market many of our products. Our arrangements with
collaborators are critical to commercializing our products. Although some of our
revenues are obtained from strategic partners' research and development payments
and upon achievement of certain milestones and sales from certain of our
products that we market directly, we expect that most of our future revenues
will be obtained from royalty payments from sales or a percentage of profits of
products licensed to our collaborators. We cannot assure you that these
relationships will continue or that our collaborators will perform
satisfactorily. Failure to make or maintain these arrangements or form new
arrangements or a delay in a collaborator's performance could adversely affect
our business and financial condition.

Disputes may arise between us and a collaborator. Such a dispute could
delay the program on which we are working with the collaborator. It could also
result in expensive arbitration or litigation, which may not be resolved in our
favor. In addition, our collaborators could merge with or be acquired by another
company or experience financial or other setbacks unrelated to our collaboration
that could, nevertheless, adversely affect us.

We are currently involved in a dispute with Block Drug Corporation relating
to a commercialization agreement we entered into with Block in 1996. Block is
now a wholly owned subsidiary of GlaxoSmithKline, plc. We believe that under the
agreement, the milestone for the FDA approval of our Atrisorb-Doxy Barrier
product was achieved in 2000 and the corresponding payment of $1,000,000 was
due. Block has not made this payment. Pursuant to our agreement with Block, we
will be entitled to an additional milestone payment of $2,000,000 upon Block's
first commercial sale of the Atrisorb-Doxy Barrier product in the United States.
The Block agreement provides that the first commercial sale of this product in
the United States must occur within 120 days after FDA approval, subject to
certain conditions that have been satisfied. The FDA approved the Atrisorb-Doxy
Barrier product in September 2000. We have notified Block that they are in
breach of the agreement for failure to commence marketing of our Atrisorb-Doxy
Barrier product and on May 11, 2001 we filed a lawsuit in the U.S. District
Court for the District of Colorado seeking injunctive relief based on Block's
breach of the agreement. Block has initiated arbitration, and an arbitration
hearing has been set for November 13, 2001. We cannot assure you of the outcome
of these disputes.

WE HAVE LIMITED EXPERIENCE IN SELLING AND MARKETING OUR PRODUCTS.

We have limited experience in marketing and selling our products. To
achieve commercial success for any products, we must either develop a marketing
and sales force or contract with another party, including collaborators, to
perform these services for us. In either case, we will be competing with
companies that have experienced and well-funded marketing and sales operations.
To the extent we undertake to market or co-market our own products, we will
require additional expenditures and management resources. We cannot assure you
that we will be successful in developing a marketing and sales force or in
contracting with a third party on acceptable terms to sell our products.

IF THERE IS NO MARKET ACCEPTANCE OF OUR PRODUCTS, OUR REVENUES WILL BE REDUCED.

Our products may not gain market acceptance among physicians, patients,
third-party payors and the medical community. The degree of market acceptance of
any of our products or product candidates will depend on a number of factors,
including:

- demonstration of their clinical efficacy and safety,

- their cost-effectiveness,

- their potential advantage over alternative existing and newly developed
treatment methods,

S-7
11

- the marketing and distribution support they receive, and

- reimbursement policies of government and third-party payors.

Our products and product candidates, if successfully developed, will
compete with a number of drugs and therapies currently manufactured and marketed
by major pharmaceutical and other biotechnology companies. Our products may also
compete with new products currently under development by others or with products
which may cost less than our products. Physicians, patients, third-party payors
and the medical community may not accept or utilize our products. If our
products do not achieve significant market acceptance, our business and
financial condition will be materially adversely affected.

WE CONDUCT OPERATIONS IN FOREIGN COUNTRIES WHICH ARE SUBJECT TO RISKS AND OUR
PLANS FOR INTERNATIONAL EXPANSION MAY NOT SUCCEED, WHICH WOULD HARM OUR REVENUES
AND PROFITABILITY.

We conduct operations in foreign countries which are subject to certain
risks. In addition, one of our strategies for increasing our revenues depends on
expansion into international markets. Our international operations may not
succeed for a number of reasons, including:

- difficulties in managing foreign operations,

- fluctuations in currency exchange rates or imposition of currency
exchange controls,

- competition from local and other foreign-based companies,

- issues relating to uncertainties of laws and enforcement relating to the
protection of intellectual property,

- unexpected changes in trading policies and regulatory requirements,

- duties and taxation issues,

- language and cultural differences,

- general political and economic trends, and

- expropriation of assets, including bank accounts, intellectual property
and physical assets by foreign governments.

Accordingly, we may not be able to successfully execute our business plan
in foreign markets. If we are unable to achieve anticipated levels of revenues
from our international operations, our revenues and profitability will decline.

OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND DEFEND OURSELVES FROM
INTELLECTUAL PROPERTY SUITS COULD HARM OUR COMPETITIVE POSITION AND OUR
FINANCIAL PERFORMANCE.

We rely heavily on our proprietary information in developing and
manufacturing our products. We attempt to protect our intellectual property
rights through patents, trade secrets and other measures. Despite our efforts to
protect our proprietary rights from unauthorized use or disclosure, parties,
including former employees or consultants of ours, may attempt to disclose,
obtain or use our proprietary information or technologies. The steps we have
taken may not prevent misappropriation of our proprietary information and
technologies, particularly in foreign countries where laws or law enforcement
practices may not protect our proprietary rights as fully as in the United
States. Unauthorized disclosure of our proprietary information could harm our
competitive position.

Intellectual property claims brought against us, regardless of their merit,
could result in costly litigation and the diversion of our financial resources
and technical and management personnel. Further, if such claims are proven
valid, through litigation or otherwise, we may be required to change our
trademarks and pay financial damages, which could harm our profitability and
financial performance.

S-8
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IF WE ENGAGE IN ACQUISITIONS, WE WILL INCUR A VARIETY OF EXPENSES, AND WE MAY
NOT BE ABLE TO REALIZE THE ANTICIPATED BENEFITS.

From time to time, we engage in preliminary discussions with third parties
concerning potential acquisitions of products, technologies and businesses.
Although there are currently no commitments or agreements with respect to any
acquisitions, in the future, we may pursue acquisitions of additional products,
technologies or businesses. Acquisitions involve a number of risks, including:

- difficulties in and costs associated with the assimilation of the
operations, technologies, personnel and products of the acquired
companies,

- assumption of known or unknown liabilities or other unanticipated events
or circumstances,

- risks of entering markets in which we have limited or no experience, and

- potential loss of key employees.

Any of these risks could harm our ability to achieve levels of
profitability of acquired operations or to realize other anticipated benefits of
an acquisition.

WE MAY SEEK TO RAISE ADDITIONAL FUNDS, AND ADDITIONAL FUNDING MAY BE DILUTIVE TO
STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS.

Any additional equity financing may be dilutive to our stockholders and
debt financing, if available, may involve restrictive covenants, which may limit
our operating flexibility with respect to certain business matters. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our stockholders will be reduced. These stockholders may
experience additional dilution in net book value per share and any additional
equity securities may have rights, preferences and privileges senior to those of
the holders or our common stock.

OUR FUTURE PERFORMANCE DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN KEY
PERSONNEL.

Our success depends in part on our ability to attract and retain highly
qualified management and scientific personnel. Competition for personnel in our
industry is intense. The loss of key employees or the inability to attract key
employees could limit our ability to develop new products and result in lost
sales and diversion of management.

WE ARE SUBJECT TO ENVIRONMENTAL COMPLIANCE RISKS.

Our research, development and manufacturing involves the controlled use of
hazardous biological, chemical and radioactive materials. We are also subject to
federal, state and local government regulation in the conduct of our business,
including regulations on employee safety and our handling and disposal of
hazardous and radioactive materials. Any new regulation or change to an existing
regulation could require us to implement costly capital or operating
improvements for which we have not budgeted. We cannot assure you that these
regulations will remain the same or that we will be able to maintain compliance
with these regulations.

OUR INDUSTRY IS CHARACTERIZED BY INTENSE COMPETITION AND RAPID TECHNOLOGICAL
CHANGE, WHICH MAY LIMIT OUR COMMERCIAL OPPORTUNITIES, RENDER OUR PRODUCTS
OBSOLETE AND REDUCE OUR REVENUES.

The pharmaceutical and biotechnology industries are highly competitive. We
face intense competition from academic institutions, government agencies,
research institutions and other biotechnology and pharmaceutical companies,
including other drug delivery companies. Some of these competitors are also our
collaborators. These competitors are working to develop and market other drug
delivery systems, vaccines, antibody therapies and other methods of preventing
or reducing disease, and new small-molecule and other classes of drugs that can
be used without a drug delivery system.

S-9
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Many of our competitors have much greater capital resources, manufacturing
and marketing experience, research and development resources and production
facilities than we do. Many of them also have much more experience than we do in
preclinical testing and clinical trials of new drugs and in obtaining FDA and
foreign approvals. In addition, they may succeed in obtaining patents that would
make it difficult or impossible for us to compete with their products.

Because major technological changes can happen quickly in the biotechnology
and pharmaceutical industries, the development by competitors of technologically
improved or different products may make our product candidates obsolete or
noncompetitive.

IF THIRD-PARTY PAYORS WILL NOT PROVIDE COVERAGE OR REIMBURSE PATIENTS FOR THE
USE OF OUR PRODUCTS, OUR REVENUES AND PROFITABILITY WILL SUFFER.

The commercial success of our products is substantially dependent on
whether third-party reimbursement is available for the use of our products by
the medical profession. Medicare, Medicaid, health maintenance organizations and
other third-party payors may not authorize or otherwise budget for the
reimbursement of our products. In addition, they may not view our products as
cost-effective and reimbursement may not be available to consumers or may not be
sufficient to allow our products to be marketed on a competitive basis.
Likewise, legislative proposals to reform health care or reduce government
programs could result in lower prices for or rejection of our products. Changes
in reimbursement policies or health care cost containment initiatives that limit
or restrict reimbursement for our products may cause our revenues to decline.

IF PRODUCT LIABILITY LAWSUITS ARE BROUGHT AGAINST US, WE MAY INCUR SUBSTANTIAL
COSTS.

Our industry faces an inherent risk of product liability claims from
allegations that our products resulted in adverse effects to the patient and
others. These risks exist even with respect to those products that are approved
for commercial sale by the FDA and manufactured in facilities licensed and
regulated by the FDA. Our insurance may not provide adequate coverage against
potential product liability claims or losses. In addition, we cannot assure you
that our current coverage will continue to be available in the future on
reasonable terms, if at all. Even if we are ultimately successful in product
liability litigation, the litigation would consume substantial amounts of our
financial and managerial resources and may create adverse publicity, all of
which would impair our ability to generate sales. If we were found liable for
any product liability claims in excess of our insurance coverage or outside our
coverage, the cost and expense of such liability could severely damage our
business and profitability.

A VARIETY OF FACTORS MAY CAUSE THE PRICE OF OUR STOCK TO BE VOLATILE.

Our stock price may fluctuate due to a variety of factors, including:

- announcements of developments related to our business or our competitors'
businesses,

- fluctuations in our operating results,

- sales of our common stock in the marketplace,

- failure to meet or changes in analysts' expectations,

- general conditions in the pharmaceutical and biotechnology industries or
the worldwide economy,

- announcements of innovations, new products or product enhancements by us
or by our competitors,

- developments in patents or other intellectual property rights or any
litigation relating to these rights, and

- developments in our relationships with our customers, suppliers and
collaborators.

In recent years, our stock, the stock of other pharmaceutical and
biotechnology companies and the stock market in general have experienced extreme
price fluctuations, which have been unrelated to the operating performance of
the affected companies. We cannot assure you that the market price of our common
stock will

S-10
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not continue to experience significant fluctuations in the future, including
fluctuations that are unrelated to our performance.

WE WILL RETAIN BROAD DISCRETION IN THE USE OF PROCEEDS FROM THIS OFFERING AND
MAY NOT OBTAIN A SIGNIFICANT RETURN ON THE USE OF THESE PROCEEDS.

We currently have no specific plans for a significant portion of our net
proceeds from this offering. Consequently, our management has discretion as to
how to spend the proceeds from this offering and may spend these proceeds in
ways with which our stockholders may not agree. Management's allocation of the
proceeds of this offering may not benefit our business and the investment of the
proceeds may not yield a favorable return.

ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD-PARTY ACQUISITION DIFFICULT.

Our certificate of incorporation and bylaws and anti-takeover provisions of
Delaware law could make it difficult for a third party to acquire control of us,
even if a change in control would be beneficial to stockholders. Our certificate
of incorporation provides that our board of directors may issue, without
stockholder approval, preferred stock having such voting rights, preferences and
special rights as the board of directors may determine. Our certificate of
incorporation and bylaws also provide for a classified board, with board members
serving staggered three-year terms. In addition, we have a stockholder rights
plan, which entitles existing stockholders to rights, including the right to
purchase shares of preferred stock, in the event of an acquisition of 15% or
more of our outstanding common stock, or an unsolicited tender offer for such
shares. These provisions of Delaware law, our certificate of incorporation and
bylaws, and our stockholders rights plan may make it difficult for a third party
to acquire us.

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 3,000,000 shares of
common stock we are offering will be approximately $64.5 million, or
approximately $74.2 million if the underwriters exercise their over-allotment
option in full, based on the public offering price of $23.00 per share and after
deducting underwriting discounts and commissions and our estimated offering
expenses.

We expect to use these net proceeds to broaden our technologies, supplement
our product pipeline, and otherwise further our current product development
efforts. We will also use funds for working capital and general corporate
purposes. In addition, we may use a portion of the net proceeds to acquire
complementary assets, technologies and businesses. We currently have no
commitments or agreements with respect to any acquisitions. Pending use of the
net proceeds, we plan to invest the net proceeds in short-term investment grade
securities. We will have broad discretion as to the allocation and use of the
net proceeds that we will receive.

PRICE RANGE OF COMMON STOCK

Our common stock is traded on the Nasdaq National Market under the symbol
"ATRX." The following table sets forth, for the fiscal periods indicated, the
range of high and low sales prices per share of our common stock as reported on
the Nasdaq National Market:

HIGH LOW
------ ------

1999:
First Quarter............................................ $16.00 $ 8.50
Second Quarter........................................... 12.13 7.94
Third Quarter............................................ 9.94 6.25
Fourth Quarter........................................... 7.69 3.31
2000:
First Quarter............................................ $16.56 $ 5.06
Second Quarter........................................... 11.06 6.88
Third Quarter............................................ 16.19 8.88
Fourth Quarter........................................... 19.81 12.13
2001:
First Quarter............................................ $25.00 $13.38
Second Quarter........................................... 24.76 9.63
Third Quarter (through August 8, 2001)................... 28.40 21.40

On August 8, 2001, the last reported sale price of our common stock as
reported by the Nasdaq National Market was $24.16 per share. As of August 7,
2001, there were 15,228,635 shares of our common stock outstanding, held by
approximately 2,470 holders of record.

DIVIDENDS

We have not paid any cash dividends to stockholders since our inception. We
currently intend to retain all available funds for use in the operation of our
business and do not anticipate paying any cash dividends on our common stock in
the foreseeable future. Any determination to pay dividends in the future will be
at the discretion of our board of directors and will be dependent on results of
operations, financial condition, restrictions imposed by applicable law and
other factors deemed relevant by our board of directors.

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CAPITALIZATION

The following table presents our cash, cash equivalents, marketable
securities and capitalization as of June 30, 2001 on an actual basis and on an
as adjusted basis to reflect the sale of 3,000,000 shares of common stock we are
offering at a public offering price of $23.00 per share and after deducting the
underwriting discounts and commissions and estimated offering expenses and
giving effect to the application of the estimated net proceeds. This table
should be read in conjunction with our consolidated financial statements and the
related notes included elsewhere in this prospectus supplement.

AS OF JUNE 30, 2001
------------------------------
ACTUAL AS ADJUSTED
------------- -------------

Cash, cash equivalents and marketable securities............ $ 56,249,042 $ 120,759,042
============= =============
Current portion of long-term debt........................... -- --
Long-term debt, less current portion:
Convertible subordinated notes............................ $ 9,711,000 $ 9,711,000
------------- -------------
Total long-term debt.............................. 9,711,000 9,711,000
------------- -------------
Stockholders' Equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized:
Series A preferred stock, $.001 par value, 200,000
shares authorized and no shares issued or
outstanding.......................................... -- --
Series A convertible exchangeable preferred stock,
$.001 par value, 20,000 shares authorized; 12,439
shares issued and outstanding........................ 12 12
Common stock, $.001 par value; 45,000,000 shares
authorized; shares issued and outstanding: Actual:
15,204,402 shares; and As Adjusted: 18,204,402
shares................................................. 15,204 18,204
Additional paid-in capital................................ 148,171,512 212,678,512
Accumulated other comprehensive loss...................... (555,204) (555,204)
Accumulated deficit....................................... (118,169,074) (118,169,074)
------------- -------------
Total stockholders' equity........................... 29,462,450 93,972,450
------------- -------------
Total capitalization.............................. $ 39,173,450 $ 103,683,450
============= =============

The number of shares of our common stock outstanding after the offering is
based on 15,204,402 shares of common stock outstanding as of June 30, 2001 and
does not include:

- 2,916,496 shares of common stock subject to outstanding options as of
June 30, 2001 at a weighted average exercise price of $11.28 per share,

- 1,013,649 shares of common stock issuable upon the exercise of warrants
outstanding as of June 30, 2001 at a weighted exercise price of $17.94
per share, and

- 1,354,056 shares of common stock reserved for issuance under our stock
option and stock incentive plans.

S-13
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SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial data as of and
for the periods indicated. The consolidated statement of operations data for
each of the fiscal years in the three-year period ended December 31, 2000 and
the consolidated balance sheet data as of December 31, 1999 and 2000 were
derived from our consolidated financial statements audited by Deloitte & Touche
LLP, independent auditors, included elsewhere in this prospectus supplement. The
consolidated statement of operations data for the fiscal years ended December
31, 1996 and 1997 and the consolidated balance sheet data as of December 31,
1996, 1997 and 1998 were derived from our consolidated financial statements
audited by Deloitte & Touche LLP not included in this prospectus supplement. The
consolidated statement of operations data for the six-month periods ended June
30, 2000 and 2001 and the consolidated balance sheet data as of June 30, 2001
are derived from unaudited interim consolidated financial statements included
elsewhere in this prospectus supplement. The unaudited interim consolidated
financial statements have been prepared on the same basis as the audited
consolidated financial statements and, in our opinion, include all adjustments
which we consider necessary to present fairly the financial condition and
results of operations for the period presented. You should read this information
together with this discussion in "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Consolidated Operations" and the
consolidated financial statements and related notes included elsewhere in this
prospectus supplement.

SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- ---------------------
1996 1997 1998 1999 2000 2000 2001
-------- ------- ------- -------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Net sales and royalties........................ $ 636 $ 1,895 $ 3,451 $ 4,542 $ 6,156 $ 2,821 $ 2,576
Contract research and development revenue...... 1,004 854 622 1,093 2,009 760 3,433
Licensing, marketing rights and milestone
revenue...................................... -- 7,100 17,000 -- 1,878 937 1,509
-------- ------- ------- -------- -------- -------- --------
Total revenue........................... 1,640 9,849 21,073 5,635 10,043 4,518 7,518
-------- ------- ------- -------- -------- -------- --------
Operating expense:
Cost of goods sold............................. 364 1,533 2,250 1,974 2,644 1,123 1,043
Research and development....................... 10,092 11,545 12,189 15,555 16,735 7,330 13,104
Purchased in-process research and
development.................................. -- -- 3,050 -- -- -- --
Administrative and marketing................... 3,872 2,027 2,507 4,300 4,386 2,212 2,702
-------- ------- ------- -------- -------- -------- --------
Total operating expense................. 14,328 15,105 19,996 21,830 23,766 10,665 16,849
-------- ------- ------- -------- -------- -------- --------
Income (loss) from operations.................... (12,688) (5,256) 1,077 (16,195) (13,723) (6,147) (9,331)
Other income (expense):
Equity in loss of joint venture................ -- -- -- -- (12,239) -- (1,517)
Investment income.............................. 1,204 1,726 3,966 2,720 1,959 888 1,456
Interest expense............................... -- (307) (3,575) (3,062) (2,582) (1,296) (491)
Debt conversion expense........................ -- -- -- -- -- -- (2,048)
Other.......................................... 51 (30) 13 (8) 89 78 (23)
-------- ------- ------- -------- -------- -------- --------
Net other income (expense).............. 1,255 1,389 404 (350) (12,773) (330) (2,623)
-------- ------- ------- -------- -------- -------- --------
Income (loss) before income taxes, extraordinary
item and cumulative effect of change in
accounting principal........................... (11,432) (3,867) 1,482 (16,545) (26,496) (6,477) (11,954)
Income tax -- current expense.................... -- -- (48) -- -- -- --
-------- ------- ------- -------- -------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle...................................... (11,432) (3,867) 1,433 (16,545) (26,496) (6,477) (11,954)
Extraordinary gain (loss) on extinguished debt... -- -- 257 3,275 80 -- (288)
Cumulative effect of change in accounting
principle...................................... -- -- -- -- (20,612) (20,612) --
-------- ------- ------- -------- -------- -------- --------
Net income (loss) before preferred stock
dividends...................................... (11,432) (3,867) 1,690 (13,270) (47,028) (27,089) (12,242)
Accretion of dividend on preferred stock......... -- -- -- -- (383) -- (430)
-------- ------- ------- -------- -------- -------- --------
Net income (loss) applicable to common stock..... $(11,432) $(3,867) $ 1,690 $(13,270) $(47,411) $(27,089) $(12,672)
======== ======= ======= ======== ======== ======== ========

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Basic and diluted earnings per common share:
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.................................... $ (1.13) $ (.35) $ .13 $ (1.46) $ (2.23) $ (.56) $ (.82)
Extraordinary item............................. -- -- .02 .29 -- -- (.02)
Cumulative effect of change in accounting
principle.................................... -- -- -- -- (1.73) (1.80) --
-------- ------- ------- -------- -------- -------- --------
Net income (loss) before preferred stock
dividends...................................... (1.13) (.35) .15 (1.17) (3.96) (2.36) (.84)
Accretion of dividend on preferred stock......... -- -- -- -- (.03) -- (.03)
-------- ------- ------- -------- -------- -------- --------
Net income (loss) applicable to common stock..... $ (1.13) $ (.35) $ .15 $ (1.17) $ (3.99) $ (2.36) $ (.87)
======== ======= ======= ======== ======== ======== ========
Basic and diluted weighted average shares
outstanding.................................... 10,147 11,134 11,270 11,327 11,884 11,458 14,655
======== ======= ======= ======== ======== ======== ========

AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------- -----------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)

CONSOLIDATED BALANCE SHEET DATA:
Working capital..................................... $24,669 $67,229 $63,121 $38,646 $56,549 $32,624 $55,798
Total assets........................................ 38,463 78,294 79,480 54,659 74,172 46,804 75,240
Long-term obligations............................... -- 50,000 48,500 36,690 60,408 36,690 37,748
Shareholders' equity................................ 30,284 26,703 28,422 14,670 7,809 7,919 29,462

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

You should read the following discussion in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this prospectus supplement. The results below are not necessarily indicative of
the results to be expected in any future period. Certain statements in the
following discussion are considered forward-looking statements under federal
securities laws. These forward-looking statements are subject to various risks
and uncertainties, including those described under the heading "Risk Factors,"
that could cause actual results to differ substantially from historical results
or our predictions.

OVERVIEW

We are an emerging specialty pharmaceutical company focused on advanced
drug delivery. With five unique patented drug delivery technologies, we are
currently developing a diverse portfolio of products, including proprietary
oncology, pain management, and dermatology products. Our drug delivery systems
deliver controlled amounts of drugs in time frames ranging from minutes to
months to address a range of therapeutic and patient needs. Atrigel is our
original proprietary sustained release biodegradable polymer drug delivery
system. The Atrigel system may provide benefits over traditional methods of drug
administration, such as safety and effectiveness, wide array and ease of
applications, site-specific or systemic delivery, customized release rates and
biodegradability. With the acquisition of ViroTex Corporation in November 1998,
we added four additional drug delivery systems: BEMA, MCA, BCP and SMP.
Currently we have 20 compounds in various stages of preclinical development, a
number of which are being developed through partnerships with different external
companies.

We form strategic alliances with large pharmaceutical and biotechnology
companies utilizing our various drug delivery systems. Our significant strategic
alliances for marketing and commercializing our drug delivery technologies
include Sanofi-Synthelabo Inc. and MediGene AG. Our significant strategic
alliances for developing new chemical entities and life cycle management
products include Elan International Services, Ltd., Pfizer Inc. and Geneva
Pharmaceuticals, Inc.

RESULTS OF OPERATIONS

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
(Restated)

Total revenues for the six months ended June 30, 2001 were approximately
$7,518,000 compared to approximately $4,518,000 for the six months ended June
30, 2000, representing a 66% increase.

Product net sales and royalty revenue were approximately $2,576,000 during
the six months ended June 30, 2001 compared to approximately $2,821,000 for the
six months ended June 30, 2000, representing a 9% decrease. This decrease was
primarily related to a reduction of sales of approximately $209,000 for our
Doxirobe product, which is used in companion animals, as well as a reduction in
sales of approximately $114,000 for our contract manufacturing business.

Contract research and development revenue represents revenue we received
from grants, from unaffiliated third parties and from our joint venture with
Elan for performing contract research and development activities using our
various patented drug delivery technologies. Contract research and development
revenue was approximately $3,433,000 for the six months ended June 30, 2001
compared to approximately $760,000 for the six months ended June 30, 2000,
representing a 352% increase. This increase is primarily related to the
recognition of approximately $1,883,000 for oncology and pain management
research activities with our joint venture, Transmucosal Technologies, Ltd.,
approximately $407,000 for dermatology research activities with Geneva
Pharmaceuticals and approximately $258,000 for research projects with Pfizer.

Licensing, marketing rights and milestone revenue recognized in accordance
with SAB No. 101 for the six months ended June 30, 2001 was approximately
$1,509,000 compared to approximately $937,000 for the six months ended June 30,
2000, representing a 61% increase. This increase is primarily related to the
recognition of approximately $495,000 in license fee revenue for our Leuprogel
products under the Sanofi-Synthelabo and MediGene agreements. The Block
agreement provides for potential milestone payments

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20

totaling up to $50 million to us over a three to five year period, as well as
manufacturing margins and royalties on sales. Prior to 2001, we had received
$24.1 million in milestone payments from Block. In February 2001, we received a
$1,000,000 Atridox sales milestone payment from Block. These milestone payments
will be recognized as revenue over a ten-year period using the straight-line
method. We are currently in a dispute with Block pertaining to two Atrisorb-Doxy
milestone payments. Additionally, the European Leuprogel license fee from
MediGene for $2,000,000 was received in April 2001 and will be recognized over a
ten-year period.

Cost of goods sold recorded for the six months ended June 30, 2001 was
approximately $1,043,000 compared to approximately $1,123,000 for the six months
ended June 30, 2000, representing a 7% decrease. This decrease in cost of sales
correlates to the decline in sales revenue.

Research and development expenses for the six months ended June 30, 2001
were approximately $13,104,000 compared to approximately $7,330,000 for the six
months ended June 30, 2000, representing a 79% increase. Approximately
$2,878,000 of this increase was due to progress in our Leuprogel products.
Approximately $773,000 is related to oncology and pain management research
activities with our joint venture, Transmucosal Technologies, Ltd. Dermatology
research and development activities for Geneva Pharmaceuticals related projects
increased approximately $739,000. In January 2001, we purchased an exclusive
option from Tulane University Heath Science Center to license growth hormone
releasing peptide-1, or GHRP-1, a patented growth promoting compound. Research
and development activities for the GHRP-1 were approximately $818,000 for the
six months ended June 30, 2001. Additionally, Atrisone research and development
expenditures increased approximately $725,000.

Administrative and marketing expenses for the six months ended June 30,
2001 were approximately $2,702,000 compared to approximately $2,212,000 for the
six months ended June 30, 2000, representing a 22% increase. The increase was
primarily related to an increase in legal expenses associated with general
business planning and activities, including fees for patents/trademark searches
and the Block dispute.

We recognized a loss of approximately $1,517,000 for the six months ended
June 30, 2001 for our 80.1% equity share in the loss of our joint venture with
Elan. The joint venture was established in June 2000. Currently, the joint
venture is developing two products using our BEMA drug delivery system. We
expect to record additional equity losses for the joint venture in the
foreseeable future.

Investment income for the six months ended June 30, 2001 was approximately
$1,456,000 compared to approximately $888,000 for the six months ended June 30,
2000, representing a 64% increase. The increase was primarily the result of a
net increase in our cash and cash equivalents and our marketable securities of
approximately $28,019,000 for the six months ended June 30, 2001 in comparison
to the six months ended June 30, 2000. The increase in our cash and investment
balances was primarily the result of receiving an $8,000,000 license fee and a
$15,000,000 purchase of our common stock from Sanofi-Synthelabo in January 2001.
Additionally, we received a $2,000,000 payment from MediGene in April 2001 to
license Leuprogel in Europe and a $3,000,000 payment from Sanofi-Synthelabo in
June 2001 for the NDA filing of the Leuprogel One-month product.

Interest expense for the six months ended June 30, 2001 was approximately
$491,000 compared to approximately $1,296,000 for the six months ended June 30,
2000, representing a 62% decrease. The reduction in interest expense was
primarily the result of exchanges of common stock for $26,479,000 of our 7%
convertible subordinated notes since the period ended June 30, 2000.

During the six months ended June 30, 2001, we completed a series of private
transactions involving the exchange of 1,482,031 issued shares of common stock
for $26,479,000, or 53% of the original offering amount, of the 7% convertible
subordinated notes. Of the 1,482,031 shares issued, 1,393,629 shares were valued
at the conversion price of $19.00 per share and the remaining 88,402 were valued
at the closing market price as of the various exchange dates. As a result, we
recognized an extraordinary loss of approximately $288,000 for the write-off of
approximately $585,000 for pro rata unamortized deferred finance

S-17
21

charges net of approximately $297,000 interest expense eliminated as a result of
these exchanges. Additionally, as part of the 88,402 shares issued to induce
conversion, debt conversion expense of approximately $2,048,000 was recognized
in the six months ended June 30, 2001. As of June 30, 2001 and December 31,
2000, the convertible notes payable balance was $9,711,000 and $36,190,000,
respectively.

As discussed below, effective in the fiscal fourth quarter of 2000, we
changed our method of accounting for nonrefundable technology access fees and
milestone payments to recognize such payments as revenue over the term of the
related agreements. The change in accounting principle is based on guidance
provided in the Securities and Exchange Commission's Staff Accounting Bulletin
No. 101 -- Revenue Recognition in Financial Statements. As a result of this
change in accounting principle, we recorded a cumulative effect adjustment in
the first quarter of 2000 which resulted in a $20,612,000 charge to earnings.

We issued 12,015 shares of our Series A convertible exchangeable preferred
stock to Elan in July 2000 in connection with the formation of our joint venture
with Elan. Related to this issuance, we recognized approximately $430,000 for
accretion of dividend on preferred stock for the six months ended June 30, 2001.

For the reasons described above, we recorded a net loss applicable to
common stock of approximately $12,672,000, or $.87 per share, for the six months
ended June 30, 2001 compared to a net loss applicable to common stock of
approximately $27,089,000, or $2.36 per share, for the six months ended June 30,
2000.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Effective in the fourth quarter of 2000, we changed our method of
accounting for nonrefundable technology access fees and milestone payments to
recognize such payments as revenue over the term of the related agreements. The
change in accounting principle is based on guidance provided in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101 -- Revenue
Recognition in Financial Statements. Previously, we recognized $24,100,000 for
nonrefundable technology access fees and milestone payments as revenue when
received and when we fulfilled all contractual obligations relating to the fees
and milestone payments. There was approximately $20,612,000 cumulative effect
for this change in accounting principle which was reported as a charge in the
year ended December 31, 2000. The cumulative effect was recorded as deferred
revenue that will be recognized as revenue over the remaining contractual terms
for each of the specific agreements. During the year ended December 31, 2000,
the impact of the change in accounting principle increased net loss by
approximately $18,734,000, or $1.58 per share. This amount is comprised of
approximately $20,612,000, or $1.73 per share, cumulative effect of the change
as described above, net of approximately $1,878,000, or $0.16 per share,
recognized as revenue during the year. The remainder of the related deferred
revenue will be recognized as revenue approximately as follows: $1,885,000 for
each year from 2001 through 2010 and $11,000 for each year from 2011 through
2015 and $2,000 in 2016.

Total revenues for the year ended December 31, 2000 were approximately
$10,043,000 compared to approximately $5,635,000 for the year ended December 31,
1999, representing a 78% increase.

Product net sales and royalty revenue were approximately $6,156,000 for the
year ended December 31, 2000 compared to approximately $4,542,000 for the year
ended December 31, 1999, representing a 36% increase. The increase of
approximately $1,710,000 in our contract manufacturing business with
unaffiliated third parties was the significant factor for the increase in net
sales revenue.

During the fourth quarter of 1999, we incurred a charge of $733,000 for a
change in estimate for revenues from sales of Atridox, Atrisorb FreeFlow GTR
Barrier and Atrisorb GTR Barrier. This change resulted when Block provided
updated information indicating the actual net selling price of these products
was less than the estimated net selling price previously provided by Block. Our
revenue is based on a set percentage of Block's actual net sales. We recorded
this adjustment in the quarter ended December 31, 1999 as a change in estimate
at the time it became known. Further, we reduced the rate at which we recognized
revenue under the Block agreement during 2000 to reflect these lower selling
prices.

Contract research and development revenue represents revenue we earned from
grants and from third parties for performing contract research and development
activities using our various patented drug delivery technologies. Contract
research and development revenue was approximately $2,009,000 for the year ended

S-18
22

December 31, 2000 compared to approximately $1,093,000 for the year ended
December 31, 1999, representing a 84% increase. Approximately, $1,344,000 was
related to work on five research projects with third parties. Additionally,
contract research and development revenue earned from our joint venture with
Elan, Transmucosal Technologies, was approximately $251,000 for the year ended
December 31, 2000 compared to $0 for the year ended December 31, 1999. We
commenced research and development activities for Transmucosal Technologies in
October 2000.

Licensing, marketing rights and milestone revenue for the year ended
December 31, 2000 was approximately $1,878,000 compared to $0 for the year ended
December 31, 1999. Revenue of $1,878,000 was recognized in the year ended
December 31, 2000 primarily for the Block milestone payments received in 1997
and 1998 in accordance with SAB 101.

The Block agreement provides for potential milestone payments totaling up
to $50 million to us over a three-to-five year period, as well as manufacturing
margins and royalties on sales. Prior to 2000, we had recognized $24.1 million
in milestone payments from Block. No additional Block milestone payments were
received in 2000. We are currently in a dispute with Block related to product
pricing and milestone payments. See "Business -- Legal Proceedings."

Cost of goods sold was approximately $2,644,000 for the year ended December
31, 2000 compared to approximately $1,974,000 for the year ended December 31,
1999, representing a 34% increase. This increase in cost of goods sold is
primarily related to the 36% increase in product net sales.

Research and development expenses were approximately $16,735,000 for the
year ended December 31, 2000 compared to approximately $15,555,000 for the year
ended December 31, 1999 representing an 8% increase. This increase reflects a
shift in our research and development focus from dental to medical products in
2000. Research and development costs for the year ended December 31, 2000
decreased approximately $3,200,000 for our dental products, increased
approximately $3,500,000 for our Leuprogel products and increased approximately
$772,000 for our Atrisone product. Our strategic goal is to devote substantial
resources to our medical research and development efforts with the expectation
of expediting products from the development stages through to commercialization.

Administrative and marketing expenses were approximately $4,386,000 for the
year ended December 31, 2000 compared to approximately $4,300,000 for the year
ended December 31, 1999.

We recognized a loss of approximately $12,239,000 for the year ended
December 31, 2000 for our 80.1% equity share in the loss of Transmucosal
Technologies, our joint venture with Elan. The joint venture's loss for this
period included a one-time, non-cash charge of $15,000,000 in July 2000 for an
exclusive license from Elan Pharma International Limited for nanoparticulate
drug delivery technology. We expect to record additional equity losses for
Transmucosal Technologies in the foreseeable future.

Investment income for the year ended December 31, 2000 was approximately
$1,959,000 compared to approximately $2,720,000 for the year ended December 31,
1999, representing a 28% decrease. The decrease was primarily the result of a
reduction in investment balances from 1999 to 2000.

Interest expense for the year ended December 31, 2000 was approximately
$2,582,000 compared to approximately $3,062,000 for the year ended December 31,
1999 representing a 16% decrease. The reduction in interest expense was
primarily the result of our repurchase and subsequent retirement of $6,810,000,
or approximately 14% of the original offering, of our 7% convertible
subordinated notes since October 1999.

During the year ended December 31, 2000, we repurchased a total of
$500,000, or 1% of the original offering, of our outstanding subordinated notes
for approximately $415,000, which includes approximately $7,000 for accrued
interest paid. As a result, we recognized an extraordinary gain of approximately
$80,000, net of deferred finance charges of approximately $12,000. As of
December 31, 2000, the notes payable balance is $36,190,000.

S-19
23

approximately $383,000 for accretion of dividend on preferred stock during the
year ended December 31, 2000 compared to $0 for the year ended December 31,
1999.

For the reasons described above, we recorded a consolidated net loss
applicable to common stock of approximately $47,411,000, or $3.99 per share, for
the year ended December 31, 2000 compared to a consolidated net loss applicable
to common stock of approximately $13,270,000, or $1.17 per share, for the year
ended December 31, 1999. The approximately $12,239,000 equity in loss of our
joint venture and the approximately $20,612,000 cumulative effect from a change
in accounting principle were the primary factors causing the increase in
consolidated net loss applicable to common stock between periods.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Total revenues for the year ended December 31, 1999 were approximately
$5,635,000 compared to approximately $21,073,000 for the year ended December 31,
1998, representing a 73% decrease.

Our total revenue included product net sales and royalty revenue of
approximately $4,542,000 for the year ended December 31, 1999 compared to
approximately $3,451,000 for the year ended December 31, 1998, representing a
32% increase. Atridox product sales increased 176% and Atrisorb FreeFlow GTR
Barrier product sales increased 217% as a result of a full year of sales in 1999
compared to four months of sales of these products at the end of 1998. Both the
Atridox and Atrisorb FreeFlow GTR Barrier products were launched in September
1998.

During the fourth quarter of 1999, we incurred a charge of $733,000 for a
change in estimate for revenues from sales of Atridox, Atrisorb FreeFlow GTR
Barrier and Atrisorb GTR Barrier. This change resulted when Block provided
updated information indicating the actual net selling price of these products
was less than the estimated net selling price previously provided by Block. Our
revenue is based on a set percentage of Block's actual net sales. We recorded
this adjustment in the quarter ended December 31, 1999 as a change in estimate
at the time it became known. Further, we have reduced the rate at which we
recognized revenue under the Block agreement during 2000 to reflect these lower
selling prices.

Third-party contract manufacturing arrangements and royalty revenue
relating to sales of the Eucalyptamint(R) 2000 product, both of which commenced
in 1999, also contributed to the increase in sales for 1999. The acquisition of
ViroTex in November 1998 included royalty revenue on future net sales of
Viractin from J.B. Williams Company through July 2002. The increase in royalty
revenue of 748% in 1999 was primarily due to the royalty revenue earned on a
full year of Viractin sales in 1999. Partially offsetting the increase in sales
revenue for 1999 was an 80% decrease in sales of the Atrisorb GTR Barrier
product and a 76% decrease in sales of the Heska Periodontal Therapeutic product
for companion animals.

Contract revenue represents revenue we earned from grants and from
unaffiliated third parties for performing contract research and development
activities utilizing our proprietary drug delivery systems. Contract revenue was
approximately $1,093,000 for the year ended December 31, 1999 compared to
approximately $622,000 for the year ended December 31, 1998, representing a 76%
increase. The increase was primarily due to the acceleration of revenue
recognition on the Atrisorb-Doxy federal research grant, as a result of the
corresponding acceleration of research and development efforts on these
products.

Sale of marketing rights of $17 million represents milestone revenue we
received pursuant to the Block agreement during the year ended December 31,
1998. We expect to receive additional revenue in the future upon the achievement
of other milestones under the Block agreement. The Block agreement provides for
potential milestone payments totaling up to $50 million to us over a
three-to-five year period, as well as manufacturing margins and royalties on
sales. Prior to 1999, we had recognized $24.1 million in milestone revenue from
Block. No additional Block milestone revenue was recognized in 1999.

Cost of goods sold was approximately $1,974,000 for the year ended December
31, 1999 compared to approximately $2,250,000 for the period ended December 31,
1998, representing a 12% decrease. Although there was an increase in sales
revenue for 1999, the decrease in cost of goods sold was primarily due to lower
costs to manufacture the Atridox and Atrisorb Freeflow GTR Barrier products as
compared to the Atrisorb GTR Barrier product in 1998.

S-20
24

Research and development expenses were approximately $15,555,000 for the
year ended December 31, 1999 compared to approximately $12,189,000 for the year
ended December 31, 1998 representing a 28% increase. This increase reflects a
shift in our research and development focus from dental to medical products in
1999. Our strategic goal is to devote substantial resources to our research and
development efforts in these areas with the expectation of quickly moving
products from the development stage to commercialization.

In 1998, we expensed $3,050,000 of the ViroTex purchase price, which was
allocated to purchased in-process research and development projects, as of the
date of acquisition. This charge to income was based upon an independent
third-party valuation.

Administrative and marketing expenses were approximately $4,300,000 for the
year ended December 31, 1999 compared to approximately $2,507,000 for the year
ended December 31, 1998, representing a 72% increase. The increase was primarily
the result of recognition of approximately $863,000 for amortization expense on
intangible assets associated with the ViroTex acquisition in November 1998. Also
contributing to the increase were expenditures of approximately $415,000
associated with establishing our foreign subsidiary, Atrix Laboratories Limited,
which commenced operations in June 1999.

Investment income for the year ended December 31, 1999 was approximately
$2,720,000 compared to approximately $3,966,000 for the year ended December 31,
1998, representing a 31% decrease. The decrease was primarily the result of a
reduction in cash and cash equivalents and investments from 1998 to 1999. A loss
of approximately $141,000 on the sale of investments recorded in 1999 also
contributed to the decrease in investment income.

Interest expense for the year ended December 31, 1999 was approximately
$3,062,000 compared to approximately $3,575,000 for the year ended December 31,
1998 representing a 14% decrease. The reduction in interest expense was
primarily the result of our repurchase and subsequent retirement of $11,810,000,
or approximately 24% of the original offering, of our 7% convertible
subordinated notes in 1999. We repurchased the notes for approximately
$8,173,000. As a result, we recognized an extraordinary gain of approximately
$3,275,000, or $0.29 per share, net of deferred finance charges and accumulated
amortization of approximately $362,000.

For the reasons described above, we recorded a consolidated net loss of
approximately $13,270,000, or $1.17 per share, for the year ended December 31,
1999 compared to a net income applicable to common stock of approximately
$1,690,000 or $0.15 per share for the year ended December 31, 1998. The $17
million Block milestone payments earned in 1998 was the primary factor causing
the decrease in net income between periods. The impact of adopting SEC SAB 101
is not reflected in the amounts presented in the Results of Operations for the
years ended December 31, 1999 and 1998.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2001, we had cash and cash equivalents of approximately
$19,073,000, marketable securities (at fair market value) of approximately
$37,176,000, and other current assets of approximately $7,579,000, for total
current assets of approximately $63,828,000. We had current liabilities of
approximately $8,030,000, which resulted in working capital of approximately
$55,798,000.

In August 2000, we renewed a $1,000,000 revolving bank line of credit that
expires August 2001. Borrowings under the line bear interest at the prime rate
and are subject to financial covenants requiring us to maintain certain levels
of net worth and liquidity. As of June 30, 2001, we had no outstanding balance
under this line of credit.

In July 2000, we formed Transmucosal Technologies with Elan. This joint
venture was established to develop and commercialize oncology and pain
management products. Subject to the satisfaction of certain conditions, Elan has
agreed to loan us up to $8,010,000 under a convertible promissory note agreement
in support of our 80.1% share of Transmucosal Technologies' research and
development costs. The note has a six-year term, will accrue interest at 7% per
annum, compounded semi-annually and added to principal, and is convertible at
the holder's option into shares of our common stock at a conversion price of
$14.60 per share, subject to adjustment as provided in the note; provided, that
if upon conversion Elan's ownership of

S-21
25

our common stock would exceed 19.9% of the outstanding shares then Elan would
receive non-voting securities to the extent of such excess. The note also allows
us to convert this debt into our common stock at the prevailing market price at
maturity. As of June 30, 2001, we had not drawn any amounts under the note.

During the six months ended June 30, 2001, net cash provided by operating
activities was approximately $4,328,000. This was primarily the result of the
net loss for the period of approximately $12,672,000, adjusted for certain
non-cash expenses, and changes in operating assets and liabilities as set forth
in the consolidated statements of cash flows. We received an $8,000,000 license
fee from Sanofi-Synthelabo in January 2001 for payment of the December 2000 Note
Receivable-License Fee. Additionally, we recognized non-cash charges for debt
conversion expense of approximately $2,048,000 and approximately $288,000 as an
extraordinary loss on extinguished debt during the six months ended June 30,
2001 for the exchange of 1,482,031 shares of our common stock to extinguish
approximately $26,479,000 of our convertible subordinated notes. The increase of
approximately $5,360,000 for deferred revenue included a $1,000,000 payment from
Block in February 2001 for an Atridox sales milestone payment, a $3,000,000
payment in June 2001 from Sanofi-Synthelabo for our Leuprogel One-month NDA
filing and a $2,000,000 payment in April 2001 from MediGene in connection with
the collaboration license and supply agreement for exclusive marketing rights
with respect to our Leuprogel product in Europe.

Net cash used in investing activities was approximately $9,855,000 during
the six months ended June 30, 2001, primarily as a result of approximately
$27,067,000 for the purchase of six bond investments and thirteen corporate note
investments. This was offset by proceeds of approximately $18,741,000 for six
called bond investments.

Net cash provided by financing activities was approximately $20,336,000
during the six months ended June 30, 2001. We received $15,000,000 from
Sanofi-Synthelabo in January 2001 for payment pertaining to Sanofi-Synthelabo's
common stock purchase in conjunction with the December 2000 collaboration,
license and supply agreement. We received $3,780,000 from MediGene for the
issuance of our common stock in conjunction with the stock purchase agreement in
April 2001. Additionally, approximately $1,242,000 was received for the issuance
of our common stock related to employee stock options and the employee stock
purchase plan.

Our long-term capital expenditure requirements will depend on numerous
factors, including:

- the progress of our research and development programs,

- the time required to file and process regulatory approval and
applications,

- the development of our commercial manufacturing facilities,

- our ability to obtain additional licensing arrangements, and

- the demand for our products.

We expect to continue to incur substantial expenditures for research and
development, testing, regulatory compliance, market development in European
countries, possible repurchases of our notes or common stock and to hire
additional management, scientific, manufacturing and administrative personnel.
We will also continue to expend a significant amount of funds for our ongoing
clinical studies. Depending on the results of our research and development
activities, we may determine to accelerate or expand our efforts in one or more
proposed areas and may, therefore, require additional funds earlier than
previously anticipated. We believe that the existing cash and cash equivalent
assets in addition to marketable security resources will be sufficient to fund
our operations through 2001. However, we cannot assure you that underlying
assumed levels of revenue and expense will prove accurate.

We believe that it is advisable to augment our cash to fund all of our
activities, including potential product or business acquisitions. Therefore, we
will consider raising cash whenever market conditions are favorable. Such
capital may be raised through additional public or private financing, as well as
collaborative relationships, borrowings and other available sources. In
addition, in the course of our business, we evaluate products and technologies
held by third parties which, if acquired, could result in our development of
product

S-22
26

candidates or which complement technologies that we are currently developing. We
expect, from time to time, to be involved in discussions with other entities
concerning our potential acquisition of rights to additional pharmaceutical
and/or biotechnology products. If we acquire such products or third-party
technologies, we may find it necessary or advisable to obtain additional
funding.

IMPACT OF INFLATION

Although it is difficult to predict the impact of inflation on our costs
and revenues in connection with our products, we do not anticipate that
inflation will materially impact our costs of operation or the profitability of
our products when marketed.

NEW ACCOUNTING PRONOUNCEMENTS

Effective in the fiscal fourth quarter of 2000, we changed our method of
accounting for nonrefundable technology access fees and milestone payments to
recognize such payments as revenue over the term of the related agreements. The
change in accounting principle is based on guidance provided in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101 -- Revenue
Recognition in Financial Statements. Previously, we recognized $24,100,000 for
nonrefundable technology access fees and milestone payments as revenue when
received and when we fulfilled all contractual obligations relating to the fees
and milestone payments. We recorded approximately $20,612,000 cumulative effect
for this change in accounting principle that was reported as a charge in the
year ended December 31, 2000. The cumulative effect was recorded as deferred
revenue that will be recognized as revenue over the remaining contractual terms
for each of the specific agreements. During the year ended December 31, 2000,
the impact of the change in accounting principle increased net loss applicable
to common stock by approximately $18,734,000, or $1.58 per share. This amount is
comprised of approximately $20,612,000, or $1.73 per share, cumulative effect of
the change as described above, net of approximately $1,878,000, or $0.16 per
share, recognized as revenue during the year ended December 31, 2000. The
remainder of the related deferred revenue will be recognized as revenue
approximately as follows: $1,885,000 for each year from 2001 through 2010 and
$11,000 for each year from 2011 through 2015 and $2,000 in 2016.

In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued which, as amended, was effective for all fiscal
years beginning after June 15, 1999. SFAS No. 133 provides new standards for the
identification, recognition and measurement of derivative financial instruments,
including embedded derivatives. Historically, we have not entered into
derivative contracts to hedge existing risks nor have we entered into
speculative derivative contracts. Although our convertible debt and preferred
stock include conversion features that are considered to be embedded
derivatives, accounting for those instruments is not affected by SFAS No. 133.
The adoption of SFAS No. 133 on January 1, 2001 did not result in a transition
adjustment in the financial statements.

On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations" was approved by the Financial Accounting Standards
Board (FASB). SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Goodwill and
certain intangible assets will remain on the balance sheet and not be amortized.
On an annual basis, and when there is reason to suspect that their values have
been diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. We are required to implement SFAS No. 141 on July
1, 2001 and we have not determined the impact, if any, that this statement will
have on our consolidated financial position or results of operations.

On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. We are required to implement SFAS No. 142 on January
1, 2002 and we have not determined the impact, if any, that this statement will
have on our consolidated financial position or results of operations.

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BUSINESS

OVERVIEW

OUR STRATEGY

Our primary objective is to be a leading specialty pharmaceutical company
focused on advanced drug delivery to improve the effectiveness of existing
pharmaceuticals and new chemical entities, particularly proteins, peptides and
vaccines. Key elements of our strategy include:

Expanding our portfolio of products through internal development. We
intend to develop our own pharmaceutical product candidates and undertake late
stage human clinical development ourselves. We are applying our drug delivery
technologies to novel applications and formulations of approved pharmaceutical
products to improve their delivery and effectiveness. For example, we developed
our product candidates Leuprogel and Atrisone. Leuprogel combines our Atrigel
drug delivery technology with leuprolide acetate, a compound used in the
treatment of prostate cancer. Atrisone combines our SMP drug delivery technology
with dapsone, a compound to treat dermatological conditions.

Maximizing the value of products by entering into late stage collaborative
relationships. We believe that advancing our products through late stage
development before seeking commercialization partners allows us to license our
products on more favorable terms than would be available earlier in the
development cycle. As part of this strategy, we developed our lead product
candidate, Leuprogel, and completed Phase III clinical trials ourselves. We
subsequently entered into commercialization arrangements for Leuprogel with
Sanofi-Synthelabo and MediGene.

Licensing our technologies to major pharmaceutical and biotechnology
companies. We are focused on developing partnerships with pharmaceutical and
biotechnology companies to utilize our drug delivery systems for new chemical
entities and life cycle management products. As part of this strategy we have
collaborative arrangements with Elan and Pfizer. We also have preclinical
feasibility studies with a number of other companies for proteins, peptides and
monoclonal antibodies. We believe that our technologies enable us to deliver a
number of products that cannot be taken orally.

Pursuing acquisitions of complementary drug delivery technologies. We are
pursuing opportunities that further strengthen our delivery technologies. We
believe that if we are able to increase the number of delivery systems in our
portfolio, we can increase our attractiveness as a product development partner
with other pharmaceutical and biotechnology companies. In addition, we believe
that pursuit of this strategy will strengthen our internal product development
efforts.

Acquiring or in-licensing proprietary compounds. To expand our pipeline,
we seek to identify drug candidates which may benefit from the application of
our drug delivery technologies. These compounds generally have entered or are
about to enter human clinical trials. An example of this strategy is our option
to license the growth hormone releasing peptide-1, or GHRP-1, a novel compound
for short stature and muscle wasting in the elderly.

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OUR PRODUCTS

The following table sets forth certain information about our pharmaceutical
product candidates.

PHARMACEUTICAL PRODUCT CANDIDATES

DELIVERY COLLABORATIVE
PRODUCT TECHNOLOGY INDICATION REGULATORY STATUS PARTNER
------- ---------- ---------- ----------------- -------------

Leuprogel One-month............ Atrigel Prostate cancer NDA submitted Sanofi-Synthelabo
MediGene
Leuprogel Three-month.......... Atrigel Prostate cancer Phase III complete Sanofi-Synthelabo
MediGene
Leuprogel Four-month........... Atrigel Prostate cancer Phase III Sanofi-Synthelabo
MediGene
Leuprogel Six-month............ Atrigel Prostate cancer Preclinical Sanofi-Synthelabo*
MediGene*
(optional)
Atrisone....................... SMP Moderate to severe Phase III None
acne
Burn itch Phase I
Atopic dermatitis Phase I
BEMA-Fentanyl.................. BEMA Chronic and Preclinical Elan
breakthrough
cancer pain
BEMA-Ondansetron............... BEMA Emesis (nausea) Preclinical Elan
BEMA-Hydrocodone............... BEMA Mild to moderate Preclinical None
pain
BEMA-Migraine.................. BEMA Migraine Preclinical None
Growth Hormone Releasing
Peptide-1.................... Atrigel Growth promotion Preclinical None
and cachexia
(muscle wasting)

---------------
* Sanofi-Synthelabo and MediGene have rights to develop this product.

Leuprogel Depot Products

We are developing our proprietary Leuprogel Depot products for prostate
cancer incorporating a leutinizing hormone-releasing hormone, or LHRH, agonist
with our proprietary Atrigel drug delivery system. The Atrigel technology allows
for sustained delivery of leuprolide acetate for periods ranging from one month
to six months. The Atrigel drug delivery system consists of biodegradable
polymers dissolved in biocompatible carriers which form an implant after
injection into the body. Pharmaceuticals may be blended into this liquid
delivery system at the time of manufacturing or, depending upon the product, may
be added later by the physician at the time of use.

Numerous clinical trials have demonstrated that the sustained release of an
LHRH agonist decreases testosterone levels to suppress tumor growth in patients
with hormone-responsive prostate cancer. Our Leuprogel products are injected
subcutaneously as a liquid with a small gauge needle. The polymers precipitate
after injection forming a solid implant in the body that slowly releases the
leuprolide as the implant is bioabsorbed. We believe our Leuprogel products are
safe and effective in treating prostate cancer and offer advantages to the
patient, including a smaller needle and subcutaneous, rather than the more
painful intramuscular, injection delivery.

The American Cancer Society estimates that in 2001 there will be 198,000
newly diagnosed cases of prostate cancer, with 32,000 deaths in the United
States. Cancerous prostate cells require the hormone

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testosterone for growth, and as a result, more than 70% of newly diagnosed
prostate cancer patients receive some form of hormone therapy to reduce
testosterone levels during the course of the disease. According to IMS Health's
Global Services Midas database, the global market for hormonal prostate cancer
drugs was approximately $2.4 billion in 1999.

Leuprogel One-month. In March 2001, we submitted an NDA to the FDA for
marketing approval of our Leuprogel One-month product, and the FDA has accepted
the NDA for review. Our Phase III clinical trial was conducted at 22 centers on
117 patients with each patient receiving a monthly Leuprogel injection over a
six-month period. The endpoint of the trial was the reduction of testosterone
below medical castration level, which is defined by the FDA as 50 ng/dL. The
Phase III results demonstrated a six-month mean testosterone level of 6.2 ng/dL,
well below the testosterone level of 50 ng/dL required by the FDA and the
recommended National Comprehensive Cancer Network standard of 20 ng/dL. In
addition, the mean prostate specific antigen, or PSA, level at six months was
reduced to 3.2 ng/mL. Throughout the course of treatment, no patient's
testosterone levels rose above the clinical castration level of 50 ng/dL, which
is referred to as a breakthrough. No patient had a serious treatment-related
adverse event.

Leuprogel Three-month. In June 2001, we completed our Phase III clinical
trial for the Leuprogel Three-month product. Our Phase III clinical trial was
conducted at 26 centers on 117 patients. Each patient received a Leuprogel
injection every three months over a six-month period. The efficacy endpoint of
the trial was the reduction of testosterone below 50 ng/dL. The data are very
similar to the Leuprogel One-month product, with six-month mean testosterone
levels reduced to approximately 10 ng/dL. The mean PSA level at six months was
reduced to 1.7 ng/mL. There was only one occurrence of testosterone
breakthrough; however, the patient's testosterone level was below the FDA
suppression level following the second injection. This resulted in 100% of the
patients being suppressed below the generally accepted testosterone level of 50
ng/dL and 94% of the 117 patients had steady-state testosterone levels below the
more stringent National Comprehensive Cancer Network recommendations. No patient
had a serious treatment-related adverse event. We are preparing an NDA for this
product which we expect to submit to the FDA in the second half of 2001.

Leuprogel Four-month. In March 2001, we completed enrollment for a Phase
III clinical trial of the Leuprogel Four-month product. The Phase III clinical
trial is being conducted at 22 centers on 90 patients with each patient
receiving a Leuprogel injection every four months over an eight-month period.
The data from the Leuprogel Four-month Phase III clinical trial are expected to
be available in the fourth quarter of 2001. We expect to submit an NDA for the
Leuprogel Four-month product in the second quarter of 2002.

Leuprogel Six-month. A Leuprogel Six-month product for prostate cancer is
currently in preclinical development. If these experiments demonstrate that
leuprolide is delivered effectively over a six-month period, we expect to enter
Phase III clinical trials in the first quarter of 2002.

North American Marketing Rights. In December 2000, we entered into an
exclusive North American marketing agreement with Sanofi-Synthelabo, a major
international pharmaceutical company, for our Leuprogel One-month, Three-month
and Four-month products. Sanofi-Synthelabo also has an option to develop a
Leuprogel Six-month product. Under the terms of the agreement, we will
manufacture the Leuprogel products and receive an agreed upon transfer price
from Sanofi-Synthelabo as well as royalties from sales. In addition, we have
received an up-front license fee of $8 million and will receive research and
development support if Sanofi-Synthelabo exercises its option with respect to
additional indications of the Leuprogel products. As part of the agreement,
Sanofi-Synthelabo purchased approximately $15 million of our common stock. We
believe the total amount that we may receive under this agreement, including all
amounts received from Sanofi-Synthelabo's purchase of our common stock, the
license fees, research and development support, and payments for clinical,
regulatory and sales milestones for the Leuprogel products upon approval for
marketing by the FDA, will be approximately $60 million. To date, we have
received $3 million in milestone payments under the agreement.

European Marketing Rights. In April 2001, we entered into an exclusive
European marketing agreement with MediGene AG, a biotechnology company based in
Germany, for our Leuprogel One-month, Three-month and Four-month products.
MediGene also has the right to develop the Leuprogel Six-month product. Under
the terms of the agreement, we will manufacture the Leuprogel products and we
will receive additional

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payments for certain clinical, regulatory and sales milestones and royalties
from sales. Pursuant to the agreement, we received an up-front license fee of $2
million and MediGene purchased $3.78 million of our common stock. Additionally,
MediGene will provide all funding and resources needed to conduct clinical
research and regulatory activities associated with seeking European marketing
approvals. We believe the total amount that we may receive under this agreement,
including all amounts received from MediGene's purchase of our common stock, the
license fees, research and development support, and payments for certain
clinical, regulatory and sales milestones, will be approximately $20 million.

Atrisone

The SMP technology consists of a two-stage system designed to provide
topical delivery of highly water-insoluble drugs, such as dapsone, to the skin.
The combination of dissolved drug with a microparticle suspension of the drug in
a single formulation allows a controlled amount of the dissolved drug to
permeate into the epidermal layer of the skin, while a high level of the
microparticle drug is maintained just above the outermost layer of the skin for
release over a sustained period of time. By topical delivery, the drug
penetrates into the epidermal layer of the skin to kill P. acnes, the bacterium
responsible for the acne lesion. After topical application, the blood levels of
dapsone are 500 to 1,000 fold less than those found when the compound is given
orally, thus reducing the potential for systemic side effects.

In the fourth quarter of 2000, we completed a Phase II clinical trial for
the Atrisone product to determine appropriate dose ranges for the treatment of
moderate to severe acne. The Phase II clinical trial was conducted at five
centers on 85 patients. Based on the results of this trial, the FDA allowed us
to proceed to a Phase III trial. In April 2001, we began enrollment for the
first of two Phase III clinical trials. The first Phase III clinical trial
consists of 500 patients at 19 centers comparing 5% dapsone applied twice a day
to a vehicle control. The endpoints of the trial are the reduction of
inflammatory lesions, non-inflammatory lesions and total lesions. An additional
endpoint of the trial is the global acne assessment, or the qualitative
assessment of the patient's improvement after using the drug. The data from this
Phase III trial are expected to be available by the first quarter of 2002. Based
on the results of these data, we expect to begin a second Phase III clinical
trial in the first quarter of 2002.

In addition, a Phase I clinical trial is underway in patients with burn
wounds to control the itch associated with this condition. To expand the
potential indications for Atrisone, we have submitted an IND for atopic
dermatitis, another inflammatory skin condition.

According to IMS data, the U.S. market for topical products to treat acne
was $600 million in 2000, with the combined oral and topical market at more than
$1 billion. We intend to find a marketing partner prior to commercialization of
one or all of the indications for Atrisone.

BEMA-Fentanyl

Through our joint venture with Elan, we are developing BEMA-Fentanyl, which
uses our proprietary Bioerodible Mucoadhesive, or BEMA, drug delivery system
with fentanyl, an opiate analgesic, for breakthrough cancer pain and potentially
the management of chronic pain. The BEMA delivery system is a polymer-based
system designed to deliver systemic levels of drugs rapidly across oral or
vaginal mucosal tissues. The system consists of a thin, semi-soft bioerodible
multi-layer disc of various polymers which adheres readily to the mucosal
tissues. The BEMA disc softens upon contact with moisture and erodes away over
approximately 10 to 20 minutes as it delivers the drug. It is a versatile
delivery system that can incorporate a wide variety of drugs, including proteins
and peptides.

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The preclinical data show clinically effective levels of fentanyl in the
blood are achieved in ten minutes, with sustained levels for up to six hours.
The BEMA-Fentanyl system has not shown any safety issues in these preclinical
studies. As a result of our pre-IND meeting with the FDA, we anticipate
submitting an IND for BEMA-Fentanyl in the second half of 2001. We anticipate
entering a Phase I safety and pharmacokinetic clinical trial shortly thereafter.

BEMA-Ondansetron

Through our joint venture with Elan, we are also developing the anti-emetic
product BEMA-Ondansetron, using our BEMA drug delivery system, for the
prevention of nausea and vomiting associated with cancer chemotherapy.
Preclinical studies have shown that the BEMA technology rapidly delivers the
drug to the systemic circulation with sustained levels to six hours. The levels
achieved in these preclinical studies were significantly higher and provided a
more extended release profile than the oral dosage form. A pre-IND meeting is
being scheduled with the FDA with the goal of moving this project into a Phase I
safety and pharmacokinetic clinical trial shortly thereafter.

BEMA-Hydrocodone

We are developing a BEMA-hydrocodone product using our BEMA system with
hydrocodone bitartrate, a narcotic analgesic used for the treatment of mild to
moderate pain. In combination with acetaminophen or ibuprofen, products
containing hydrocodone were the most prescribed generic oral drug products in
2000. These products are oral tablets requiring at least one hour or more to
achieve efficacious blood levels after administration. We believe that a
non-injectible drug product containing hydrocodone with a rapid onset of action
would have definite advantages over these current oral products. Preclinical
results with BEMA discs containing hydrocodone bitartrate have shown rapid
absorption of the drug with efficacious blood levels in 15 minutes. We
anticipate submitting an IND for this product and commencing a Phase I safety
study by early 2002.

BEMA-Migraine

We are exploring the development of a migraine product utilizing the BEMA
drug delivery system with various migraine treatment compounds to provide rapid
relief for migraine headaches, with a rapid onset comparable to that of
injections. It is estimated that there are as many as 63 million people in the
world who suffer from migraine headaches. The total U.S. market for migraine
products was up 14% in 2000 to $1.5 billion. Imitrex (Sumatriptan) dominates the
market with sales of $1 billion, according to IMS Health. A significant problem
with Imitrex and other triptans on the market is their inability to provide pain
relief as quickly as desired. Intramuscular injection provides rapid relief but
many patients do not favor this method of administration. Preclinical studies
with the BEMA delivery system and a number of migraine treatment compounds have
shown the potential for rapid absorption and improved bioavailability compared
to oral administration.

Growth Hormone Releasing Peptide-1

We are developing a sustained release GHRP-1 product with our Atrigel drug
delivery system. This proprietary compound promotes the pulsatile release of the
body's own growth hormone from the pituitary gland. GHRP-1 represents the first
of a new class of small synthetic peptides, and we believe the pulsatile
delivery of growth hormone produced by GHRP-1 offers advantages over current
methods of administration of growth hormone because pulsatile delivery more
closely mirrors the natural physiological mechanism. We have begun preclinical
studies for the GHRP-1 compound utilizing the Atrigel system. Applications for
human growth hormones and/or promoting compounds include inhibition of cachexia
(extensive muscle and tissue wasting) in patients whose immune systems are
compromised, such as patients with AIDS or other immune system disorders, or
patients receiving cancer treatments, promotion of growth in children of short
stature, and possibly prevention of muscle wasting and frailty in aged
individuals. We anticipate submitting an IND for GHRP-1 by the end of 2001.

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Other Products

Dental Products. We have a number of approved products which target the
dental market. Atridox, which combines the Atrigel system and the antibiotic
doxycycline, is a minimally invasive treatment intended to control the bacteria
that causes periodontal disease. Atrisorb GTR Barrier is a biodegradable polymer
that utilizes the Atrigel system to aid in the guided tissue regeneration of a
tooth's support following osseus flap surgery or other periodontal procedures.
Our Atrisorb-Doxy products also use the Atrigel system to address infections
following periodontal surgery and thereby improve healing. Block currently has
the exclusive rights to market each of these products in North America. To date,
Block has not begun marketing the Atrisorb-Doxy products and we have notified
Block that they are in breach of the agreement for failure to commence marketing
efforts. We are currently in several disputes with Block relating to the
agreement. See "-- Legal Proceedings" below for information regarding these
disputes. We retain European marketing rights for each of these products and are
marketing them in selected European countries. We continue to seek mutual
recognition of Atridox in additional European countries as well as registration
and marketing approvals in other countries.

In addition to these products, we also sell Doxirobe Gel, a subgingival
therapy for periodontal disease in companion animals, which is comprised of the
antibiotic doxycycline and the Atrigel system. Pharmacia & Upjohn Company
currently has the worldwide rights to market this product, which we manufacture
exclusively.

Biocompatible Polymer Products. The Biocompatible Polymer, or BCP,
delivery system, composed of polymers, solvents and active agents carefully
selected for their low toxicity to skin cells, can be formulated as either
film-forming gels or liquids for topical applications. BCP gels are non-greasy,
non-staining formulations that can be applied to wounded or denuded skin to
deliver a drug, such as an antibiotic, and then dry to form a non-constricting,
protective film over the wound. The gels have the unique property of maintaining
an ideal wound-healing environment by removing excess moisture from exudative
wounds and transferring moisture from the gel into wounds that are too dry.
Liquid BCP formulations are designed to provide effective cleansing of topical
wounds or denuded skin without causing further trauma to the skin, thereby
promoting faster healing with minimal scarring. The first two products in
development utilizing the BCP technology are a topical antibiotic preparation
(with and without local anesthetic) for superficial wound healing and a
wound-washing solution for cleansing dirty wounds.

Over-The-Counter Products. Our over-the-counter products which are
currently being marketed include Viractin(R) Cold Sore & Fever Blister Medicine
and Orajel-Ultra(R) Mouth Sore Medicine, which utilizes our proprietary MCA drug
delivery system. Viractin is marketed by J.B. Williams Company and Orajel-Ultra
is marketed by Del Pharmaceuticals.

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OUR DRUG DELIVERY TECHNOLOGIES

We believe there are multiple opportunities to expand our product pipeline
and enter into additional partnerships with pharmaceutical and biotechnology
companies using our proprietary drug delivery technologies. The following chart
provides a brief description of and applications for our drug delivery systems.

TECHNOLOGY DESCRIPTION APPLICATION
---------- ----------- -----------

Atrigel System.................................. Biodegradable sustained release in Delivery of drugs from weeks to
situ implant for local or systemic months
delivery
Bioerodible Mucoadhesive System (BEMA).......... Pre-formed bioerodible film for fast- Transmucosal delivery of drugs from
acting local or systemic delivery minutes to hours
Mucocutaneous Adsorption System (MCA)........... Water resistant topical gel providing Film for either wet or dry surfaces
sustained delivery
Solvent Microparticle System (SMP).............. Topical gel providing two-stage Dermal delivery of water insoluble
dermal delivery drugs
Biocompatible Polymer System (BCP).............. Non-cytotoxic gel/liquid for topical Protective gel film for wound healing
delivery and liquid formulation for wound
washing

Atrigel System

The Atrigel drug delivery system consists of biodegradable polymers,
similar to those used in biodegradable sutures, dissolved in biocompatible
carriers. Pharmaceuticals may be blended into this liquid delivery system at the
time of manufacturing or, depending upon the product, may be added later by the
physician at the time of use. When the liquid product is injected subcutaneously
or intramuscularly through a small gauge needle or placed into accessible tissue
sites through a cannula, displacement of the carrier with water in the tissue
fluids causes the polymer to precipitate to form a solid film or implant. The
drug encapsulated within the implant is then released in a controlled manner as
the polymer matrix biodegrades with time. Depending upon the patient's medical
needs, the Atrigel system can deliver small molecules, peptides, and proteins
over a period ranging from days to months. We believe we have a strong
proprietary position with respect to our Atrigel drug delivery system, with 35
United States patents and 33 foreign patents and 15 United States and 43 foreign
patent applications pending. We believe that the Atrigel system may provide
benefits over traditional methods of drug administration such as tablets,
capsules, injections and continuous infusion as a result of the following
properties:

- Broad Applicability -- The Atrigel system is compatible with a broad
range of pharmaceutical compounds, including water soluble and insoluble
compounds and high and low molecular weight compounds, including peptides
and proteins.

- Site Specific Drug Delivery -- The Atrigel system can be delivered
directly to a target area, thus potentially achieving higher drug
concentrations at the desired site of action to minimize systemic side
effects.

- Systemic Drug Delivery -- The Atrigel system can be used to provide
sustained drug release into the systemic circulation.

- Customized Continuous Release and Degradation Rates -- The Atrigel system
can be designed to provide continuous release of incorporated
pharmaceuticals over a targeted time period so as to reduce the frequency
of drug administration.

- Biodegradability -- The Atrigel system will biodegrade and does not
require removal when the drug is depleted.

- Ease of Application -- The Atrigel system can be injected or inserted as
flowable compositions, such as solutions, gels, pastes, and putties, by
means of ordinary needles and syringes, or can be sprayed or painted onto
tissues.

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- Safety -- All current components of the Atrigel system are biocompatible
and have independently established safety and toxicity profiles. The
polymers used in the system are members of a class, some of which have
previously been approved by the FDA for human use in other applications.

Bioerodible Mucoadhesive System

The BEMA system is a proprietary polymer-based system designed to deliver
local or systemic levels of drugs rapidly across oral or vaginal mucosal
tissues. The semi-soft BEMA disc adheres readily to the mucosal tissue, where it
softens further on contact with moisture, rapidly becoming unnoticeable as it
delivers the drug and erodes away in approximately 10 to 20 minutes. The BEMA
system is versatile and can incorporate a wide variety of drugs, including
proteins and peptides. The compound can be loaded into the mucoadhesive layer
for delivery into the mucosal tissue, while minimizing drug release into
surrounding tissues or cavities. The drug may also be loaded into the backing
layer to provide more controlled release into the oral or vaginal cavity.

Various properties of the BEMA products, such as residence time, bioerosion
kinetics, taste, shape and thickness can be modified to the desired level to
customize drug delivery to the medical need and patient needs. The BEMA
technology has potential applications in pain management, anti-migraine
compounds and anti-emetics, all of which require rapid onset of action and
avoidance of first-pass metabolism.

Mucocutaneous Adsorption System

The Mucocutaneous Adsorption, or MCA, delivery system can be formulated as
either alcohol-based gels or as aerosols for the localized delivery of drugs to
the skin or mucosal tissues. The MCA formulations can be applied to dry, damp or
even wet skin or mucosal surfaces. Because of the novel blend of cellulose
polymers dissolved in alcohol, they quickly dry to form moisture-resistant films
that can deliver drugs and/or promote healing. Depending on the desired
application, the MCA products can be formulated to form opaque films to
highlight the area of treatment, or transparent films that are more cosmetically
acceptable. The MCA formulations can be easily flavored to mask the taste of
active ingredients for oral products and are compatible with liquid spray
applicators.

Solvent Microparticle System

The SMP technology consists of a two-stage system designed to provide
topical delivery of highly water-insoluble drugs to the skin. The combination of
dissolved drug with a microparticle suspension of the drug in a single
formulation allows a controlled amount of the dissolved drug to permeate into
the epidermal layer of the skin, while a high level of the microparticle drug is
maintained just above the outermost layer of the skin for later delivery. The
consistent microparticle size and distribution maximize drug delivery while
minimizing crystal growth over the shelf life of the product.

Biocompatible Polymer System

The BCP delivery system, composed of polymers, solvents and actives
carefully selected for their low toxicity to skin cells, can be formulated as
either film-forming gels or liquids for topical applications. The BCP gels are
non-greasy, non-staining formulations that can be applied to wounded or denuded
skin to deliver a drug, such as an antibiotic, and then dry to form a
non-constricting, protective film over the wound. We believe the gels have the
unique property of maintaining an ideal wound-healing environment by removing
excess moisture from exudative wounds and transferring moisture from the gel
into wounds that are too dry. The liquid BCP formulations are designed to
provide effective cleansing of topical wounds or denuded skin without causing
further trauma to the skin, thereby promoting faster healing with minimal
scarring.

COLLABORATIVE ARRANGEMENTS

We form strategic alliances with major pharmaceutical and biotechnology
companies utilizing our various drug delivery systems. Our significant strategic
alliances for marketing and commercializing our drug delivery

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technologies include Sanofi-Synthelabo and MediGene. Our significant strategic
alliances for developing new chemical entities and life cycle management
products include Elan, Pfizer and Geneva Pharmaceuticals.

Significant Marketing and Commercialization Alliances

Sanofi-Synthelabo Inc.

In December 2000, we entered into an exclusive North American marketing
agreement with Sanofi-Synthelabo for our One-month, Three-month and Four-month
Leuprogel products. Sanofi-Synthelabo also has an option to develop a Leuprogel
Six-month product for prostate cancer and has a right of first negotiation for
new products consisting of a combination of leuprolide acetate in the Atrigel
delivery system that we may seek to develop.

Under the terms of the agreement, we will manufacture the Leuprogel
products and receive an agreed upon transfer price from Sanofi-Synthelabo. In
addition, we have received an up-front license fee of $8 million and we will
receive research and development support if Sanofi-Synthelabo exercises its
option with respect to additional indications of the Leuprogel products. We will
also receive royalty payments based on sales of the Leuprogel products upon
approval for marketing by the FDA. As part of the agreement, Sanofi-Synthelabo
purchased 824,572 shares of our common stock for approximately $15 million. We
believe the total amount that we may receive under this agreement, including all
amounts received from Sanofi-Synthelabo's purchase of our common stock, the
license fees, research and development support, and payments for clinical,
regulatory and sales milestones for the Leuprogel products upon approval for
marketing by the FDA, will be approximately $60 million. To date we have
received $3 million in milestone payments under the agreement.

MediGene AG

In April 2001, we entered into an exclusive European marketing agreement
with MediGene for the One-month, Three-month, Four-month and Six-month Leuprogel
products. MediGene also has the right to develop the Leuprogel Six-month
product. In the agreement, MediGene paid $2 million as an up-front license fee
and purchased 233,918 shares of our common stock for approximately $3.78
million. We will manufacture the Leuprogel products and will receive payments
for certain clinical, regulatory and sales milestones. Furthermore, MediGene
will provide all funding and resources needed to conduct clinical research and
regulatory activities associated with seeking European marketing approvals. We
believe the total amount that we may receive under this agreement, including all
amounts received from MediGene's purchase of our common stock, the license fees,
research and development support, and payments for certain clinical, regulatory
and sales milestones, will be approximately $20 million. In addition, MediGene
has a right of first negotiation for new products consisting of a combination of
leuprolide acetate or similar chemical compounds in the Atrigel delivery system
that we may seek to develop.

Significant Development Alliances

Elan International Services, Ltd.

In July 2000, we formed a joint venture with Elan, a wholly owned
subsidiary of Elan Corporation, plc, for the purpose of developing and
commercializing oncology and pain management products. This joint venture,
Transmucosal Technologies, Ltd., will use our patented BEMA and Atrigel drug
delivery systems to deliver compounds targeted for major unmet medical needs in
oncology and pain management. As part of this agreement, we granted the joint
venture an exclusive license to use our BEMA technology in these fields. The
first compound selected was the opiate analgesic, fentanyl, using our BEMA drug
delivery system for breakthrough cancer pain and management of chronic pain. As
part of our agreement, Elan may provide funding to develop this and any future
selected compounds. Initially, we are the majority-owner of this joint venture.

In connection with the formation of the joint venture, Elan purchased
approximately $12.015 million of our Series A convertible exchangeable preferred
stock and $5 million of our common stock. The Series A convertible exchangeable
preferred stock is convertible at any time after July 2002, at Elan's option,
into

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shares of our common stock at a price equivalent to $18 per share. In the event
of a merger or the sale of our common stock in an underwritten public offering,
we have the option to convert the Series A convertible exchangeable preferred
stock into shares of our common stock. Alternatively, Elan has the option to
exchange this preferred stock for a 30.1% interest in the joint venture. This
exchange option will terminate if the preferred stock is converted into our
common stock unless we cause the conversion. This preferred stock must be
redeemed by us in July 2006 for either cash or shares of our common stock, at
our option, in an amount or value equal to the liquidation preference. We also
issued to Elan a five-year warrant to purchase up to 1 million shares of our
common stock at an exercise price of $18 a share.

As part of our agreement, Elan may loan us up to approximately $8.01
million to support our share of the joint venture's research and development
costs pursuant to a convertible promissory note we issued to Elan. The
convertible promissory note has a maximum principal amount of approximately
$8.01 million and is due in July 2006. The note is convertible into shares of
our common stock at a conversion price of $14.60 per share, subject to
adjustment as provided in the note. As of July 20, 2001, we have not drawn any
amounts under the convertible promissory note.

Pfizer Inc.

In August 2000, we executed a non-exclusive comprehensive research and
worldwide licensing agreement with Pfizer to provide broad-based access to our
proprietary drug delivery systems in the development of new products. Pfizer
will provide funding to develop and commercialize selected compounds developed
by Pfizer using our patented drug delivery technologies. We retained
co-manufacturing rights with Pfizer and will receive royalties on the sales of
products that are successfully developed and commercialized under this
agreement. Pfizer purchased $5 million of our common stock as part of the
agreement.

Geneva Pharmaceuticals, Inc.

In August 2000, we entered into a collaboration, development and supply
agreement with Geneva Pharmaceuticals, Inc., a subsidiary of Novartis, to
conduct research and development activities on a collaborative basis to develop
designated generic topical prescription dermatology products. We are currently
developing two products. The first product entered a pivotal clinical trial in
the second quarter of 2001. Under the agreement, we will be responsible for
validation, formulation, development and required clinical studies of selected
products. This collaboration extends to the United States, although additional
territories may be added at a later date. Geneva will be responsible for market
research and commercialization of the products. Geneva will reimburse us for one
half of the research and development expenses we incur and both parties will
generally share equally in the net profits from the sale of the products.

Other Arrangements

In addition to the foregoing, we have marketing and commercialization
agreements with other third parties relating to certain of our products. Under
the terms of our agreement with our marketing partner, Del Pharmaceuticals Inc.,
we receive a royalty on net sales of Orajel-Ultra Mouth Sore Medicine, an
over-the-counter oral care product based on our MCA drug delivery system.
Pharmacia & Upjohn Company is our marketing partner for our Doxirobe Gel product
to treat periodontal disease in companion animals. We continue to manufacture
the product. As part of our acquisition of ViroTex, we acquired the
over-the-counter product Viractin Cold Sore & Fever Blister Medicine. J.B.
Williams Company markets the product and we receive royalty payments on net
sales.

In December 1996, we entered into a commercialization agreement with Block
Drug Corporation, which is now a wholly owned subsidiary of GlaxoSmithKline.
Under the agreement, Block has exclusive rights to market the Atrisorb GTR
Barrier products and the Atrisorb-Doxy products in North America. Block also
acquired the rights to market the Atridox product in the United States, with an
option to acquire the rights to market the Atridox product in Canada and certain
European countries. On September 12, 1997, Block exercised its option to market
the Atridox product in Canada, but allowed its option lapse with respect to

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Europe. This agreement is the subject of a dispute between us and Block, which
is described below under "-- Legal Proceedings."

PATENTS AND TRADEMARKS

We consider patent protection and proprietary position to be significant to
our business. As of July 19, 2001, we maintained 44 United States patents and 33
foreign patents, and have 26 United States and 59 foreign patent applications
pending. A number of the claims contained in these patents and pending patent
applications cover certain aspects of our drug delivery technology and products
based upon these technologies, including the Atrigel, BEMA, MCA, BCP, and SMP
drug delivery technologies and the Atrisorb GTR Barrier, Atrisorb FreeFlow,
Atrisorb-Doxy, Atridox, Leuprogel and Atrisone products.

Notwithstanding our pursuit of patent protection, we cannot provide
assurance that others will not develop delivery systems, compositions and/or
methods that infringe our patent rights resulting from outright ownership or
non-revocable exclusive licensure of patents which relate to our delivery
systems, composition and/or methods. In that event, such delivery systems,
compositions and methods may compete with our systems, compositions and methods
and may adversely affect our operations. Furthermore, we cannot provide
assurance that patent protection will afford adequate protection against
competitors with similar systems, composition or methods, nor can we provide
assurance that the patents will not be infringed or circumvented by others.
Moreover, it may be costly to pursue and to prosecute patent infringement
actions against others, and such actions could hamper our business. We also rely
on our unpatented proprietary knowledge. We cannot provide assurance that others
will not be able to develop substantially equivalent proprietary knowledge or
otherwise obtain access to our knowledge, or that our rights under any patents
will afford sufficient protection.

In addition to patents, we also maintain several United States and numerous
foreign trademark and service mark applications for registrations of our name,
logo, drug delivery systems and products. These include seven United States and
27 foreign issued trademarks, with nine U.S. and 24 foreign applications
pending.

FACILITIES

We lease approximately 24,580 square feet of office and research laboratory
space located in Fort Collins, Colorado, pursuant to a lease that expires in
June 2004. We own a 24,100 square foot manufacturing facility in Fort Collins
that we acquired in July 1996. As part of the building acquisition, we acquired
two acres of vacant land, directly adjacent to the building. In August 1997, we
acquired an additional 2.7 acres for possible future development or expansion.

We also lease approximately 740 square feet of office space located in
Frankfurt, Germany, pursuant to a lease that expires in June 2004. This office
space is used for the operations of our wholly owned subsidiary Atrix
Laboratories GmbH.

We own substantially all of our laboratory and manufacturing equipment,
which we consider to be adequate for our research, development and testing
requirements for the foreseeable future.

EMPLOYEES

As of July 19, 2001, we employed 137 employees on a full-time basis. Of
these 137 full-time employees, 105 are engaged in production, research and
clinical testing and the remaining 32 are in administrative capacities. A total
of 36 employees have earned doctorate or advanced degrees. None of our employees
are represented by a union or collective bargaining unit and management
considers relations with employees to be good.

LEGAL PROCEEDINGS

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market the Atrisorb GTR Barrier products and the Atrisorb-Doxy products in North
America. Block also acquired the rights to market the Atridox product in the
United States, with an option to acquire the rights to market the Atridox
product in Canada and certain European countries. On September 12, 1997, Block
exercised its option to market the Atridox product in Canada, but let its option
lapse with respect to Europe.

We have been involved in disputes with Block concerning product pricing and
the payments due upon achievement of milestones under the commercialization
agreement. With respect to product pricing, arbitration began in December 2000
to resolve the issue as to the minimum price Block must pay for products under
the agreement. On April 20, 2001, we entered into a settlement agreement with
Block resolving the pricing dispute over Block's sale of our Atridox product.
The settlement agreement provides for the payment owed to us for sales of the
product in 1999. We also implemented a new pricing schedule for future
purchases.

With respect to milestone payments, we believe that under the agreement,
the milestone for the FDA approval of our Atrisorb-Doxy Barrier product was
achieved in September 2000 and the corresponding payment of $1,000,000 is due.
Block has not made this payment. Pursuant to our agreement with Block, we will
be entitled to an additional milestone payment of $2,000,000 upon Block's first
commercial sale of the Atrisorb-Doxy Barrier product in the United States. The
agreement provides that the first commercial sale of this product in the U.S.
must occur within 120 days after FDA approval, subject to certain conditions
that have been satisfied. The FDA approved the Atrisorb-Doxy Barrier product in
September 2000. We have notified Block that they are in breach of the agreement
for failure to commence marketing of our Atrisorb-Doxy Barrier product and on
May 11, 2001 we filed a lawsuit in the U.S. District Court for the District of
Colorado seeking injunctive relief based on Block's breach of the agreement.
Block has initiated arbitration, and an arbitration hearing has been set for
November 13, 2001. We intend to vigorously pursue our right to these milestone
payments.

We are currently negotiating with the BDF Beierdorf Corporation of Germany
regarding BDF Beierdorf's allegation that in certain foreign countries we have
engaged in unauthorized use of the word "Atrix." We are not aware of any threat
or commencement of litigation in this matter.

We are not a party to any other legal proceedings.

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MANAGEMENT

Information is set forth below regarding our executive officers, directors
and key employees, including their ages.

NAME AGE POSITION
---- --- --------

Mr. David R. Bethune................. 60 Chairman and Chief Executive Officer, Director
Dr. Richard L. Jackson............... 61 Senior Vice President, Research and Development,
Director
Dr. Richard L. Dunn.................. 60 Senior Vice President, Drug Delivery Research
Dr. Charles P. Cox................... 49 Senior Vice President, Corporate Development
Mr. Brian G. Richmond................ 49 Chief Financial Officer
Dr. J. Steven Garrett................ 56 Vice President, Clinical Research
Mr. Michael R. Duncan................ 38 Vice President, Technical Operations
Dr. David W. Osborne................. 40 Vice President, Pharmaceutical Development
Mr. Sean F. Moriarty................. 37 Vice President, Licensing and Counsel
Mr. Magnus Pelles.................... 54 Vice President Sales and Marketing, European
Operations
Dr. Nicolas Bazan.................... 59 Director
Mr. Sander A. Flaum.................. 64 Director
Dr. D. Walter Cohen.................. 74 Director
Mr. C. Rodney O'Connor............... 68 Director
Mr. H. Stuart Campbell............... 71 Director

Mr. David R. Bethune has served as our Chairman and Chief Executive Officer
since August 1999 and as a director since 1995. Mr. Bethune previously served as
President and Chief Operating Officer of IVAX Corporation, a pharmaceutical
holding company, from 1997 to 1998 and as the President and Chief Executive
Officer of Aesgen, Inc., a pharmaceutical company, from 1995 to 1996. From 1996
to 1997, Mr. Bethune served as a consultant to the pharmaceutical industry. Mr.
Bethune served as the Group Vice President of American Cyanamid Company, a
health care business, from 1992 to 1995. Mr. Bethune also serves as a director
of Female Health Co. Mr. Bethune received his Bachelors degree in Business from
Lenoir-Rhyne College and an Executive Management degree from Columbia University
Graduate School.

Dr. Richard L. Jackson has served as our Senior Vice President, Research
and Development since November 1998 and as a director since 1999. Dr. Jackson
previously served as the Senior Vice President of Discovery Research at
Wyeth-Ayerst, American Home Products from 1993 to June 1998. From 1985 to 1992,
Dr. Jackson was Vice President, Research at Marion-Merrell Dow. Prior to that
Dr. Jackson was at the National Institutes of Health, and was a Professor at
Baylor College of Medicine and University of Cincinnati College of Medicine. Dr.
Jackson received his Bachelor of Science in Chemistry and his Ph.D. degree in
Microbiology from the University of Illinois, Urbana, Illinois.

Dr. Richard L. Dunn has served as our Senior Vice President, Drug Delivery
Research since 1998. Dr. Dunn previously served as the Vice President of Drug
Delivery Research from 1992 to 1998 and as the Vice President of Research and
Development from 1987 to 1992. Dr. Dunn received his Bachelor of Science in
Chemistry from the University of North Carolina at Chapel Hill and a Ph.D. in
Organic Chemistry from the University of Florida.

Dr. Charles P. Cox has served as the Senior Vice President, Corporate
Development since April 2001. Dr. Cox previously served as the Vice President of
New Business Development from January 1996 to April 2001, and as the Vice
President of Product Development from September 1992 to January 1996. Dr. Cox
received his Bachelor of Arts in Zoology and Pre-Med from the University of
Tulsa and a Masters and Ph.D. in Medical Microbiology and Immunology from the
University of Oklahoma Health Sciences Center. Dr. Cox also received a Masters
in Business Administration from Northwestern University, Kellogg Graduate School
of Management.

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40

Mr. Brian G. Richmond has served as our Chief Financial Officer since April
2001 and Vice President of Finance since December 1997. He has also served as
Assistant Secretary since January 1997. Mr. Richmond previously served as the
Corporate Controller from January 1997 to November 1997 and as the Accounting
Manager from 1991 to 1996. Mr. Richmond received his Bachelor of Science in
Education and a Masters degree in Business Management from Colorado State
University. Mr. Richmond is a certified public accountant, certified management
accountant and a member of both the American Institute for Certified Public
Accountants and the Colorado Society for Certified Public Accountants.

Dr. J. Steven Garrett has served as the Vice President, Clinical Research
since April 1995. Dr. Garrett was previously a professor of Periodontics at Loma
Linda University from 1986 to 1995 and has been in private practice specializing
in periodontics since 1978. Dr. Garrett received his D.D.S. from Northwestern
University and his Masters degree in Periodontics and Oral Biology from Loma
Linda University.

Mr. Michael R. Duncan has served as the Vice President, Technical
Operations since October 2000. Mr. Duncan previously served as Vice President of
Manufacturing from October 1995 to October 2000. Mr. Duncan previously served as
the Director of Production Operations and Packaging Manager for Geneva
Pharmaceuticals, Inc. from October 1991 to October 1995. Mr. Duncan received his
Bachelor of Science in Education from Ohio State University and a Bachelor of
Science in Business from Regis University.

Dr. David W. Osborne has served as the Vice President, Pharmaceutical
Development since November 1998. Dr. Osborne previously served as the Vice
President of Research and Development for ViroTex Corporation from June 1993 to
November 1998. Dr. Osborne received his Bachelor of Science in Chemistry from
Southwest Missouri State University and his Ph.D. in Physical Chemistry from
University of Missouri-Rolla.

Mr. Sean F. Moriarty has served as the Vice President, Licensing and
Counsel since October 2000. Mr. Moriarty previously served as the Director of
Business Development for Geneva Pharmaceuticals, Inc. from September 1998 to
October 2000. Mr. Moriarty was an attorney with the law firm of Isaacson,
Rosenbaum, Woods & Levy, P.C. from June 1996 to September 1998. Mr. Moriarty
received his Bachelor of Science in Engineering and Applied Science from
California Institute of Technology and his J.D. from University of Colorado
School of Law.

Mr. Magnus Pelles has served as the Vice President, Sales and Marketing,
European Operations since January 2000. Mr. Pelles previously served as the
Managing Director and Chief Executive Officer for the German, Austrian and Swiss
divisions of Biora AB from 1995 to January 2000. Mr. Pelles attended the
University of Uppsala.

Dr. Nicolas Bazan has served as a director since November of 2000. Dr.
Bazan is a Professor at Louisiana State University Medical Center and
Neuroscience Center of Excellence in the areas of Ophthalmology, Biochemistry,
Molecular Biology, and Neurology and serves as a Director of the Neuroscience
Training Program. Dr. Bazan sits on the Scientific Advisory Board of Centaur in
Sunnyvale, California, and is the founder and Chairman of the Board of St.
Charles Pharmaceuticals in New Orleans, Louisiana. Dr. Bazan received his
Bachelors degree from Colegio Belgrano, Argentina, his M.D. from U. Tucuman,
Argentina, and his Ph.D. from the Medical School at U. Tucuman.

Mr. Sander A. Flaum has served as a director since 1999. Mr. Flaum has
served as the Chief Executive Officer of Robert A. Becker, Inc. Euro RSCG (a
member of the Euro RSCG Healthcare Global Network) since 1998. Mr. Flaum is also
an adjunct professor at The Fordham University Graduate School of Business in
New York City and a member of the editorial advisory board of Pharmaceutical
Executive. He serves on

S-37
41

the boards of Fischer College of Business at The Ohio State University, Fordham
Graduate School of Business, Hollins Communications Research Institute and
Neopharm Corporation. Mr. Flaum received his Bachelor of Arts in Business from
Ohio State University and his Masters degree in Business from Fairleigh
Dickenson.

Dr. D. Walter Cohen has served as a director since 1992. Dr. Cohen has
served as the Chancellor-Emeritus of MCP Hahnemann University's School of
Medicine since 1998, the Chancellor of MCP Hahnemann University's School of
Medicine from 1993 to 1998 and as the President of MCP Hahnemann University's
School of Medicine from 1986 to 1993. Since 1950, Dr. Cohen has had a dental
practice specializing in periodontics. Dr. Cohen also serves as a director of
Crusader Bank of Philadelphia. Dr. Cohen received his D.D.S. from the University
of Pennsylvania School of Dentistry and served as its Dean from 1972 to 1983.

Mr. C. Rodney O'Connor has served as director since 1987. Mr. O'Connor has
served as the Chairman and Chief Executive Officer of Cameron Associates, Inc.,
a financial services firm, since 1976. Mr. O'Connor also serves on the boards of
Streicher Mobile Fueling, Inc., Fundamental Management Corporation and Morgan
Holdings, Inc. Mr. O'Connor received his Bachelor of Arts degree from Wesleyan
University and a Masters degree in Finance from the Wharton School of Finance.

Mr. H. Stuart Campbell has served as a director since 1995. Mr. Campbell
has been the owner and Vice President of Highland Packaging Labs, Inc., a
specialty packaging company for the pharmaceutical industry, since 1983. Mr.
Campbell also serves as a director for Biomatrix, Inc. and Mesa Laboratories,
Inc. Mr. Campbell received his Bachelor of Science degree in Agriculture from
Cornell University.

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42

UNDERWRITING

We are offering the shares of common stock described in this prospectus
supplement through a number of underwriters. Banc of America Securities LLC,
U.S. Bancorp Piper Jaffray Inc., CIBC World Markets Corp. and Gruntal & Co.,
L.L.C. are the representatives of the underwriters. We have entered into an
underwriting agreement with the representatives. Subject to the terms and
conditions of the underwriting agreement, we have agreed to sell to the
underwriters, and each underwriter has severally agreed to purchase, the number
of shares of common stock listed next to its name in the following table:

UNDERWRITER NUMBER OF SHARES
----------- ----------------

Banc of America Securities LLC.............................. 1,214,550
U.S. Bancorp Piper Jaffray Inc. ............................ 674,750
CIBC World Markets Corp. ................................... 674,750
Gruntal & Co., L.L.C. ...................................... 134,950
Arnhold and S. Bleichroeder, Inc. .......................... 43,000
Emedsecurities, Inc. ....................................... 43,000
Global Capital Securities Corporation....................... 43,000
Leerink Swann & Company..................................... 43,000
M.R. Beal & Company......................................... 43,000
Stifel, Nicolaus & Company, Incorporated.................... 43,000
ThinkEquity Partners........................................ 43,000
---------
Total.................................................. 3,000,000
=========

The underwriters initially will offer the shares to the public at the price
specified on the cover page of the prospectus supplement. The underwriters may
allow selected dealers a concession of not more than $0.76 per share. The
underwriters may also allow, and any other dealers may reallow, a concession of
not more than $0.10 per share to some other dealers. If all the shares are not
sold at the public offering price, the underwriters may change the public
offering price and the other selling terms. The common stock is offered subject
to a number of conditions, including:

- receipt and acceptance of our common stock by the underwriters, and

- the right to reject orders in whole or in part.

We have granted the underwriters an option to buy up to 450,000 additional
shares of common stock. These additional shares would cover sales of shares by
the underwriters that exceed the number of shares specified in the table above.
The underwriters may exercise this option at any time within 30 days after the
date of the prospectus supplement. If the underwriters exercise this option,
they will each purchase, subject to a number of terms and conditions, additional
shares approximately in proportion to the amounts specified above.

The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters. These amounts are shown assuming
no exercise and full exercise of the underwriters' option to purchase additional
shares:

PAID BY ATRIX
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------

Per share underwriting discounts and commissions.... $ 1.38 $ 1.38
Total underwriting discounts and commissions........ $ 4,140,000 $4,761,000

The expenses of the offering, not including the underwriting discounts and
commissions, are estimated to be approximately $350,000 and will be paid by us.
Expenses of the offering, exclusive of the underwriting discounts and
commissions, include NASD fees, printing expenses, transfer agent fees and other
miscellaneous fees.

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43

We, our executive officers and directors have entered into lock-up
agreements with the underwriters. Under these agreements, subject to exceptions,
we may not issue any new shares of common stock, and our executive officers and
directors may not offer, sell, contract to sell or otherwise dispose of or hedge
any common stock or securities convertible into or exchangeable for shares of
common stock. These restrictions will be in effect for a period of 90 days after
the date of the prospectus supplement. At any time and without notice, Banc of
America Securities LLC may, in its sole discretion, release all or some of the
securities from these lock-up agreements. Elan, MediGene, Pfizer and
Sanofi-Synthelabo are subject to lock-up restrictions with us pursuant to their
respective stock purchase agreements. Under these agreements, they may not
offer, sell, contract to sell or otherwise dispose of or hedge any common stock
or securities convertible into or exchangeable for shares of our common stock
for the periods set forth in the agreements. These restrictions will be in
effect for at least 90 days after the date of the prospectus supplement.

We will indemnify the underwriters against some liabilities, including some
liabilities under the Securities Act. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be required
to make in respect of those liabilities.

In connection with the offering, the underwriters may purchase and sell
common stock in the open market. These transactions may include:

- short sales,

- stabilizing transactions, and

- purchases to cover positions created by short sales.

Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.

The underwriters may also impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions
or to cover short sales, the representatives can require the underwriters that
sold those shares as part of the offering to repay the underwriting discounts
and commissions received by them.

The underwriters may engage in activities that stabilize, maintain or
otherwise affect the price of the common stock, including:

- over-allotment,

- stabilization,

- syndicate covering transactions, and

- imposition of penalty bids.

As a result of these activities, the price of the common stock may be
higher than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National Market,
in the over-the-counter market or otherwise.

In connection with the offering, some underwriters and any selling group
members who are qualified market makers on the Nasdaq National Market may engage
in passive market making transactions in the common stock on the Nasdaq National
Market in accordance with Rule 103 of Regulation M during the business day
before the pricing of the offering, before the commencement of offers or sales
of the common stock. Passive market makers must comply with applicable volume
and price limitations and must be identified as a passive market maker. In
general, a passive market maker must display its bid at a price not in excess of
the highest independent bid for the security; if all independent bids are
lowered below the passive market maker's bid, however, the bid must then be
lowered when purchase limits are exceeded.

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44

One or more of the underwriters may facilitate the marketing of this
offering online directly or through one of its affiliates. In those cases,
prospective investors may view offering terms and a prospectus online and,
depending upon the particular underwriter, place orders online or through their
financial advisors.

Some of the underwriters or their affiliates have in the past engaged, and
may in the future engage, in transactions with and perform services for us,
including commercial banking, financial advisory and investment banking
services, in the ordinary course of business.

LEGAL MATTERS

The validity of the shares of common stock offered by us hereby will be
passed upon for us by Morrison & Foerster LLP, Denver, Colorado. As of the date
of this prospectus supplement, Morrison & Foerster LLP held options to acquire
5,000 shares of our common stock. Certain legal matters will be passed upon for
the underwriters by Cahill Gordon & Reindel, New York, New York.

EXPERTS

The consolidated financial statements as of December 31, 2000 and 1999, and
for each of the three years ended December 31, 2000, included and incorporated
by reference in this prospectus supplement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, appearing herein
(which reports express an unqualified opinion and includes an explanatory
paragraph referring to a change in accounting principle), and have been so
included and incorporated by reference herein in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.

The financial statements of Transmucosal Technologies, Ltd. incorporated by
reference in this prospectus supplement from our Amendment No. 1 on Form 10-K/A
to our Annual Report on Form 10-K for the year ended December 31, 2000, have
been audited by KPMG, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. We have also filed with
the SEC a registration statement on Form S-3 to register the shares of common
stock being offered in the prospectus supplement and the accompanying
prospectus. This prospectus supplement does not contain all of the information
included in the registration statement. For further information about us and the
shares of common stock offered by this prospectus supplement and the
accompanying prospectus, you should refer to the registration statement and its
exhibits and our other SEC filings. You can read and copy the registration
statement as well as reports, proxy statements and other information we have
filed with the SEC at the public reference rooms maintained by the SEC in
Washington, D.C., New York, New York, and Chicago, Illinois. You can obtain
copies from the public reference rooms of the SEC upon payment of various fees.
You can call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms. We are also required to file electronic versions of these
documents with the SEC, which may be accessed through the SEC's website at
http://www.sec.gov. Our common stock is quoted on the Nasdaq National Market
System under the symbol "ATRX."

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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The SEC allows us to "incorporate by reference" certain of our publicly
filed documents into this prospectus supplement and the accompanying prospectus,
which means that information included in these documents is considered part of
this prospectus supplement and the accompanying prospectus. The information
incorporated by reference is considered to be part of the prospectus supplement
and the accompanying prospectus, and information that we subsequently file with
the SEC will automatically update and supersede this information. This
prospectus supplement and the accompany prospectus do not include all the
information in the registration statement and documents incorporated by
reference. You should refer to the documents and to the exhibits to the
registration statement for a more complete understanding of the matter involved.
We hereby incorporate by reference the documents listed below and any future
filings made with the SEC prior to the termination of the offering under
sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934.

The following documents filed with the SEC are incorporated by reference in
this prospectus:

1. Our Annual Report on Form 10-K for the year ended December 31,
2000, and Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K
for the year ended December 31, 2000 (File No. 0-18231).

2. Our Quarterly Report on Form 10-Q for the quarter ended March 31,
2001 (File No. 0-18231).

3. Our Quarterly Report on Form 10-Q for the quarter ended June 30,
2001 (File No. 0-18231).

4. Our Current Report on Form 8-K dated April 20, 2001, filed with the
SEC on April 24, 2001 (File No. 0-18231), our Current Report on Form 8-K
dated December 29, 2000, filed with the SEC on February 23, 2001 (File No.
0-18231), our Current Report on Form 8-K dated December 29, 2000, filed
with the SEC on January 9, 2001 (File No. 0-18231), and our Current Report
on Form 8-K dated April 4, 2001, filed with the SEC on June 20, 2001 (File
No. 0-18231).

5. Our Proxy Statement dated April 4, 2001, filed in connection with
our May 7, 2001 Annual Meeting of Stockholders.

6. The description of our common stock contained in our Registration
Statement on Form 8-A, filed with the SEC on January 12, 1990, including
any amendments or reports filed with the SEC for the purpose of updating
such description.

7. The description of our Series A Preferred Stock Purchase Rights
contained in our Registration Statement on Form 8-A, filed with the SEC on
October 1, 1998, including any amendments or reports filed with the SEC for
the purpose of updating such description.

We will furnish you without charge, on written or oral request, a copy of
any or all of the documents incorporated by reference. You should direct any
requests for documents to our Corporate Secretary, Atrix Laboratories, Inc.,
2579 Midpoint Drive, Fort Collins, Colorado 80524, telephone number (970)
482-5868.

You should rely only on the information contained or incorporated by
reference in this prospectus supplement or the accompanying prospectus. We have
not authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We will sell the offered securities only in states where the offer
or sale is permitted. You should assume that the information appearing in this
prospectus supplement or the accompanying prospectus or incorporated by
reference is accurate only as of the date on the front of these documents. Our
business and financial condition may have changed since that date.

S-42
46

ATRIX LABORATORIES, INC.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2000, 1999 and 1998...... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to the Consolidated Financial Statements for the Years
Ended December 31, 2000, 1999 and 1998.................... F-8

Consolidated Balance Sheets as of June 30, 2001 and December
31, 2000.................................................. F-26
Consolidated Statements of Operations for the Six Months
Ended June 30, 2001 and 2000.............................. F-27
Consolidated Statements of Changes in Shareholders' Equity
for the Six Months Ended June 30,
2001...................................................... F-28
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2001 and 2000.............................. F-29
Notes to the Consolidated Financial Statements for the Six
Months Ended June 30, 2001 and 2000....................... F-30

F-1
47

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
Atrix Laboratories, Inc. and Subsidiaries
Fort Collins, Colorado

We have audited the accompanying consolidated balance sheets of Atrix
Laboratories, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for revenue recognition in 2000.

DELOITTE & TOUCHE LLP

Denver, Colorado
February 28, 2001

F-2
48

ATRIX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, DECEMBER 31,
2000 1999
------------- ------------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,484,330 $ 3,021,869
Marketable securities available for sale, at fair market
value................................................... 28,910,439 34,856,697
Notes receivable -- stock subscription and other.......... 23,000,000 --
Accounts receivable, net of allowance for doubtful
accounts of $209,659 and $18,355........................ 2,610,683 1,222,850
Interest receivable....................................... 472,201 562,318
Inventories............................................... 1,940,929 1,862,522
Prepaid expenses and deposits............................. 1,085,070 418,812
------------- ------------
Total current assets............................... 62,503,652 41,945,068
------------- ------------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 6,818,372 7,114,761
------------- ------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$2,399,431 and $1,477,698............................... 4,049,104 4,580,325
Deferred finance costs, net of accumulated amortization of
$628,379 and $430,007................................... 800,536 1,018,650
------------- ------------
Other assets, net....................................... 4,849,640 5,598,975
------------- ------------
TOTAL ASSETS....................................... $ 74,171,664 $ 54,658,804
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade................................. $ 2,197,980 $ 2,455,605
Interest payable.......................................... 215,156 211,094
Accrued salaries and payroll taxes........................ 278,684 321,548
Other accrued liabilities................................. 265,873 150,396
Deferred revenue.......................................... 2,997,154 160,000
------------- ------------
Total current liabilities.......................... 5,954,847 3,298,643
------------- ------------
DEFERRED REVENUE............................................ 24,217,699 --
CONVERTIBLE SUBORDINATED NOTES PAYABLE...................... 36,190,000 36,690,000
COMMITMENTS AND CONTINGENCIES (SEE NOTES 4, 6, 7 AND 11)
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares
authorized
Series A preferred stock, $.001 par value, 200,000
shares authorized and no shares issued or
outstanding.......................................... -- --
Series A convertible exchangeable preferred stock, $.001
par value, 20,000 shares authorized; 12,015 shares
issued and outstanding. Liquidation preference
$12,397,505 and $-0-................................. 12 --
Common stock, $.001 par value; 25,000,000 shares
authorized; 13,341,681 and 11,435,244 shares issued;
13,341,681 and 11,427,554 shares outstanding............ 13,342 11,435
Additional paid-in capital................................ 113,763,660 74,495,672
Treasury stock, -0- and 7,690 shares, at cost............. -- (80,846)
Accumulated other comprehensive loss...................... (471,306) (1,696,010)
Accumulated deficit....................................... (105,496,590) (58,060,090)
------------- ------------
Total shareholders' equity........................... 7,809,118 14,670,161
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $ 74,171,664 $ 54,658,804
============= ============

See notes to the consolidated financial statements.
F-3
49

ATRIX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------

REVENUE:
Net sales and royalties................................... $ 6,156,227 $ 4,541,703 $ 3,451,148
Contract research and development revenue................. 2,008,773 1,093,358 621,771
Licensing, marketing rights and milestone revenue......... 1,877,538 -- 17,000,000
------------ ------------ ------------
Total revenue...................................... 10,042,538 5,635,061 21,072,919
------------ ------------ ------------
OPERATING EXPENSE:
Cost of goods sold........................................ 2,644,192 1,974,009 2,249,776
Research and development.................................. 16,735,195 15,555,333 12,189,212
Purchased in-process research and development............. -- -- 3,050,000
Administrative and marketing.............................. 4,386,465 4,300,480 2,506,879
------------ ------------ ------------
Total operating expense............................ 23,765,852 21,829,822 19,995,867
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS............................... (13,723,314) (16,194,761) 1,077,052
OTHER INCOME (EXPENSE):
Equity in loss of joint venture........................... (12,238,700) -- --
Investment income......................................... 1,959,195 2,719,830 3,965,966
Interest expense.......................................... (2,582,320) (3,062,239) (3,574,906)
Other..................................................... 88,581 (7,651) 13,439
------------ ------------ ------------
Net other income (expense)......................... (12,773,244) (350,060) 404,499
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE....... (26,496,558) (16,544,821) 1,481,551
Income tax -- current expense............................... -- -- (48,183)
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................. (26,496,558) (16,544,821) 1,433,368
Extraordinary gain on extinguished debt..................... 79,906 3,274,595 256,678
Cumulative effect of change in accounting principle......... (20,611,526) -- --
------------ ------------ ------------
NET INCOME (LOSS) BEFORE PREFERRED STOCK DIVIDENDS.......... $(47,028,178) $(13,270,226) $ 1,690,046
Accretion of dividend on preferred stock.................... (382,505) -- --
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................ $(47,410,683) $(13,270,226) $ 1,690,046
============ ============ ============
Basic and diluted earnings per common share:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle................ $ (2.23) $ (1.46) $ .13
Extraordinary item........................................ -- .29 .02
Cumulative effect of change in accounting principle....... (1.73) -- --
------------ ------------ ------------
Net income (loss) before preferred stock dividends.......... $ (3.96) $ (1.17) $ .15
Accretion of dividend on preferred stock.................... (.03) -- --
------------ ------------ ------------
Net income (loss) applicable to common stock................ $ (3.99) $ (1.17) $ .15
============ ============ ============
Basic and diluted weighted average common shares
outstanding............................................... 11,883,712 11,327,213 11,269,981
============ ============ ============
Pro forma amounts assuming the change in revenue recognition
method is applied retroactively:
Net loss before extraordinary item........................ $(26,496,558) $(14,671,046) $(14,454,433)
============ ============ ============
Net loss applicable to common stock....................... $(26,799,157) $(11,396,451) $(14,197,755)
============ ============ ============
Basic and diluted earnings per common share:
Net loss before extraordinary item.......................... $ (2.23) $ (1.30) $ (1.28)
============ ============ ============
Net loss applicable to common stock......................... $ (2.26) $ (1.01) $ (1.26)
============ ============ ============

See notes to the consolidated financial statements.
F-4
50

ATRIX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
--------------- -------------------- PAID-IN TREASURY COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK LOSS
------ ------ ---------- ------- ------------ ----------- -------------

BALANCE, DECEMBER 31, 1997........ -- $-- 11,177,261 $11,177 $ 73,224,442 $ -- $ (177,867)
Comprehensive income:
Net income...................... -- -- -- -- -- -- --
Other comprehensive income:
-- Unrealized gain on
investments................. -- -- -- -- -- -- 81,314
Net comprehensive income..........
Exercise of stock options......... -- -- 145,212 146 228,686 -- --
Issuance for employee stock
purchase plan................... -- -- 339 -- 4,557 -- --
Issuance for acquisition:
Common stock.................. -- -- 37,860 38 389,920 -- --
Stock options................. -- -- 921,370 -- --
Warrants...................... -- -- -- -- 30,555 -- --
Compensation -- stock options..... -- -- 23,412 -- --
Purchase of treasury stock........ -- -- (157,000) -- -- (1,650,564) --
------ --- ---------- ------- ------------ ----------- -----------
BALANCE, DECEMBER 31, 1998........ -- -- 11,203,672 11,361 74,822,942 (1,650,564) (96,553)
Comprehensive loss:
Net loss........................ -- -- -- -- -- -- --
Other comprehensive loss:
-- Cumulative foreign currency
translation adjustments..... -- -- -- -- -- -- (931)
-- Unrealized loss on
investments................. -- -- -- -- -- -- (1,598,526)
Net comprehensive loss............
Exercise of stock options......... -- -- 120,650 15 (763,781) 1,107,550 --
Exercise of non-qualified stock
options......................... -- -- 1,000 -- -- 10,513 --
Issuance for employee stock
purchase plan................... -- -- 3,382 -- 4,781 31,129 --
Issuance of restricted stock...... -- -- 80,000 40 236,840 420,526 --
Issuance for earn-out
distribution.................... -- -- 18,850 19 194,890 -- --
------ --- ---------- ------- ------------ ----------- -----------
BALANCE, DECEMBER 31, 1999........ -- $-- 11,427,554 $11,435 $ 74,495,672 $ (80,846) $(1,696,010)
Comprehensive loss:
Net loss........................ -- -- -- -- -- -- --
Other comprehensive loss:
-- Cumulative foreign currency
translation adjustments..... -- -- -- -- -- -- 13,430
-- Unrealized gain on
investments................. -- -- -- -- -- -- 1,211,274
Net comprehensive loss............
Issuance of Series A Convertible
Exchangeable Preferred Stock to
Elan............................ 12,015 12 -- -- 12,014,988 -- --
Accretion on preferred stock...... -- -- -- -- 382,505 -- --
Issuance of common stock and
warrants to Elan................ -- -- 442,478 442 4,999,558 -- --
Issuance of common stock to
Pfizer.......................... -- -- 447,550 448 4,999,552 -- --
Issuance of common stock to
Sanofi-Synthelabo............... -- -- 824,572 824 14,999,171 -- --
Exercise of stock options......... -- -- 135,352 130 1,144,665 69,029 --
Exercise of non-qualified stock
options......................... -- -- 4,480 4 29,698 -- --
Issuance for employee stock
purchase plan................... -- -- 8,707 8 73,330 11,817 --
Issuance of restricted stock...... -- -- 42,702 43 499,902 -- --
Issuance for earn-out
distribution.................... -- -- 8,286 8 124,619 -- --
------ --- ---------- ------- ------------ ----------- -----------
BALANCE, DECEMBER 31, 2000........ 12,015 $12 13,341,681 $13,342 $113,763,660 $ -- $ (471,306)
====== === ========== ======= ============ =========== ===========

TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
------------- -------------

BALANCE, DECEMBER 31, 1997........ $ (46,354,834) $ 26,702,918
Comprehensive income:
Net income...................... 1,690,046 1,690,046
Other comprehensive income:
-- Unrealized gain on
investments................. -- 81,314
------------
Net comprehensive income.......... 1,771,360
Exercise of stock options......... -- 228,832
Issuance for employee stock
purchase plan................... -- 4,557
Issuance for acquisition:
Common stock.................. -- 389,958
Stock options................. -- 921,370
Warrants...................... -- 30,555
Compensation -- stock options..... -- 23,412
Purchase of treasury stock........ -- (1,650,564)
------------- ------------
BALANCE, DECEMBER 31, 1998........ (44,664,788) 28,422,398
Comprehensive loss:
Net loss........................ (13,270,226) (13,270,226)
Other comprehensive loss:
-- Cumulative foreign currency
translation adjustments..... -- (931)
-- Unrealized loss on
investments................. -- (1,598,526)
Net comprehensive loss............ (14,869,683)
Exercise of stock options......... (32,567) 311,217
Exercise of non-qualified stock
options......................... (3,513) 7,000
Issuance for employee stock
purchase plan................... 1,530 37,440
Issuance of restricted stock...... (90,526) 566,880
Issuance for earn-out
distribution.................... -- 194,909
------------- ------------
BALANCE, DECEMBER 31, 1999........ $ (58,060,090) $ 14,670,161
Comprehensive loss:
Net loss........................ (47,410,683) (47,410,683)
Other comprehensive loss:
-- Cumulative foreign currency
translation adjustments..... -- 13,430
-- Unrealized gain on
investments................. -- 1,211,274
Net comprehensive loss............ (46,185,979)
Issuance of Series A Convertible
Exchangeable Preferred Stock to
Elan............................ -- 12,015,000
Accretion on preferred stock...... -- 382,505
Issuance of common stock and
warrants to Elan................ -- 5,000,000
Issuance of common stock to
Pfizer.......................... -- 5,000,000
Issuance of common stock to
Sanofi-Synthelabo............... -- 14,999,995
Exercise of stock options......... (23,920) 1,189,904
Exercise of non-qualified stock
options......................... -- 29,702
Issuance for employee stock
purchase plan................... (1,897) 83,258
Issuance of restricted stock...... -- 499,945
Issuance for earn-out
distribution.................... -- 124,627
------------- ------------
BALANCE, DECEMBER 31, 2000........ $(105,496,590) $ 7,809,118
============= ============

See notes to the consolidated financial statements.
F-5
51

ATRIX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
----------------- ----------------- -----------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) applicable to common
stock................................ $(47,410,683) $(13,270,226) $ 1,690,046
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Accretion of dividend on preferred
stock.............................. 382,505 -- --
Depreciation and amortization........ 2,190,431 1,776,695 1,317,871
Equity in loss of joint venture...... 12,238,700 -- --
(Gain) loss on sale of property,
plant and equipment................ (7,496) 113,772 45,031
(Gain) loss on sale of marketable
securities......................... 171,583 140,350 (28,186)
Provision for bad debts.............. 191,304 (30,810) (62,313)
Write-off of obsolete patents........ 2,656 25,835 32,226
Stock compensation................... 124,620 309,380 23,412
Extraordinary gain on extinguished
debt............................... (79,906) (3,274,595) (256,678)
Cumulative effect of change in
accounting principle............... 20,611,526 -- --
Purchased in-process research and
development........................ -- -- 3,050,000
Net changes in operating assets and
liabilities, net of effects of
ViroTex acquisition in 1998:
Accounts receivable.................. (1,588,431) 4,745,406 (4,271,706)
Interest receivable.................. 90,117 102,056 (324,028)
Inventories.......................... (74,827) 701,014 (1,254,017)
Prepaid expenses and deposits........ (665,846) 434,454 (649,997)
Other assets......................... -- 474,708 --
Accounts payable..................... (423,926) 805,115 (466,755)
Interest payable..................... 4,062 (67,945) (8,632)
Accrued salaries and payroll taxes... (43,190) 61,562 (16,746)
Other accrued liabilities............ 113,763 (63,691) (149,210)
Deferred revenue..................... (1,556,673) 6,398 153,602
------------ ------------ ------------
Net cash used in operating
activities.................... (15,729,711) (7,010,522) (1,176,080)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and
equipment and leasehold
improvements......................... (795,176) (1,194,081) (1,004,291)
Investment in intangible assets......... (246,142) (268,184) (213,189)
Proceeds from sale of property, plant
and equipment........................ 20,025 29,235 2,725
Proceeds from sale of marketable
securities........................... 7,402,544 10,710,352 20,130,000
Proceeds from maturity of marketable
securities........................... -- 9,352,656 48,043,018
Investment in marketable securities..... (421,927) (19,570,429) (54,968,515)
Acquisition of ViroTex -- net of cash
acquired............................. -- (23,124) (4,833,192)
------------ ------------ ------------
Net cash provided by (used in)
investing activities.......... 5,959,324 (963,575) 7,156,556
------------ ------------ ------------

F-6
52
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
----------------- ----------------- -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity
securities........................... 11,678,184 613,156 233,388
Extinguished convertible long-term
debt................................. (408,000) (8,172,900) (1,192,500)
Acquisition of treasury stock........... -- -- (1,650,564)
------------ ------------ ------------
Net cash provided by (used in)
financing activities.......... 11,270,184 (7,559,744) (2,609,676)
------------ ------------ ------------
NET EFFECT OF EXCHANGE RATE ON CASH....... (37,336) (931) --
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. 1,462,461 (15,534,772) 3,370,800
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR.................................... 3,021,869 18,556,641 15,185,841
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR.... $ 4,484,330 $ 3,021,869 $ 18,556,641
============ ============ ============
Supplemental cash flow information:
Cash paid for interest.......... $ 2,568,015 $ 3,110,116 $ 3,569,421
============ ============ ============

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

Non-cash activities: 1998

Issued common stock, warrants, and stock options valued
at $1,341,883 in connection with the acquisition of
ViroTex

1999

Issued common stock valued at $194,909 in connection
with the May 1999 earn-out payments relating to the
ViroTex acquisition

Recognized compensation expense of $309,380 with
issuance of restricted common stock as an addition to
additional paid-in capital

2000

Issued common stock valued at approximately $15,000,000
to Sanofi-Synthelabo in connection with the marketing
agreement

Issued preferred stock valued at $12,015,000 in exchange
for an 80.1% initial interest in our joint venture with
Elan

Issued common stock valued at $124,627 in connection
with the November 2000 earn-out payments relating to the
ViroTex acquisition

See notes to the consolidated financial statements.
F-7
53

ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Atrix Laboratories, Inc. was formed in August 1986 as a Delaware
corporation. In November 1998, the Company acquired ViroTex. In June 1999, the
Company organized its wholly owned subsidiary Atrix Laboratories Limited, which
is based in London, England. In February 2000, the Company organized its wholly
owned subsidiary Atrix Laboratories GmbH, which is based in Frankfurt, Germany,
to conduct its European operations. Collectively, Atrix Laboratories and its
subsidiaries are referred to as Atrix or the Company. In June 2000, the Company
entered into a research joint venture, Transmucosal Technologies, with Elan, a
wholly owned subsidiary of Elan Corporation, plc.

The Company is an emerging specialty pharmaceutical company focused on
advanced drug delivery. With five unique patented drug delivery technologies,
the Company is currently developing a diverse portfolio of products, including
proprietary oncology, pain management, and dermatology products. The Company
also partners with large pharmaceutical and biotechnology companies to apply its
proprietary technologies to new chemical entities or to extend the patent life
of existing products. The Company has strategic alliances with several
pharmaceutical to use its drug delivery technologies and expertise in the
development of new products.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Atrix Laboratories, Inc., and its wholly owned subsidiaries Atrix Laboratories
Limited and Atrix Laboratories, GmbH. All significant intercompany transactions
and balances have been eliminated. While the Company initially owns 80.1% of
Transmucosal Technologies' outstanding common stock, Elan and its subsidiaries
have retained significant minority investor rights that are considered
"participating rights" as defined in Emerging Issues Task Force Bulletin 96-16,
"Investor's Accounting for an Investor When the Investor Has a Majority of the
Voting Interest, but the Minority Shareholder or Shareholders Have Certain
Approval or Veto Rights." Accordingly, the Company accounts for its investment
in Transmucosal Technologies under the equity method of accounting.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

CASH AND CASH EQUIVALENTS

Cash equivalents include highly liquid investments with an original
maturity of three months or less.

MARKETABLE SECURITIES

Marketable securities are classified as available-for-sale and are carried
at fair market value with the unrealized holding gain or loss included in
shareholders' equity as a component of other comprehensive income (loss).
Premiums and discounts associated with bonds are amortized using the effective
interest rate method.

F-8
54
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK SUBSCRIPTIONS

The note receivable for stock subscriptions is shown as a current asset to
the extent collected before the financial statements are published.

INVENTORIES

Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market. The components of inventories are as follows as of
December 31:

2000 1999
---------- ----------

Raw materials....................................... $1,616,878 $1,486,289
Work in progress.................................... 144,723 300,571
Finished goods...................................... 179,328 75,662
---------- ----------
Total.......................................... $1,940,929 $1,862,522
========== ==========

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, which range from three to
forty years. Leasehold improvements and capital additions to the Company's
building are amortized over the remaining term of the related lease and
estimated useful life respectively. The components of net property, plant and
equipment are as follows as of December 31:

2000 1999
----------- -----------

Land.............................................. $ 1,071,018 $ 1,071,018
Building.......................................... 3,610,068 3,573,695
Leasehold improvements............................ 470,002 470,002
Furniture & fixtures.............................. 440,534 387,549
Machinery......................................... 5,038,815 4,517,952
Office equipment.................................. 813,317 686,958
----------- -----------
Total property, plant and equipment.......... 11,443,754 10,707,174
Accumulated depreciation and amortization......... (4,625,382) (3,592,413)
----------- -----------
Property, plant and equipment, net........... $ 6,818,372 $ 7,114,761
=========== ===========

INTANGIBLE ASSETS

Intangible assets consist of patents, purchased technology, purchased
royalty rights, and goodwill. Patents are stated at the legal cost incurred to
obtain the patents. Upon approval, patent costs are amortized, using the
straight-line method, over their estimated useful life ranging from ten to
twenty years. The values assigned to the purchased technology, purchased royalty
rights, and goodwill arising from the ViroTex acquisition are being amortized
using the straight-line method over the period of expected benefit of four to
five years.

VALUATION OF LONG-LIVED ASSETS

The Company reviews its long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If this review indicates
that these assets will not be recoverable, based on the forecasted
non-discounted future operating cash flows expected to result from the use of
these assets and their eventual disposition, the carrying value of

F-9
55
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

these assets is reduced to fair value. Management does not believe current
events or circumstances indicate that long-lived assets, including goodwill, are
impaired as of December 31, 2000.

DEFERRED FINANCE COSTS

Costs associated with the issuance of the 7% convertible subordinated notes
were deferred and are being amortized on a straight-line basis over the
seven-year term of the notes. As convertible notes are repurchased and
subsequently extinguished, the pro-rata portion of unamortized deferred finance
costs is written off.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Unless otherwise stated herein, the fair value of the Company's financial
instruments approximate their carrying value due to the relatively short periods
to maturity of the instruments and/or variable rates of the instruments, which
approximate current interest rates.

REVENUE RECOGNITION

The Company recognizes revenue on product sales and contract manufacturing
at the time of shipment. Royalty revenue is recognized at the time of shipment
by the licensee and is reported with net sales revenue.

Contract research and development revenue, with the exception of the joint
venture with Elan and the partnership agreement with Geneva Pharmaceuticals, is
recognized on a straight-line basis over the estimated time frame to complete
the work detailed in each agreement. Contract research and development revenue,
as it relates to work performed on behalf of the joint venture with Elan, is
recognized as approved costs are incurred and subsequently charged back to the
joint venture. Contract research and development revenue as it relates to work
performed under the agreement with Geneva Pharmaceuticals is recognized as
research work is performed and costs are incurred for Geneva's share of costs.

The Company previously recognized nonrefundable technology access fees and
milestone payments as revenue when received and when the Company fulfilled all
contractual obligations relating to the fees and milestone payments. Effective
in the fourth quarter of 2000, the Company changed its method of accounting for
nonrefundable technology access fees and milestone payments to recognize such
payments over the term of the related agreements in accordance the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101 -- Revenue
Recognition in Financial Statements. The $20,611,526 cumulative effect of a
change in accounting principle was reported as a charge in the year ended
December 31, 2000. The cumulative effect was recorded as deferred revenue that
will be recognized as revenue over the remaining contractual terms of the
specific agreements. During the year ended December 31, 2000, the impact from
the change in accounting principle increased net loss by approximately
$18,734,000, or $1.58 per share. This amount is comprised of approximately
$20,612,000, or $1.73 per share, cumulative effect of the change as described
above, net of approximately $1,878,000, or $0.16 per share, recognized as
revenue during the year. The remainder of the related deferred revenue will be
recognized as revenue approximately as follows: $1,885,000 for each year from
2001 through 2010 and $11,000 for each year from 2011 through 2015 and $2,000 in
2016.

RESEARCH AND DEVELOPMENT

Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects, as well as fees paid to various entities that
perform certain research on the Company's behalf. A portion of overhead costs is
allocated to research and development costs on a weighted-average percentage
basis among all projects under development.

F-10
56
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share excludes dilution and is computed
by dividing net income (loss) by the weighted-average number of common shares
outstanding during the periods presented. Diluted net income (loss) per common
share reflects the potential dilution of securities that could participate in
the earnings. Stock options, warrants outstanding and their equivalents are
included in diluted earnings per share computations through the "treasury stock
method" unless they are antidilutive. Convertible securities are included in
diluted earnings per share computations through the "if converted" method unless
they are antidilutive. The effect of assuming conversion of the Series A
convertible preferred stock is excluded from the diluted earnings per share
computations since the conversion option commences July 18, 2002. Additionally,
since the Company did not draw any proceeds under the convertible promissory
note agreement with Elan as of December 31, 2000, there was no effect on
earnings per share computations pertaining to this convertible promissory note
for the periods presented. Common share equivalents are excluded from the
computations in loss periods, as their effect would be antidilutive. For the
years ended December 31, 2000 and 1999 approximately 2.3 million, and 1.9
million equivalent dilutive securities (primarily convertible notes and common
stock options), respectively, have been excluded from the weighted-average
number of common shares outstanding for the diluted net loss per share
computations as they are antidilutive. Additionally, for the year ended December
31, 1998, approximately 2.6 million equivalent dilutive securities for
convertible notes were excluded from the weighted-average number of common
shares outstanding for the net income per share computation as they are
antidilutive. The notes were antidilutive as a result of assuming the
elimination of interest expense under the "if converted" method for the year
ended December 31, 1998. Also for the year ended December 1998, approximately
429,000 equivalent dilutive securities for common stock options were excluded
from the weighted-average number of common shares outstanding for the net income
per share computation due to the insignificant effect.

NEW ACCOUNTING PRONOUNCEMENTS

Effective in the fiscal fourth quarter of 2000, the Company changed its
method of accounting for nonrefundable technology access fees and milestone
payments to recognize such payments as revenue over the term of the related
agreements. The change in accounting principle is based on guidance provided in
the Securities and Exchange Commission's Staff Accounting Bulletin No.
101 -- Revenue Recognition in Financial Statements. Previously, the Company
recognized $24,100,000 for nonrefundable technology access fees and milestone
payments as revenue when received and when the Company fulfilled all contractual
obligations relating to the fees and milestone payments. The Company recorded a
$20,612,000 cumulative effect for this change in accounting principle which was
reported as a charge in the year ended December 31, 2000. The cumulative effect
was recorded as deferred revenue that will be recognized as revenue over the
remaining contractual terms for each of the specific agreements. During the year
ended December 31, 2000, the impact of the change in accounting principle
increased net loss by approximately $18,734,000, or $1.58 per share. This amount
is comprised of approximately $20,612,000, or $1.73 per share, cumulative effect
of the change as described above, net of approximately $1,878,000, or $0.16 per
share, recognized as revenue during the year. The remainder of the related
deferred revenue will be recognized as revenue approximately as follows:
$1,885,000 for each year from 2001 through 2010 and $11,000 for each year from
2011 through 2015 and $2,000 in 2016.

In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued which, as amended, was effective for all fiscal
years beginning after June 15, 1999. SFAS No. 133 provides new standards for the
identification, recognition and measurement of derivative financial instruments,
including embedded derivatives. Historically, the Company has not entered into
derivative contracts to hedge existing risks nor has the Company entered into
speculative derivative contracts. Although the Company's convertible debt and
preferred stock include conversion features that are considered to be embedded

F-11
57
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

derivatives, accounting for those instruments is not affected by SFAS No. 133.
The adoption of SFAS No. 133 on January 1, 2001 did not result in a transition
adjustment in the financial statements.

COMPREHENSIVE INCOME

Disclosure of comprehensive income for the years ended December 31, 2000,
1999, and 1998 is included in the accompanying financial statements as part of
the consolidated statements of shareholders' equity.

STOCK OPTION PLANS

The Company accounts for stock-based compensation to employees and
directors using the intrinsic value method. The Company accounts for stock-based
compensation to non-employees using a fair value based method. Pro forma
operating results showing the impact of using the intrinsic value method instead
of the fair value method for employee stock options is provided in Note 8.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the financial
statement basis and the income tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future. Such deferred income tax
liability computations are based on enacted tax laws and rates applicable to the
years in which the differences are expected to affect taxable income. A
valuation allowance is established when it is necessary to reduce deferred
income tax assets to the expected realized amounts.

TRANSLATION OF FOREIGN CURRENCIES

The Company's primary functional currency is the United States dollar.
Foreign subsidiaries with a functional currency other than the U.S. dollar
translate balance sheet accounts at period-end exchange rates. Revenue and
expense accounts are translated at average exchange rates in effect during the
period. Translation adjustments are recorded as a component of comprehensive
income. Some of the Company's transactions and transactions of its subsidiaries
are made in currencies different from their functional currency. Gains and
losses from these transactions are included in other income or expense as they
occur. To date, the effect on income and expenses for such amounts has been
immaterial.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current
year's financial statement presentation.

F-12
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. MARKETABLE SECURITIES

As of December 31, 2000 marketable securities consist of the following:

NUMBER OF SHARES OR FAIR
PRINCIPAL AMOUNT COST MARKET VALUE
------------------- ----------- ------------

U.S. Government and Agency Bond Funds:
Thornburg Fund....................... 48,172 Shares $ 604,822 $ 592,514
Pimco Fund........................... 661,342 Shares 7,097,314 6,871,345
----------- -----------
Total............................. 7,702,136 7,463,859
U.S. Government and Agency Bonds....... $21,695,000 21,692,107 21,446,580
----------- -----------
Total............................. $29,394,243 $28,910,439
=========== ===========

As of December 31, 1999 marketable securities consist of the following:

NUMBER OF SHARES OR FAIR
PRINCIPAL AMOUNT COST MARKET VALUE
------------------- ----------- ------------

U.S. Government and Agency Bond Funds:
Thornburg Fund....................... 45,496 Shares $ 572,871 $ 540,494
Pimco Fund........................... 622,446 Shares 6,707,337 6,162,219
----------- -----------
Total............................. 7,280,208 6,702,713
U.S. Government and Agency Bonds....... $29,265,000 29,271,567 28,153,984
----------- -----------
Total............................. $36,551,775 $34,856,697
=========== ===========

As of December 31, 2000 gross unrealized gains and losses pertaining to
marketable securities were $-0-and $483,805 respectively. As of December 31,
1999 gross unrealized gains and losses pertaining to marketable securities were
$-0- and $1,695,079, respectively. Realized investment gains and losses are
included in investment income and included gains of $-0-, $608, and $28,186 in
2000, 1999, and 1998, respectively, and losses of $171,583, $140,958, and $-0-,
in 2000, 1999, and 1998, respectively. Fair value of these marketable securities
is based on quoted market prices or dealer quotes.

3. INTANGIBLE ASSETS

Intangible assets consist of the following as of December 31:

2000 1999
----------- -----------

Patents........................................... $ 2,115,194 $ 1,864,185
Purchased technology.............................. 2,800,000 2,800,000
Purchased royalty rights.......................... 600,000 600,000
Goodwill.......................................... 933,341 793,838
----------- -----------
Sub-total.................................... 6,448,535 6,058,023
----------- -----------
Less: Accumulated amortization.................... (2,399,431) (1,477,698)
----------- -----------
Total........................................ $ 4,049,104 $ 4,580,325
=========== ===========

4. LINE OF CREDIT

The Company has a revolving line of credit with a bank that expires in
August 2001. Under the terms of the line of credit, the Company may borrow up to
$1,000,000. Borrowings under the line bear interest at the

F-13
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

prime rate and are subject to financial covenants requiring the Company to
maintain certain levels of net worth and liquidity. As of December 31, 2000, the
Company had no outstanding balance under this line.

5. CONVERTIBLE SUBORDINATED NOTES PAYABLE

In November 1997, the Company issued $50,000,000 of convertible
subordinated notes. The notes bear interest at the rate of 7% and are due in
2004. The notes are convertible, at the option of the holder, into the Company's
common stock, $.001 par value, at any time prior to maturity, unless previously
redeemed or repurchased, at a conversion price of $19.00 per share, subject to
adjustments in certain events. The notes are redeemable, in whole or in part, at
the Company's option, on or after December 5, 2000.

In 2000, the Company repurchased a total of $500,000 of the notes in the
open market for approximately $415,000, which includes approximately $7,000 for
accrued interest paid. As a result, the Company recognized an extraordinary gain
of approximately $80,000, net of unamortized deferred finance charges of
approximately $12,000. In 1998 and 1999, the Company repurchased $1,500,000 and
$11,810,000 of the notes and recognized an extraordinary gain of approximately
$257,000 and $3,275,000 respectively. As of December 31, 2000 and 199, the notes
payable balance was $36,190,000 and $36,690,000 respectively. The estimated fair
value of the notes payable, based on quoted market prices or dealer quotes, was
approximately $37,226,000 and $21,464,000 at December 31, 2000 and 1999
respectively.

6. COLLABORATIVE ARRANGEMENTS

Sanofi-Synthelabo, Inc.

In December 2000, the Company entered into an exclusive North American
marketing agreement with Sanofi-Synthelabo, a major international pharmaceutical
company, for the One-, Three-, and Four-month Leuprogel products for the
treatment of prostate cancer.

Under the terms of the agreement the Company is to receive a license fee,
research and development support and payments for certain clinical, regulatory
and sales milestones. In addition to the milestone payments, the Company will
receive royalty payments based on sales of the Leuprogel products upon approval
for marketing by the FDA. The Company will manufacture Leuprogel at its facility
in Fort Collins, Colorado.

As part of the agreement, Sanofi-Synthelabo purchased 824,572 shares of the
Company's common stock for approximately $15 million. Additionally, included in
deferred revenue is the license fee of $8 million that was deferred and will be
amortized to revenue over a ten-year period using the straight-line method
beginning in 2001. The $15 million for the stock purchase and the $8 million for
the license fee are included in notes receivable -- stock subscription and other
at December 31, 2000. These amounts were collected in January 2001.

Pfizer, Inc.

In August 2000, the Company executed a comprehensive research and worldwide
licensing agreement with Pfizer to provide broad-based access to the Company's
proprietary drug delivery systems in the development of new products. Pfizer
will provide funding to develop and commercialize their selected compounds using
Atrix's patented drug delivery technologies. The Company retained manufacturing
rights and will receive royalties on the sales of products that are successfully
developed and commercialized under this agreement. Pfizer also purchased 447,500
shares of the Company's common stock for $5 million as part of the agreement.

F-14
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Elan International Services, Ltd.

The Company's joint venture, Transmucosal Technologies, with Elan
International Services, Ltd., a wholly owned subsidiary of Elan Corporation,
plc, was formed with the purpose of developing and commercializing oncology and
pain management products. The first compound selected to develop in the joint
venture was the opiate analgesic, fentanyl, using the BEMA drug delivery system
for breakthrough cancer pain and management of chronic pain. This joint venture
will use the patented BEMA and Atrigel drug delivery systems and Elan's
nanoparticulate drug delivery technology to deliver compounds targeted for major
unmet medical needs in oncology and pain management.

In connection with the formation of the joint venture in July 2000, Elan
purchased 12,015 shares of the Company's Series A convertible exchangeable
preferred stock for $12,015,000. The Company used the proceeds of the preferred
stock sale to purchase 6,000 shares of Transmucosal Technologies' common stock
and 3,612 shares of their preferred stock to fund its share of the joint
venture's initial capitalization. This preferred stock bears an annual dividend
of 7%, accruing semi-annually and payable by the issuance of additional shares
of preferred stock. This preferred stock is convertible at any time after July
2002, at Elan's option, into the Company's common stock at a price equivalent to
$18.00 per share, subject to a weighted average anti-dilution adjustment.
Additionally, in the event of a merger or consolidation of Atrix, or a sale of
the Company's common stock in an underwritten public offering, the Company has
the option to convert the Series A preferred stock into its common stock. As of
December 31, 2000 the Company had accrued dividends of approximately $383,000.
Alternatively, Elan has an option to exchange this preferred stock for a 30.1%
interest in the joint venture, increasing Elan's ownership in Transmucosal
Technologies to 50% and decreasing Atrix's ownership in the joint venture to
50%. This exchange option, if exercised within the first two years of formation
of the joint venture, provides that the preferred stock will be exchanged for
non-voting convertible preferred stock of Transmucosal Technologies. This
exchange right will terminate if the preferred stock is converted into Atrix's
common stock, unless Atrix causes the conversion. The Series A preferred stock
must be redeemed by the Company in July 2006 for either cash or shares of the
Company's common stock, at the Company's option, in an amount or value equal to
the liquidation preference. Under the terms of the related agreements,
Transmucosal Technologies paid $15,000,000 to Elan for a license giving the
joint venture exclusive rights to use Elan's nanoparticulate drug delivery
technology.

In July 2000, Elan purchased 442,478 shares of the Company's common stock
for $5,000,000 and the Company issued Elan a five-year warrant to purchase up to
1,000,000 shares of its common stock for $18 per share, in conjunction with the
formation of its joint venture. The warrant expires in July 2005 and may be
exercised for $18.00 per share.

Elan may also loan Atrix up to $8,010,000 to support the Company's share of
the joint venture's research and development costs pursuant to a convertible
promissory note issued by us to Elan. During the year ended December 31, 2000,
the Company recognized approximately $251,000 in contract revenues for research
and development activity performed for Transmucosal Technologies.

The joint venture, for the year ended December 31, 2000, had a net loss of
approximately $15,279,000 for which the Company recognized 80.1%, or
approximately $12,239,000 as equity in the loss. The net loss includes the
one-time, non-cash charge to research and development expense of $15,000,000 for
a license fee paid by the joint venture to Elan for exclusive access to Elan's
nanoparticulate drug delivery technology.

Geneva Pharmaceuticals, Inc.

In August 2000, the Company also entered into a collaborative, development
and supply agreement with the Novartis company -- Geneva Pharmaceuticals, to
conduct research and development activities on a collaborative basis to develop
designated prescription generic dermatology products. Under the agreement, Atrix
will be responsible for validation, formulation, development and required
clinical studies of selected

F-15
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

products. Geneva will be responsible for market research and commercialization
of the products. Geneva will reimburse the Company for a portion of the research
and development expenses Atrix incurs and both parties will share in the net
profits from the sale of the products. Atrix will recognize contract research
and development revenue for Geneva's portion of the costs relating to the
research and development expenses as they are incurred pertaining to the
products covered under this agreement.

Del Pharmaceuticals, Inc.

In September 2000, the Company announced the nationwide sales launch of
Orajel-Ultra Mouth Sore Medicine, a new over-the-counter oral care product based
on a patented drug delivery system. Under the terms of the agreement with
marketing partner, Del Pharmaceuticals, the Company will receive a royalty on
net sales. Additionally, the Company received licensing fees of $175,000 from
Del Pharmaceuticals in 2000. This licensing fee revenue is being amortized
through February 2016.

Pharmacia &Upjohn Animal Health

Pharmacia & Upjohn Animal Health, a division of Pharmacia Corporation,
replaced Heska Corporation in April 2000 as the Company's marketing partner for
a product to treat periodontal disease in companion animals. The Company
manufactures the product and receives manufacturing margins.

J.B. Williams Company

As part of the Company's acquisition of ViroTex in November 1998, Atrix
acquired the over-the-counter product Viractin Cold Sore & Fever Blister
Medicine. J.B. Williams Company markets Viractin and Atrix receives royalty
payments on net sales.

Block Drug Corporation/GlaxoSmithKline, plc

On December 17, 1996, the Company entered into an agreement with Block Drug
Corporation ("Block"), which became a wholly owned subsidiary of
GlaxoSmithKline, plc in January 2001. Under the terms of the agreement, Block
acquired the North American marketing rights to the Atrisorb GTR Barrier
products and Atrisorb-Doxy products, and the rights to market the Atridox
product in the United States and Canada.

The agreement provides for potential milestone payments totaling up to $50
million to Atrix over a three-to-five year period, as well as manufacturing
margins and royalties on sales. Prior to 2000, Atrix received $24.1 million in
milestone payments under the agreement. No additional milestone payments were
received in 2000.

Several disputes exist with Block concerning product pricing and the
payments due upon achievement of milestones. With respect to product pricing,
arbitration began in December 2000 to resolve the issue as to the minimum price
Block must pay for products under the agreement. An arbitration hearing has been
set for July 25, 2001. We intend to vigorously pursue our rights with respect to
the minimum price.

With respect to milestone payments, the milestone for the FDA approval of
the Atrisorb-Doxy Barrier product was achieved in 2000 and the corresponding
payment of $1,000,000 was due. Block has not made this payment. Pursuant to the
agreement with Block, the Company will be entitled to an additional milestone
payment of $2,000,000 upon Block's first commercial sale of the Atrisorb-Doxy
Barrier product in the United States. The agreement provides that the first
commercial sale of this product in the U.S. must occur within 120 days after FDA
approval, subject to certain conditions that have been satisfied. The Company
has notified Block that they are in breach of the agreement for failure to
commence marketing of the Atrisorb-Doxy barrier product. The FDA approved the
Atrisorb-Doxy Barrier product in September 2000. An arbitrator has

F-16
62
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

been selected with respect to this dispute, but no schedule or hearing has been
set. The Company intends to vigorously pursue its right to these milestone
payments.

7. ACQUISITION OF VIROTEX

In November 1998, the Company acquired the common stock of ViroTex. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the assets and liabilities of ViroTex were recorded at their fair
value at the date of acquisition. The results of operations of ViroTex have been
included in the Company's financial statements since the date of acquisition.
Total consideration paid was $7,693,749 as follows: cash of $6,201,556, issuance
of 37,860 shares of common stock valued at $389,958, stock options to purchase
113,229 shares of common stock valued at $921,370, a warrant to purchase 6,750
shares of common stock valued at $30,556, and transaction expenses of $150,309.
The total purchase price of $7,693,749 was allocated to the fair value of the
assets, based primarily on an independent third-party valuation, as follows:

Net tangible assets......................................... $ 667,944
----------
Intangible assets:
Purchased in process research and development............. 3,050,000
Purchased technology...................................... 2,800,000
Purchased royalty rights.................................. 600,000
Goodwill.................................................. 575,805
----------
Total....................................................... $7,025,805
==========
Net assets purchased........................................ $7,693,749
==========

The Company expensed $3,050,000 of the purchase price, which was allocated
to in-process research and development projects, as of the acquisition date. The
projects were valued based on an independent third-party valuation. At the time
of the agreement, additional consideration of up to $3,000,000 was payable, in
shares of common stock or cash upon the satisfaction of certain defined earn-out
events related to the performance of certain ViroTex products. In 2000 and 1999,
the Company made payments totaling approximately $140,000 and $218,000,
respectively, under the earn-out provisions of the merger agreement. All
earn-out payments have been recorded as additional goodwill and are being
amortized over the remaining estimated useful life of the goodwill. At December
31, 2000, no additional earn-outs are available to be paid under the agreement.

The following unaudited pro forma results of operations for the year ended
December 31, 1998 assumes the purchase of ViroTex had occurred as of January 1,
1998:

1998
-----------

Total revenues.............................................. $25,260,962
Net income (loss)........................................... $ (142,921)
Basic net income (loss) per Common share.................... $ (0.01)

The pro forma results of operations include adjustments to give effect to
amortization of goodwill and other intangible assets, the write-off of purchased
in-process research and development and certain other adjustments. The unaudited
pro forma financial information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made as of January 1,
1998, or the future results of combined operations.

F-17
63
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. STOCK OPTION PLANS

As of December 31, 2000, the Company has three stock-based compensation
plans, which are discussed below.

1987 Performance Stock Option Plan

The Company has reserved 2,500,000 of its authorized but unissued common
stock for stock options to be granted under the 1987 Plan. Under the terms of
the 1987 Plan, as amended, options generally vest ratably over a period of three
years from the date of grant and expire after ten years. The exercise price of
all options is the closing bid price of the stock on the date of grant. There
are 1,509 shares that remain available under the 1987 Plan for future employee
stock option grants.

The following tables summarize information on stock option activity for the
1987 Plan:

WEIGHTED-
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- -------------- --------------

Options outstanding, December 31, 1997...... 1,023,397 $ .50 - 21.75 $ 8.45
Options granted........................... 409,169 1.18 - 19.00 9.60
Options canceled or expired............... (12,190) .50 - 12.50 8.22
Options exercised......................... (145,222) 10.50 - 20.00 1.58
--------- -------------- ------
Options outstanding, December 31, 1998...... 1,275,154 .50 - 21.75 9.60
Options granted........................... 342,390 5.38 - 12.88 13.98
Options canceled or expired............... (68,942) .50 - 21.75 12.30
Options exercised......................... (120,650) 8.75 - 15.00 11.15
--------- -------------- ------
Options outstanding, December 31, 1999...... 1,427,952 5.38 - 20.75 9.54
Options granted........................... 289,450 7.88 - 16.25 9.53
Options canceled or expired............... (71,526) 5.50 - 18.94 9.37
Options exercised......................... (135,352) 9.00 - 19.00 14.67
--------- -------------- ------
Options outstanding, December 31, 2000...... 1,510,524 $ 5.38 - 20.75 $ 9.61
--------- -------------- ------

Options outstanding are available for exercise as
follows:
Exercisable at December 31, 2000............ 972,784 $ 9.90
Exercisable at December 31, 1999............ 884,743 $ 9.57

NUMBER WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT AVERAGE WEIGHTED- EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, EXERCISE PRICE
EXERCISE PRICES 2000 CONTRACTUAL LIFE EXERCISE PRICE 2000 EXERCISABLE
--------------- -------------- ---------------- -------------- -------------- --------------

$ 6.75 - 6.88 73,000 4 years $ 6.80 73,000 $ 6.80
6.63 - 11.63 94,338 5 years 8.38 94,338 8.38
5.88 - 14.00 439,201 6 years 8.78 439,201 8.78
11.38 - 20.75 163,936 7 years 16.72 148,157 16.66
9.19 - 14.44 289,284 8 years 10.38 159,799 10.47
5.38 - 16.25 450,765 9 years 8.07 58,289 6.04
--------- ---------- ------ ------- ------
$ 5.38 - 20.75 1,510,524 7.58 years $ 9.61 972,784 $ 9.90
========= ========== ====== ======= ======

F-18
64
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2000 Stock Incentive Plan

The Company reserved 1,750,000 of its authorized but unissued common stock
for stock options to be granted under the 2000 Plan. Under the terms of the 2000
Plan, options generally vest ratably over a period of three years from the date
of grant and expire ten years after grant. The exercise price of all options is
the closing bid price of the stock on the date of grant. There are 685,675
shares that remain available under the 2000 Plan for future employee stock
option grants. The following tables summarize information about stock options
outstanding under the 2000 Plan as of December 31, 2000 and for the year then
ended:

WEIGHTED-
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- -------------- --------------

Options granted.............................. 1,064,325 $9.00 - 18.88 $12.09
Options canceled or expired.................. (3,840) 9.00 - 15.19 10.60
Options exercised............................ (0) N/A N/A
--------- ------------- ------
Options outstanding, December 31, 2000....... 1,060,485 $9.00 - 18.88 $12.09
========= ============= ======

$9.00 - 9.64 407,350 9 years $ 9.64 0 $-0-
9.38 - 18.88 653,135 10 years 13.61 0 -0-
--------- ---------- ------ -- ----
$9.00 - 18.88 1,060,485 9.70 years $12.09 0 $-0-
========= ========== ====== == ====

Non-Employee Director Stock Incentive Plan

During the year ended December 31, 1999, the Company adopted a Non-Employee
Director Stock Incentive Plan ("DSI Plan"). The purposes of the DSI Plan are to
attract and retain the best available Non-Employee Directors, to provide them
additional incentives, and to promote the success of the Company's business.
This DSI Plan is comprised of two components: an "Automatic Option Grant
Program" and a "Stock Fee Program."

Automatic Option Grant Program

Immediately following each annual meeting of the Company's stockholders,
commencing with the 1999 Annual Stockholders' Meeting, each Non-Employee
Director is granted a Non-Qualified Stock Option to purchase 4,000 (5,000 in the
case of the Chairman) shares of the Company's common stock. These options vest
ratably over a period of three years. The exercise price of each option, which
has a maximum ten-year life, is equal to the market price of the Company's
common stock on the date of the grant. All options awarded under this portion of
the plan are made under the "Performance Stock Option Plan". For the year ended
December 31, 2000, 38,400 stock options were issued and none were exercised
under this program. The exercise price of these options range from $9.00 to
$18.25.

Stock Fee Program

Commencing with the 1999 Annual Stockholders' Meeting, each Non-Employee
Director will receive an annual retainer fee. Each Non-Employee Director was
eligible to elect to apply all or any portion of the retainer fee to the
acquisition of shares of restricted common stock or the receipt of stock
options. The portion of the fee subject to election of restricted common stock
is determined by dividing the elected dollar

F-19
65
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amount by the fair market value per share on the date the fee is due to be paid.
The restricted common stock vests ratably over a period of three years.

Beginning with the August 2000 meeting, the annual retainer was amended to
provide each Non-Employee Director with 2,800 stock options in place of the
retainer fee. The options vest ratably over a period of three years. The
exercise price of each stock option, which has a maximum ten-year life, is equal
to the market price of the Company's common stock on the date of the grant.

The maximum aggregate number of restricted shares that may be issued under
the Stock Fee Program portion of the plan is 25,000 shares. During the year
ended December 31, 2000 and 1999, the Non-Employee Directors elected to have
3,092 and 2,474 shares of Restricted Common Stock issued, respectively and no
stock options were elected to be issued. There are 19,434 shares that remain
available under this program.

PRO FORMA EFFECT OF STOCK OPTION ISSUANCES

The Company accounts for the 1987 Plan and the 2000 Plan using the
intrinsic value. Accordingly, no compensation expense has been recognized for
stock option grants. Had compensation cost been determined based on the fair
value of the options at the grant dates of awards under the 1987 Plan consistent
with SFAS No. 123, the Company's net income (loss) applicable to common stock
and basic and diluted income (loss) per common share would have been changed to
the pro forma amounts indicated below:

2000 1999 1998
------------ ------------ ----------

Net income (loss) applicable to common
stock:
-- as reported........................... $(47,410,683) $(13,270,226) $1,690,046
-- pro forma............................. $(51,498,161) $(14,911,956) $ 76,088
Basic and diluted net income (loss) per
common share:
-- as reported........................... $ (3.99) $ (1.17) $ .15
-- pro forma............................. $ (4.33) $ (1.32) $ .01

The weighted-average Black-Scholes fair value per option granted in 2000,
1999, and 1998 was $5.65, $5.63, and $5.29, respectively. The fair value of
options was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for grants in
2000, 1999, and 1998: no dividend yield, expected volatility of 59.14% for 2000,
52.5% for 1999, and 47.7% for 1998, risk free interest rate of 7.0%, and
expected life of five years.

NON-QUALIFIED STOCK OPTION PLAN

The Company has reserved 150,000 of its authorized but unissued common
stock for stock options to be granted to outside consultants under its
Non-Qualified Stock Option Plan. The Compensation Committee sets the options
price and exercise terms granted under the Non-Qualified Plan. The exercise
price of all options granted under the Non-Qualified Plan currently outstanding
has been the closing market price at the date of grant. There are 52,020 shares,
which remain available under the Non-Qualified Plan for future stock option
grants.

The Company accounts for grants under the Non-Qualified Plan at fair value.
The weighted-average fair value per option, granted under the Non-Qualified Plan
in 2000 and 1998 was $4.66 and $7.80, respectively. The fair value of options
granted under the Non-Qualified Plan was estimated on the grant date using the
Black-Scholes option-pricing model. The following weighted-average assumptions
were used in 2000 and 1999: no dividend yield, expected volatility of 59.14% for
2000 and 47.7% for 1999, risk free interest rate of 7.0%, and expected lives of
five years.

F-20
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information on stock option activity for the
Non-Qualified Plan.

WEIGHTED-
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- -------------- --------------

Options outstanding, December 31, 1997....... 31,480 $5.13 - 16.50 $ 8.92
Options granted............................ 3,000 15.38 15.38
Options exercised.......................... -- -- --
------ ------------- ------
Options outstanding, December 31, 1998....... 34,480 5.13 - 16.50 8.67
Options granted............................ -- -- --
Options exercised.......................... (1,000) 7.00 7.00
------ ------------- ------
Options outstanding, December 31, 1999....... 33,480 5.13 - 16.50 8.67
Options granted............................ 20,000 6.00 - 10.13 8.06
Options exercised.......................... (4,480) 6.63 6.63
------ ------------- ------
Options outstanding, December 31, 2000....... 49,000 $5.13 - 16.50 $ 9.21
Options vest as follows:
Currently exercisable...................... 48,000 9.08
2001.................................... 1,000 15.38
------ ------
TOTAL...................................... 49,000 $ 9.21
====== ======

The following table summarizes information about stock options outstanding
under the Non-Qualified Plan as of December 31, 2000:

$ 5.13 7,000 4 years $ 5.13 7,000 $ 5.13
7.00 4,000 5 years 7.00 4,000 7.00
9.50 - 16.50 15,000 6 years 12.01 15,000 12.01
15.38 3,000 7 years 15.38 2,000 15.38
6.00 - 10.13 20,000 9 years 8.06 20,000 8.06
------ ---------- ------ ------ ------
$5.13 - 16.50 49,000 6.92 years $ 9.21 48,000 $ 9.08
====== ========== ====== ====== ======

F-21
67
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES

Net deferred tax assets at December 31, consist of:

2000 1999
----------- -----------

Deferred tax assets:
Net operating loss carry forwards............... $27,975,901 $22,793,308
Research and development tax credit
carryforwards................................ 2,319,738 1,967,066
Amortization of intangibles..................... 1,929,018 2,124,879
Deferred revenue................................ 7,688,099 --
Depreciation.................................... 114,972 104,449
Other items..................................... 415,913 296,266
----------- -----------
Net deferred tax assets................. 40,443,641 27,285,968
----------- -----------
Less valuation allowance........................ 40,443,641 27,285,968
----------- -----------
Total................................... $ -0- $ -0-
=========== ===========

At December 31, 2000, the Company has $74,864,290 of income tax net
operating loss carryforwards and $2,319,738 of research and development credits,
which expire through 2020. Included in the deferred tax asset for net operating
loss carryforwards are benefits from the exercise of employee stock options of
$3,999,792, which when subsequently recognized will be allocated to additional
paid in capital.

A reconciliation of the differences in income tax expense from income
(loss) computed at the federal statutory rate and income tax expense as recorded
for the year ended December 31 are as follows:

2000 1999 1998
------------ ----------- -----------

Income tax computed at federal statutory
rate:..................................... $(16,119,632) $(4,511,877) $ 590,998
State income taxes -- net of federal
benefit................................... (1,564,553) (437,917) 57,362
Meals and entertainment..................... 9,352 9,569 8,457
Exercise of employee stock options.......... (444,876) (351,991) (593,368)
Research and development.................... (352,672) (359,027) (1,110,854)
Other....................................... 5,314,708 (1,059,171) 15,316
Change in valuation allowance............... 13,157,673 6,710,414 1,080,272
------------ ----------- -----------
Income tax expense.......................... $ 0 $ 0 $ 48,183
============ =========== ===========

10. SEGMENT AND CUSTOMER INFORMATION

The Company operates in a single reportable segment and all revenues from
customers are primarily from a similar group of periodontal products. Product
net sales, royalty revenues and milestone revenues from one customer, Block,
amounted to approximately $3,001,000, $3,176,000, and $19,028,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. Accounts receivable
balances from Block were approximately $953,000 and $502,000 as of December 31,
2000 and 1999 respectively. Revenues from export sales to customers outside of
North America amounted to approximately $852,000, $758,000, and $557,000 for the
years ended December 31, 2000, 1999, and 1998, respectively.

F-22
68
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. COMMITMENTS

As of December 31, 2000, minimum rental commitments under non-cancelable
operating leases of one year or more are approximately as follows:

YEAR ENDING MINIMUM RENTAL
DECEMBER 31 COMMITMENTS
----------- --------------

2001.......................................... $352,000
2002.......................................... 361,000
2003.......................................... 200,000
2004.......................................... 46,000
2005.......................................... 19,000
--------
Total......................................... $978,000
========

Rent expenses were approximately $344,000, $330,000, and $276,000 for the
following years ended December 31, 2000, 1999, and 1998, respectively.

12. BENEFIT PLANS

The Company has a 401(k) employee savings plan that allows eligible
employees to contribute from 1% to 17% of their income to the Savings Plan. The
Company matches 50% of the first 6% of the employees' contributions. Matching
contributions to the Savings Plan were $105,848, $119,120, and $91,889 for the
following years ended December 31, 2000, 1999, and 1998, respectively.

The Company has an Employee Stock Purchase Plan that provides eligible
employees with the opportunity to purchase shares through authorized payroll
deductions at 85% of the average market price on the last day of each quarter.
The Company reserved 300,000 shares of its authorized but unissued common stock
for issuance under the ESPP, of which 282,663 shares remain available at
December 31, 2000.

13. COMMON STOCK

The Company's Board of Directors has authorized the repurchase of up to $20
million of the 7% Convertible Subordinated Notes or shares of Common Stock. As
of December 31, 2000, the Company had repurchased 157,000 shares of its common
stock for approximately $1,651,000. In 1999, 149,310 and in 2000, 7,690 shares
of the Company's treasury stock were reissued under the ESPP, the Performance
Stock Option Plan and the Non-Qualified Plan.

During 1999, the Company granted an officer the right to purchase up to
50,000 shares of common stock at the market price on the date of purchase. Upon
purchase, the Company agreed to match the number of shares acquired for no
additional consideration. This arrangement extended for the term of the
officer's employment. In 1999, 40,000 shares were purchased and 40,000 shares
were issued to match the stock purchases resulting in the recognition of
$309,380 compensation expense. In 2000, 10,000 shares were purchased and 10,000
matching shares were issued resulting in the recognition of $75,620 compensation
expense. There are no additional shares available to be acquired under this
arrangement.

F-23
69
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following summarizes the quarterly financial information for the year
ended December 31, 2000:

2000 FISCAL QUARTERS
------------------------------------------------------- FISCAL
FIRST SECOND THIRD FOURTH 2000
------------ ----------- ------------ ----------- ------------

Sales......................... $ 1,157,401 $ 1,663,336 $ 1,767,564 $ 1,567,926 $ 6,156,227
Gross profit.................. 698,140 999,476 957,148 857,271 3,512,035
Loss before extraordinary and
cumulative effect of change
in accounting principle..... (3,139,802) (3,340,285) (16,007,349) (4,007,788) (26,496,558)
Net loss applicable to common
stock....................... (23,751,328) (3,340,285) (16,097,957) (4,221,113) (47,410,683)
------------ ----------- ------------ ----------- ------------
Basic and diluted earnings per
common share before
extraordinary and cumulative
effect of change in
accounting principle........ (.27) (.29) (1.32) (.32) (2.23)
------------ ----------- ------------ ----------- ------------
Basic and diluted earnings per
common share for net loss
applicable to common
stock....................... (2.08) (.29) (1.33) (.34) (3.99)
============ =========== ============ =========== ============

The following summarizes the quarterly financial information for the year
ended December 31, 1999:

1999 FISCAL QUARTERS
----------------------------------------------------- FISCAL
FIRST SECOND THIRD FOURTH 1999
----------- ----------- ----------- ----------- ------------

Sales........................... $ 1,228,719 $ 1,322,384 $ 1,250,017 $ 740,583 $ 4,541,703
Gross profit.................... 526,503 1,076,648 658,454 306,089 2,567,694
Loss before extraordinary and
cumulative effect of change in
accounting principle.......... (3,514,209) (4,427,047) (3,909,279) (4,694,286) (16,544,821)
Net loss applicable to common
stock......................... (2,746,910) (4,159,457) (3,909,279) (2,454,580) (13,270,226)
----------- ----------- ----------- ----------- ------------
Basic and diluted earnings per
common share before
extraordinary and cumulative
effect of change in accounting
principle..................... (.31) (.39) (.34) (.41) (1.46)
----------- ----------- ----------- ----------- ------------
Basic and diluted earnings per
common share for net loss
applicable to common stock.... (.24) (.37) (.34) (.22) (1.17)
=========== =========== =========== =========== ============

The quarterly information for 2000 differs from that reported in the
Company's quarterly filings on Form 10-Q due to the adoption of SAB No. 101 in
the fourth quarter of 2000. The effect of this change resulted in a reduction of
loss before extraordinary items and cumulative effect of change in accounting
principle of approximately $403,000, $428,000, and $319,000 for the first,
second and third quarters, respectively. The effect of this change resulted in
an increase in net loss applicable to common stock of approximately $20,208,000
for the first quarter. The effect of this change resulted in a reduction of loss
on earnings per common share before extraordinary items and cumulative effect of
change in accounting principle of approximately $.04, $.04, and $.03 for the
first, second and third quarters, respectively. The effect of this change
resulted in an increase of loss on earnings per common share for net loss
applicable to common stock of approximately $1.77 for the first quarter.

F-24
70
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. SUBSEQUENT EVENTS

In January and February 2001, the Company completed a series of private
transactions involving the exchange of 1,459,672 newly issued common shares for
$26,062,000, or 52% of the original offering amount, of the 7% convertible
subordinated notes. Of the 1,459,672 shares issued, 1,371,684 shares were valued
at the conversion price of $19.00 per share and the remaining 87,988 were valued
at the closing market price as of the various exchange dates. As a result, the
Company will recognize an extraordinary loss of approximately $577,000, for the
write-off of pro rata unamortized deferred finance charges. Additionally, as
part of the 87,988 shares issued to induce conversion, a debt conversion expense
of approximately $2,039,000 will also be recognized in the first quarter ended
March 31, 2001. The convertible notes payable balance was reduced to $10,128,000
as a result of these exchanges.

F-25
71

ATRIX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, DECEMBER 31,
2001 2000
------------- -------------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 19,073,358 $ 4,484,330
Marketable securities available for sale, at fair market
value................................................... 37,175,684 28,910,439
Notes receivable -- stock subscription and license fee.... -- 23,000,000
Accounts receivable, net of allowance for doubtful
accounts of $169,431 and $209,659....................... 2,957,232 2,610,683
Interest receivable....................................... 417,274 472,201
Inventories............................................... 2,787,987 1,940,929
Prepaid expenses and deposits............................. 1,416,461 1,085,070
------------- -------------
Total current assets............................... 63,827,996 62,503,652
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 7,478,584 6,818,372
------------- -------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$2,906,694 and $2,399,431............................... 3,748,208 4,049,104
Deferred finance costs, net of accumulated amortization of
$197,742 and $628,379................................... 185,684 800,536
------------- -------------
Other assets, net....................................... 3,933,892 4,849,640
------------- -------------
TOTAL ASSETS....................................... $ 75,240,472 $ 74,171,664
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade................................. $ 2,929,231 $ 2,197,980
Interest payable.......................................... 54,939 215,156
Accrued salaries and payroll taxes........................ 362,857 278,684
Other accrued liabilities................................. 145,035 265,873
Deferred revenue.......................................... 4,538,294 2,997,154
------------- -------------
Total current liabilities.......................... 8,030,356 5,954,847
------------- -------------
DEFERRED REVENUE............................................ 28,036,666 24,217,699
CONVERTIBLE SUBORDINATED NOTES PAYABLE...................... 9,711,000 36,190,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares
authorized Series A preferred stock, $.001 par value,
200,000 shares authorized and no shares issued or
outstanding............................................. -- --
Series A convertible exchangeable preferred stock, $.001
par value, 20,000 shares authorized; 12,439 and 12,015
shares issued and outstanding. Liquidation preference
$12,827,827 and $12,397,505............................. 12 12
Common stock, $.001 par value; 45,000,000 shares
authorized; 15,204,402 and 13,341,681 shares issued and
outstanding............................................. 15,204 13,342
Additional paid-in capital................................ 148,171,512 113,763,660
Accumulated other comprehensive loss...................... (555,204) (471,306)
Accumulated deficit....................................... (118,169,074) (105,496,590)
------------- -------------
Total shareholders' equity.............................. 29,462,450 7,809,118
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $ 75,240,472 $ 74,171,664
============= =============

See notes to the consolidated financial statements.

F-26
72

ATRIX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000

2000
2001 (RESTATED)
------------ ------------
(UNAUDITED)

REVENUE:
Net sales and royalties................................... $ 2,576,323 $ 2,820,652
Contract research and development revenue................. 3,432,933 760,150
Licensing, marketing rights and milestone revenue......... 1,509,084 936,888
------------ ------------
Total revenue...................................... 7,518,340 4,517,690
------------ ------------
OPERATING EXPENSES:
Cost of goods sold........................................ 1,043,486 1,123,084
Research and development.................................. 13,104,238 7,330,384
Administrative and marketing.............................. 2,701,500 2,211,568
------------ ------------
Total operating expense............................ 16,849,224 10,665,036
------------ ------------
LOSS FROM OPERATIONS........................................ (9,330,884) (6,147,346)
------------ ------------
OTHER INCOME (EXPENSE):
Equity in loss of joint venture........................... (1,516,661) --
Investment income......................................... 1,455,979 888,038
Interest expense.......................................... (490,582) (1,296,460)
Debt conversion expense................................... (2,048,347) --
Other..................................................... (23,312) 78,122
------------ ------------
Net other expense.................................. (2,622,923) (330,300)
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE............................ (11,953,807) (6,477,646)
Extraordinary loss on extinguished debt..................... (288,355) --
Cumulative effect of change in accounting principle......... -- (20,611,526)
------------ ------------
NET LOSS BEFORE PREFERRED STOCK DIVIDEND.................... (12,242,162) (27,089,172)
Accretion of dividend on preferred stock.................... (430,322) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK......................... $(12,672,484) $(27,089,172)
============ ============
Basic and diluted earnings per common share:
Loss before extraordinary item and cumulative effect of
change in accounting principle.......................... $ (.82) $ (.56)
Extraordinary item........................................ (.02) --
Cumulative effect of change in accounting principle....... -- (1.80)
------------ ------------
Net loss before preferred stock dividend.................... (.84) (2.36)
Accretion of dividend on preferred stock.................... (.03) --
------------ ------------
Net loss applicable to common stock......................... $ (.87) $ (2.36)
============ ============
Basic and diluted weighted average common shares
outstanding............................................... 14,655,378 11,457,533
============ ============

See notes to the consolidated financial statements.
F-27
73

ATRIX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001

ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
--------------- --------------------- PAID IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS DEFICIT
------ ------ ----------- ------- ------------ ------------- -------------
(UNAUDITED)

BALANCE, DECEMBER 31, 2000... 12,015 $12 13,341,681 $13,342 $113,763,660 $(471,306) $(105,496,590)
Comprehensive loss:
Net loss................... -- -- -- -- -- -- (12,672,484)
Other comprehensive loss:
-- Cumulative foreign
currency translation
adjustments............ -- -- -- -- -- (39,046) --
-- Unrealized loss on
investments............ -- -- -- -- -- (44,852) --
Net comprehensive loss.......
Issuance of Series A
convertible exchangeable
preferred stock to Elan for
accrued dividends.......... 424 -- -- -- -- -- --
Accretion on preferred
stock...................... -- -- -- -- 430,322 -- --
Issuance of common stock to
extinguish debt............ -- -- 1,482,031 1,482 28,525,865 -- --
Issuance of common stock to
MediGene................... -- -- 233,918 234 3,779,766 -- --
Non-qualified stock
compensation............... -- -- -- -- 116,524 -- --
Exercise of non-qualified
stock options.............. -- -- 5,000 5 29,995 -- --
Exercise of stock options.... -- -- 114,074 114 1,242,035 -- --
Issuance for employee stock
purchase plan.............. -- -- 1,198 1 16,715 -- --
Issuance of restricted
stock...................... -- -- 26,500 26 266,630 -- --
------ --- ----------- ------- ------------ --------- -------------
BALANCE, JUNE 30, 2001....... 12,439 $12 $15,204,402 $15,204 $148,171,512 $(555,204) $(118,169,074)
====== === =========== ======= ============ ========= =============

TOTAL
SHAREHOLDERS'
EQUITY
-------------
(UNAUDITED)

BALANCE, DECEMBER 31, 2000... $ 7,809,118
Comprehensive loss:
Net loss................... (12,672,484)
Other comprehensive loss:
-- Cumulative foreign
currency translation
adjustments............ (39,046)
-- Unrealized loss on
investments............ (44,852)
-----------
Net comprehensive loss....... (12,756,382)
Issuance of Series A
convertible exchangeable
preferred stock to Elan for
accrued dividends.......... --
Accretion on preferred
stock...................... 430,322
Issuance of common stock to
extinguish debt............ 28,527,347
Issuance of common stock to
MediGene................... 3,780,000
Non-qualified stock
compensation............... 116,524
Exercise of non-qualified
stock options.............. 30,000
Exercise of stock options.... 1,242,149
Issuance for employee stock
purchase plan.............. 16,716
Issuance of restricted
stock...................... 266,656
-----------
BALANCE, JUNE 30, 2001....... $29,462,450
===========

See notes to the consolidated financial statements.
F-28
74

ATRIX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000

2000
2001 (RESTATED)
------------ ------------
(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common stock....................... $(12,672,484) $(27,089,172)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Accretion of dividend on preferred stock................ 430,322 --
Depreciation and amortization........................... 1,189,378 1,119,817
Equity in loss of joint venture......................... 1,516,661 --
Loss on sale of property, plant and equipment........... 23,392 5,447
Loss on sale of marketable securities................... -- 171,583
Provision for bad debts................................. (40,228) --
Write-off of obsolete patents........................... 497 --
Stock compensation...................................... 116,524 75,620
Debt conversion expense................................. 2,048,347 --
Extraordinary loss on extinguished debt................. 288,355 --
Cumulative effect of change in accounting principle..... -- 20,611,526
Net changes in operating assets and liabilities:
Accounts receivable....................................... (358,524) (1,521,309)
Note receivable -- license fee............................ 8,000,000 --
Interest receivable....................................... 54,927 132,747
Inventories............................................... (871,070) (496,645)
Prepaid expenses and deposits............................. (332,118) (636,979)
Accounts payable.......................................... (531,952) (1,070,472)
Interest payable.......................................... 136,096 (3,517)
Accrued salaries and payroll taxes........................ 85,547 16,239
Other accrued liabilities................................. (115,559) (50,760)
Deferred revenue.......................................... 5,360,108 (826,888)
------------ ------------
Net cash provided by (used in) operating
activities....................................... 4,328,219 (9,562,763)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment.............. (1,323,557) (278,593)
Investments in intangible assets.......................... (206,368) (112,867)
Proceeds from sale of property, plant and equipment....... 904 25
Proceeds from sale of marketable securities............... -- 7,402,545
Proceeds from maturity of marketable securities........... 18,740,841 --
Investment in marketable securities....................... (27,066,960) (203,049)
------------ ------------
Net cash provided by (used in) investing
activities....................................... (9,855,140) 6,808,061
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities............... 5,335,521 402,229
Note receivable -- stock subscription..................... 15,000,000 --
------------ ------------
Net cash provided by financing activities.......... 20,335,521 402,229
------------ ------------
NET EFFECT OF EXCHANGE RATE ON CASH......................... (219,572) (3,089)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 14,589,028 (2,355,562)
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 4,484,330 3,021,869
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 19,073,358 $ 666,307
============ ============
Supplemental cash flow information:
Cash paid for interest.................................... $ 354,486 $ 1,292,190
============ ============
Non-cash activities:
During the six months ended June 30, 2001, the Company issued common stock valued at
$28,527,347 to extinguish $26,479,000 of the convertible subordinated notes.

See notes to the consolidated financial statements.
F-29
75

ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements of Atrix
Laboratories, Inc. and subsidiaries have been prepared in accordance with
generally accepted accounting principles for interim consolidated financial
statements and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, all adjustments considered necessary (which
consist of normal recurring accruals) for a fair presentation have been
included. These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto for the
year ended December 31, 2000, filed with the Securities and Exchange Commission
in the Company's Annual Report on Form 10-K.

Atrix Laboratories, Inc. was formed in August 1986 as a Delaware
corporation. In November 1998, the Company acquired ViroTex. In June 1999, the
Company organized its wholly owned subsidiary Atrix Laboratories Limited, which
is based in London, England. In February 2000, the Company organized its wholly
owned subsidiary Atrix Laboratories GmbH, which is based in Frankfurt, Germany,
to conduct its European operations. Collectively, Atrix Laboratories and its
subsidiaries are referred to as Atrix or the Company. In June 2000, the Company
entered into a research joint venture, Transmucosal Technologies, Ltd., with
Elan International Services, Ltd. ("Elan"), a wholly owned subsidiary of Elan
Corporation, plc, to develop oncology and pain management compounds. Drug
delivery of these compounds will utilize the Company's patented Atrigel and BEMA
drug delivery systems and Elan's nanoparticulate delivery technology.

Atrix is an emerging specialty pharmaceutical company focused on advanced
drug delivery. With five unique patented drug delivery technologies, the Company
is currently developing a diverse portfolio of products, including proprietary
oncology, pain management, growth hormone releasing peptide-1 and dermatology
products. The Company also partners with several large pharmaceutical and
biotechnology companies to apply its proprietary technologies to new chemical
entities or to extend the patent life of existing products. The Company has
strategic alliances with several large pharmaceutical companies to use its drug
delivery technologies and expertise in the development of new products.

On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations" was approved by the Financial Accounting Standards
Board (FASB). SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Goodwill and
certain intangible assets will remain on the balance sheet and not be amortized.
On an annual basis, and when there is reason to suspect that their values have
been diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. The Company is required to implement SFAS No. 141
on July 1, 2001 and it has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.

On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company is required to implement SFAS No. 142 on
January 1, 2002 and it has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.

F-30
76
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

fees and milestone payments as revenue when received and when the Company
fulfilled all contractual obligations relating to the fees and milestone
payments. There was approximately $20,612,000 cumulative effect for this change
in accounting principle that was reported as a charge in the year ended December
31, 2000. The cumulative effect was recorded as deferred revenue that will be
recognized as revenue over the remaining contractual terms for each of the
specific agreements.

The following represents the Consolidated Statement of Operations for the
six months ended June 30, 2000 as previously reported, the adjustments for the
adoption of SAB No. 101, and the resulting Consolidated Statement of Operations
as restated for that adoption.

F-31
77
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ATRIX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AS PREVIOUSLY REPORTED AND RESTATED
(UNAUDITED)

2000
(AS PREVIOUSLY SAB NO. 101 2000
REPORTED) ADJUSTMENTS (RESTATED)
-------------- ------------ ------------

REVENUE:
Net sales and royalties........................... $ 2,820,652 $ -- $ 2,820,652
Contract research and development revenue......... 760,150 -- 760,150
Licensing, marketing rights and milestone
revenue........................................ 105,000 831,888 936,888
----------- ------------ ------------
Total revenue............................. 3,685,802 831,888 4,517,690
----------- ------------ ------------
OPERATING EXPENSES:
Cost of goods sold................................ 1,123,084 -- 1,123,084
Research and development.......................... 7,330,384 -- 7,330,384
Administrative and marketing...................... 2,211,568 -- 2,211,568
----------- ------------ ------------
Total operating expenses.................. 10,665,036 -- 10,665,036
----------- ------------ ------------
INCOME (LOSS) FROM OPERATIONS....................... (6,979,234) 831,888 (6,147,346)
----------- ------------ ------------
OTHER INCOME (EXPENSE):
Investment income................................. 888,038 -- 888,038
Interest expense.................................. (1,296,460) -- (1,296,460)
Other............................................. 78,122 -- 78,122
----------- ------------ ------------
Net other expense......................... (330,300) -- (330,300)
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.............................. (7,309,534) 831,888 (6,477,646)
Cumulative effect of change in accounting
principle......................................... -- (20,611,526) (20,611,526)
----------- ------------ ------------
NET LOSS............................................ $(7,309,534) $(19,779,638) $(27,089,172)
=========== ============ ============
Basic and diluted earnings per common share:
Income (loss) before cumulative effect of change
in accounting principle........................ $ (.64) $ (.56)
Cumulative effect of change in accounting
principle...................................... -- (1.80)
----------- ------------
Net loss.......................................... $ (.64) $ (2.36)
=========== ============
Basic and diluted weighted average common shares
outstanding.................................... 11,457,533 11,457,533
=========== ============

NOTE 2. PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Atrix Laboratories, Inc., and its wholly owned subsidiaries Atrix Laboratories
Limited and Atrix Laboratories, GmbH. All significant intercompany transactions
and balances have been eliminated. While the Company owns 80.1% of Transmucosal
Technologies' outstanding common stock, Elan and its subsidiaries have retained
significant minority investor rights that are considered "participating rights"
as defined in Emerging Issues Task Force Bulletin 96-16, "Investor's Accounting
for an Investee When the Investor Has a Majority of the Voting Interest, but the
Minority Shareholder or Shareholders Have Certain Approval or Veto Rights."
Accordingly,

F-32
78
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company accounts for its investment in Transmucosal Technologies under the
equity method of accounting.

NOTE 3. INVENTORIES

Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. The inventory components at June 30, 2001
and December 31, 2000, are as follows:

JUNE 30, DECEMBER 31,
2001 2000
---------- ------------

Raw materials............................................... $1,982,248 $1,616,878
Work in process............................................. 495,473 144,723
Finished goods.............................................. 310,266 179,328
---------- ----------
$2,787,987 $1,940,929
========== ==========

NOTE 4. PROPERTY, PLANT, AND EQUIPMENT

The components of net property, plant and equipment are as follows:

JUNE 30, DECEMBER 31,
2001 2000
----------- ------------

Land....................................................... $ 1,071,018 $ 1,071,018
Building................................................... 3,616,693 3,610,068
Leasehold improvements..................................... 580,563 470,002
Furniture and fixtures..................................... 561,404 440,534
Machinery.................................................. 5,756,210 5,038,815
Office equipment........................................... 1,100,188 813,317
----------- -----------
Total property, plant and equipment.............. 12,686,076 11,443,754
Accumulated depreciation and amortization.................. (5,207,492) (4,625,382)
----------- -----------
Property, plant and equipment, net......................... $ 7,478,584 $ 6,818,372
=========== ===========

NOTE 5. NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share excludes dilution and is computed
by dividing net income (loss) by the weighted-average number of common shares
outstanding during the periods presented. Diluted net income (loss) per common
share reflects the potential dilution of securities that could participate in
the earnings. Stock options, warrants outstanding and their equivalents are
included in diluted earnings per share computations through the "treasury stock
method" unless they are antidilutive. Convertible securities are included in
diluted earnings per share computations through the "if converted" method unless
they are antidilutive. The effect of assuming conversion of the Series A
convertible preferred stock is excluded from the diluted earnings per share
computations since the conversion option commences July 18, 2002. Additionally,
since the Company has not drawn any proceeds under the convertible promissory
note agreement with Elan as of June 30, 2001, there was no effect on earnings
per share computations pertaining to this convertible promissory note for the
periods presented. Common share equivalents have been excluded from the
computations in loss periods, as their effect would be antidilutive. For the six
months ended June 30, 2001 and 2000, approximately 1.8 million and 1.9 million
equivalent dilutive securities (primarily convertible notes and common stock
options), respectively, have been excluded from the weighted-average number of
common shares outstanding for the basic and diluted net earnings per common
share computations as they are antidilutive.

F-33
79
ATRIX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6. CONVERTIBLE SUBORDINATED NOTES PAYABLE

During the six months ended June 30, 2001, the Company completed a series
of private transactions involving the exchange of 1,482,031 issued common shares
for $26,479,000, or 53% of the original offering amount, of the 7% convertible
subordinated notes. Of the 1,482,031 shares issued, 1,393,629 shares were valued
at the conversion price of $19.00 per share and the remaining 88,402 were valued
at the closing market price as of the various exchange dates. As a result, the
Company recognized an extraordinary loss of approximately $288,000, for the
write-off of approximately $585,000 of pro rata unamortized deferred finance
charges net of approximately $297,000 interest expense eliminated as a result of
these exchanges. Additionally, as part of the 88,402 shares issued to induce
conversion, debt conversion expense of approximately $2,048,000 was recognized
in the six months ended June 30, 2001. As of June 30, 2001 and December 31,
2000, the convertible notes payable balance was $9,711,000 and $36,190,000,
respectively.

NOTE 7. PENDING LEGAL ACTION

The Company has been involved in disputes with Block Drug Corporation, a
wholly owned subsidiary of GlaxoSmithKline, concerning product pricing and the
payments due to the Company upon achievement of milestones under the Company's
commercialization agreement with Block. With respect to product pricing,
arbitration began in December 2000 to resolve the issue as to the minimum price
Block must pay for products under the agreement. On April 20, 2001, the Company
entered into a settlement agreement with Block resolving the pricing dispute
over Block's sale of Atridox. The settlement agreement provides for the payment
owed to the Company for sales of the product in 1999. A new pricing schedule for
future purchases was also implemented.

With respect to milestone payments, the Company believes that under the
agreement, the milestone for the FDA approval of the Atrisorb-Doxy Barrier
product was achieved in 2000 and the corresponding payment of $1,000,000 is due.
Block has not made this payment. Pursuant to the Company's agreement with Block,
the Company will be entitled to an additional milestone payment of $2,000,000
upon Block's first commercial sale of the Atrisorb-Doxy Barrier product in the
United States. The agreement provides that the first commercial sale of this
product in the U.S. must occur within 120 days after FDA approval, subject to
certain conditions that have been satisfied. The FDA approved the Atrisorb-Doxy
Barrier product in September 2000. The Company has notified Block that it is in
breach of the agreement for failure to commence marketing of the Atrisorb-Doxy
Barrier product and on May 11, 2001 the Company filed a lawsuit in the U.S.
District Court for the District of Colorado seeking injunctive relief based on
Block's breach of the agreement. Block has initiated arbitration, and an
arbitration hearing has been set for November 13, 2001. The Company intends to
vigorously pursue its right to these milestone payments.

F-34
80

Prospectus

4,000,000 SHARES

[ATRIX LABORATORIES, INC. LOGO]

ATRIX LABORATORIES, INC.

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

We may from time to time offer and sell up to 4,000,000 shares of our
common stock, par value $0.001 per share. We may offer these shares in one or
more offerings in amounts, at prices and on terms determined at the time of the
offering. The specific terms will be contained in one or more supplements to
this prospectus. Read this prospectus and any prospectus supplement carefully
before you invest.

Our common stock is quoted on the Nasdaq National Market under the symbol
"ATRX."

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

INVESTING IN OUR SECURITIES INVOLVES RISKS. BEFORE BUYING OUR SECURITIES,
YOU SHOULD REFER TO THE RISK FACTORS INCLUDED IN OUR PERIODIC REPORTS, IN
PROSPECTUS SUPPLEMENTS RELATING TO SPECIFIC OFFERINGS AND IN OTHER INFORMATION
THAT WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION. SEE "RISK FACTORS" ON
PAGE 2.

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

Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

June 5, 2001
81

TABLE OF CONTENTS

About This Prospectus....................................... 1
Where You Can Find More Information......................... 1
Atrix Laboratories, Inc. ................................... 2
Recent Developments......................................... 2
Risk Factors................................................ 2
Use of Proceeds............................................. 3
Description of Capital Stock................................ 3
Plan of Distribution........................................ 9
Legal Matters............................................... 10
Experts..................................................... 10

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

You should only rely on the information contained or incorporated by
reference in this prospectus and in the prospectus supplement. We have not
authorized anyone to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it. We
will not make an offer to sell these securities in any jurisdiction where the
offer and sale is not permitted. You should assume that the information
appearing in this prospectus, as well as information we previously filed with
the SEC and incorporated by reference, is accurate as of the date on the front
cover of this prospectus only. Our business, financial condition, results of
operations and prospects may have changed since that date.

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82

ABOUT THIS PROSPECTUS

This prospectus is part of a "shelf" registration statement that we filed
with the Securities and Exchange Commission. By using a shelf registration
statement, we may sell up to 4,000,000 shares of our common stock from time to
time in one or more offerings. This prospectus only provides you with a general
description of the common stock we may offer. Each time we sell securities, we
will provide a supplement to this prospectus that contains specific information
about the terms of the securities offered, including the amount, the price and
the terms determined at the time of the offering. The prospectus supplement will
also contain, with respect to the offering, the name of any underwriters,
dealers or agents, the compensation to any underwriters and the net proceeds to
us. The prospectus supplement may also add to, update or change information
contained in this prospectus. Before purchasing any securities, you should
carefully read both this prospectus and any supplement, together with additional
information described under the heading "Where You Can Find More Information."

We will not use this prospectus to offer and sell securities unless it is
accompanied by a prospectus supplement that more fully describes the terms of
the offering.

WHERE YOU CAN FIND MORE INFORMATION

We file reports, proxy statements and other information with the SEC. Our
filings with the SEC are available to the public on the Internet at the SEC's
web site at http://www.sec.gov. You may also read and copy any document we file
with the SEC at the SEC's public reference rooms at the following addresses:

450 Fifth Street, N.W. Seven World Trade Center 500 West Madison Street
Room 1024 13th Floor Suite 1400
Washington, DC 20549 New York, New York 10048 Chicago, Illinois 60661

Please call the SEC at 1-800-SEC-0330 for more information about their
public reference rooms and their copy charges. Our SEC filings and other
information concerning us are also available at The National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.

The SEC allows us to "incorporate by reference" the information we file
with the SEC, which means that we can disclose important information to you by
referring you to those documents. Any information that we refer to in this
manner is considered part of this prospectus. Any information that we file with
the SEC after the date of this prospectus will automatically update and
supersede the information contained in this prospectus.

We are incorporating by reference the following documents that we have
previously filed with the SEC:

1. Our Annual Report on Form 10-K for the year ended December 31,
2000, filed with the SEC on March 14, 2001, and Amendment No. 1 on Form
10-K/A to the Annual Report on Form 10-K for the year ended December 31,
2000, filed with the SEC on May 31, 2001,

2. Our Quarterly Report on Form 10-Q for the quarter ended March 31,
2001, filed with the SEC on April 26, 2001,

3. Our Current Report on Form 8-K dated December 29, 2000, filed with
the SEC on January 9, 2001,

4. Our Current Report on Form 8-K dated December 29, 2000, filed with
the SEC on February 23, 2001,

5. Our Current Report on Form 8-K dated April 20, 2001, filed with the
SEC on April 24, 2001,

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83

We are also incorporating by reference any future filings that we make with
the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934 after the date of this prospectus. In no event, however, will any of the
information that we disclose under Item 9 of any Current Report on Form 8-K that
we may from time to time file with the SEC be incorporated by reference into, or
otherwise be included in, this prospectus.

You may obtain a copy of any of the documents referred to above, including
exhibits specifically incorporated by reference in those documents, without
charge by written or oral request directed to Atrix Laboratories, Inc.,
Attention: Corporate Secretary, 2579 Midpoint Drive, Fort Collins, Colorado
80525, telephone number (970) 482-5868 and facsimile number (970) 482-1152. We
maintain a web site at www.atrixlabs.com. The reference to our web site does not
constitute incorporation by reference of the information contained at the site.

ATRIX LABORATORIES, INC.

We were formed in August 1986 as a Delaware corporation. In November 1998,
we acquired ViroTex Corporation through the merger of our wholly owned
subsidiary, Atrix Acquisition Corporation, with and into ViroTex. In June 1999,
we organized our wholly owned registered subsidiary Atrix Laboratories Limited,
which is based in London, England. In February 2000, we organized our wholly
owned registered subsidiary Atrix Laboratories GmbH, which is based in
Frankfurt, Germany, to conduct our European operations. In June 2000, we entered
into a research joint venture, Transmucosal Technologies Ltd. with Elan
International Services, Ltd., a wholly owned subsidiary of Elan Corporation,
plc.

We are an emerging specialty pharmaceutical company focused on advanced
drug delivery. With five patented drug delivery technologies, we are currently
developing a diverse portfolio of products, including proprietary oncology, pain
management and dermatology products. We also partner with large pharmaceutical
and biotechnology companies to apply our proprietary technologies to new
chemical entities or to extend the patent life of existing products.

Unless the context indicates otherwise, the terms "we," "our," "us" and
"Atrix" are used in this prospectus for purposes of convenience and are intended
to refer to Atrix Laboratories, Inc. and its subsidiaries. Our principal
executive offices are located at 2579 Midpoint Drive, Fort Collins, Colorado,
our telephone number is (970) 482-5868, and our facsimile number is (970)
482-1152.

RECENT DEVELOPMENTS

Please see the applicable prospectus supplement and our recent public
filings for recent developments.

RISK FACTORS

You should carefully consider the risks involved before you invest in our
securities. These risks include, but are not limited to, any risks that may be
described in other filings we make with the SEC and in the prospectus
supplements relating to specific offerings of securities.

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84

USE OF PROCEEDS

Unless the applicable prospectus supplement states otherwise, the net
proceeds we receive from the sale of the common stock offered by this prospectus
will be used for general corporate purposes, which may include:

- funding the development and growth of our product offerings and business,

- repaying indebtedness that we may incur from time to time,

- financing potential acquisitions of complementary businesses, assets and
technologies that we may consider from time to time, and

- general working capital.

Pending these uses, we may temporarily use the net proceeds to make
short-term investments or reduce short-term borrowings.

DESCRIPTION OF CAPITAL STOCK

The following is a general description of our capital stock. The terms of
our certificate of incorporation and bylaws are more detailed than the general
information provided below. Therefore, you should carefully consider the actual
provisions of these documents.

AUTHORIZED CAPITAL STOCK

As of the date of this prospectus, we are authorized to issue a total of
50,000,000 shares of our capital stock. Each share has a par value of $.001 per
share. Of the authorized amount, 45,000,000 of the shares are common stock and
5,000,000 are shares of preferred stock.

Our Board of Directors may, without further action by our stockholders,
issue a series of preferred stock and fix the rights and preferences of those
shares, including the dividend rights, dividend rates, conversion rights,
exchange rights, voting rights, terms of redemption, redemption price or prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock issued by us. Of the 5,000,000 authorized shares of preferred
stock, 200,000 shares have been designated as Series A Preferred Stock, and
20,000 shares have been designated as Series A Convertible Exchangeable
Preferred Stock.

As of May 31, 2001, there were 15,165,839 shares of common stock issued and
outstanding. As of such date, no shares of Series A Preferred were issued or
outstanding, and 12,015 shares of Series A Convertible Exchangeable Preferred
were issued and outstanding.

COMMON STOCK

General. Each share of our common stock has identical rights and
privileges in every respect. Holders of our common stock do not have any
preferences or any preemptive, conversion or exchange rights. All of our
outstanding shares of common stock are fully paid and nonassessable. Our common
stock is listed on the Nasdaq National Market under the symbol "ATRX."

Voting Rights. The holders of our common stock are entitled to vote upon
all matters submitted to a vote of our stockholders and are entitled to one vote
for each share of common stock held. Our certificate of incorporation provides
for cumulative voting for the election of directors on or after the date on
which we become aware that any stockholder has become the beneficial owner,
directly or indirectly, of 30% or more of our outstanding shares of capital
stock entitled to vote generally in the election of directors. Our certificate
of incorporation also provides that our Board of Directors consists of three
classes. The members of each class serve three-year staggered terms with one
class elected at each annual meeting of stockholders.

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85

Dividends. Subject to the prior rights and preferences, if any, applicable
to shares of preferred stock or any series of preferred stock, or the
restrictions set forth in any applicable indentures, the holders of common stock
are entitled to participate equally in dividends, payable in cash, stock or
otherwise, as may be declared by our Board of Directors out of any funds legally
available for the payment of dividends.

Liquidation and Distribution. If we voluntarily or involuntarily
liquidate, dissolve or wind-up, the holders of our common stock will be entitled
to receive after distribution in full of the preferential amounts, if any, to be
distributed to the holders of preferred stock or any series of preferred stock,
all of the remaining assets available for distribution ratably in proportion to
the number of shares of common stock held by them.

Transfer Agent and Registrar. The principal transfer agent and registrar
for our common stock is American Stock Transfer & Trust Company.

SERIES A CONVERTIBLE EXCHANGEABLE PREFERRED STOCK

Dividends. Each share of Series A Convertible Exchangeable Preferred Stock
is entitled to receive a mandatory dividend equal to 7% per year of the original
issue price of $1,000 per share. This dividend is payable semi-annually on each
succeeding six-month anniversary of the first issuance of Series A Convertible
Exchangeable Preferred solely by the issuance of additional shares of Series A
Convertible Exchangeable Preferred, at a price per share equal to $1,000, and
not in cash, compounding to commence six months after the original issuance of
Series A Convertible Exchangeable Preferred. Such dividend may include the
issuance of fractional shares of Series A Convertible Exchangeable Preferred. In
addition, when and if our Board of Directors declares a dividend or distribution
payable with respect to our outstanding shares of common stock, the holders of
the Series A Convertible Exchangeable Preferred will be entitled to the amount
of dividends per share in the same form as such common stock dividends that
would be payable on the largest number of whole shares of common stock into
which a holder's aggregate shares of Series A Convertible Exchangeable Preferred
could then be converted.

Seniority; Liquidation Preference. We may not issue any additional classes
or series of preferred stock with a liquidation preference, dividend or other
rights senior to or pari passu to the Series A Convertible Exchangeable
Preferred, except with the prior approval of the holders of at least a majority
of the then-outstanding shares of Series A Convertible Exchangeable Preferred
voting separately as a series. In the event of any liquidation, dissolution or
winding-up of the affairs of Atrix before any payment of cash or distribution of
other property is made to the holders of our common stock or any other class or
series of stock subordinate in liquidation preference to the Series A
Convertible Exchangeable Preferred, the holders of the Series A Convertible
Exchangeable Preferred will be entitled to receive out of the assets of Atrix
legally available for distribution to our stockholders, the original issue price
per share of $1,000 (as appropriately adjusted for any combinations or divisions
or similar recapitalizations affecting the Series A Convertible Exchangeable
Preferred after issuance) and accrued and unpaid dividends thereon.

If, upon any liquidation, dissolution or winding up, our assets available
for distribution to our stockholders are insufficient to pay the holders of the
Series A Convertible Exchangeable Preferred the full amounts to which they are
entitled, the holders of the Series A Convertible Exchangeable Preferred will
share ratably in any distribution of assets in proportion to the respective
amounts which would be payable to them in respect of the shares held by them if
all amounts payable to them in respect of such were paid in full as described in
the preceding paragraph. After the distributions described in the preceding
sentence have been paid, subject to the rights of other series of preferred
stock that may from time to time be issued, our remaining assets available for
distribution to our stockholders will be distributed among the holders of our
common stock pro rata based on the number of shares of common stock held by each
holder.

Conversion. Each share of Series A Convertible Exchangeable Preferred is
convertible, at the option of the holder, at any time after the date that is two
years after the issuance thereof and before the date that is six years after the
first issuance thereof, into such number of fully paid and non-assessable shares
of common stock (or successor securities) as is determined by dividing (x) the
sum of the original issue price of such share of Series A Convertible
Exchangeable Preferred and any accrued but unpaid dividends thereon by (y) the
Series A Conversion Price, which is initially $18.00 and is subject to
adjustment as described below.
4
86

Notwithstanding the above, in the case of a merger or consolidation of Atrix
with or into another entity as a consequence of which Elan International
Services, Ltd., or EIS, will own 50% or less of the equity of the survivor of
such merger or consolidation than EIS did of Atrix prior thereto or the sale of
our common stock in a firm commitment underwritten public offering, then at our
option, the outstanding shares of the Series A Convertible Exchangeable
Preferred then held by the original holder of the Series A Convertible
Exchangeable Preferred or any of its affiliates will, immediately prior to the
consummation thereof be converted into the same number of shares of common stock
into which such shares are then convertible. No fractional shares of common
stock will be issued upon conversion of the Series A Convertible Exchangeable
Preferred.

If the Series A Convertible Exchangeable Preferred is converted into common
stock pursuant to the preceding sentence, the common stock delivered upon such
conversion will have the benefit of the exchange right identical to that with
respect to the Series A Convertible Exchangeable Preferred so converted, as
described below. In all other circumstances of conversion, such exchange right
will automatically terminate. If EIS's ownership of common stock will exceed
19.9% of the issued and outstanding shares of our common stock on a fully
diluted basis upon conversion of the Series A Convertible Exchangeable
Preferred, EIS will to the extent of such excess be entitled to receive
non-voting securities of Atrix.

Anti-Dilution Protection. If we issue any additional shares of common
stock (excluding shares issued (1) in connection with a stock split or
subdivision, (2) upon conversion of our preferred stock, (3) to employees,
consultants or directors in accordance with plans approved by our Board of
Directors, (4) under our Employee Stock Purchase Plan and (5) upon conversion of
our 7% Convertible Subordinated Notes due 2004) without consideration or for a
consideration per share less than the fair market value (as defined in our
certificate of incorporation) per share on such date, the conversion price in
effect immediately prior to each such issuance will be adjusted on a weighted
average basis, as further described in our certificate of incorporation. The
number of shares into which the Series A Convertible Exchangeable Preferred are
convertible at any time will be proportionately adjusted for any stock splits,
subdivisions or combinations, stock or certain other dividends or distributions
and recapitalizations.

Exchange Right. At any time prior to the sixth anniversary of the first
issuance of the Series A Convertible Exchangeable Preferred, the original
purchaser (or any of its affiliates) of the Series A Convertible Exchangeable
Preferred may exchange all of the shares of Series A Convertible Exchangeable
Preferred but not any accrued and unpaid dividends thereon for 3,612 convertible
preferred shares (as adjusted for any combinations or divisions or similar
recapitalizations) of Transmucosal Technologies Ltd., a Bermuda exempted limited
liability company, held by Atrix convertible into 30.1% of Transmucosal
Technologies' common shares on a fully diluted basis (or, if we have converted
the Transmucosal Technologies convertible preferred shares pursuant to the terms
thereof, the common shares of Transmucosal Technologies issued upon such
conversion). If the original purchaser exercises the exchange right during the
first two years after the issuance of the Series A Convertible Exchangeable
Preferred, the Transmucosal Technologies convertible preferred shares that the
original purchaser will receive from us will be shares of non-voting convertible
preferred stock of Transmucosal Technologies. Upon exercise of the exchange
right, all shares of Series A Convertible Exchangeable Preferred originally
purchased from us, excluding accrued and unpaid dividends thereon, will be
canceled and will no longer be entitled to any rights in Atrix.

Mandatory Redemption. On the date that is six years after the date of the
first issuance of shares of Series A Convertible Exchangeable Preferred, we
will, at our option, either (1) redeem the shares of Series A Convertible
Exchangeable Preferred in cash in an amount equal to the then-applicable
liquidation preference or (2) redeem the shares of Series A Convertible
Exchangeable Preferred in shares of common stock having a then fair market value
equal to the liquidation preference.

Voting Rights; Protective Provisions. Holders of Series A Convertible
Exchangeable Preferred will not be entitled to vote together with the holders of
the common stock, including with respect to the election of our directors, other
than as described in the following sentence. Subject to the rights of any series
of preferred stock that may from time to time come into existence, without first
obtaining the approval (by vote

5
87

or written consent, as provided by law) of the holders of at least a majority of
the then-outstanding shares of Series A Convertible Exchangeable Preferred,
voting separately as a series, we may not:

- amend our certificate of incorporation to alter or change the voting
powers, preferences, or other special rights or privileges, or
restrictions of the Series A Convertible Exchangeable Preferred so as to
affect adversely such shares,

- change the rights of the holders of the Series A Convertible Exchangeable
Preferred in any other respect, or

- amend our certificate of incorporation so as to create any additional
classes or series of preferred stock with a liquidation preference,
dividend or other rights senior to the Series A Convertible Exchangeable
Preferred.

Status of Converted Stock. If any shares of Series A Convertible
Exchangeable Preferred are converted or exchanged as described above, the shares
so converted or exchanged will be canceled and will not be reissuable by Atrix.
Our certificate of incorporation will be appropriately amended to effect the
corresponding reduction in our authorized capital stock.

RIGHTS AGREEMENT

The following summary highlights certain provisions of a Rights Agreement
between American Stock Transfer & Trust Company, as rights agent, and us, dated
as of September 25, 1998, as amended from time to time, and our certificate of
incorporation. Because the terms of these documents are more detailed than the
general information provided below, you should carefully consider the actual
provisions of these documents.

Rights. On September 25, 1998 our Board of Directors declared a dividend
distribution of one right for each outstanding share of our common stock to
stockholders of record at the close of business on September 25, 1998, and
authorized the issuance of one right with each share of common stock issued
(including shares distributed from treasury) by us thereafter and before the
Distribution Date defined below. Each right entitles the registered holder to
purchase from us one one-hundredth of a share, or a Unit, of Series A Preferred,
at a purchase price of $67.50 per Unit, subject to adjustment.

Initially, the rights attach to all certificates representing shares of
outstanding common stock, and no separate rights certificates will be
distributed. The rights will separate from the common stock, and the
"Distribution Date" will occur upon the earlier of (1) ten business days
following a public announcement that a person or group of affiliated or
associated persons, or an acquiring person, has acquired or otherwise obtained
beneficial ownership of 15% or more of the then outstanding shares of our common
stock, and (2) ten business days (or such later date as may be determined by
action of our Board of Directors prior to such time as any person becomes an
acquiring person) following the commencement of a tender offer or exchange offer
that would result in a person or group beneficially owning 15% or more of the
then outstanding shares of our common stock.

Until the Distribution Date, (1) the rights will be evidenced by common
stock certificates and will be transferred with and only with such common stock
certificates, (2) common stock certificates issued after September 25, 1998
(also including shares distributed from treasury) will contain a notation
incorporating the Rights Agreement by reference, and (3) the surrender for
transfer of any certificates representing outstanding common stock will also
constitute the transfer of the rights associated with the common stock
represented by such certificates.

The rights are not exercisable until the Distribution Date and will expire
at the close of business on September 25, 2008 unless earlier redeemed or
exchanged by us as described below. Under certain circumstances the
exercisability of the rights may be suspended. In no event, however, will the
rights be exercisable prior to the expiration of the period in which the rights
may be redeemed.

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As soon as practicable after the Distribution Date, rights certificates
will be mailed to holders of record of our common stock as of the close of
business on the Distribution Date and, thereafter, the separate rights
certificates alone will represent the rights.

If a person becomes an acquiring person, each holder of a right will
thereafter have the right to receive, upon exercise, shares of common stock (or,
in certain circumstances, cash, property or other securities of ours) having a
value equal to two times the exercise price of the right. The exercise price is
the purchase price multiplied by the number of Units of Series A Preferred
issuable upon exercise of a right prior to any person's becoming an acquiring
person. Following the occurrence of any person's becoming an acquiring person,
all rights that are, or under certain circumstances specified in the Rights
Agreement were, beneficially owned by any acquiring person will be null and
void.

If at any time following the date that any person becomes an acquiring
person, (1) we are acquired in a merger or other business combination
transaction and we are not the surviving corporation, (2) any person merges with
us and all or part of our common stock is converted or exchanged for securities,
cash or property of Atrix or any other person or (3) 50% or more of our assets
or earning power is sold or transferred, each holder of a right (except rights
which have been voided) will have the right to receive, upon exercise, common
stock of the acquiring person having a value equal to two times the exercise
price of the right.

The purchase price payable, and the number of Units of Series A Preferred
issuable, upon exercise of the rights are subject to adjustment from time to
time to prevent dilution (1) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Series A Preferred, (2) if
holders of the Series A Preferred are granted certain rights or warrants to
subscribe for Series A Preferred or convertible securities at less than the
current market price of the Series A Preferred, or (3) upon the distribution to
the holders of the Series A Preferred of evidences of indebtedness, cash or
assets (excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).

With certain exceptions, no adjustment in the purchase price will be
required until cumulative adjustments amount to at least 1% of the purchase
price. We are not required to issue fractional shares of Series A Preferred
(other than fractions which are integral multiples of one one-hundredth of a
share of Series A Preferred which may be evidenced by depositary receipts). In
lieu thereof, an adjustment in cash may be made based on the current market
price of a share of Series A Preferred on the day of exercise.

At any time until ten business days following the public announcement of a
person becoming an acquiring person, a majority of our Board of Directors
(including, following the date on which there is an acquiring person, the
majority of our independent directors) may redeem the rights in whole, but not
in part, at a price of $.01 per right (subject to adjustment in certain events)
payable, at the election of the majority of our Board of Directors, including a
majority of our independent directors, in cash or shares of our common stock.
Immediately upon the action of a majority of our Board of Directors (including,
following the date on which there is an acquiring person, a majority of our
independent directors) ordering the redemption of the rights, the rights will
terminate and the only right of the holders of rights will be to receive the
redemption price.

At any time after there is an acquiring person, by action of a majority of
our Board of Directors, including a majority of our independent directors, we
may exchange all or part of the then outstanding and exercisable rights (other
than rights that have become null and void) for shares of our common stock
pursuant to a one-for-one exchange ratio, as may be adjusted.

Until a right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Atrix, including, without limitation, the right to
vote or to receive dividends. While the distribution of the rights will not be
taxable to our stockholders or to us, stockholders may, depending upon the
circumstances, recognize taxable income if the rights become exercisable for
Units of Series A Preferred or other consideration.

Any of the provisions of the Rights Agreement may be amended without the
approval of the holders of our common stock at any time prior to the
Distribution Date, including an amendment to lower certain thresholds described
above to not less than the greater of (1) the sum of .001% and the largest
percentage of
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our outstanding shares of common stock then known to us to be beneficially owned
by any person or group of affiliated or associated persons, and (2) 10%. After
the Distribution Date, the provisions of the Rights Agreement may be amended to
cure any ambiguity, defect or inconsistency, to make changes which do not
adversely affect the interests of holders of rights (excluding the interests of
any acquiring person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to adjust (1) the time
period governing redemption shall be made at such time as the rights are not
redeemable or (2) any other time period unless such lengthening is for the
purpose of protecting, enhancing or clarifying the rights of and/or benefiting
the holders of rights. In addition, after a person becomes an acquiring person,
no amendment or supplement may be made without the approval of a majority of our
Board of Directors, including a majority of our independent directors.

Series A Preferred. The Units of Series A Preferred that may be acquired
upon exercise of the rights will be non-redeemable and are subordinate to our
shares of Series A Convertible Exchangeable Preferred and any other shares of
preferred stock that may be issued by us in the future.

Each Unit of Series A Preferred will have a minimum preferential quarterly
dividend of $.01 per Unit or any higher per share dividend declared on our
common stock. In the event of liquidation, the holder of a Unit of Series A
Preferred will receive a preferred liquidation payment equal to the greater of
$.01 per Unit and the per share amount paid in respect of a share of our common
stock.

Each Unit of Series A Preferred will have one vote, voting together with
our common stock. In the event of any merger, consolidation or other transaction
in which shares of our common stock are exchanged, each Unit of Series A
Preferred will be entitled to receive the per share amount paid in respect of
each share of our common stock.

The rights of holders of the Series A Preferred with respect to dividends,
liquidation and voting, and in the event of mergers and consolidations, are
protected by customary anti-dilution provisions.

Because of the nature of the Series A Preferred's dividend, liquidation and
voting rights, the economic value of one Unit of Series A Preferred that may be
acquired upon the exercise of each right should approximate the economic value
of one share of our common stock.

Potential Anti-Takeover Effect. The rights may have anti-takeover effects.
The rights will cause substantial dilution to a person or group that attempts to
acquire us on terms not approved by our Board of Directors unless the offer is
conditioned on that person or group acquiring a substantial number of rights.
The rights are intended to encourage persons who may seek to acquire control of
us to initiate an acquisition through negotiations with our Board of Directors.
However, the effect of the rights may be to discourage a third party from making
a partial tender offer or otherwise attempting to obtain a substantial equity
position in our equity securities or seeking to obtain control of us, even when
some of our stockholders may find the transaction attractive. To the extent that
any potential acquirors are deterred by the rights, the rights may have the
effect of keeping our existing management in office.

PREEMPTIVE RIGHTS

No holder of any shares of our stock has any preemptive or preferential
right to acquire or subscribe for any unissued shares of any class of stock or
any authorized securities convertible into or carrying any right, option or
warrant to subscribe for or acquire shares of any class of stock.

PROVISIONS WHICH MAY DELAY A CHANGE OF CONTROL OF ATRIX

Our certificate of incorporation contains certain provisions that may delay
or discourage a change of control of Atrix, including provisions:

- establishing a classified board of directors,

- permitting cumulative voting in certain circumstances,

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- allowing our Board of Directors to issue and determine the rights, powers
and preferences of preferred stock without any vote or further action by
our stockholders,

- establishing a process to enlarge and fill vacancies on our Board of
Directors, and

- deterring certain self-dealing transactions.

Certain of these provisions are designed to increase the likelihood that
our Board of Directors, if presented with a proposal for a business combination
or other major transaction from a third party that has acquired a block of our
stock, will have sufficient time to review the proposal and possible
alternatives to the proposal and to act in what it believes to be in the best
interests of our stockholders. These provisions may discourage certain types of
non-negotiated transactions which would result in a change of control of us and
are expected to encourage persons seeking to acquire control of us to consult
first with our Board of Directors to negotiate the terms of any proposed
business combination or offer.

PLAN OF DISTRIBUTION

We may offer and sell shares of our common stock described in this
prospectus directly to purchasers or to or through underwriters, dealers or
designated agents. We will name any underwriter or agent involved in the offer
and sale of the shares of common stock in the applicable supplement to this
prospectus. We may sell the common stock from time to time in one or more
transactions:

- at a fixed price or prices, which may be changed,

- at market prices prevailing at the time of sale,

- at prices related to prevailing market prices, or

- at negotiated prices.

We also may authorize underwriters acting as our agents to offer and sell
the securities upon terms and conditions that will be described in the
applicable prospectus supplement.

If we use underwriters to assist us in the offer and sale of our common
stock, the underwriters may act as our agents, and we may pay the underwriters
in the form of discounts, concessions or commissions. These underwriters may
sell the securities to or through dealers, and the dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agents. Any persons whom we use to assist us in the offer and sale of our common
stock may be deemed to be underwriters, and any discounts or commissions that
they receive from us or from their resale of the common stock may be deemed to
be underwriting discounts and commissions under the securities laws.

Each time we use this prospectus to sell shares of our common stock, we
will also provide a prospectus supplement that contains the specific terms about
those shares and about the offering. We will identify in the applicable
prospectus supplement any underwriter or agent that we use, as well as any
compensation that these underwriters or agents will receive from us or
otherwise. The prospectus supplement will also include information regarding the
terms or our relationship with any underwriters or agents, their obligations
with respect to that offering, and information regarding the proceeds that we
will receive and our expected use of those proceeds.

We may grant to underwriters that we use options to purchase additional
shares of common stock to cover over-allotments, if any, at the public offering
price, with additional underwriting commissions or discounts, as may be set
forth in a related prospectus supplement. The terms of any over-allotment option
will be set forth in the applicable prospectus supplement.

If we use dealers to assist us in the offer and sale of the shares of our
common stock, we will likely sell the securities to those dealers as principals.
The dealers may then resell the securities to the public at varying

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prices to be determined by the dealers at the time of resale. We will include
the names of the dealers and the terms of any transactions involving the dealers
in the applicable prospectus supplement.

We may authorize agents or underwriters to solicit offers by some types of
institutions to purchase shares of our common stock from us at the public
offering price set forth in the prospectus supplement pursuant to delayed
delivery contracts. These contracts will provide for payment and delivery on a
specified date in the future. The conditions to these contracts and the
commissions payable for solicitation of these contracts will be described in the
applicable prospectus supplement.

We may enter into agreements with underwriters, dealers and agents who
agree to assist us in the offer and sale of shares of our common stock. Under
these agreements, we may agree to indemnify the underwriters and their
controlling persons, dealers and agents against certain liabilities, including
liabilities under the securities laws. We may also agree to contribution
relating to any payments that the underwriters and their controlling persons,
dealers or agents may be required to make under the securities or other laws.
Unless otherwise indicated in the applicable prospectus supplement, any agent
will be acting on a best efforts basis for the period of its appointment.

Certain persons participating in an offering of our common stock may engage
in transactions that stabilize, maintain or otherwise affect the price of the
common stock, including over-allotment, stabilizing and short-covering
transactions in such securities, and the imposition of a penalty bid, in
connection with the offering.

Any underwriters, dealers or agents that assist us in the offer and sale of
our common stock may engage in transactions with or perform services for us in
the ordinary course of business.

LEGAL MATTERS

The validity of the common stock offered by this prospectus will be passed
upon for us by Morrison & Foerster LLP. As of the date of this prospectus,
Morrison & Foerster LLP held options to acquire 5,000 shares of our common
stock. Any underwriters will be advised about other issues relating to any
offering by their own legal counsel named in the applicable prospectus
supplement.

EXPERTS

The consolidated financial statements of Atrix Laboratories, Inc.
incorporated in this prospectus by reference from our Annual Report on Form 10-K
for the year ended December 31, 2000, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports, which are incorporated
herein by reference, and have been so incorporated in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.

The financial statements of Transmucosal Technologies Ltd. incorporated in
this prospectus by reference from our Amendment No. 1 on Form 10-K/A to our
Annual Report on Form 10-K for the year ended December 31, 2000, have been
audited by KPMG, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.

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3,000,000 SHARES

[ATRIX LABORATORIES, INC. LOGO]

ATRIX LABORATORIES, INC.

COMMON STOCK

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PROSPECTUS SUPPLEMENT

AUGUST 8, 2001

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BANC OF AMERICA SECURITIES LLC
U.S. BANCORP PIPER JAFFRAY
CIBC WORLD MARKETS
GRUNTAL & CO., L.L.C.

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