1998 Financial Statements

Notes to Financial Statements
Years Ended December 31, 1998, 1997 and 1996

Stock Options

Noven established a stock option plan (the "Plan") effective January 1, 1997 that provides for the granting of up to 4,000,000 incentive and non-qualified stock options to selected individuals. The terms and conditions of these options (including price, vesting schedule, term and number of shares) are determined by the Stock Option Committee, which administers the Plan. The per share exercise price of (i) non-qualified stock options granted to directors and all other persons, can not be less than the fair market value of the common stock on the date of grant and (ii) incentive stock options granted to employees and employees owning in excess of 10% of the issued and outstanding common stock, can not be less than the fair market value and 110% of the fair market value, respectively, of the common stock on the date of grant.

Each option issued under the Plan is exercisable after the period(s) specified in the relevant option agreement, and no option can be exercised after 10 years from the date of grant (or five years from the date of grant in the case of a grantee holding more than 10% of the issued and outstanding common stock). Generally, the options vest over a period of five years, beginning one year after date of grant.

The predecessor stock option plan, which had 3,750,000 options authorized to be granted, had provisions similar to those of the Plan. This plan terminated on December 31, 1996, and no additional options may be granted under this plan. At December 31, 1998, there were approximately 790,000 stock options outstanding under this plan.

Noven applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its option plans. Accordingly, no compensation expense has been recognized. Had compensation cost for Noven’s plan been determined based upon the fair value at the grant date consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," Noven’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

	1998	1997	1996
(dollars in thousands) Net Loss:
As reported	$(4,079)	$(9,557)	$(1,984)
Pro forma	$(4,263)	$(9,864)	$(2,698)
Loss per Share:
As reported	$ (0.19)	$ (0.47)	$ (0.10)
Pro forma	$ (0.20)	$ (0.49)	$ (0.14)

The fair value of the options granted during 1998, 1997 and 1996, is estimated as $2.57, $2.91 and $6.44, respectively, on the date of the grant using the Black-Scholes option-pricing model with the assumptions listed below. The discount rate reflects the reduction in value due to transfer restrictions on the stock.

	1998	1997	1996
Volatility	64.5%	65.3%	65.9%
Risk-free interest rate	5.16%	5.83%	6.21%
Expected life (years)	7	7	7
Discount rate	33.3%	33.3%	33.3%

Stock option transactions related to the plans are summarized as follows:

Year Ended December 31,	1998		1997		1996
(options and shares in thousands)	Weighted Average Exercise		Weighted Average Exercise		Weighted Average Exercise
	Options	Price	Options	Price	Options	Price
Outstanding at beginning of year	1,594	$ 8.27	1,565	$8.95	1,509	$ 6.79
Granted	675	$ 6.84	612	$6.62	363	$14.38
Exercised	(56)	$ 2.31	(156)	$2.64	(189)	$ 2.17
Canceled	(187)	$11.89	(427)	$2.45	(118)	$ 8.86
Outstanding at year end	2,026	$ 7.57	1,594	$8.27	1,565	$ 8.95
Shares of common stock reserved	4,928		4,983		1,565
Options exercisable at year end	656		350		489

The following table summarizes information concerning outstanding and exercisable options at December 31, 1998:

	Options Outstanding			Options Exercisable
Range of Exercise Prices	Number Outstanding at Year End	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Number Exercisable at Year End	Weighted Average Exercise Price
(options in thousands)
$ 0–$ 4	225	1.53	$ 2.31	135	$ 2.31
$ 4–$ 8	963	6.20	$ 5.76	165	$ 6.40
$ 8–$12	565	3.74	$ 9.47	243	$ 9.86
$12–$18	273	4.25	$14.38	113	$14.40
	2,026	4.73	$ 7.57	656	$ 8.21

Copyright ©  1999 Noven Pharmaceuticals, Inc. All rights reserved.