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

                                   FORM 10-K
                            ------------------------

     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934

                    FOR THE FISCAL YEAR ENDED JUNE 30, 2000

                        COMMISSION FILE NUMBER: 0-37159

                                  IOMED, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                    UTAH                                        87-0441272
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)
 3385 WEST 1820 SOUTH, SALT LAKE CITY, UTAH                        84104
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

                                 (801) 975-1191
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

      SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:

                           COMMON STOCK, NO PAR VALUE

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]     No [ ]

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

     The aggregate market value of the Registrant's voting stock held by
non-affiliates based upon the closing price of the common stock as quoted on the
American Stock Exchange on September 1, 2000, was approximately $18,459,600.

     The number of shares of Registrant's common stock outstanding on September
1, 2000, was 6,530,659.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Certain information is incorporated into Part III of this Report on Form
10-K by reference to the Registrant's Proxy Statement for its 2000 Annual
Meeting of Shareholders.
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                               TABLE OF CONTENTS

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<CAPTION>
                                                                       PAGE
                                                                       -----
<S>      <C>                                                           <C>
                                   PART I
Item 1   Business....................................................      3
Item 2   Properties..................................................     17
Item 3   Legal Proceedings...........................................     18
Item 4   Submission of Matters to a Vote of Security Holders.........     18

                                  PART II

Item 5   Market for Registrant's Common Equity and Related
         Stockholder Matters.........................................     19
Item 6   Selected Consolidated Financial Data........................     20
Item 7   Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................     21
Item 7a  Quantitative and Qualitative Information About Market
         Risk........................................................     29
Item 8   Financial Statements and Supplementary Data.................     30
Item 9   Changes and Disagreements with Accountants on Accounting and
         Financial Disclosure........................................     30
         Audited Financial Statements................................  31-46

                                  PART III
Item 10  Directors and Executive Officers of the Company.............     47
Item 11  Executive Compensation......................................     47
Item 12  Security Ownership of Certain Beneficial Owners and
         Management..................................................     47
Item 13  Certain Relationships and Related Transactions..............     47

                                  PART IV

Item 14  Exhibits, Financial Statement Schedules, and Reports on Form
         8-K.........................................................     47
SIGNATURES...........................................................     50
</TABLE>
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                                     PART I

ITEM 1. BUSINESS

FORWARD-LOOKING STATEMENTS

     Certain statements contained in this report on Form 10-K (the "Report") are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements may be
identified by the use of terminology such as "may," "will," "expect,"
"anticipate," "intend," "designed," "estimate," "should," or "continue" or the
negatives thereof or other variations thereon or comparable terminology. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
IOMED, Inc. and its subsidiary Dermion, Inc. (collectively the "Company"), or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These risks, uncertainties and other factors include, among other
things, the following: the Company's sporadic history of profitability and the
continuing uncertainty of its profitability; the Company's ability to develop
and introduce new products; the uncertainty of market acceptance of the
Company's new and existing products and their market penetration; the
uncertainties related to the Company's product development programs; the
Company's reliance on collaborative partners and licenses; the Company's limited
sales, marketing and distribution experience and current dependence on
distributors; the risks associated with obtaining governmental approval of the
Company's products; the highly competitive industry in which the Company
operates and the rapid pace of technological change within that industry; the
uncertainty of patented and proprietary technology protection and the Company's
reliance on such patented and proprietary technology (including reliance on
technology licensed from third parties); changes in or failure to comply with
governmental regulation; the uncertainty of third party reimbursement for the
Company's products; the Company's dependence on key employees; general economic
and business conditions and other factors referenced in this Report.

INTRODUCTION

     The Company was incorporated in Utah in 1974 as Motion Control, Inc. In
1987, the Company merged with JMW Acquisition Corporation, and the name of the
merged entity was changed to IOMED, Inc. The Company is a specialty
pharmaceutical company focused on satisfying substantial unmet medical needs in
large pharmaceutical markets. The Company is currently pursuing research,
product development and commercialization activities primarily in the local
inflammation and ophthalmic markets, representing worldwide annual markets of
$10 billion and $5 billion, respectively.

     The Company is funded, in part, by an established business engaged in the
manufacture and sale of iontophoretic drug delivery systems primarily used to
treat acute local inflammation in the sports and occupational medicine and
physical therapy markets. Iontophoresis is a non-invasive method of enhancing
and controlling the active transdermal transport of water-soluble ionic drugs
into and through the skin and other body tissues using a low-level electrical
current. The Company currently markets two products, an iontophoretic system
used to deliver a potent corticosteroid and an iontophoretic system used to
deliver Iontocaine(R), IOMED's brand of lidocaine HCl 2% and epinephrine
1:100,000. More than 13 million treatments have been clinically administered
using the Company's products to treat patients, including top professional and
semi-professional athletes and sports teams. The Company is also developing
products in other therapeutic areas, including ophthalmic disease and pain
control.

COMMERCIAL BUSINESS

     The Company is currently developing, manufacturing and commercializing
proprietary products used in the non-invasive delivery of drugs to treat acute
local inflammation and to administer local dermal anesthetics. The Company's
proprietary, patented system (the "Phoresor(R) System") is designed for clinical
use and is comprised of a reusable dose controller and single use, disposable
active transdermal patch kits. The dose

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controller incorporates an advanced microprocessor to precisely control drug
dosage through the Company's proprietary patch kits, which include IOGEL(TM),
TransQ(TM)and Anestrode(TM) patches.

     Using the Company's Phoresor System, medical professionals are able to
deliver a potent and effective corticosteroid to treat local inflammatory
conditions. Because of the negative side effects often associated with the oral
or injectible administration of potent corticosteroids, they are used only as
second- or third-line therapies. Using the Company's technology, the
administration of these drugs without the occurrence of negative side effects is
possible. The Company's solutions have been used for site-specific
corticosteroid therapy in clinics nationwide to treat a variety of conditions,
including those suffered by top professional and semi-professional athletes in
football, baseball, basketball, hockey, golf and skiing.

     The Company also markets a specialty pharmaceutical product, Numby
Stuff(R), for the delivery of Iontocaine(R). Numby Stuff offers non-invasive,
needle-free local dermal anesthesia in as little as 10 minutes, and can be used
prior to needle sticks, IV starts, lumbar punctures, PICC insertions, and fine
needle and skin biopsies. The product is primarily used in the pediatrics
market.

MARKET OPPORTUNITIES

     The Company is leveraging its market presence and brand awareness in the
physical therapy and sports medicine markets. The Company's goal is to introduce
active transport systems under a Food and Drug Administration ("FDA") approved
New Drug Application ("NDA"). These systems would include a unit dose of drug
together with a patch kit, which the Company believes would make the products
reimbursable as a prescription pharmaceutical product.

     The Company has chosen to expand into the ophthalmic market to address
significant unmet medical needs. Current methods for delivering therapeutic
levels of drug into the eye using oral or infusion therapies are very difficult.
Local intraocular injections or implants are often used, but they are not
practical for either patients or physicians. In addition, these methods are
inherently risky due to the potential for bleeding, infection or retinal
detachment. The Company believes its drug transport systems are capable of
delivering potent drugs safely and site specifically. The ability to accomplish
this without needles or systemic side-effects could give the Company a
significant competitive advantage.

     The Company has refined its business development strategy to focus a
majority of its internal product development resources on specific market
opportunities in acute local inflammation and ophthalmics. The Company believes
specialty pharmaceuticals combined with its unique active transport systems may
be effectively applied in site-specific therapeutic applications in these areas.
The Company has chosen to focus on these markets because it believes that its
specialty pharmaceutical products offer a solution or a significant improvement
to currently unmet medical needs in these areas. Specifically, the Company is
targeting products that it can develop internally, where it can play a direct
role in the marketing or co-marketing of its products, while giving it greater
control over the timing of product development and introduction.

BACKGROUND ON DRUG DELIVERY SYSTEMS

     A wide variety of drug delivery methods are currently available in the
market, although not all drugs can be delivered by all routes of administration.
For certain applications, there are clinical benefits in providing rapid onset
of therapeutic action and the minimum drug dosage necessary to achieve the
desired effect. In all applications, drug delivery should be convenient, cost
effective and as non-invasive as possible.

     Conventional Oral Methods. Conventional oral drug dosage forms, such as
pills and capsules, are the most common types of drug delivery. These methods
offer ease of administration and low cost-per-use, but their application is
often limited by inconvenient dosage intervals and less than optimal
bioavailability (due to degradation of the drug in the gastro intestinal tract
("GI tract") and the liver) and efficacy. In addition, conventional oral dosage
forms often produce higher initial drug levels than are required to achieve the
desired therapeutic effects, thereby increasing the risk of side effects and
lower than therapeutically optimal levels of the drug as it is metabolized and
cleared from the body. More frequent administration of lower doses can sometimes
mitigate this problem, but can also increase cost, inconvenience and patient
noncompliance.

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     Injection Methods. Injectable drug dosage forms generally provide rapid
onset of action and offer many of the same advantages as conventional oral drug
dosage methods. Like conventional oral dosage forms, however, they often produce
higher initial drug levels than are required to achieve the desired therapeutic
effect, thereby increasing risk of side effects. Injectable drug delivery
methods require caregiver administration and have the added disadvantage of
using needles as a delivery path into the body, raising the possibility of
needle stick injuries, as well as risk of infection to the caregiver and the
patient. The use of needles also increases patient anxiety due to the pain of
injection.

     Controlled Release Methods. Controlled release drug delivery systems
attempt to overcome many of the limitations inherent in conventional drug
delivery methods by maintaining a more consistent and appropriate drug level in
the bloodstream. Sustained release oral dosage forms are designed to release the
active ingredients of the drug into the body at either a predetermined point in
time or at a predetermined rate over an extended period of time, but they
generally do not provide rapid onset of action and may not achieve optimal
bioavailability. Passive transdermal patches allow absorption of drugs through
the skin and generally provide a convenient method of administering drugs at a
steady rate over an extended period of time, but onset of action may take hours
after application, and absorption of the drug may continue for hours after the
patch is removed, which can increase side effects. Additionally, because human
skin is an effective barrier, most drug formulations will not passively permeate
the skin in therapeutic quantities. Continuous infusion pumps introduce drugs
directly into the body, thereby providing rapid onset of action, and may offer
variable controlled dosing. Infusion therapy requires insertion of a needle,
however, and, therefore, can be painful and threatening to the patient. The use
of infusion pumps also increases the risk of infection and generally requires
medical professionals for safe administration, which may significantly increase
costs.

     Pulmonary and Nasal Methods. Both pulmonary (inhalation) delivery and nasal
sprays are designed to provide rapid onset of action or to deliver drugs that
are not orally bioavailable. Pulmonary delivery has the disadvantage of variable
drug amounts reaching the alveoli of the lungs, therefore making it difficult to
control the bioavailability of the dose. Nasal sprays can cause irritation in
some patients and can be difficult to administer in variable intranasal
conditions. In addition, the dose of the product cannot be controlled by the
patient over a period of time, and patients and caregivers may have difficulty
maintaining the desired therapeutic effect.

     Other. Many existing and emerging pharmaceutical compounds, such as
biotechnology-derived oligonucleotides, peptides and other macromolecular drugs,
cannot be effectively administered by traditional non-invasive methods and are,
therefore, administered only by injection or infusion. Oral delivery of such
molecules is generally inefficient due to the rapid breakdown of the molecules
during digestion and the natural impermeability of the GI tract to larger
molecules. The skin is even less permeable to macromolecules than the GI tract,
which the Company believes is the primary reason passive transdermal delivery of
those molecules using patch technology has not been successful to date.

IONTOPHORETIC DRUG DELIVERY TECHNOLOGY AND ITS ADVANTAGES

     Iontophoretic drug delivery systems are designed to overcome many of the
limitations associated with many other drug delivery methods. Iontophoresis is
an active method of transdermal drug delivery in which water-soluble, ionized
(electrically charged) drugs are transported through the skin for local or
systemic therapeutic applications by applying a low-level electrical current.
The amount of drug delivered through the skin is proportional to the total
electrical charge applied (which is a function of time and current). Therefore,
it is possible to program the system's electrical current levels to control more
precisely the desired drug dose, delivery rate and the pattern of delivery.

     Among the many drug delivery methods available today, the Company believes
the advantages of iontophoresis drug delivery are many and include the
following:

     - Non-invasive, needle-free

     - Rapid onset and cessation kinetics

     - Controlled, programmable and titratable drug delivery capabilities
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<PAGE>   6

     - Ability to provide smooth, variable or bolus plasma levels, singly or in
       combination, all in a single delivery system

     - Enhanced transdermal delivery for a broad range of compounds, including
       large drug molecules such as peptides and oligonucleotides

     - Minimal variability in the delivery profiles among patients and body
       sites

     - Potential for enhanced patient compliance and control

     In contrast, the most common types of drug delivery, tablets and capsules,
are often limited by inconvenient dose intervals and degradation of the drug in
the GI tract, which can lead to use of higher dosages with concomitant greater
risks of side effects. Injection methods provide rapid onset but require
caregiver administration and have risks of side effects and infection. Certain
drugs can be delivered by iontophoresis 10 to 1,000 times faster than by passive
transdermal patches. Bioavailability and dose control are difficult in pulmonary
and nasal drug delivery. Iontophoretic administration can be precisely
controlled for customized therapeutic needs.

     Iontophoretic drug delivery systems are generally comprised of a power
supply which is used to control drug dose (the "dose controller") and a pair of
electrode patches, one containing the drug and one serving as a grounding patch
to complete the electrical circuit through the skin. The drug patch is applied
to the patient's skin at a local treatment site (such as for joint or tendon
soreness or to induce local dermal anesthesia), or at any suitable site on the
body for systemic drug delivery. The grounding patch is applied to the skin a
short distance away from the drug patch . When an electric current with the same
positive or negative electric charge as the drug is applied to the drug patch ,
the drug is repelled from the patch and into the skin in the same way as like
poles of two magnets repel each other. Although the Company's currently marketed
products consist of discrete components, the Company has begun the development
of more advanced systems which integrate all components in a single miniaturized
patch.

THE COMPANY'S IONTOPHORETIC SYSTEMS

     Although the fundamentals of iontophoresis have been understood for
decades, the method has become commercially practicable as a means of delivering
drugs only recently as a result of advances in electronics, materials science
and electrochemistry. These advances have led to the development of more
efficient and adaptable drug patches and more reliable, compact and programmable
dose controllers. The Company has developed iontophoretic drug delivery systems,
which incorporate dose controllers and active transdermal patch kits that have
enhanced performance characteristics, which the Company believes are adaptable
to a number of clinical settings and therapeutic applications, and which the
Company believes are cost effective in a number of therapeutic applications. The
Company's current iontophoretic drug delivery systems are not designed to
facilitate patient self-administration, but systems currently being developed by
the Company may allow patients significant control over the administration of
certain drugs.

     In March 1997, the Company entered into a series of agreements with Elan
Corporation, plc ("Elan") pursuant to which the Company acquired certain
in-process research and development programs, including exclusive world-wide
rights to the commercial exploitation of certain technology developed by Elan in
the field of iontophoretic drug delivery and certain other electro-transport
fields (the "Elan Agreements"). The acquisition of the Elan technology is
intended to speed the development and commercialization of products using a
combination of the Company's and Elan's technology, including the miniaturized
integrated, wearable systems currently under development by the Company. The
Company also believes its competitive position in relation to other companies
engaged in the development of iontophoretic drug delivery systems has been
significantly enhanced by Elan's broad base of United States and foreign
patents, in-depth body of in vitro drug transport data and in vivo animal and
human clinical data, in addition to other proprietary know-how.

     In June 2000, the Company further strengthened its proprietary position by
acquiring all of the rights to the iontophoretic intellectual property owned by
Laboratories Fournier, S.C.A. ("Laboratories Fournier"), a former collaborative
development partner. The purchase included patented technology, know-how, and a
10-year non-compete agreement.
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     Dose Controllers. The Company's dose controllers generate the low-level
electrical current needed for iontophoretic drug delivery. The Company presently
markets a compact, fully portable dose controller (the "Phoresor") that offers
durable microprocessor control, enhanced user interface, versatile programmable
dosing capability, autocalculating treatment time (based on electrical current
settings and selected dose) and constant current output (by automatically
adjusting voltage to compensate for variations in the electrical resistance of
the skin). The Phoresor incorporates a microprocessor, other microelectronic
components, on-board software that monitors and controls the rate of current
flow, and an easy-to-use control panel. The Company's next generation of dose
controllers, both stand-alone and wearable miniaturized versions, are being
designed to include many of the same features as the Phoresor. Depending on the
therapeutic application, the new generation dose controllers may be designed to
allow bolus dosing capability and programming (using a physician's or
pharmacist's key) to adjust dosing to match desired delivery profiles or
patterns.

     In a clinical setting for short treatment durations, the dose controller is
a small, discrete, reusable unit connected to a disposable, single-use patch to
which drug solution is added immediately prior to application to the patient.
This technology is used in the Company's current products. For longer term or
chronic applications or patient-administered therapy outside the clinical
setting, the Company is developing iontophoretic systems in which the battery,
dose controller and patches will be combined on a small adhesive patch applied
to the skin as a single, integrated unit. The electronic components may be
reusable, with replaceable or rechargeable batteries, or the entire unit may be
disposable after a single use. The drug may be added to the drug patch during
manufacturing, or may be stored separately in the system and introduced into the
patch immediately before use by means of proprietary, integrated hydration
devices developed by the Company.

     Active Transdermal Patches. Patch design is critical to successful delivery
of a drug by iontophoresis. The Company's drug patches incorporate patented and
proprietary design innovations which the Company believes offer significant
advantages to both patients and health care providers. The Company's proprietary
patch technology includes patented polymer hydrogels which absorb drug solutions
in seconds, becoming soft and pliable so as to conform better to the body and to
be comfortable to the patient. The Company's patch technology also employs
special silver and silver chloride inks to distribute electric current more
evenly from the dose controller to the patches and to control potential changes
in acidity and alkalinity (pH changes) which can occur during iontophoresis.

BUSINESS STRATEGY

     The Company's primary business goal is to establish its specialty
pharmaceutical products and its proprietary active transdermal drug delivery
systems as a preferred, cost effective means of delivering a wide range of
drugs. To achieve this goal, the Company uses its multi-disciplinary expertise
in pharmacology and drug formulation, regulatory and product testing,
microelectronics, electrochemistry, polymer chemistry, adhesives, design and
manufacturing. The Company's strategy for achieving this goal includes the
following principal elements:

     Develop Systems for Off-Patent Drugs. The Company intends to focus on the
independent development of proprietary iontophoretic drug delivery systems for
off-patent drugs with known safety and efficacy and for which the Company
believes its drug delivery technology may be cost competitive with and offer
advantages over other drug delivery methods. The Company believes that, by
developing proprietary products based on currently approved off-patent drugs,
rather than new chemical entities ("NCEs"), it can reduce regulatory and
development risks and shorten the product development cycle for certain
products.

     Increase Market Penetration of Existing Products. The Company is actively
seeking to expand the commercial potential of its current products by pursuing
additional regulatory approvals. The Company is conducting Phase III clinical
trials to establish the safety and efficacy of its active transdermal drug
transport systems for the treatment of acute local inflammation using a
formulation of Dexamethasone.

     In order to achieve broad distribution and market penetration of its
current and future products, the Company intends to expand its marketing
presence through direct sales and marketing or through

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co-marketing of its products with collaborative marketing partners or
distributors that have national or market-specific marketing capabilities

     Broaden Technology Platform. The Company intends to enhance its proprietary
technology base principally through internal research and development. The
Company will also pursue additional iontophoretic and other complementary
products and technologies owned or developed by third parties, on a case-by-case
basis, through in-licensing or acquisition.

     Control Product Manufacturing Processes. The Company has historically
maintained control over the manufacture of its active transdermal patch kits in
order to retain control over the quality of its products and capture a larger
portion of the product revenue stream when third parties are involved in the
marketing of the product.

     Enter into Collaborative Relationships. In order to gain access to NCEs and
other proprietary drugs, and to reduce the costs and risks associated with the
development of drug delivery systems for such compounds, the Company intends to
enter into collaborative relationships with pharmaceutical and other
biotechnology companies whose drugs could benefit from the Company's active
transdermal technology.

PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

     The Company currently has product development programs in various stages of
development for acute local inflammation, ophthalmic disease, local dermal
anesthesia and pain control. The following table lists the therapeutic
applications of the principal products developed or currently under development
by the Company. This table is qualified in its entirety by reference to the more
detailed descriptions set forth elsewhere in this Report. There can be no
assurance that any product under development will be developed successfully or
approved in a timely manner, if at all, or even if developed or approved, be
successfully manufactured or marketed. In addition, the status of development
indicated below does not necessarily indicate the order in which the products
shown may be submitted to or approved by the FDA.

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       APPLICATION           THERAPEUTIC AGENT       PRODUCT STATUS
       -----------           -----------------       --------------
<S>                        <C>                    <C>
Acute local inflammation   Dexamethasone          Phase III
                                                  clinicals(1)
Acute local inflammation   None specified         Currently marketed(1)
Ophthalmic disease         To be determined       Preclinical
Local dermal anesthetic    Iontocaine             Currently marketed
Pain control               Hydromorphone          Phase II clinicals(2)
</TABLE>

---------------
(1) Currently marketed under a 510(k) clearance for use with "ions of soluble
    salts or other drugs." The Company is conducting Phase III trials in support
    of an NDA seeking drug labeling for this application.

(2) Initial Phase II clinical studies were conducted by Elan. The Company
    acquired the rights to the data from those studies under the Elan
    Agreements. The Company will be required to conduct expanded Phase II and
    Phase III clinical trials.

  ACUTE LOCAL INFLAMMATION

     Acute local inflammatory conditions resulting from exercise, sports
injuries, trauma or repetitive motion disorders are among the leading types of
injuries occurring in the workplace and among physically active adults. The most
common of these injuries include tendonitis, bursitis, carpal tunnel syndrome
and epicondylitis (tennis elbow). The Company believes iontophoretic delivery of
Dexamethasone provides significant advantages over other current treatment
regimens for acute local inflammation. Dexamethasone is a potent, highly
effective corticosteroid used to treat local inflammation. Because the Company's
delivery systems are non-invasive and can be site specific, the Company believes
that it can offer patients the benefit of the most potent anti-inflammatory drug
available with the added benefits of enhanced safety and a benign side effect
profile. The Company's active transdermal transport systems eliminate many of
the risks and much of the inconvenience associated with bolus steroid
injections, avoid the systemic side effects of oral steroids and eliminate the
significant incidence of GI tract side effects of orally administered
nonsteroidal anti-inflam-

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matory drugs (" NSAIDS") and Cox II inhibitors. The Company believes its
proprietary delivery system also increases therapeutic efficacy by bypassing
metabolism by the liver, by reducing the possibility of overdosing, and by
providing localized delivery at the target site without trauma. As a result, the
Company believes that it may be advantageous to introduce the iontophoretic
delivery of Dexamethasone into the initial treatment regimen for acute local
inflammation. The Company believes that earlier treatment with Dexamethasone has
the potential to significantly increase the rate of patient recovery and, in
doing so, reduce the overall cost of patient treatment.

     While the Company's products are currently used in the active transdermal
delivery of corticosteroids, validation of efficacy, an approved NDA, and a
strategic marketing collaboration may dramatically expand the market potential
for this product. The Company estimates that the total potential retail market
in the United States for the sale of iontophoretic drug delivery systems to
treat acute local inflammatory conditions may be in excess of $540 million. The
Company estimates that present retail sales into this market by the Company and
its competitors are approximately $40 million.

     Commercial Products. The Company pioneered the commercial introduction of
its active transdermal drug delivery system in 1979. The product is used
principally by physical therapists (under a doctor's prescription) and has been
administered in over 13 million patient treatments for the delivery of
corticosteroids. More than 11 million of these treatments have occurred since
1990, when advancements in patch technology made by the Company led to the
introduction of its present family of hydrogel patches for use with its
microprocessor controlled dose controllers. The Company's products are also used
by athletic trainers and physical therapists serving a number of professional
and semi-professional athletes and teams, including golfers, tennis players,
men's and women's Olympic ski teams, and football, basketball and hockey teams.
The Company believes that its active transdermal drug delivery systems have been
accepted in the rehabilitation marketplace due to their ease of use,
non-invasiveness, recognized efficacy and lack of significant side effects.

     Products Under Development. Currently, due to limited labeling, neither the
Company nor its competitors has the requisite regulatory approval to promote the
use of iontophoretic drug delivery systems specifically for the delivery of
Dexamethasone. The Company believes that its inability to do so limits its
ability to market its system, particularly to the physician market. The Company
further believes that to market iontophoretic drug delivery systems for a
specific drug and therapeutic indication the FDA requires that each new
drug/device combination be approved through an NDA. Therefore, in order to
expand the Company's sales of its products into the physician market as a first
line treatment for acute local inflammation, the Company has filed an
investigational new drug application ("IND") with the FDA.

     The Company has completed patient enrollment in two of the three legs of a
pivotal Phase III clinical study for the delivery of Dexamethasone for the
treatment of acute local inflammation. The three legs or indications being
studied in Phase III trials are designed to enable the Company to seek general
labeling for the treatment of acute local soft tissue inflammation. The Company
expects to begin a confirmatory study prior to the end of calendar year 2000,
with an NDA filing anticipated during 2001. The initial market introduction of
ProDex(TM) for clinical use is planned in 2002, subsequent to FDA approval.
Following the market introduction of ProDex, the Company plans to introduce
IontoDex(TM), an integrated version of the product for patient in-home use.

     The Company believes its unique drug formulation, combined with its
proprietary active transport system, satisfies a significant unmet medical need
by offering patients the superior anti-inflammatory effects of Dexamethasone
while avoiding all of the gastrointestinal and other systemic side effects of
NSAIDS and Cox II inhibitors. The Company believes the approval of an NDA (if
obtained) would allow the Company to more actively promote its products to
family physicians, orthopedists, neurologists and sports and industrial medicine
clinics. The Company also believes that with NDA approval of IontoDex in a
patient friendly, second-generation, mini-integrated iontophoretic delivery
system, could effectively compete as a first line therapy in the NSAID and
COX-II inhibitor market. The Company believes the worldwide prescription market
for these anti-inflammatory drugs is in excess of $10 billion annually.

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  OPHTHALMICS

     Age related macular degeneration ("AMD") and proliferative diabetic
retinopathy are the two leading causes of blindness in North America and Europe.
Both of these diseases result in the abnormal growth of blood vessels in the
eye, which weaken and allow the leakage of blood into the macula of the eye
causing damage to the retina and loss of vision. Currently AMD and diabetic
retinopathy remain largely untreatable diseases. Laser photocoagulation surgery
can be used in about 5% -- 15% of patients to destroy leaking blood vessels that
arise in wet AMD and is also used in about 50% of proliferative diabetic
retinopathy patients. However, laser surgery itself causes progressive damage to
the retinal tissue, formation of scar tissue; and reappearance of the fragile
blood vessels is a common occurrence.

     New photodynamic treatments are under development, whereby a light
sensitive compound is injected into the bloodstream and a low-dose laser or
other light source is used to "activate" the photo-sensitive compound in the
eye. However, due to the fact the eye is generally immunopriviledged, large
systemic doses of these compounds are generally necessary in order to reach a
therapeutic level in the diseased tissue. Furthermore due to these high systemic
doses of photosensitive compounds, patients must remain protected from external
light sources for extended periods after administration.

     In addition, many new antiangiogenic compounds, which inhibit the formation
of new blood vessels, are being evaluated; however, they must be administered by
intraocular injection or implant into the eye. This involves significant patient
anxiety and discomfort as well as risk of vision loss due to infection, bleeding
and retinal detachment.

     The Company believes that effective treatment for this patient population
represents a significant unmet clinical need. Industry analysts project
potential world-wide future revenue for therapies to treat or to halt the
progression of these two sight-threatening diseases to be in excess of $2.0
billion annually.

     Products Under Development. The Company is at a pre-clinical stage in the
development of proprietary systems for the non-invasive, site-specific delivery
of drugs into the center and posterior chambers of the eye. An initial focus of
this application of the Company's technology will be for the delivery of
antiangiogenic compounds, which will bind to or near the retinal structure or
related tissue to inhibit the abnormal vessel growth and halt the progression of
diseases such as AMD and proliferative diabetic retinopathy.

     The Company's OcuPhor(TM) System holds promise for the non-invasive,
site-specific delivery of a number of potential specialty pharmaceutical
products to the eye. Initial research to date supports the technical feasibility
of OcuPhor for the treatment of ophthalmic diseases. Currently, the Company is
working with a number of biotech, ophthalmic and pharmaceutical companies to
evaluate the feasibility of delivering their therapeutic compounds in the
OcuPhor System. The high level of interest the Company has experienced with
these potential collaborative partners supports its belief that the ability to
offer specialty pharmaceutical products for the non-invasive treatment of
diseases to the eye will serve another significant unmet medical need and would
also capitalize on another unique application of its proprietary active drug
transport technologies.

     In addition to evaluating compounds for potential partners, the Company is
also evaluating various drugs that are currently approved for ophthalmic
application, but are presently delivered via intraocular injection or implant.
The Company believes that many of these drugs represent meaningful market
opportunities, which could be enhanced by offering the benefits of OcuPhor.
Product opportunities in this category include anti-inflammatories, antibiotics,
antivirals, and anesthetics.

     Drugs currently approved for ophthalmic application offer a less expensive
and more rapid clinical and regulatory pathway. In addition, they offer the
Company the opportunity to develop and commercialize these products on its own,
giving it the potential for a broader reach into the $5 billion ophthalmic
pharmaceutical market and making the Company less dependent upon corporate
partnerships.

     The Company recently demonstrated successful proof-of-principle involving
the transscleral delivery of a commercially-available antibiotic to the eye.
Additionally, the Company has disclosed the results of a safety study showing
that its active transport system did not negatively affect intraocular pressure
or retinal function.

                                       10
<PAGE>   11

  LOCAL DERMAL ANESTHESIA

     Medical care providers have long recognized the importance of the
management of pain, including pain associated with certain minimally invasive
medical procedures such as needle injections; venous access (including
phlebotomies and intravenous catheterizations); lumbar punctures; and local
dermatological, gynecological and urological procedures such as wart and mole
removal, biopsies (including fine needle, punch, excisional, shave and cervical
biopsies), Mohs procedures and vasectomies. To address this concern, local
dermal anesthetics are widely used in medical practice.

     The primary means of administering local dermal anesthetics is by needle
injection, which has the benefit of being fast, effective and long lasting.
However, the fear and pain associated with the needle stick, especially on the
extremities or on other sensitive areas such as the face, vulva and cervix is
compounded by the sting associated with virtually all injectable local
anesthetics. These factors increase patient discomfort and anxiety. In addition,
the local tissue distortion which typically accompanies injections may cause
procedural difficulty for the physician. New topical analgesic formulations have
recently been introduced into the market and are gaining widespread acceptance,
especially in pediatric hospitals and clinics and in pediatric dermatology.
These topical formulations avoid many of the pitfalls of anesthetic injections,
but they generally require significant advance preparation since they take one
to two hours to obtain anesthesia. Even when topical formulations are given
adequate time to achieve anesthesia, they anesthetize only to a maximum depth of
3 to 5 mm. The time required to achieve therapeutic anesthesia and the depth of
anesthesia make these formulations less suitable or impractical for many
potential applications. The Company believes that the growing interest in these
products, in spite of their clinical limitations, is a positive indication of
the market's desire for an effective, needle-free local dermal anesthetic.

     Commercial Products. The Company's Iontocaine is FDA approved under an NDA
and is specifically labeled for use with the Company's Phoresor system and its
proprietary, single use, disposable active transdermal patch kits. The Company
has received FDA labeling to use the system for all procedures requiring local
dermal anesthesia.

     Using the Company's product, clinicians can administer needle-free, long
lasting (up to two hours) local dermal anesthesia up to a depth of 10 mm in
approximately ten minutes. The Company believes the ability to provide painless
local dermal anesthesia up to three times deeper than topical formulations, and
in 85% less time, could make the Company's products a preferred drug delivery
method for many existing applications where topical anesthetic creams are
currently employed, and that the product will provide a means of painlessly
inducing local dermal anesthesia for a broader range of medical procedures where
the use of such creams is not practical.

     A leading concern among patients, parents and health care professionals is
the control of pain in the practice of children's medicine, including the pain
associated with needle insertions. With the growing acceptance of topical
anesthetic creams in the pediatric hospital setting, the Company believes there
is a large potential market for local anesthetic products targeted toward
pediatrics. Accordingly, the Company focused its initial local dermal anesthesia
product launch into the pediatric market under the brand name Numby Stuff. Numby
Stuff is presently being used to induce local dermal anesthesia prior to
pediatric intravenous starts, blood draws and other invasive procedures, and the
Company believes it provides a cost effective alternative to the leading topical
product.

     Although the response to the Company's Numby Stuff product line by medical
professionals and medical organizations has been very positive, the process by
which such products obtain administrative review and final approval for use in
the hospital environment is extremely complex and time consuming. Among other
things, such new products are subject to extensive evaluations within each
hospital and often each department, require review and approval by hospital
products and therapeutics committees, and must be accepted for inclusion on the
hospital's formulary. As a result, to date, Numby Stuff has not generated
significant revenues. The Company seeks to expand its sales, marketing and
distribution capabilities for this product through additional distribution
arrangements and does not anticipate achieving significant revenues to be
generated from this product until such distribution capabilities have been
established.

                                       11
<PAGE>   12

     Products Under Development. In order to achieve greater market acceptance
of its Iontocaine product, the Company supports evaluations conducted by doctors
and other medical personnel for the use of its anesthetic product prior to a
wide variety of painful medical procedures. The Company also believes, in
addition to the pediatric market, the adult hospital market represents
additional opportunities for growth.

  PAIN MANAGEMENT

     The Company estimates that of the 24 million surgeries performed each year
in the United States, 75%, or 18 million, result in moderate to severe
post-operative pain. In addition, there are currently 9.1 million cancer
patients in the United States. Each year roughly 6.6 million patients with
cancer are treated for pain and of these, 65% to 80% experience moderate to
severe pain. In recent years, there has been a growing awareness that many
patients, especially the terminally ill, do not receive adequate analgesic
therapy for their pain. Sales of prescription narcotics in the United States to
treat pain are over $1.0 billion and, according to market reports, the market is
estimated to be growing at a rate of approximately 10% per year. Factors
contributing to this growth rate include more relaxed policies for narcotic
administration and the introduction of drug delivery systems that make
administration safer, more controllable and convenient.

     Morphine is the most commonly prescribed drug for the management of severe
pain in critically ill patients in the United States. Morphine and hydromorphone
are the most widely used parenteral pain medications for home use because they
are relatively safe, effective and have relatively short half lives.
Hydromorphone is a more potent, highly soluble analog of morphine, which is the
standard against which other analgesics are generally measured.

     The Company believes that iontophoretic delivery systems for narcotic
analgesics for the treatment of post operative and chronic pain control could
offer significant benefits over existing methods of delivery, including infusion
pumps, transdermal patches and transmucosal products. To provide effective pain
relief, a morphine injection is generally administered every four hours.
Repeated injection or continuous infusion of morphine is expensive because the
methods of administration consume substantial hospital staff time or require
frequent visits by a health care provider to a patient receiving home infusion
therapy. An iontophoretic system has the potential to offer all of the benefits
of an infusion pump, including the ability to closely match the delivery profile
with rapid onset and cessation of action characteristics and to provide control
of baseline delivery with bolus dose capability for acute episodes of pain, but
without the need to use needles. The Company believes an iontophoretic delivery
system for pain management may also be more convenient and less expensive, since
the rental of costly infusion pumps and intervention by a skilled medical
professional may not be required. Passive transdermal patches offer convenience
and reduced costs, but they take four to eight hours before effective analgesia
is achieved and take hours or even days for the drug depot to clear from the
skin after the patch is removed. In addition, passive transdermal patches do not
offer precise baseline dosing from patient to patient and do not address the
need for bolus dosing required to address acute episodes of pain.

     Products Under Development. The Company believes an iontophoretic delivery
system for hydromorphone may be a favorable alternative to the administration of
morphine by infusion for acute post-operative pain and for chronic pain in the
hospice or home care setting. Hydromorphone is approximately ten times more
potent than morphine and has added therapeutic advantages, including lower
incidence of nausea and vomiting (which frequently accompanies the
administration of morphine), and more effective analgesia with no stupefying and
minimal hypnotic effects. Through the Elan Agreements, the Company obtained
rights to prototype wearable iontophoretic drug delivery systems for the
delivery of hydromorphone and to the preclinical, Phase I and limited Phase II
clinical data generated by Elan in testing the device. In addition, the Company
is conducting further studies in support of this program and believes that the
mini-integrated system being developed for IontoDex may offer additional
advantages to those systems already under development. The Company will continue
to conduct studies and development activities to facilitate its business
development efforts relating to this therapeutic application. However, at this
time, the Company does not intend to advance this development program further
into Phase II or into Phase III clinical trials without the financial,
strategic, marketing, and clinical and regulatory support of a collaborative
development and marketing partner. The Company believes the clinical trials
necessary to market this product may be of relatively short duration

                                       12
<PAGE>   13

in comparison to an NCE, since hydromorphone's safety and efficacy profile is
well known and the clinical endpoints are both well established and easy to
measure.

OTHER POTENTIAL PRODUCT APPLICATIONS

     The Company has a program for identifying and screening other specialty
pharmaceutical products for additional therapeutic indications where the Company
believes there is a significant unmet medical need. This includes the
identification of suitable water-soluble ionic drugs that can be delivered
through iontophoresis in therapeutic quantities on a cost-competitive basis. The
Company has identified certain drugs and therapeutic indications as potential
product opportunities, and has undertaken preliminary steps toward verifying the
market need and technical feasibility of iontophoretic delivery of those drugs.
In addition, through the Elan Agreements, the Company acquired certain
in-process research and development, including exclusive worldwide rights for
the commercial exploitation of certain iontophoretic patents, know-how and
clinical data. The Elan technology includes in vitro feasibility studies
conducted on 64 drugs (including several peptide drugs), in vivo blood level
animal studies on 18 of those drugs and human blood level studies on nine of
those drugs.

     As part of its continuing product development program, the Company will
evaluate the feasibility of iontophoretic delivery of biotechnology-derived
peptides, small proteins and oligonucleotides for applications where existing
drug delivery systems have significant limitations.

COLLABORATIVE RELATIONSHIPS AND LICENSES

     The Company is targeting specialty pharmaceutical products that it can
develop internally, without depending on collaborative research and product
development partners, and where it can play a direct role in the marketing or
co-marketing of its products. The Company believes this strategy will earn
maximum profits for shareholders, while giving it greater control over the
timing of product development and introduction, as well as marketing efforts.

     This strategy will not preclude the Company from seeking collaborative
marketing partners for internal programs, nor will it interfere with its
interest or ability to enter into collaborative research and development
activities with prospective pharmaceutical or biotech partners. However, the
Company's product development and commercialization strategy will not be as
dependent upon such relationships, as it has been in the past.

     If the Company elects to enter into collaborative relationships, potential
collaborative partners may provide proprietary drugs, technology, financial
resources, research and pharmaceutical manufacturing capabilities or marketing
infrastructure to aid in the development and commercialization of the Company's
current and future products. Depending on the availability of financial,
marketing and scientific resources and other factors, the Company may also
license or cross-license its technology or products to others and retain profit
sharing, royalty, manufacturing, co-marketing, co-promotion or similar rights.
Any such arrangements could limit the Company's flexibility in pursuing
alternatives for the development or commercialization of its products.

     The Company has entered into collaborative relationships and license
arrangements with Novartis Pharmaceuticals Corporation ("Novartis"), Elan, Alza
Corporation ("Alza"), University of Utah Research Foundation (the "University"),
and Boston University. However, the Company expects no further material revenues
or expenditures from these collaborative relationships.

MANUFACTURING

     The Company's manufacturing activities primarily relate to its manufacture
of active transdermal patch kits, which are manufactured and assembled using
several proprietary materials, components, processes and production technologies
developed by the Company in conjunction with its equipment and materials
suppliers. The Company has manufactured internally all of the drug patches it
has sold, and believes its patch manufacturing capacity can be expanded to meet
its needs for the foreseeable future.

                                       13
<PAGE>   14

     The Company does not manufacture or repackage any drugs or compounds used
in its delivery systems and outsources the manufacture and assembly of its
Phoresor dose controllers. The Company's Phoresor employs a variety of
sub-assemblies and components that are designed or specified by the Company.
These components and subassemblies are manufactured by third parties, and then
shipped to a contract manufacturer for final assembly. The Company's
manufacturing activities for the Phoresor are limited to design, labeling,
inspection and packaging.

     The Company's second and third generation dose controllers are in various
stages of design, research, and development. The Company, alone or in
conjunction with its development partners, designs these products and, in
combination with its suppliers, will manufacture and assemble prototypes and
clinical quantities. Upon completion of the design, specifications and testing,
the Company intends to subcontract the manufacture and assembly of all
commercial quantities of its dose controllers to electronics companies that
specialize in such work.

     The Company and certain of its suppliers are required to comply with FDA
regulations governing manufacturing practices, including the Quality System
Regulations, which mandate controls for product design, control and quality. The
Company believes it is in compliance with the Quality System Regulations. The
Company is also ISO 9001 and CE Mark certified and has good manufacturing
practices audits conducted on a regular basis.

SALES AND DISTRIBUTION

     The Company's marketing strategy is to position its specialty
pharmaceutical products in the marketplace as the preferred means of
administration for a wide range of drugs. The strategy employs the use of
multiple sales and distribution channels, including (i) a network of medical
supply dealers; (ii) independent sales representatives; and (iii) co-marketing
through collaborative marketing partners or distributors that have national or
market-specific marketing capabilities. The Company intends to use these
distribution channels, both singly and, for certain products, in combination, to
maximize the Company's marketing resources.

     The Company currently sells the majority of its products into the physical
therapy, sports medicine, and related specialty markets. The Company employs a
nationwide network of distributors and independent sales representatives to sell
and distribute its products in those markets. This distribution network is
supported by regional business managers and internal customer service
representatives who are employees of the Company. In addition to the Company's
sales and distribution efforts for its local inflammation products in the United
States, it maintains marketing and sales activities in international markets.
These sales are made primarily through independent distributors operating in
those countries.

     The Company's regional business managers and internal customer service
representatives along with independent sales representatives facilitate the
sales of Numby Stuff in the pediatric hospital market. The Company is seeking to
expand its presence in this market through collaborative marketing partners or
through distributors that have market-specific distribution capability.

     One distributor accounted for approximately 16% and 15% of the Company's
product sales for the fiscal years ended June 30, 2000 and 1999. Although a
valued distribution channel, in the event of a loss of such customer, the
Company believes that it could continue to reach a substantial portion of its
end user customers through alternative distribution channels. No single
distributor accounted for more than 10% of product sales in fiscal 1998.

PATENTS AND PROPRIETARY RIGHTS

     The Company's proprietary technology includes patents, trademarks, trade
secrets and other proprietary know-how. These technologies are used in various
combinations in the testing, evaluation and formulation of optimal ionic drug
solutions and in the research, development, design and manufacture of
microprocessor controlled power supplies and active transdermal patches which
are specifically designed and constructed for particular therapeutic
applications.

                                       14
<PAGE>   15

     The Company has implemented a policy of actively patenting and maintaining
as trade secrets and proprietary information all inventions and technologies
which it believes are important to its business operations. The Company
generally seeks patent protection for its key proprietary technologies in major
markets in the United States, Canada, Europe and Japan. The Company also relies
on a number of trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop and maintain its competitive position.

     As of June 30, 2000, the Company held or had rights to utilize
approximately 76 United States patents and 364 foreign patents and has (or has
the rights to utilize) approximately 12 pending patent applications in the
United States and 71 pending patent applications in foreign countries for that
technology. The Company also owns or has licensed rights to issued and pending
United States patents governing the design and manufacture of certain
myoelectric prosthetic devices which it has sublicensed to a third party in
connection with the sale of the Company's Motion Control division.

GOVERNMENT REGULATION

     Both drugs and medical devices, including the Company's iontophoretic drug
delivery systems, are subject to extensive regulation by the FDA in the United
States and by comparable authorities in other foreign countries.

     The Company's iontophoretic drug delivery products involve a medical device
component, thereby subjecting such products to compliance with the FDA's
regulations governing medical devices. Where such medical devices are labeled
for use with a specific pharmaceutical product for a specific therapeutic
indication, they are subject to the FDA's regulations governing both medical
devices and pharmaceutical products. The Company believes that most, if not all,
of its future iontophoretic drug delivery systems will involve a pharmaceutical
component or specific labeling for use with a pharmaceutical product.

     Products regulated as medical devices may not be commercially distributed
in the United States unless they have been cleared or approved by the FDA.
Currently, there are two methods for obtaining FDA clearance or approval of
medical devices. Devices deemed to pose less risk are placed in class I (general
controls) or class II (general and special controls) and qualify for 510(k)
notification, a procedure under sec. 510(k) of the Federal Food, Drug, and
Cosmetic Act. A medical device that does not qualify for the 510(k) clearance is
placed in class III, which is reserved for devices deemed by the FDA to pose the
greatest risk. A preamendment class III device is one that was on the market
before May 28, 1976. This status means that the device at present can be
marketed through a 510(k) clearance, but it remains subject to a call for a PMA
application under sec. 515 of the Drug Act. A PMA application generally requires
a much more complex submission than a 510(k) notification. Typically, it
requires a showing that the device is safe and effective based on extensive and
costly preclinical and clinical testing, as well as information about the device
and its components regarding, among other things, manufacturing, labeling and
promotion.

     The regulatory status of iontophoretic devices is complex. The FDA has
classified them as class II devices eligible for marketing through 510(k)
premarket clearance when intended for use with a drug whose labeling bears
adequate directions for the device's use with that drug. However, if an
iontophoretic device is intended for use with a drug that is not labeled for use
with the device, the FDA considers the iontophoresis device to be a preamendment
class III device.

     The Company's Phoresor received 510(k) clearance as a preamendment class
III device labeled for use with ions of soluble salts or other drugs. In 1995,
the FDA approved an NDA for Iontocaine to be used as a local anesthetic and
delivered iontophoretically by the Phoresor, which effectively moved the
Phoresor into class II for this intended use. Unlike Iontocaine, Dexamethasone
does not have an NDA approval allowing it to be labeled for iontophoretic
delivery. Thus, at the present time, the Company's Phoresor is a preamendment
class III device when used with Dexamethasone (or any drug other than
Iontocaine). No assurance can be given that the Company will ever obtain an
approved NDA for the iontophoretic delivery of any drug other than Iontocaine.

                                       15
<PAGE>   16

     In August 2000, the FDA published a proposed rule to amend the physical
medical device regulations to remove the class III iontophoresis device
identification. The Company is seeking clarification of the proposed rule from
the FDA and is evaluating its specific implications on the regulatory and
competitive environment of iontophoresis devices. However, since the Company's
products are all approved as class II devices, the Company does not believe that
the proposed regulation would have any effect on the Company's ability to
continue the manufacturing and selling of its current products.

     A lengthy and complex regulatory framework also applies to the labeling and
marketing of specific drugs. Generally these pharmaceutical products require the
submission of an NDA. The NDA approval process generally entails (i) conducting
preclinical laboratory and animal testing to enable FDA authorization of an IND
application, (ii) initial IND clinical studies to define safety and dose
parameters, (iii) well controlled IND clinical trials to demonstrate product
safety and efficacy, and (iv) submission to the FDA of an NDA. Preclinical
studies involve laboratory evaluation of product characteristics and animal
studies to assess the efficacy and safety of the drug. Human clinical trials are
typically conducted in three sequential phases. Phase I trials normally consist
of testing the product in a small number of healthy volunteers for safety and
pharmacokinetic parameters using single and multiple dosing regimens. In Phase
II trials, the manufacturer evaluates safety, initial efficacy, and dose ranging
of the product for specific indications in a somewhat larger patient population.
Phase III trials typically involve expanded testing for safety and clinical
efficacy in a broad patient population at multiple clinical testing centers. The
FDA under a series of regulations called the Good Laboratory Practice
regulations regulates the preclinical and clinical studies. The results of the
studies must be submitted to the FDA for review. In responding, the FDA may
grant marketing approval, require additional testing and/or information, or deny
the application altogether. The process of obtaining FDA approval for a new
product through the IND/NDA process may take several years and typically
involves substantial risks and the expenditure of substantial resources.

     The FDA regulates the Company's quality control and manufacturing
procedures by requiring the Company and its contract manufacturers to comply
with certain standards, including compliance with the Quality System Regulations
(for devices) and the current Good Manufacturing Practices ("GMP") regulations
(for drugs).

     The Company may be subject to certain user fees that the FDA is authorized
to collect under the Food and Drug Modernization Act of 1997, which reauthorized
the user fees established in the Prescription Drug User Fees Act of 1992 for
certain drugs.

     Agencies similar to the FDA regulate medical devices and pharmaceutical
products in most foreign countries. The International Standards Organization
(ISO) has established regulations for medical devices in the European Union.
Currently the Company is in compliance with these ISO 9001 regulations and its
products are CE Marked. The Company will be required to meet the regulations of
any foreign country where it markets its products. In addition, various aspects
of the Company's business and operations are also regulated by a number of other
governmental agencies including the Drug Enforcement Agency, U.S. Department of
Agriculture, the Environmental Protection Agency, the Occupational Safety and
Health Administration as well as by other federal, state and local authorities.

     Noncompliance with these various government regulatory requirements could
result in enforcement actions that could include fines, plant closure, a recall
of the Company's products or other civil or criminal sanctions. Noncompliance as
well as unanticipated changes in existing regulatory requirements or adoption of
new requirements could have a material adverse effect on the Company.

COMPETITION

     The drug delivery, pharmaceutical and biotechnology industries are highly
competitive and rapidly evolving, with significant developments expected to
continue at a rapid pace. The Company's success will depend upon maintaining a
competitive position and developing products and technologies for efficient and
cost effective drug delivery. The Company's products will compete with other
formulations of drugs and with other drug delivery systems, including other
iontophoretic delivery systems. The Company believes its products will compete
on the basis of quality, efficacy, cost, convenience, safety and patient
compliance.
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     The Company is aware of many other competitors in the general field of drug
delivery, including competitors developing injectable or implantable drug
delivery systems, oral drug delivery technologies, passive transdermal systems,
oral transmucosal systems and intranasal and inhalation systems. The Company is
also aware of other companies that have developed or are currently developing
iontophoretic and other active transdermal drug delivery systems.

     Alza, Becton Dickinson, and Empi, Inc. ("Empi") are engaged in the
development and/or marketing of iontophoretic devices. Alza, a licensee of the
Company, and Becton Dickinson are both undertaking the development of
iontophoretic drug delivery systems, but neither currently market any
iontophoretic products. Empi is the Company's primary competitor in the
treatment of acute local inflammation in the physical therapy market and, the
Company estimates, controls a majority of the retail iontophoresis market for
that indication.

     In connection with their collaboration, the Company granted Novartis a
perpetual, non-exclusive, royalty-bearing license to certain of the Company's
iontophoretic technology which survived the termination of the collaboration.
After the termination of the collaboration on December 31, 1998, Novartis may,
pursuant to the royalty-bearing license, independently develop products using
the licensed technology, including products which may compete directly with
those currently marketed or under development by the Company

     Currently, no other company has FDA approval to market an iontophoretic
system for the inducement of local anesthesia. The Company's iontophoretic
system for delivering Iontocaine for the inducement of local dermal anesthesia
will therefore primarily compete with traditional methods of delivering local
dermal anesthetics by needle injection or will be used in circumstances where
either no anesthesia is used, due to the pain associated with the needle
injection (including needle injections themselves), or where topical anesthetic
creams are used. The most effective and widely used topical anesthetic cream,
EMLA, is manufactured and sold by Astra Corporation, a large Swedish
pharmaceutical company. There can be no assurance that the Company can
effectively compete with these products or any other drug delivery system.

EMPLOYEES

     The Company has assembled a team of medical-products managers and
scientists with considerable experience in iontophoresis encompassing all of the
key disciplines which the Company believes are necessary to further the
development and implementation of the Company's business.

     As of June 30, 2000, the Company had 70 full-time employees, 3 of whom hold
doctorate degrees. Nine others hold advanced business or technical degrees. Of
the Company's 70 full-time employees on that date, 13 were engaged in research
and development, 33 in manufacturing and quality control, and 24 in marketing
and general administration. The Company's future success depends in significant
part upon the continued service of its key technical and senior management
personnel and its continuing ability to attract and retain highly qualified
technical and managerial personnel. None of the Company's employees is
represented by a labor union. The Company has not experienced any employee
related work stoppages and considers its relations with its employees to be
good.

DISCONTINUED OPERATIONS

     In December 1996, the Company sold the assets of the Motion Control
division for $1.0 million and granted the purchaser an exclusive, worldwide
license and sublicense to the patents, trademarks, know-how and other
intellectual property of the Company relating to the Motion Control products.
Under the terms of that sublicense agreement, the Company receives license fees
and royalties on future sales of Motion Control products.

ITEM 2. PROPERTIES

     As of June 30, 2000, the Company leased administrative, manufacturing and
research office space at two facilities. The Company's principal executive
offices and manufacturing facility, which consists of approximately 18,000
square feet of useable space, are located at 3385 West 1820 South in Salt Lake
City, Utah. Its

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<PAGE>   18

research facility, which consists of approximately 10,000 square feet of useable
space, is located at 1290 West 2320 South in Salt Lake City, Utah. These
facilities are leased to the Company until December 31, 2000 and 2002,
respectively.

     In an effort to consolidate its research, administrative and manufacturing
operations, the Company has leased approximately 34,000 square feet of useable
space located at 2441 South 3850 West in West Valley City, Utah and anticipates
consolidation into this single facility by January 2001. This facility is leased
to the Company until April 2006. In conjunction with the facility consolidation,
the Company expects to execute an option for early abandonment of its research
facility located at 1290 West 2320 South. The Company is liable for certain
remaining lease obligations of its abandoned space. Relating to the planned
consolidation, the Company accrued the remaining obligations and recorded a net
non-recurring charge of $360,000.

     Taking into consideration the planned relocation to its new facility in
2001, the Company believes its facilities will be adequate and suitable for its
present needs and that additional space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS

     The Company is not involved in, nor is it aware of, any litigation or
impending litigation.

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

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.

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                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's common stock has traded on the American Stock Exchange (the
"AMEX") since April 24, 1998, under the symbol "IOX". The following table sets
forth, for the periods indicated, the high and low sales prices as reported by
the AMEX. These prices represent quotations between dealers and do not include
retail mark-up, markdown or commission, and do not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
                                                         2000                1999
                                                   ----------------    ----------------
                                                    HIGH      LOW       HIGH      LOW
                                                   ------    ------    ------    ------
<S>                                                <C>       <C>       <C>       <C>
First Quarter....................................  $3.000    $2.000    $5.125    $1.438
Second Quarter...................................  $4.250    $2.188    $3.750    $1.000
Third Quarter....................................  $7.125    $3.500    $3.875    $1.750
Fourth Quarter...................................  $6.188    $3.750    $2.750    $2.000
</TABLE>

     As of June 30, 2000, there were approximately 130 shareholders of record of
the Company's common stock. Included in the number of shareholders of record are
shares held in "nominee" or "street" names. Because many of such shares are held
by brokers and other institutions on behalf of individual investors, the Company
is unable to estimate the total number of shareholders represented by these
record holders.

     The Company has not paid dividends to date and does not anticipate or
contemplate paying cash dividends in the foreseeable future. It is the present
intention of management to utilize all available funds for the development and
growth of the Company's business.

                                       19
<PAGE>   20

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected statement of operations data for the years ended
June 30, 2000, 1999 and 1998, and the balance sheet data as of June 30, 2000 and
1999 are derived from the audited consolidated financial statements included in
this report and should be read in conjunction with those consolidated financial
statements and the notes thereto. The selected statement of operations data for
the years ended June 30, 1997 and 1996, and the balance sheet data as of June
30, 1998, 1997 and 1996 are derived from the audited consolidated financial
statements of the Company, which are not included herein and are qualified by
reference to such financial statements and the notes thereto. Certain
reclassifications have been made to prior year balances to conform to the
financial statement presentation included herein.

<TABLE>
<CAPTION>
                                                                         FISCAL YEAR ENDED JUNE 30,
                                                  -------------------------------------------------------------------------
                                                      2000           1999           1998            1997           1996
                                                  ------------   ------------   ------------    ------------    -----------
<S>                                               <C>            <C>            <C>             <C>             <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
  Product sales.................................  $ 10,596,000   $  9,608,000   $  8,489,000    $  7,483,000    $ 6,829,000
  Contract research revenues, royalties and
    license fees................................       171,000        893,000      1,788,000       1,800,000      2,409,000
                                                  ------------   ------------   ------------    ------------    -----------
        Total revenues..........................    10,767,000     10,501,000     10,277,000       9,283,000      9,238,000
Operating costs and expenses:
  Cost of products sold.........................     3,692,000      3,961,000      3,659,000       3,147,000      2,984,000
  Research and development......................     3,210,000      1,860,000      1,790,000       1,679,000      1,253,000
  Selling, general and administrative...........     5,620,000      5,393,000      5,389,000       3,501,000      3,283,000
  Non-recurring charges(1)......................       360,000             --             --(2)   15,059,000(3)     430,000
                                                  ------------   ------------   ------------    ------------    -----------
        Total costs and expenses................    12,882,000     11,214,000     10,838,000      23,386,000      7,950,000
                                                  ------------   ------------   ------------    ------------    -----------
Income (loss) from operations...................    (2,115,000)      (713,000)      (561,000)    (14,103,000)     1,288,000
Interest expense................................        26,000         19,000        930,000         242,000          9,000
Interest income and other, net..................       986,000        867,000        402,000         291,000        167,000
                                                  ------------   ------------   ------------    ------------    -----------
Income (loss) from continuing operations before
  income taxes and minority interest............    (1,155,000)       135,000     (1,089,000)    (14,054,000)     1,446,000
Minority interest...............................            --             --         11,000          23,000        (17,000)
Income tax expense (benefit)....................            --             --             --           5,000        (79,000)
                                                  ------------   ------------   ------------    ------------    -----------
Income (loss) from continuing operations........    (1,155,000)       135,000     (1,100,000)    (14,082,000)     1,542,000
Income from discontinued operations(4)..........            --             --             --          44,000        201,000
                                                  ------------   ------------   ------------    ------------    -----------
Net income (loss)...............................  $ (1,155,000)  $    135,000   $ (1,100,000)   $(14,038,000)   $ 1,743,000
                                                  ============   ============   ============    ============    ===========
DILUTED PER COMMON SHARE AMOUNTS:
Income (loss) from continuing operations........  $      (0.18)  $       0.02   $      (0.29)   $      (4.52)   $      0.42
Income from discontinued operations.............            --             --             --            0.01           0.05
                                                  ------------   ------------   ------------    ------------    -----------
Net income (loss)...............................  $      (0.18)  $       0.02   $      (0.29)   $      (4.51)   $      0.47
                                                  ============   ============   ============    ============    ===========
Shares used in computing diluted per share
  amounts(5)....................................     6,513,000      7,429,000      3,821,000       3,109,000      3,710,000
BALANCE SHEET DATA:
Cash and cash equivalents.......................  $ 15,097,000   $ 17,263,000   $ 16,709,000    $  6,346,000    $ 4,507,000
Total assets....................................    19,916,000     20,154,000     20,200,000       8,664,000      7,251,000
Long-term obligations, including current
  portion.......................................       521,000        186,000        237,000(6)   15,240,000         44,000
Redeemable, convertible preferred shares........            --             --             --         900,000      1,270,000
Accumulated deficit.............................   (23,658,000)   (22,503,000)   (22,638,000)    (21,538,000)    (7,500,000)
Shareholders' equity (deficit)..................    17,713,000     18,791,000     18,651,000      (9,491,000)     3,992,000
</TABLE>

---------------
(1) Reflects a lease abandonment charge for facilities relocation.

(2) Reflects the write-off of certain in-process research and development
    (including related transaction costs) purchased from Elan.

(3) Costs incurred in connection with the settlement of certain trade dress
    litigation.

(4) Discontinued operations include the operating results of the Company's
    prosthetics division, which was sold in December 1996.

(5) See Notes to Consolidated Financial Statements for information concerning
    the computation of per share amounts.

(6) Reflects $15,240,000 (including accrued interest) in notes issued to Elan at
    June 30, 1997.

                                       20
<PAGE>   21

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Report. The following Management's Discussion and Analysis of Financial
Condition and Results of Operations 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 involve risks and uncertainties. The
Company's actual results of operations could differ significantly from those
anticipated in such forward-looking statements as a result of numerous factors
discussed under Item 1 "Business" and elsewhere in this Report.

OVERVIEW

     The Company is a specialty pharmaceutical company focused on satisfying
substantial unmet medical needs in large pharmaceutical markets. The Company is
currently pursuing research, product development and commercialization
activities in the local inflammation and ophthalmic markets. The majority of the
Company's revenues have been generated through the sale of its Phoresor system
and related active transdermal drug delivery products into the physical therapy
market for use in the treatment of acute local inflammation. Since its
inception, the Company has generally incurred operating losses and it expects to
incur additional operating losses over the next several years as a result of
anticipated costs associated with a significant increase in internally funded
research, development and clinical trial activities relating to new applications
for its iontophoretic drug delivery technologies, and the consolidation and
equipping of its facilities. As of June 30, 2000, the Company's accumulated
deficit was approximately $23.7 million. The Company's ability to achieve and
sustain profitability will depend on its ability to achieve market acceptance
and successfully expand sales of its existing products; successfully complete
the development of, receive regulatory approvals for, and successfully
manufacture and market its products under development; as well as successfully
perform and achieve development, clinical testing, manufacture, marketing or
commercialization of certain of its products or products in development, as to
which there can be no assurance.

FISCAL YEARS ENDED JUNE 30, 2000 AND 1999

     Revenues. Product sales increased 10% to $10.6 million in fiscal 2000 from
$9.6 million in fiscal 1999. The increase can be attributed primarily to
continued growth in the IOGEL(TM) product line, expanded distribution efforts
and increased market acceptance of iontophoresis.

     Contract research revenues, royalties and license fees were $171,000 in
fiscal 2000 compared to $893,000 in fiscal 1999. This is attributable to a
decrease in research revenues from the Company's collaborative development
agreement with Novartis, which ended in December 1998. This decrease in research
revenue is expected to continue while the Company seeks new collaborative
development partnerships.

     Costs of Products Sold. Costs of products sold decreased 7% to $3.7 million
in fiscal 2000 from $4.0 million in fiscal 1999, reflecting higher fiscal 1999
costs due to certain non-recurring engineering and tooling costs in fiscal 1999.
Gross product margins improved substantially to 65% during fiscal 2000 from 59%
in fiscal 1999. Increased sales, a favorable product mix and effective cost
containment efforts in manufacturing operations accounted for this improvement.
The Company expects a reduction in gross margin during fiscal 2001 due to higher
fixed costs resulting from its relocation to a new facility and from the
installation of automated manufacturing equipment in anticipation of volume
increases following FDA approval of new products.

     Research and Development Expense. Research and development expenditures
increased 73% to $3.2 million in fiscal 2000 from $1.9 million in fiscal 1999,
reflecting the Company's investment in key internal development programs. The
Company is in the latter stages of Phase III clinical trials for the
non-invasive, site-specific delivery of dexamethasone for the treatment of acute
local inflammation. In addition, the Company continues to conduct research and
to publish and present data relating to the technical feasibility of its
OcuPhor(TM) System for the delivery of specialty pharmaceutical products in the
treatment of ophthalmic

                                       21
<PAGE>   22

diseases. The Company intends to continue the self-funding of these and other
research and product development programs.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $5.6 million in fiscal 2000 and $5.4 million in
1999. Expenses in fiscal 2000 included increased business development costs and
legal, professional and related costs incurred in connection with patent
prosecution and maintenance costs. Expenses in fiscal 1999 included
non-recurring costs associated with the restructuring of the Company's field
sales force and an increase in certain marketing and promotional expenses,
increased legal, professional and related costs incurred in connection with
investor relations and SEC compliance, increased patent prosecution and
maintenance costs, and executive recruiting costs.

     Lease Abandonment Charge. The Company incurred a non-recurring lease
abandonment charge of $360,000 associated with the planned consolidation of its
research, administrative and manufacturing operations.

     Other Costs and Expenses. Interest expense increased to $26,000 in fiscal
2000 from $19,000 in fiscal 1999. This increase can be attributed to higher
interest expense resulting from the increased equipment and furniture purchased
under the Company's lease line. Interest income and other miscellaneous income
was $986,000 in fiscal 2000, compared to $867,000 in fiscal 1999. Amounts in
both periods reflect interest earnings on the invested cash balances.

     Income Taxes. The Company has substantial net operating loss carryforwards,
which, under the current "change of ownership" rules of the Internal Revenue
Code of 1986, as amended, may be subject to substantial annual limitation. No
income tax benefit was recognized for fiscal 2000. In addition, no income tax
expense was recognized on the Company's fiscal 1999 pre-tax income.

     Net Income (loss). A net loss of $1,155,000 in fiscal 2000 compares to net
income of $135,000 in fiscal 1999. Interest earnings on invested cash balances
offset a loss from operations in fiscal 2000, in part. The net loss in fiscal
2000 can be attributed to internally funded research and development programs,
including the Phase III clinical studies, and the leasehold abandonment charge.
Net income in fiscal 1999 can be attributed to the interest earnings on invested
cash balances.

FISCAL YEARS ENDED JUNE 30, 1999 AND 1998

     Revenues. Product sales increased 13% to $9.6 million in fiscal 1999 from
$8.5 million in fiscal 1998. The increase can be attributed primarily to higher
sales of the Company's iontophoretic drug delivery products for the treatment of
local inflammation resulting from continued overall growth in this market.

     Contract research revenues, royalties and license fees were $893,000 in
fiscal 1999 compared to $1.8 million in fiscal 1998. This is attributable to a
decrease in research revenues pursuant to the Company's collaborative
development agreement with Novartis, which ended in December 1998.

     Costs of Products Sold. Costs of products sold increased 8% to $4.0 million
in fiscal 1999 from $3.7 million in fiscal 1998, reflecting increased material
and labor costs associated with higher unit sales volumes and certain
non-recurring engineering and tooling costs. Costs of products sold decreased as
a percentage of product sales primarily as a result of lower fixed manufacturing
services costs spread over a larger sales volume offset, in part, by an increase
in labor and material costs.

     Research and Development Expense. Research and development expenditures
were approximately $1.9 million in fiscal 1999 and $1.8 million in fiscal 1998.
A reduction in research and development expenditures on Novartis related
activities during fiscal 1999 was offset by increased discretionary spending on
internally funded research projects, including the Phase III clinical trials for
the non-invasive, site-specific delivery of Dexamethasone for the treatment of
acute local inflammatory conditions.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $5.4 million in fiscal 1999 and 1998. Expenses in
fiscal 1999 included increased legal, professional and related costs incurred in
connection with investor relations and SEC compliance, increased patent
prosecution and maintenance costs, and executive recruiting costs associated
with the Company's efforts to fill positions in its
                                       22
<PAGE>   23

executive management staff. In addition, the Company incurred one-time costs
associated with the restructuring of the Company's field sales force and an
increase in certain marketing and promotional expenses. Expenses in fiscal 1998
included recruiting, personnel and other sales and marketing costs associated
with the Company's initial investment in the market introduction of Numby Stuff.
In addition, the Company realized increased costs associated with the
maintenance and prosecution of the patent portfolio acquired from Elan.

     Other Costs and Expenses. Interest expense decreased to $19,000 in fiscal
1999 from $930,000 in fiscal 1998. This decrease can be attributed to lower
interest expense resulting from the repayment of the Company's indebtedness to
Elan in transactions related to the initial public offering of its common shares
in April 1998. In contrast, in fiscal 1998, the Company recognized non-cash
interest expense on the $15.0 million in notes issued to Elan in connection with
the Elan Agreements. Interest income and other miscellaneous income was $867,000
in fiscal 1999, compared to $402,000 in fiscal 1998, reflecting higher interest
earnings on higher average invested cash balances, which included the net
proceeds from the Company's initial public offering in April 1998.

     Net Income (loss). Net income of $135,000 in fiscal 1999 compares to a net
loss of $1.1 million in fiscal 1998. The net income in fiscal 1999 can be
attributed to the interest earnings on invested cash balances, while the loss in
fiscal 1998 can be attributed to the non-cash interest charges on the Elan
indebtedness and the Company's investment in the sales and marketing of Numby
Stuff, which, to date, has not generated significant revenues.

LIQUIDITY AND CAPITAL RESOURCES

     Prior to fiscal 1996, the Company funded its operating losses primarily
through private equity financing, convertible debt arrangements, capital lease
financing, and collateralized bank loans. During the periods fiscal 1996 through
fiscal 1999, the Company's operating and research activities have been
internally funded, primarily as a result of the research and development
revenues and license fees the Company received from Novartis. During fiscal
2000, the Company's operating loss, which resulted from investment in research
and development programs, was funded largely by cash flow from its commercial
operating business and its cash reserves.

     Novartis elected not to renew its collaborative research and development
agreement with the Company, which expired on December 31, 1998. Accordingly, the
Company's contract research revenues declined during fiscal 2000.

     In April 1998, the Company completed an initial registered public offering
pursuant to which the Company issued 1,850,000 common shares and raised
approximately $11,445,000, net of underwriters' discounts and offering expenses.
As of June 30, 2000, the Company had cash and cash equivalents totaling
approximately $15.1 million. Cash in excess of immediate requirements is
invested in a manner which is intended to maximize liquidity and return while
minimizing investment risk, and, whenever possible, the Company seeks to
minimize the potential effects of concentration of credit risk.

     The Company consumed $491,000 in cash from operating activities during
fiscal 2000 compared to generating $789,000 in fiscal 1999. Decreased cash from
operating activities in fiscal 2000 can be attributed to the Company's net loss.
The Company generated $789,000 in cash from operating activities during fiscal
1999 compared to consuming $251,000 in cash during fiscal 1998. This increased
cash from operating activities in fiscal 1999 can be attributed to the
generation of $135,000 of net income in fiscal 1999 as compared to a net loss of
$1.1 million in fiscal 1998, as well as a decrease in the Company's net
investment in working capital during fiscal 1999.

     Historically, the Company's operations have not been capital intensive and,
therefore, its investment in property, plant and equipment during the periods
presented has not been significant. However, the Company has entered into
agreements with various commercial banks and lending institutions to provide
additional lease financing for the Company's anticipated investments in capital
equipment. As of June 30, 2000, the Company had approximately $521,000
outstanding under these lease agreements, all of which was classified as
long-term obligations. The Company intends to use the available credit under the
agreement to fund the majority of its

                                       23
<PAGE>   24

capital equipment needs during the next 12 months. The Company's expenditures
for equipment and furniture in excess of equipment acquired under the lease
agreements were $234,000, $189,000 and $670,000 in each of the fiscal years
ended June 30, 2000, 1999 and 1998, respectively.

     Other sources and uses of cash during the periods included the following:
During fiscal 2000, the Company purchased all rights to the iontophoretic
intellectual property owned by Laboratories Fournier, including patented
technology, know-how and a 10-year non-compete clause, at a cost of $1.4
million, including transaction expenses; used $84,000 for payments on long-term
capital lease obligations; and received $43,000 in proceeds from exercise of
stock options. During fiscal 1999, the Company used $51,000 for payments on
long-term capital lease obligations. During fiscal 1998, the Company purchased a
license to certain iontophoretic drug delivery technology at a cost of $214,000,
including transaction expenses; received proceeds of $240,000 under a long-term
capital lease; and paid $180,000 for the mandatory redemption of a portion of
its Series C Preferred Shares.

     In other non-cash transactions related to the initial public offering, (i)
the Company granted warrants to purchase 170,000 common shares to the
underwriters, exercisable after April 23, 1999, at an initial exercise price of
$9.38 per share; (ii) Elan converted the amounts outstanding under the Elan
Notes, including accrued interest thereon, into 1,206,391 common shares and
893,901 shares of newly created Series D preferred shares, at the initial public
offering price of $7.50 per share; (iii) the 28,800 Series C preferred shares of
the Company which were outstanding immediately prior to the offering were
automatically converted, on a share-for-share basis, into common shares; and
(iv) the Company issued an additional 29,697 common shares to Laboratories
Fournier, pursuant to the antidilution provisions of a prior stock purchase
agreement between the companies. Also during fiscal 1998, Novartis converted
their minority interest in Dermion, Inc. into common shares of the Company.

     In an effort to meet anticipated future growth and to consolidate its
research and administrative functions and manufacturing operations, the Company
executed a lease agreement in fiscal 2000 for an approximate 34,000 square foot
facility. Accordingly, the Company recorded a non-recurring charge of $360,000
relating to the abandonment of its current facilities. The Company anticipates
the use of term loans and lease lines, the availability of which is not assured,
to fund the facilities modification and consolidation.

     The Company expects to continue to incur substantial costs associated with
its research and product development activities, including clinical trials,
investment in sales and marketing of new product lines, additional investment in
working capital, and the cost of consolidating and equipping its facilities.
These costs will be funded by internally generated funds from the Company's
established commercial business; term loan and capital lease financing
agreements; and from existing cash balances. It is currently estimated that the
Company will consume $5 million of existing cash balances during fiscal year
2001. The Company anticipates that its existing cash balances and cash generated
from operations will be sufficient to fund the operations of the Company at
least through fiscal 2001. However, the Company may be required or elect to
raise additional capital before that time. The Company's actual capital
requirements will depend on many factors, some of which are outside the
Company's control.

                                       24
<PAGE>   25

ADDITIONAL RISK FACTORS

     Future results could differ materially from those currently anticipated by
the Company due to a number of factors, including those identified in this
section and elsewhere in this Form 10-K, any of which could have a material
adverse impact on the Company's business, financial condition or results of
operations.

     Continuing Operating Losses; Uncertainty of Future Profitability. Since
1991, the Company has sustained losses in each fiscal year, except fiscal years
1999 and 1996. The Company had an accumulated deficit of $23.7 million as of
June 30, 2000. The Company intends to expand its product lines, research and
development, business development and marketing efforts in the near future and,
therefore, does not anticipate being profitable in the near term.

     Uncertainties Related to Product Development. The Company will be required
to undertake time-consuming and costly development activities and seek
regulatory approval for new applications and products. Product revenues may not
be realized from the sale of any such products for several years, if at all.

     Reliance on Collaborative Partners. The Company's strategy is to target
products that it can develop internally, without depending on collaborative
research and product development partners, and where it can play a direct role
in the marketing or co-marketing of its products. The strategy will not preclude
the Company from seeking collaborative marketing partners for internal programs,
nor will it interfere with its interest or ability to enter into collaborative
research and development activities with prospective pharmaceutical or biotech
partners. However, the Company's product development and commercialization
strategy will not be as dependent upon such relationships, as it has been in the
past.

     The Company has previously entered into arrangements with corporate
partners, licensors, licensees and other parties for the development, clinical
testing, manufacture, marketing or commercialization of certain of its products
or products in development. Until the Company elects to and enters into
additional collaborative agreements, the Company will be required to internally
fund all of its research and development expenditures. To the extent the Company
chooses not, or is not able, to establish such collaborations, it could
experience significantly increased business risk and capital requirements in the
development, clinical testing, manufacturing, marketing and commercialization of
its products. The Company could also encounter significant delays in introducing
products into markets or find that the development, manufacture or sale of
proposed products in such markets is adversely affected by the absence of those
collaborative arrangements.

     Intense Competition and Rapid Technological Change. The drug delivery,
pharmaceutical and biotechnology industries are highly competitive and rapidly
evolving, with significant developments expected to continue at a rapid pace.
Many competitors, including public and private corporations, academic
institutions, governmental agencies and other public and private research
organizations, are involved in the development of drug delivery systems,
including competing electrotransport-related drug delivery technologies. Many of
these competitors have substantially greater financial and other resources, are
more experienced, and are larger, more established organizations than the
Company. There can be no assurance the Company's competitors will not succeed in
more rapidly developing or marketing products that are more effective or
commercially attractive than the Company's current or future products, or that
would render the Company's products obsolete or noncompetitive. There can also
be no assurance the Company will have the financial resources, technical or
management expertise, or manufacturing or support capability to compete in the
future.

     Reliance on Third Party Distribution. The Company presently markets its
drug delivery systems for the treatment of acute local inflammation primarily to
physical therapists through a nationwide network of distributors and independent
sales representatives. The Company is currently marketing its local dermal
anesthesia products in the United States hospital market through a limited
number of sales personnel who work directly for the Company and independent
manufacturers representatives.

     In order to achieve broad distribution and market penetration of its
current and future products, the Company intends to expand its marketing
presence through direct sales and marketing or through co-marketing of its
products with collaborative marketing partners or distributors that have
national or market-specific marketing capabilities. There can be no assurance
that the Company will be able to maintain existing, or establish new, marketing
arrangements on terms favorable to the Company, if at all.
                                       25
<PAGE>   26

     Dependence on Patents and Proprietary Technology. The Company's ability to
commercialize many of the products it has under development will depend, in
part, on its or its licensors' ability, both in the United States and in other
countries, to obtain patents, enforce those patents, preserve trade secrets and
operate without infringing on the proprietary rights of third parties.

     The patent positions of drug delivery, pharmaceutical and biotechnology
companies are highly uncertain and involve complex legal and factual questions.
There can be no assurance the patents currently owned and licensed by the
Company, or any future patents, will prevent other companies from developing
similar or therapeutically equivalent products, or that other companies will not
be issued patents that may prevent the sale of Company products or require
licensing and the payment of significant fees or royalties by the Company.
Furthermore, there can be no assurance any of the Company's products or methods
will be patentable, will not infringe upon the patents of third parties, or that
the Company's patents or future patents will give the Company an exclusive
position in the subject matter claimed by those patents. The Company may be
unable to avoid infringement of third party patents and may have to obtain
licenses, defend infringement actions or challenge the validity of those patents
in court. There can be no assurance a license will be available to the Company,
if at all, on terms and conditions acceptable to the Company, or that the
Company will prevail in any patent litigation. There can be no assurance the
Company's pending patent applications will result in issued patents, patent
protection will be secured for any particular technology, any patents that have
been or may be issued to the Company or its licensors will be valid or
enforceable or that the Company's patents will provide meaningful protection to
the Company.

     The Company also relies on trade secrets and other unpatented proprietary
information in its product development activities. To the extent the Company
relies on confidential information to maintain its competitive position, there
can be no assurance other parties may not independently develop the same or
similar information.

     Need to Manage Expanding Operations. If the Company is successful in
achieving market acceptance of its products and products under development, it
will be required to expand its operations, particularly in the areas of research
and development, sales and marketing, and manufacturing. As the Company expands
its operations in these areas, those expansions will likely result in new and
increased responsibilities for management personnel and place significant strain
on the Company's management, operating and financial systems and other
resources. To accommodate any such growth and compete effectively, the Company
will be required to implement improved information systems, procedures and
controls, and to expand, train, motivate and manage its work force. The
Company's future success will depend to a significant extent on the ability of
its current and future management personnel to operate effectively both
independently and as a group. There can be no assurance the Company's personnel,
systems, procedures and controls will be adequate to support the Company's
future operations.

     Future Capital Needs; Uncertainty of Additional Funding. The further
development and commercialization of the Company's products and technology will
require a commitment of substantial funds to conduct research and development
activities, including preclinical and clinical studies, to expand distribution
and hire additional sales and marketing personnel and to expand and develop
manufacturing capabilities. The Company believes that existing cash balances and
cash generated from operations will be sufficient to fund the operations of the
Company for at least the next 24 months; however, the Company's actual capital
requirements will depend on many factors, and the Company may be required or
elect to raise additional capital before that time.

     To satisfy its capital requirements, the Company may seek to raise funds
through public or private financings, collaborative relationships or other
arrangements. Any additional equity financing may be dilutive to shareholders
and debt financing may involve significant restrictive covenants. Collaborative
arrangements to raise additional funds may require the Company to relinquish its
rights to certain of its technologies, products or marketing territories. There
can be no assurance that any such financing, if required, will be available on
terms satisfactory to the Company, if at all.

     Uncertainty of Government Regulation. The research, development,
manufacture and marketing of the Company's products are extensively regulated by
the FDA, which requires its approval of drugs and medical
                                       26
<PAGE>   27

devices before they can be marketed in the United States. Similar approvals are
also required from other regulatory bodies in foreign countries. The regulatory
processes established by these government agencies are lengthy, expensive and
uncertain. In addition, once approval is obtained, that approval may be
withdrawn.

     The Company has received approval from the FDA on its NDA for Iontocaine,
and the FDA has allowed the Company to market its iontophoretic dose controllers
and electrode products for use with ions of soluble salts or other drugs under
the FDA's 510(k) regulations governing medical devices. However, in 1994, the
FDA publicly stated that it intends to require manufacturers of iontophoretic
devices to obtain PMAs for marketed devices currently used with drugs not
specifically labeled for iontophoretic delivery, which would include the
Company's dose controller for use with ions of soluble salts or other drugs,
such as Dexamethasone. The agency to date has not published such a regulation.

     If the FDA calls for PMAs for preamendment class III iontophoretic devices,
the Company would be required to have a PMA accepted for filing by the FDA
within 90 days after the date of the final regulation calling for PMAs. There
can be no assurance that the Company would be able to complete and file a PMA
within the prescribed time period, or that the FDA would approve it. The
Company's failure to submit a PMA within the required timeframe could result in
the Company being required to cease commercial distribution of the Phoresor for
use with any drug other than Iontocaine. Any interference with the Company's
ability to distribute its Phoresor system for use with Dexamethasone would have
a material adverse effect on the Company's financial condition and results of
operations.

     Even if the Company obtains regulatory approval, a marketed product, its
manufacturer and its manufacturing facilities and pertinent operations are
subject to extensive regulation and periodic inspections. Discovery of
previously unknown problems with a product, manufacturer or facility could
result in FDA sanctions, restrictions on a product or manufacturer, or an order
to withdraw and/or recall a specific product from the market. There can also be
no assurance that changes in the legal or regulatory framework or other
subsequent developments will not result in the limitation, suspension or
revocation of regulatory approvals granted to the Company. Such events, were
they to occur, could have a material adverse effect on the Company's business,
financial condition and results of operations.

     The Company and certain of its suppliers are also required to comply with
US and foreign regulations governing manufacturing practices, which mandate
procedures for extensive control and documentation of product design, control
and validation of the manufacturing process and overall product quality. If the
Company or its suppliers fail to comply with applicable regulations regarding
these manufacturing practices, the Company could be subject to sanctions.

     Under the FDA's regulations, when a manufacturer changes or modifies a
device for which it has received a 510(k) clearance, it is required to obtain an
additional 510(k) clearance for the modified device if the modification
significantly affects the safety or efficacy of the device, or if the
modification results in a major change in intended use. In such cases, the
manufacturer is expected to make the initial determination as to whether the
modification is of a kind that would require a new 510(k) clearance. The FDA's
regulations provide only limited guidance in making this determination. The FDA
has cleared the Company's iontophoretic dose controller and electrode kits for
marketing under a 510(k) clearance. Since obtaining its 510(k) clearances, the
Company has made modifications to its products. Based on the checklist developed
by the FDA to assist manufacturers in determining whether they are required to
obtain a 510(k) clearance for a modified device, the Company has determined that
a new 510(k) submission was not required in connection with the commercial
introduction of such products. However, there can be no assurance that the FDA
will not require the Company to obtain additional 510(k) clearances with respect
to those products. If the FDA requires the Company to submit a new 510(k) notice
for any device modification, the Company may be prohibited from marketing the
modified device until the 510(k) notice is cleared by the FDA.

     The Company may be required to comply with other proposed and new US and
foreign regulations governing its current and future products. There can be no
assurance that proposed and new regulations will not have a materially adverse
effect on the Company.

                                       27
<PAGE>   28

     Dependence on Single Sources of Supply. A key material used in many of the
Company's current electrode products is available only from a single supplier.
In addition, the Company obtains Iontocaine from Abbott Laboratories under a
contract which may be terminated with six months notice. The Company also has
the right to obtain Dexamethasone from Luitpold Pharmaceuticals, Inc./American
Regent Laboratories, Inc. under a contract expiring in January 2005. The Company
believes that, if necessary, alternative sources can be developed or alternate
materials can be substituted for each of these single-sourced materials.
Although the Company has not experienced difficulty acquiring these materials on
commercially reasonable terms and in sufficient quantities to maintain required
production levels, no assurance can be given that price increases or
interruptions in the supply of these materials will not occur in the future or
that the Company will not have to seek alternate suppliers or obtain substitute
materials, which may require additional product validations and regulatory
submissions. Any significant price increase, interruption of supply, inability
to secure an alternate source or qualify a substitute material could have a
material adverse effect on the Company's ability to manufacture its products or
to obtain or maintain regulatory approval of its products.

     The Company's current dose controllers are manufactured under a contract
with a third party electronics manufacturer. There can be no assurance that its
present supplier can manufacture sufficient quantities of dose controllers that
meet quality and performance standards on a timely basis. If the supplier cannot
meet the Company's requirements, or in the event of an interruption of its
supply, the Company would be required to identify, qualify and validate an
alternate source of supply within a reasonable period of time.

     Limited Manufacturing Experience. The Company manufactures its
iontophoretic drug delivery electrodes in quantities sufficient to satisfy its
current level of product sales. To meet anticipated increases in sales, the
Company may need to increase its production significantly beyond its present
manufacturing capacity. Accordingly, the Company may be required to increase its
manufacturing capacities or to contract with another party to manufacture its
products. There can be no assurance the Company can successfully increase its
capacity on a profitable basis, or contract with another party on terms
acceptable to the Company, if at all.

     Significant increases in production volume will likely require changes in
the Company's product and manufacturing process in order to facilitate increased
automation of the Company's production. There can be no assurance such changes
in products or processes or efforts to automate the Company's manufacturing
process will be successful.

     The Company believes its facilities operate in accordance with the Quality
System Regulations currently prescribed by the FDA and in substantial compliance
with ISO 9001 and CE Mark standards. The Company has GMP audits conducted by a
qualified, independent organization on a regular basis and is ISO 9001 and CE
Mark certified. There can be no assurance the Company will be able to maintain
such compliance, particularly if the scale of the Company's manufacturing
operations increases.

     Uncertainty of Health Care Reimbursement. The Company's ability to
commercialize its products successfully will depend in part on the extent to
which reimbursement for the costs of those products and related treatments will
be available from government health administration authorities, private health
insurers and other organizations in the United States and in foreign markets
where the Company's products will be sold and used. Third party payors can
affect the pricing or relative attractiveness of the Company's products by
regulating the reimbursement they provide on the Company's or competing products
or therapies. There can be no assurance such reimbursement will continue at
present levels, if at all. Some insurance carriers do not reimburse health care
providers for use of the Company's products in certain applications.
Furthermore, significant uncertainty exists as to the reimbursement status of
new health care products.

     Effective October 1, 1991, the Health Care Financing Administration adopted
new regulations providing for the treatment of capital related costs for medical
products. The Company is unable to predict what adverse impact on the Company,
if any, these or any additional government regulations, legislation or
initiatives or changes by other payors affecting reimbursement or other matters
that may influence decisions to obtain medical devices may have.

     Retention and Attraction of Key Employees. The Company is highly dependent
on its ability to continue to attract and retain qualified scientific,
managerial, manufacturing and sales and marketing personnel. There

                                       28
<PAGE>   29

is intense competition for qualified personnel in the Company's area of
activity, and there can be no assurance the Company will be able to continue to
attract and retain the qualified personnel necessary for the development of its
business. The Company does not carry key-man insurance with respect to any of
its executives or employees.

     Risk of Product Liability, Product Recalls and Warranty Claims;
Availability of Insurance. The testing, marketing and sale of drug delivery and
related pharmaceutical products for use in humans involves unavoidable risks.
The use of the Company's products in clinical trials and the sale of its
products upon approval may expose the Company to potential product liability
resulting from the use of such products. In addition, the existence of a product
liability claim, a product recall or excessive warranty claims (in any such
case, whether arising from defects in design or manufacture or otherwise) could
have an adverse effect on the Company's sales of that product or require a
change in the indications for which it may be used.

     Product liability insurance in the Company's industry is expensive and
difficult to obtain. Although the Company currently has product liability
insurance, there can be no assurance the existing coverage is adequate. The
Company will seek to maintain and appropriately increase its insurance coverage
as its product sales increase and the clinical development of its new product
applications progress. There can be no assurance, however, that the Company will
be able to maintain its current levels of insurance on acceptable terms, will be
able to secure increased coverage as the commercialization of its products
proceeds or that any particular level of insurance will provide adequate
protection against potential liabilities.

     Anti-Takeover Provisions of Certain of the Company's Agreements. Certain
provisions of a cross-license agreement between the Company and Alza may have
the effect of deferring, delaying or preventing a change in control of the
Company, a merger involving the Company or the assignment or transfer of certain
technologies of the Company. Under the agreement, the Company and Alza, among
other things, exchanged non-exclusive, royalty free rights to certain patented
technologies which each party believed to be of significant strategic importance
to the potential technological success of many iontophoretic drug delivery
applications. Both parties are prohibited from assigning their rights under the
agreement to certain named companies or any other entity that derives more than
50 percent of its income from the development, licensing and/or sale of drug
delivery systems to other pharmaceutical companies without first receiving the
consent of the other party. Restrictions imposed on the Company's ability to
assign its rights under this agreement may have the effect of prohibiting a sale
of the Company to such named companies or entities, or may otherwise limit the
Company's ability to capitalize on the commercial and other economic potential
of these technologies through a technology license, asset sale, merger,
combination or similar transaction.

     Environmental Matters. The Company's research and development activities
involve the controlled use of hazardous materials, chemicals and various
radioactive compounds. These materials, and their use, disposal and handling,
are extensively regulated by federal, state and local government authorities.
Although the Company believes its safety procedures for handling and disposing
of such materials comply in all material respects with the standards prescribed
by state and federal regulations, the risk of accidental environmental
contamination or personal injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages and any such liability could exceed the resources of the
Company. There can be no assurance the Company will not be required to incur
significant costs to comply with such environmental and health and safety laws
and regulations in the future, particularly if the Company develops additional
manufacturing or research facilities and capacity.

ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK

     Not applicable.

                                       29
<PAGE>   30

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements of the Company and its subsidiary are
included elsewhere in this Report.

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

     None.

                                       30
<PAGE>   31

                       CONSOLIDATED FINANCIAL STATEMENTS

                                  IOMED, INC.

                                 JUNE 30, 2000

                                       31
<PAGE>   32

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                  IOMED, INC.

<TABLE>
<CAPTION>
                                                               PAGE
                                                              -------
<S>                                                           <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors..............................       33
Consolidated Balance Sheets at June 30, 2000 and 1999.......       34
Consolidated Statements of Operations for the Years Ended
  June 30, 2000, 1999 and 1998..............................       35
Consolidated Statements of Shareholders' Equity (Deficit)
  for the Years Ended June 30, 2000, 1999 and 1998..........       36
Consolidated Statements of Cash Flows for the Years Ended
  June 30, 2000, 1999 and 1998..............................       37
Notes to Consolidated Financial Statements..................  38 - 46
</TABLE>

                                       32
<PAGE>   33

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
IOMED, Inc.

     We have audited the accompanying consolidated balance sheets of IOMED, Inc.
and subsidiary as of June 30, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended June 30, 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. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IOMED, Inc. and
subsidiary at June 30, 2000 and 1999, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States.

                                          ERNST & YOUNG LLP

Salt Lake City, Utah
August 9, 2000

                                       33
<PAGE>   34

                                  IOMED, INC.

                          CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                        JUNE 30,
                                                              ----------------------------
                                                                  2000            1999
                                                              ------------    ------------
<S>                                                           <C>             <C>
Current assets:
  Cash and cash equivalents.................................  $ 15,097,000    $ 17,263,000
  Accounts receivable, less allowance for doubtful accounts
     of $78,000 in 2000 and 1999............................     1,339,000       1,292,000
  Inventories...............................................       767,000         782,000
  Prepaid expenses..........................................       119,000          43,000
                                                              ------------    ------------
          Total current assets..............................    17,322,000      19,380,000
Equipment and furniture, net................................       908,000         603,000
Other assets................................................     1,686,000         171,000
                                                              ------------    ------------
          Total assets......................................  $ 19,916,000    $ 20,154,000
                                                              ============    ============

                           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable....................................  $    145,000    $    237,000
  Accrued liabilities.......................................     1,338,000         940,000
  Current portion of long-term obligations..................       134,000          57,000
                                                              ------------    ------------
          Total current liabilities.........................     1,617,000       1,234,000
Long-term obligations.......................................       387,000         129,000
Other long-term liabilities.................................       199,000              --
Commitments
Shareholders' equity:
  Common shares, no par value; 100,000,000 shares
     authorized; issued and outstanding 6,527,535 shares in
     2000 and 6,507,744 shares in 1999......................    34,490,000      34,413,000
  Convertible preferred shares, no par value; 10,000,000
     shares authorized; issued and outstanding of all series
     893,801 shares in 2000 and 1999........................     6,881,000       6,881,000
  Accumulated deficit.......................................   (23,658,000)    (22,503,000)
                                                              ------------    ------------
          Total shareholders' equity........................    17,713,000      18,791,000
                                                              ------------    ------------
          Total liabilities and shareholders' equity........  $ 19,916,000    $ 20,154,000
                                                              ============    ============
</TABLE>

                            See accompanying notes.
                                       34
<PAGE>   35

                                  IOMED, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED JUNE 30,
                                                      -----------------------------------------
                                                         2000           1999           1998
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Revenues:
  Product sales.....................................  $10,596,000    $ 9,608,000    $ 8,489,000
  Contract research revenue, royalties and license
     fees...........................................      171,000        893,000      1,788,000
                                                      -----------    -----------    -----------
          Total revenues............................   10,767,000     10,501,000     10,277,000
Operating costs and expenses:
  Cost of products sold.............................    3,692,000      3,961,000      3,659,000
  Research and development..........................    3,210,000      1,860,000      1,790,000
  Selling, general and administrative...............    5,620,000      5,393,000      5,389,000
  Lease abandonment charge..........................      360,000             --             --
                                                      -----------    -----------    -----------
          Total costs and expenses..................   12,882,000     11,214,000     10,838,000
                                                      -----------    -----------    -----------
Loss from operations................................   (2,115,000)      (713,000)      (561,000)
Interest expense....................................       26,000         19,000        930,000
Interest income and other, net......................      986,000        867,000        402,000
                                                      -----------    -----------    -----------
Income (loss) before minority interest..............   (1,155,000)       135,000     (1,089,000)
Minority interest...................................           --             --         11,000
                                                      -----------    -----------    -----------
Net income (loss)...................................  $(1,155,000)   $   135,000    $(1,100,000)
                                                      ===========    ===========    ===========
Basic and diluted income (loss) per common share....  $      (.18)   $       .02    $      (.29)
</TABLE>

                            See accompanying notes.
                                       35
<PAGE>   36

                                  IOMED, INC.

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                 COMMON SHARES          CONVERTIBLE
                            ------------------------     PREFERRED     ACCUMULATED
                             SHARES        AMOUNT         SHARES         DEFICIT          TOTAL
                            ---------    -----------    -----------    ------------    -----------
<S>                         <C>          <C>            <C>            <C>             <C>
BALANCE AT JUNE 30,
  1997....................  3,134,392    $12,047,000    $       --     $(21,538,000)   $(9,491,000)
  Stock options
     exercised............     11,786         25,000            --               --         25,000
  Conversion of
     redeemable,
     convertible preferred
     shares...............     28,800        720,000            --               --        720,000
  Sale of common shares
     for cash.............  1,850,000     11,445,000            --               --     11,445,000
  Conversion of
     subordinated,
     convertible debt.....  1,206,391      9,287,000     6,881,000                      16,168,000
  Exchange of minority
     interest and other...    268,149        884,000            --                         884,000
  Net loss................         --             --            --       (1,100,000)    (1,100,000)
                            ---------    -----------    ----------     ------------    -----------
BALANCE AT JUNE 30,
  1998....................  6,499,518     34,408,000     6,881,000      (22,638,000)    18,651,000
  Stock options
     exercised............      8,226          5,000            --               --          5,000
  Net income..............         --             --            --          135,000        135,000
                            ---------    -----------    ----------     ------------    -----------
BALANCE AT JUNE 30,
  1999....................  6,507,744     34,413,000     6,881,000      (22,503,000)    18,791,000
  Stock options
     exercised............     19,791         43,000            --               --         43,000
  Compensation related to
     non-employee stock
     option grants........         --         34,000            --               --         34,000
  Net loss................         --             --            --       (1,155,000)    (1,155,000)
                            ---------    -----------    ----------     ------------    -----------
BALANCE AT JUNE 30,
  2000....................  6,527,535    $34,490,000    $6,881,000     $(23,658,000)   $17,713,000
                            =========    ===========    ==========     ============    ===========
</TABLE>

                            See accompanying notes.
                                       36
<PAGE>   37

                                  IOMED, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                    YEAR ENDED JUNE 30,
                                                          ---------------------------------------
                                                             2000          1999          1998
                                                          -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................................  $(1,155,000)  $   135,000   $(1,100,000)
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
  Depreciation and amortization.........................      380,000       407,000       289,000
  Compensation from non-employee stock options
     granted............................................       34,000            --            --
  Non-cash interest expense.............................           --            --       928,000
  Minority interest and other non-cash charges..........           --        30,000        62,000
  Lease abandonment charge..............................      360,000            --            --
  Changes in operating assets and liabilities:
     Accounts receivable................................      (47,000)      249,000      (432,000)
     Inventories........................................       15,000        94,000      (162,000)
     Prepaid expenses and other assets..................     (120,000)       10,000       (34,000)
     Trade accounts payable.............................      (92,000)     (389,000)      455,000
     Other accrued liabilities..........................      134,000       253,000      (257,000)
                                                          -----------   -----------   -----------
Net cash provided by (used in) operating activities.....     (491,000)      789,000      (251,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment and furniture....................     (234,000)     (189,000)     (670,000)
Purchase of intangible assets...........................   (1,400,000)           --      (214,000)
                                                          -----------   -----------   -----------
Net cash used in investing activities...................   (1,634,000)     (189,000)     (884,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common shares.................       43,000         5,000    11,470,000
Proceeds from long-term obligations.....................           --            --       240,000
Payments on long-term obligations.......................      (84,000)      (51,000)       (5,000)
Redemptions of redeemable preferred shares..............           --            --      (180,000)
Other...................................................           --            --       (27,000)
                                                          -----------   -----------   -----------
Net cash provided by (used in) financing activities.....      (41,000)      (46,000)   11,498,000
Net increase/(decrease) in cash and cash equivalents....   (2,166,000)      554,000    10,363,000
Cash and cash equivalents at beginning of year..........   17,263,000    16,709,000     6,346,000
                                                          -----------   -----------   -----------
Cash and cash equivalents at end of year................  $15,097,000   $17,263,000   $16,709,000
                                                          ===========   ===========   ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest..................................  $    26,000   $    19,000   $     2,000
Cash paid for income taxes..............................  $        --   $        --   $        --
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
  FINANCING ACTIVITIES
Purchase of equipment under capital lease obligation....  $   419,000   $        --   $        --
Preferred shares converted to common shares.............  $        --   $        --   $   720,000
Subordinated debt converted to common and preferred
  shares................................................  $        --   $        --   $16,168,000
Minority interest converted to common shares............  $        --   $        --   $   909,000
</TABLE>

                            See accompanying notes.
                                       37
<PAGE>   38

                                  IOMED, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

     IOMED, Inc., a Utah corporation (the "Company"), is a specialty
pharmaceutical company focused on satisfying substantial unmet medical needs in
large pharmaceutical markets. The Company is currently pursuing research,
product development and commercialization activities in the local inflammation
and ophthalmic markets.

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Dermion, Inc. ("Dermion"). Dermion was formed
in April 1996 to conduct advanced research and development of iontophoretic
systems on its own behalf and on behalf of third party clients. All significant
intercompany transactions and accounts have been eliminated. Prior to November
1997, Novartis Pharmaceuticals Corporation ("Novartis") owned a 20% interest in
Dermion which is reflected as minority interest in the accompanying financial
statements.

Estimates

     Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

Cash Equivalents

     The Company considers all highly-liquid investments with maturities of
three months or less, when purchased, to be cash equivalents.

Concentrations of Credit Risk

     The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash, cash equivalents and trade accounts
receivable. Cash and cash equivalents are held in federally insured financial
institutions or invested in high-grade short-term commercial paper issued by
major United States corporations. The Company sells its products primarily to,
and has trade accounts receivable with, independent durable medical equipment
dealers in the United States and abroad. Less than 10% of product sales are to
foreign customers. As a general policy, collateral is not required for accounts
receivable; however, the Company maintains an allowance for losses based upon
expected collections of accounts receivable. Additionally, customers' financial
condition and credit worthiness are regularly evaluated and historical losses
have not been material. Sales to one customer accounted for approximately 16%
and 15% of the Company's product sales for the years ended June 30, 2000 and
1999. At June 30, 2000 and 1999, amounts due from such customer accounted for
approximately 14% and 18% of trade receivables, all of which was current. No
single customer accounted for more than 10% of such sales in fiscal 1998. The
Company considers credit risk from concentrations of trade accounts receivable
to be low.

Reclassifications

     Certain reclassifications have been made to prior year balances to conform
to the financial statement presentation included herein.

                                       38
<PAGE>   39
                                  IOMED, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Patent Development Costs

     In connection with its research and development efforts, costs of which are
expensed as incurred, the Company incurs certain costs in the preparation,
application, filing, maintenance and defense of patents and trademarks. Where
such costs primarily relate to patents and trademarks covering technologies or
products which are under development or in the early stages of
commercialization, the Company expenses such costs as incurred.

Revenue Recognition

     Revenues on product sales are generally recognized upon shipment against a
customer order. The Company recognized revenue from contract research based on
qualifying expenditures. Revenues from royalty and license agreements are
recognized as earned, during the term of the agreement.

Inventories

     Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories consist of the following:

<TABLE>
<CAPTION>
                                                               JUNE 30,
                                                         --------------------
                                                           2000        1999
                                                         --------    --------
<S>                                                      <C>         <C>
Raw materials..........................................  $441,000    $469,000
Work-in-progress.......................................    24,000      25,000
Finished goods.........................................   302,000     288,000
                                                         --------    --------
                                                         $767,000    $782,000
                                                         ========    ========
</TABLE>

Equipment and Furniture

     Equipment and furniture are stated at cost. Depreciation and amortization
is computed using the straight-line method over estimated useful lives of three
to five years. Leasehold improvements are amortized over the term of the lease
or the useful life of the improvements, whichever is shorter. Equipment and
furniture consist of the following:

<TABLE>
<CAPTION>
                                                             JUNE 30,
                                                    --------------------------
                                                       2000           1999
                                                    -----------    -----------
<S>                                                 <C>            <C>
Manufacturing equipment...........................  $ 1,199,000    $   965,000
Office and research and development equipment.....    1,868,000      1,477,000
Leasehold improvements............................      736,000        708,000
                                                    -----------    -----------
                                                      3,803,000      3,150,000
Less accumulated depreciation and amortization....   (2,895,000)    (2,547,000)
                                                    -----------    -----------
                                                    $   908,000    $   603,000
                                                    ===========    ===========
</TABLE>

Intangible Assets

     Intangible assets, which are included in other assets, consist of rights to
intellectual property, including intellectual property purchased from
Laboratories Fournier, S.C.A. in June 2000 for $1.4 million. Such assets are
being amortized on a straight-line basis over the estimated useful lives of the
individual assets, ranging from between five and seventeen years.

                                       39
<PAGE>   40
                                  IOMED, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Long Lived Assets

     The estimated useful lives and recorded values of all long lived assets are
periodically reviewed by management and adjusted to reflect any change in
anticipated lives or reduction in value.

Stock Options

     The Company has elected to follow Accounting Principles Board Opinion No.
25 -- Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options rather than
adopting the alternative fair value accounting provided for under FASB Statement
No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying shares on the date of grant, the Company does not
recognize any compensation expense.

     Stock compensation expense for options granted to non-employees has been
determined in accordance with SFAS 123 and the Emerging Issues Task Force
consensus in Issue No. 96-18, Accounting for Equity Instruments that are Issued
to Other than Employees for Acquiring, or in Conjunction with Selling Goods or
Services (EITF 96-18). The fair value of options granted to non-employees is
periodically re-measured as the underlying options vest.

Earnings (Loss) Per Share

     The Company's net income (loss) per share has been calculated in accordance
with SFAS No. 128 -- Earnings Per Share and, accordingly, includes a computation
of both basic and diluted earnings per share. Net income (loss) as presented in
the statements of operations represents the numerator used in computing earnings
per share and the following table sets forth the computation of the weighted
average shares used in determining basic and diluted earnings per share:

<TABLE>
<CAPTION>
                                                              2000     1999     1998
                                                              -----    -----    -----
                                                                  (IN THOUSANDS)
<S>                                                           <C>      <C>      <C>
Denominator for basic earnings per share -- weighted average
  shares....................................................  6,513    6,503    3,821
Dilutive securities: preferred stock, convertible debt,
  warrants and stock options................................     --      926       --
                                                              -----    -----    -----
Denominator for diluted earnings per share -- adjusted
  weighted average shares and assumed conversions...........  6,513    7,429    3,821
                                                              =====    =====    =====
</TABLE>

     At June 30, 2000, the following securities were outstanding but were not
included in the computation of diluted earnings per share due to their
anti-dilutive effect: options to purchase 1,220,420 common shares at a weighted
average exercise price of $3.33 per share; warrants to purchase 339,792 common
shares at a weighted average price of $13.70 per share; and 893,801 convertible
Series D preferred shares convertible on a share-for-share basis into common
stock.

Income Taxes

     The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

                                       40
<PAGE>   41
                                  IOMED, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

New Accounting Pronouncements

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. The
effective date of SAB 101 is the fourth quarter of the fiscal year ending after
December 15, 1999. This SAB clarifies certain existing guidance related to
revenue recognition. The Company is currently evaluating the impact that SAB 101
will have on its revenue recognition policies and practices. However, it is not
anticipated that SAB 101 will have a material impact on the Company's reported
revenue.

2. ACCRUED LIABILITIES

     Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                              JUNE 30,
                                                       ----------------------
                                                          2000         1999
                                                       ----------    --------
<S>                                                    <C>           <C>
Payroll and related benefits.........................  $  585,000    $500,000
Professional fees....................................     219,000     122,000
Royalties............................................      69,000      88,000
FDA user fees........................................      83,000      96,000
Lease and other obligations on abandoned
  facilities.........................................     264,000          --
Warranty.............................................      10,000      10,000
Other................................................     108,000     124,000
                                                       ----------    --------
                                                       $1,338,000    $940,000
                                                       ==========    ========
</TABLE>

3. SUBORDINATED, CONVERTIBLE DEBT

     In connection with the March 1997 purchase of in-process research and
development from Elan Corporation, plc ("Elan"), the Company issued two
subordinated convertible notes to Elan (the "Elan Notes"), an A Note and a B
Note, each bearing interest at 9.5%, in the amount of $10,000,000 and
$5,000,000, respectively. On April 28, 1998, concurrent with the closing of the
initial public offering of the Company's common shares, the Elan Notes,
including accrued interest thereon, were converted at $7.50 per share into an
aggregate of 1,206,391 common shares and 893,801 Series D preferred shares of
the Company.

4. COMMITMENTS

Operating Leases

     The Company leases space and certain equipment under noncancellable
operating lease agreements that expire at various dates through April 2006.
Rental expense for such leases was $227,000, $248,000 and $239,000 for the years
ended June 30, 2000, 1999 and 1998, respectively. It is generally expected that,
in the normal course of business, operating leases that expire will be renewed
or replaced by other leases with similar terms. Future minimum lease payments
under noncancellable operating leases at June 30, 2000 were $2,104,000. These
obligations mature as follows: fiscal 2001 -- $385,000; fiscal 2002 -- $418,000;
fiscal 2003 -- $368,000; fiscal 2004 -- $324,000; and thereafter $609,000.

     In order to consolidate its research, administrative and manufacturing
operations, the Company entered into a lease agreement for a new facility in
fiscal 2000 and recorded a net non-recurring lease abandonment charge of
$360,000 and accrued the associated non-cancelable abandoned lease and other
obligations at June 30, 2000. The Company recorded $199,000 of lease obligations
on the abandoned facility with terms in excess of one year as other long-term
liabilities. All other obligations associated with the abandonment are
considered current and are recorded as accrued liabilities.

                                       41
<PAGE>   42
                                  IOMED, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Long-Term Obligations

     The Company has acquired various equipment and furniture under capital
lease agreements. The capitalized cost of such equipment is $713,000 and
accumulated amortization was $152,000 at June 30, 2000.

     The carrying values of the long-term obligations approximate fair values as
the interest rates on these long-term obligations approximate market rates of
interest. Future minimum payments under capital leases consisted of the
following at June 30, 1999:

<TABLE>
<S>                                                           <C>
YEAR ENDING JUNE 30:
  2001......................................................  $ 178,000
  2002......................................................    173,000
  2003......................................................    109,000
  2004......................................................    106,000
  2005......................................................     63,000
                                                              ---------
Total minimum lease payments................................    629,000
Amounts representing interest...............................   (108,000)
                                                              ---------
Present value of net minimum lease payments.................    521,000
Less current portion of capital lease obligations...........   (134,000)
                                                              ---------
Noncurrent portion of capital lease obligations.............  $ 387,000
                                                              =========
</TABLE>

Royalty Agreements

     The Company is the licensee under royalty agreements which provide for the
payment of royalties to the licensor based upon net sales of the products under
royalty. Royalty expense in each of the three years in the period ended June 30,
2000 was not material.

5. SHAREHOLDERS' EQUITY

Initial Public Offering

     During fiscal 1998, the Company completed an initial registered public
offering pursuant to which the Company issued 1,850,000 common shares and raised
approximately $11,445,000, net of underwriters' discounts and offering expenses.

     In other transactions related to the initial public offering, (i) the
Company granted warrants to purchase 170,000 common shares to the underwriters,
exercisable after April 23, 1999, at an initial exercise price of $9.38 per
share; (ii) Elan converted the amounts outstanding under the Elan Notes,
including accrued interest thereon, into 1,206,391 common shares and 893,901
shares of newly created Series D preferred shares, at the initial public
offering price of $7.50 per share; (iii) the 28,800 Series C preferred shares of
the Company, which were outstanding immediately prior to the offering, were
automatically converted, on a share-for-share basis, into common shares; and
(iv) the Company issued an additional 29,697 common shares to Laboratories
Fournier, pursuant to the anti-dilution provisions of a prior stock purchase
agreement between the companies.

Redeemable, Convertible Preferred Shares

     In connection with a reorganization of the Company in fiscal 1988, the
Company issued 878,254 shares of $.001 par value redeemable convertible
preferred shares in three series; Series A, Series B and Series C. Pursuant to
the terms of such preferred shares, the 14,000 Series A shares were redeemed and
the 828,254 Series B shares were converted prior to August 1996 into common
shares.

                                       42
<PAGE>   43
                                  IOMED, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Pursuant to mandatory redemption requirements, 7,200 Series C preferred
shares were redeemed in July 1997. The remaining 28,800 Series C preferred
shares were subject to mandatory conversion, on a share-for-share basis, into
common shares upon the closing of the initial public offering of the Company.

Series D Convertible Preferred Shares

     In April 1998, the Company issued 893,801 Series D preferred shares to Elan
in connection with the conversion of the Elan Notes. The Series D preferred
shares are convertible at the option of the holder into common shares, on a
share-for-share basis, subject to adjustment for certain corporate transactions.
Further, the Series D preferred shares are non-voting and have no dividend,
liquidation or similar preferences over common shares but are entitled to a pro
rata share of any such distribution as if the Series D preferred shares had been
converted into common shares.

Warrants

     The Company has issued five warrants which entitle the holders thereof to
acquire common shares of the Company. In April 1998, the Company issued a
warrant to Everen Securities to acquire up to 170,000 shares for an initial
exercise price of $9.38 per share. In November 1997, the Company issued a
warrant to Novartis to acquire up to 18,750 shares for an exercise price of
$21.60 per share. In March 1997, the Company issued a warrant to Elan to acquire
up to 104,167 shares for an exercise price of $21.60 per share. In December
1996, the Company issued a warrant to the Alliance of Children's Hospitals, Inc.
to acquire up to 44,792 shares for an exercise price of $8.88 per share. In June
1995, the Company issued a warrant to the Silicon Valley Bank to acquire up to
2,083 shares for an exercise price of $4.80 per share. The warrants expire in
April 2003, November 2002, April 2002, December 2003, and June 2002,
respectively. At June 30, 2000, the Company had 339,792 shares of its
authorized, unissued common shares reserved for issuance pursuant to these
warrant obligations.

Stock Options

     The Company has adopted and approved two incentive compensation plans. The
Company's 1988 Stock Option Plan was approved by the shareholders in November
1988 and the Company's 1997 Share Incentive Plan was approved by the
shareholders in November 1997. The 1988 Stock Option Plan expired in August 1998
and no further grants were made under the Plan following the adoption of the
1997 Share Incentive Plan.

                                       43
<PAGE>   44
                                  IOMED, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In general, options granted vest over zero to five years. A summary of the
activity under the Plans during each of the three years ended June 30, 2000, is
as follows:

<TABLE>
<CAPTION>
                                                OUTSTANDING STOCK OPTIONS
                                    SHARES      --------------------------      WEIGHTED-
                                   AVAILABLE    NUMBER OF        PRICE           AVERAGE
                                   FOR GRANT     SHARES        PER SHARE      EXERCISE PRICE
                                   ---------    ---------    -------------    --------------
<S>                                <C>          <C>          <C>              <C>
Balance at June 30, 1997.........  1,327,642      330,381    $ .38 - $6.72        $4.70
  Options granted................    (15,758)      15,758    $8.88 - $9.00        $8.91
  Options exercised..............         --      (11,786)   $ .38 - $8.88        $2.09
  Options canceled...............      3,016       (3,016)   $4.80 - $8.88        $6.58
                                   ---------    ---------    -------------        -----
Balance at June 30, 1998.........  1,314,900      331,337    $ .72 - $9.00        $4.96
  Options granted................   (540,000)     540,000    $2.25 - $2.63        $2.28
  Options exercised..............         --       (8,226)       $.72             $ .72
  Options canceled...............      1,000      (20,734)   $ .72 - $9.00        $6.41
                                   ---------    ---------    -------------        -----
Balance at June 30, 1999.........    775,900      842,377    $ .72 - $9.00        $3.25
  Options granted................   (418,500)     418,500    $2.25 - $3.88        $3.50
  Options exercised..............         --      (19,791)       $2.16            $2.16
  Options canceled...............      5,500      (20,666)   $ .72 - $8.88        $4.52
                                   ---------    ---------    -------------        -----
Balance at June 30, 2000.........    362,900    1,220,420    $ .72 - $9.00        $3.33
                                   =========    =========    =============        =====
</TABLE>

     The weighted average fair value of options granted in the years ended June
30, 2000, 1999 and 1998, were $2.26, $2.06 and $1.24, respectively. Additional
information regarding the options outstanding at June 30, 2000 follows:

<TABLE>
<CAPTION>
                        OPTIONS OUTSTANDING
-------------------------------------------------------------------        OPTIONS EXERCISABLE
                                WEIGHTED-AVERAGE                      ------------------------------
   RANGE OF         NUMBER         REMAINING       WEIGHTED-AVERAGE     NUMBER      WEIGHTED-AVERAGE
EXERCISE PRICES   OUTSTANDING   CONTRACTUAL LIFE    EXERCISE PRICE    EXERCISABLE    EXERCISE PRICE
---------------   -----------   ----------------   ----------------   -----------   ----------------
<S>               <C>           <C>                <C>                <C>           <C>
     $.72              3,332       0.12 years           $ .72             3,332          $ .72
 $2.16 - $2.63       647,667       8.52 years           $2.30           202,167          $2.30
 $3.60 - $4.80       501,793       7.22 years           $4.17           238,393          $4.50
 $6.72 - $9.00        67,628       6.23 years           $7.13            53,234          $7.03
 -------------     ---------       ----------           -----           -------          -----
 $ .72 - $9.00     1,220,420       7.83 years           $3.33           497,126          $3.85
 =============     =========       ==========           =====           =======          =====
</TABLE>

     Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
Had compensation cost for the Company's employee stock options been determined
consistent with the methodology prescribed under SFAS 123, the Company's net
income and earnings per share would have been reduced by approximately $378,000,
or $.06 per common share in fiscal 2000. The effect on the Company's pro forma
results for each of the fiscal years 1999 and 1998 was not material (less than
$.01 per share). The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 2000, 1999 and 1998, respectively: risk-free interest
rates of 6.5%, 5.6% and 5.7%; dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of 0.63, 1.42 and 0; and a
weighted-average expected life of the option of 6 years.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. In management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options because the Company's employee stock options have characteristics
different from
                                       44
<PAGE>   45
                                  IOMED, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate.

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Because the effect of
SFAS 123 is prospective, the initial impact on pro forma net income (loss) may
not be representative of compensation expense in future years.

     In accordance with EITF 96-18, the Company accounts for stock options
issued to non-employees at fair value. The value of the stock options is
amortized to expense over the vesting period. The Company issued stock options
to certain non-employees and recognized related compensation expense of $34,000
during the fiscal year ended June 30, 2000.

6. RESEARCH & DEVELOPMENT

     In July 1995, the Company entered into a research and development agreement
with Novartis, a Swiss pharmaceutical company, to evaluate the feasibility of
delivering certain Novartis compounds using the Company's iontophoretic drug
delivery technologies. The term of the research and development agreement ended
on December 31, 1998, and Novartis did not renew the agreement beyond that date.
Research funding payments and license fees paid pursuant to the agreement with
Novartis totaled $716,000 and $1,640,000, respectively, in fiscal years ended
June 30, 1999 and 1998.

7. EMPLOYEE BENEFIT PLAN

     The Company has established a 401(k) savings plan for its full-time
employees. The Company makes a matching contribution based on a percentage of
the contributions of participating employees. The Company contributed
approximately $63,000, $20,000 and $21,000 for the years ended June 30, 2000,
1999 and 1998, respectively.

8. INCOME TAXES

     Deferred taxes result from differences in the carrying value of various
assets and liabilities between income tax reporting and financial reporting
purposes. These differences arise from differing depreciation methods, and other
reserves that are deductible in different periods for tax and financial
reporting purposes.

     The approximate tax effect of temporary differences, net operating loss
carryforwards and tax credit carryforwards as of June 30, 2000 and 1999, is as
follows:

<TABLE>
<CAPTION>
                                                       2000           1999
                                                    -----------    -----------
<S>                                                 <C>            <C>
Deferred tax assets:
  Net operating loss carryforwards................  $ 3,115,000    $ 2,430,000
  Book in excess of tax depreciation..............      235,000        227,000
  Book in excess of tax amortization..............    4,401,000      4,767,000
  Tax credit carryforwards........................      516,000        516,000
  Accrued liabilities.............................      473,000        290,000
                                                    -----------    -----------
Total deferred tax assets.........................    8,740,000      8,230,000
Valuation allowance...............................   (8,740,000)    (8,230,000)
                                                    -----------    -----------
Net deferred tax assets...........................  $        --    $        --
                                                    ===========    ===========
</TABLE>

     There were no significant deferred tax liabilities in 2000 or 1999. The
valuation allowance increased by $510,000 during the fiscal year.

                                       45
<PAGE>   46
                                  IOMED, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     There were no net deferred income tax provisions in any of the years
presented. The Company recorded no current federal or state income tax provision
for fiscal 2000, 1999 and 1998.

     The reconciliation of income taxes at the statutory United States federal
income tax rate and the Company's effective income expense attributable to
continuing operations is as follows:

<TABLE>
<CAPTION>
                                                              2000     1999     1998
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
United States statutory rate (percentage)...................  (34.0)%   34.0%   (34.0)%
State tax, net of federal tax benefit.......................   (3.3)     3.3     (3.3)
Non-deductible interest and other expenses..................    1.5     22.7     15.3
Effect of NOL carryforward and valuation allowance..........   35.8    (60.0)    22.0
                                                              -----    -----    -----
Effective income tax rate (percentage)......................     --%      --%      --%
                                                              =====    =====    =====
</TABLE>

     As of June 30, 2000, the Company had approximately $7,982,000 and
$4,173,000 in federal and state net operating loss carryforwards, respectively,
and $516,000 in federal tax credit carryforwards, that expire from 2003 through
2020. Utilization of the Company's net operating loss and credit carryforwards
is limited to the future taxable income of the Company. Under the "change of
ownership" provisions of the Internal Revenue Code, utilization of these net
operating loss and credit carryforwards may be subject to substantial annual
limitation.

                                       46
<PAGE>   47

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

     The information required by this item is included under "Election of
Directors," "The Board of Directors and Committees," and "Executive Officers" in
the Company's Proxy Statement to be filed in connection with its Annual Meeting
of Shareholders, to be held on November 10, 2000, and is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item is included under "Compensation of
Directors and Executive Officers" in the Company's Proxy Statement to be filed
in connection with its Annual Meeting of Shareholders, to be held on November
10, 2000, and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is included under "Security Ownership
of Certain Beneficial Owners and Management" in the Company's Proxy Statement to
be filed in connection with its Annual Meeting of Shareholders, to be held on
November 10, 2000, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is included under "Certain
Relationships and Related Transactions" in the Company's Proxy Statement to be
filed in connection with its Annual Meeting of Shareholders, to be held on
November 10, 2000, and is incorporated herein by reference.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS

     The consolidated financial statements of the Company and its subsidiary are
included elsewhere in this Report.

FINANCIAL STATEMENT SCHEDULES

     No schedules are required in connection with the filing of this Report as
amounts are either immaterial or are otherwise disclosed in the financial
statements.

EXHIBITS

<TABLE>
<CAPTION>
 NUMBER                             DESCRIPTION
---------                           -----------
<C>         <S>
 3.1**      Amended and Restated Articles of Incorporation of the
            Company
 3.2*       Amended and Restated Bylaws of the Company
 4.1*       Reference is made to Exhibit 3.1
 4.2*       Specimen of Common Share Certificate
 4.3***     1988 Stock Option Plan of the Company
 4.4***     1997 Share Incentive Plan of the Company
10.1*       Lease between the Company and Hayter Properties, Inc., dated
            September 1, 1997
10.2*       License Agreement between the Company and Elan International
            Services, Ltd., dated April 14, 1997
</TABLE>

                                       47
<PAGE>   48

<TABLE>
<CAPTION>
 NUMBER                             DESCRIPTION
---------                           -----------
<C>         <S>
10.3*       License Agreement between the Company and Drug Delivery
            Systems, Inc., dated April 14, 1997
10.4*       Promissory Note issued by the Company to Elan International
            Management, Ltd., in the principal amount of $10,000,000,
            dated April 14, 1997
10.5*       Promissory Note issued by the Company to Elan International
            Management, Ltd., in the principal amount of $5,000,000,
            dated April 14, 1997
10.6*       Note Purchase and Warrant Agreement among the Company, Elan
            International Services, Ltd. And Elan International
            Management, Ltd. dated April 14, 1997
10.7*       Warrant issued to Elan International Services, Ltd., dated
            April 14, 1997
10.8*       Registration Rights Agreement between the Company and Elan
            International Services, Ltd., dated April 14, 1997
10.9*       Asset Acquisition Agreement between the Company and
            Fillauer, Inc., dated December 27, 1996
10.10*      License Agreement between the Company and Fillauer, Inc.,
            dated December 26, 1996
10.11*      Warrant issued to Alliance of Children's Hospitals, Inc.,
            dated December 1, 1996
10.12*      Stock Purchase Agreement between the Company and Child
            Health Investment Corporation, dated November 29, 1996
10.13*      Manufacturing Agreement between the Company and KWM
            Electronics Corporation, dated November 1, 1996
10.14*      Contribution Agreement between the Company and Dermion,
            Inc., dated March 29, 1996
10.15*      Patent License Agreement between the Company and Dermion,
            Inc., dated March 29, 1996
10.16*      Research and Development Agreement among the Company,
            Dermion, Inc. and Ciba-Geigy Corporation, dated March 29,
            1996
10.17*      Stock Purchase Agreement among the Company, Dermion, Inc.
            and Ciba-Geigy Corporation, dated March 29, 1996
10.18*      Stockholders' Agreement among the Company, Dermion, Inc. and
            Ciba-Geigy Corporation, dated March 29, 1996
10.19*      Agreement between the Company and Laboratoires Fournier
            S.C.A., dated February 20, 1996
10.20*      Agreement between the Company and ALZA Corporation, dated
            July 28, 1993
10.21*      Supply Agreement between the Company and Abbot Laboratories,
            Inc., dated April 27, 1993
10.22*      Stock Purchase Agreement between the Company and The CIT
            Group/Venture Capital, Inc., dated March 8, 1993
10.23*      Stock Purchase Agreement between the Company and certain
            investors, dated February 19, 1993
10.24*      License Agreement between the Company and the University of
            Utah Research Foundation, dated October 1, 1992
10.25*      Warrant issued to Silicon Valley Bank, dated June 25, 1992
10.26*      Company 1997 Share Incentive Plan
10.27*      Preferred Stock Purchase Agreement between the Company,
            Newtek Ventures, MBW Venture Partners, Michigan Investment
            Fund, Utah Ventures, Cordis Corporation, Ian R.N. Bund,
            James R. Weersing and Robert J. Harrington, dated August 4,
            1987
10.28*      Exchange Agreement among the Company, Novartis
            Pharmaceuticals Corporation and Dermion, Inc., dated
            November 1, 1997
10.29*      Warrant to Purchase Shares of Common Stock in favor of
            Novartis Pharmaceuticals Corporation, dated November 1, 1997
</TABLE>

                                       48
<PAGE>   49

<TABLE>
<CAPTION>
 NUMBER                             DESCRIPTION
---------                           -----------
<C>         <S>
10.30*      First Amendment of Research & Development Agreement among
            the Company, Novartis Pharmaceuticals Corporation and
            Dermion, Inc. dated November 1, 1997
10.31*      Supply Agreement between the Company and Luitpold
            Pharmaceuticals, Inc./American Regent Laboratories, Inc.
            dated December 4, 1994
10.32****   Lease between the Company and NP#2, dated May 22, 2000
11.1*****   Statement re computation of earnings per share
23.1****    Consent of Ernst & Young LLP, Independent Auditors
21.1*       Schedule of Subsidiaries
27.1****    Financial Data Schedule
</TABLE>

---------------
*      Filed as an exhibit to the Registration Statement on Form S-1, filed by
       the Company on April 23, 1998.

**     Filed as an exhibit to the Annual Report on Form 10-K, filed by the
       Company on September 28, 1998.

***   Filed as an exhibit to the Registration Statement on Form S-8, filed by
      the Company on February 9, 2000

****  Filed herewith.

***** Information included in consolidated financial statements.

REPORTS ON FORM 8-K

     No reports on Form 8-K were filed during the quarter ended June 30, 2000.

                                       49
<PAGE>   50

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

                                          IOMED, INC.

Date: September 26, 2000                  By: /s/ JAMES R. WEERSING
                                            ------------------------------------
                                            James R. Weersing
                                            President and Chief Executive
                                              Officer

Date: September 26, 2000                  By: /s/ ROBERT J. LOLLINI
                                            ------------------------------------
                                            Robert J. Lollini
                                            Vice President, Finance and
                                            Chief Financial Officer

                                   SIGNATURES

     In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
                     SIGNATURE                                  CAPACITY                    DATE
                     ---------                                  --------                    ----
<S>                                                  <C>                             <C>
                /s/ PETER J. WARDLE                             Chairman             September 26, 2000
---------------------------------------------------
                  Peter J. Wardle

               /s/ JAMES R. WEERSING                            Director             September 26, 2000
---------------------------------------------------
                 James R. Weersing

              /s/ JOHN W. FARA, PH.D.                           Director             September 26, 2000
---------------------------------------------------
                John W. Fara, Ph.D.

               /s/ MICHAEL T. SEMBER                            Director             September 26, 2000
---------------------------------------------------
                  Michael Sember

               /s/ STEVEN P. SIDWELL                            Director             September 26, 2000
---------------------------------------------------
                 Steven P. Sidwell

                  /s/ WARREN WOOD                               Director             September 26, 2000
---------------------------------------------------
                    Warren Wood
</TABLE>

                                       50
<PAGE>   51

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
NUMBER                           DESCRIPTION                           PAGE
------                           -----------                           ----
<C>      <S>                                                           <C>
10.32    Lease between the Company and NP#2, dated May 22, 2000         51
23.1     Consent of Ernst & Young LLP, Independent Auditors             71
27.1     Financial Data Schedule                                        72
</TABLE>