# UNITED STATES SECURITIES AND
EXCHANGE COMMISSION

# WASHINGTON, D.C. 20549

# FORM 10-Q

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

For the quarterly
period ended June 30, 2003

# OR

# [_] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE
ACT OF 1934

Commission File Number:
000-30039

# ADOLOR CORPORATION

(Exact Name of
Registrant as Specified in its Charter)

|                                |                       
|------------------------------- | ----------------------
|Delaware                        | 31-1429198            
|(State or other jurisdiction of | (I.R.S. Employer      
|incorporation or organization)  | Identification Number)

700 Pennsylvania Drive Exton, Pennsylvania
19341 (Address of Principal Executive Offices and Zip Code)

484-595-1500 (Registrants
Telephone Number, Including Area Code)

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (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: [X] Yes [_] No

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

Number of shares outstanding of the issuer's Common Stock, par value $.0001 per share, as of July 15, 2003:
31,638,627 shares.

# ADOLOR CORPORATION

# INDEX

|PART I  | FINANCIAL INFORMATION                                                                      |   
|------- | ------------------------------------------------------------------------------------------ | --
|ITEM 1  | Financial Statements (Unaudited):                                                          |   
|        | Consolidated Balance Sheets at June 30, 2003 and December 31, 2002                         | 1 
|        | Consolidated Statements of Operations for the three and six months ended June 30, 2003 and |   
|        | 2002, and the period from August 9, 1993 (inception) to June 30, 2003                      | 2 
|        | Consolidated Statements of Cash Flows for the six months ended June 30, 2003               |   
|        | and 2002 and the period from August 9, 1993 (inception) to June 30, 2003                   | 3 
|        | Notes to Consolidated Financial Statements                                                 | 4 
|ITEM 2  | Management's Discussion and Analysis of Financial Condition and                            |   
|        | Results of Operations                                                                      | 8 
|ITEM 3  | Quantitative and Qualitative Disclosures About Market Risk                                 | 23
|ITEM 4  | Controls and Procedures                                                                    | 23
|PART II | OTHER INFORMATION                                                                          |   
|ITEM 1  | Legal Proceedings                                                                          | 24
|ITEM 4  | Submission of Matters to a Vote of Security Holders                                        | 24
|ITEM 6  | Exhibits and Reports on Form 8-K                                                           | 24
|        | Signatures                                                                                 | 26

# PART I. FINANCIAL
INFORMATION

# ITEM 1. FINANCIAL STATEMENTS

# ADOLOR CORPORATION (A Development Stage
Company)

# Consolidated Balance SheetsUnauditedJune 30, 2003 and
December 31, 2002

|                                                                | June 30, 2003 | December 31, 2002
|--------------------------------------------------------------- | ------------- | -----------------
|                                                                |               |                  
|                                                               
|Assets                                                          |               |                  
|Current assets:                                                 |               |                  
|Cash and cash equivalents                                       |               |                  
|Short-term investments (Note 3)                                 |               |                  
|Accounts receivable from collaboration agreements (Note 4)      |               |                  
|Prepaid expenses and other current assets                       |               |                  
|                                                               
|Total current assets                                            |               |                  
|Equipment and leasehold improvements, net                       |               |                  
|Other assets                                                    |               |                  
|                                                               
|Total assets                                                    |               |                  
|                                                               
|Liabilities and Stockholders' Equity                            |               |                  
|Current liabilities:                                            |               |                  
|Notes payable                                                   |               |                  
|Accounts payable                                                |               |                  
|Accrued expenses                                                |               |                  
|Deferred licensing fees - current (Note 4)                      |               |                  
|                                                               
|Total current liabilities                                       |               |                  
|Deferred licensing fees - non-current (Note 4)                  |               |                  
|                                                               
|Total liabilities                                               |               |                  
|                                                               
|Stockholders' equity:                                           |               |                  
|Series A Junior Participating preferred stock, $0.01 par value; |               |                  
|35,000 shares authorized, none issued and outstanding           |               |                  
|Preferred stock, $0.01 par value; 1,000,000                     |               |                  
|shares authorized; none issued and outstanding                  |               |                  
|Common stock, par value $.0001 per share;                       |               |                  
|99,000,000 shares authorized; 31,634,444                        |               |                  
|and 31,494,237 shares issued and outstanding at                 |               |                  
|June 30, 2003 and December 31, 2002, respectively               |               |                  
|Additional paid-in capital                                      |               |                  
|Notes receivable for stock options                              |               |                  
|Deferred compensation                                           |               |                  
|Unrealized gains on available for sale securities               |               |                  
|Deficit accumulated during the development stage                |               |                  
|                                                               
|Total stockholders' equity                                      |               |                  
|                                                               
|Total liabilities and stockholders' equity                      |               |                  
|                                                               

The accompanying notes are an
integral part of the consolidated financial statements.

# ADOLOR CORPORATION (A Development Stage
Company)

# Consolidated
Statements of Operations  (Unaudited)Three and Six months ended June 30, 2003 and 2002 and the period from August 9, 1993
(inception) to June 30, 2003

|                                |  |   |                    |                  |               
|------------------------------- |  | - | ------------------ | ---------------- | --------------
|                                |  |   |                    |                  |               
|                                |  |   | Three months ended | Six months ended | August 9, 1993
|                                |  |   | June 30,           | June 30,         | (inception) to
|                                |  |   |                    |                  |               
|                                |  |   |                    | 2003             |               
|                               
|Revenues:                       |  |  
|Contract, grant, license        |  |  
|and milestone revenue (Note 4)  |  |   | $                  | 5,119,839        |               
|                               
|Operating expenses incurred     |  |  
|during the development stage:   |  |  
|Research and development        |  |   |                    | 13,528,103       |               
|Marketing, general and          |  |  
|administrative                  |  |   |                    | 3,741,282        |               
|                               
|Total operating expenses        |  |   |                    | 17,269,385       |               
|                               
|Loss from operations            |  |   |                    | (12,149,546      | )             
|Interest income                 |  |   |                    | 659,782          |               
|Interest expense                |  |   |                    | (1,672           | )             
|                               
|Net loss                        |  |   | $                  | (11,491,436      | )             
|                               
|Basic and diluted net loss per  |  |  
|share:                          |  | $ |                    | (0.36            | )             
|                               
|Shares used in computing basic  |  |  
|and diluted net loss per share: |  |   |                    | 31,591,557       |               
|                               

The accompanying notes are an
integral part of the consolidated financial statements.

# ADOLOR CORPORATION (A Development Stage
Company)

# Consolidated
Statements of Cash Flows(Unaudited) Six months ended June 30, 2003 and 2002 and theperiod from August 9, 1993
(inception) to June 30, 2003

|                                                                                         |  | Period from August 9, 1993
|---------------------------------------------------------------------------------------- |  | --------------------------
|
|
|
|Cash flows from operating activities:                                                    |  |                           
|Net loss                                                                                 |  |                           
|Adjustments to reconcile net loss to net cash used in operating                          |  |                           
|activities:                                                                              |  |                           
|Non-cash compensation expense                                                            |  |                           
|Non-cash warrant value                                                                   |  |                           
|Depreciation expense                                                                     |  |                           
|Non-cash proceeds from the trade of equipment                                            |  |                           
|Gain on the sale of equipment and leasehold improvements                                 |  |                           
|Issuance of common stock for technology license agreements                               |  |                           
|Changes in assets and liabilities:                                                       |  |                           
|Prepaid expenses and other current assets                                                |  |                           
|Accounts receivable from collaboration agreements                                        |  |                           
|Other assets                                                                             |  |                           
|Accounts payable                                                                         |  |                           
|Deferred licensing fees                                                                  |  |                           
|Accrued expenses                                                                         |  |                           
|                                                                                        
|Net cash (used in) provided by operating activities                                      |  |                           
|                                                                                        
|Cash flows from investing activities:                                                    |  |                           
|Purchase of equipment and leasehold improvements                                         |  |                           
|Proceeds from the sale of equipment and leasehold improvements                           |  |                           
|Purchase of short-term investments                                                       |  |                           
|Maturities of short-term investments                                                     |  |                           
|                                                                                        
|Net cash (used in) provided by investing activities                                      |  |                           
|                                                                                        
|Cash flows from financing activities:                                                    |  |                           
|Net proceeds from issuance of mandatorily redeemable                                     |  |                           
|convertible preferred stock and Series B warrants                                        |  |                           
|Proceeds from Series D mandatorily redeemable convertible   preferred stock subscription |  |                           
|Net proceeds from issuance of restricted common stock and                                |  |                           
|exercise of common stock options                                                         |  |                           
|Proceeds from notes payable-related parties                                              |  |                           
|Payment of notes payable                                                                 |  |                           
|Proceeds received on notes receivable                                                    |  |                           
|Interest receivable converted to principal on notes                                      |  |                           
|Proceeds from notes payable                                                              |  |                           
|Net proceeds from IPO                                                                    |  |                           
|Net proceeds from issuance of newly registered shares of common stock                    |  |                           
|                                                                                        
|Net cash provided by financing activities                                                |  |                           
|                                                                                        
|Net (decrease) increase in cash and cash equivalents                                     |  |                           
|Cash and cash equivalents at beginning of period                                         |  |                           
|                                                                                        
|Cash and cash equivalents at end of period                                               |  |                           
|                                                                                        
|Supplemental disclosure of cash flow information:                                        |  |                           
|Cash paid for interest                                                                   |  |                           
|Supplemental disclosure of noncash transactions:                                         |  |                           
|Unrealized (losses) gains on available for sale securities                               |  |                           
|Deferred compensation from issuance of common stock,                                     |  |                           
|restricted common stock and common stock options                                         |  |                           
|Issuance of common stock for technology license agreements or   for services             |  |                           
|Conversion of Series A through H preferred stock for common   stock                      |  |                           
|Conversion of stock subscription to Series D mandatorily   redeemable preferred stock    |  |                           
|Conversion of bridge financing, including accrued interest, to                           |  |                           
|Series B mandatorily redeemable preferred stock                                          |  |                           

The accompanying notes are an
integral part of the consolidated financial statements.

# Adolor Corporation(A Development Stage
Company)

# Notes to Consolidated
Financial Statements

# June 30, 2003(Unaudited)

# 1.    ORGANIZATION AND BUSINESS ACTIVITIES

Adolor
Corporation (together with its subsidiary, Adolor or the Company)
is a development stage biopharmaceutical corporation that was formed in 1993. The Company
specializes in the discovery, license, acquisition, development and commercialization of
prescription pain management products. The Company has a number of small molecule product
candidates that are in various stages of development ranging from preclinical studies to
Phase III clinical trials. In April 2002, the Company entered into a collaboration
agreement with Glaxo Group Limited (Glaxo), an affiliate of GlaxoSmithKline
plc, for the exclusive worldwide development and commercialization of its most advanced
product candidate, alvimopan, for certain indications.

The
Company has not generated any product sales revenues and has not achieved profitable
operations. The Companys deficit accumulated during the development stage through
June 30, 2003 aggregated approximately $178.0 million, and the Company expects to continue
to incur substantial losses in future periods. A significant portion of the Companys
revenue recognized in 2002 and to date in 2003 has been from reimbursement of expenses
from Glaxo under the Company's collaboration agreement and it is expected that such revenues will be
reduced in future periods as the related reimbursable expenses are expected to decrease.
The Companys future operations are heavily dependent on the success of the
Companys research, development and licensing efforts and, ultimately, upon
regulatory approval and market acceptance of its products under development, particularly
its lead product candidate, alvimopan. There is no assurance that the Company will ever
generate product sales or achieve profitable operations, or that profitable operations, if
achieved, could be sustained on a continuing basis.

The
Company does not expect to generate a positive cash flow from operations for the next
several years, if ever. Prior to exhausting the Company's current cash and short-term investments,
the Company will need to raise additional funds to finance its operating activities. There
are no assurances that the Company will be successful in obtaining an adequate level of
financing for the long-term development and commercialization of its product candidates.

# Principles of
Consolidation

The
consolidated financial statements include the accounts of Adolor Corporation and its
wholly owned subsidiary. All significant intercompany accounts and transactions have been
eliminated in consolidation. The information at June 30, 2003 and for periods ended June
30, 2003 and 2002, is unaudited but includes all adjustments (consisting only of normal
recurring adjustments) which, in the opinion of management, are necessary to state fairly
the financial information set forth in accordance with accounting principals generally
accepted in the United States of America. The interim results are not necessarily
indicative of results to be expected for the full fiscal year. These consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2002 included in the Companys Annual
Report on Form 10-K filed with the Securities and Exchange Commission.

# 2.    COMPREHENSIVE
LOSS

In
the Companys annual consolidated financial statements, comprehensive loss is
presented as a separate financial statement. For interim consolidated financial
statements, the Company is permitted to disclose the information in the footnotes to the
financial statements. The disclosures are required for comparative purposes.

The
following is the reconciliation of net loss to comprehensive loss for the three and six
months ended June 30, 2003 and 2002:

|                                                           | Three months ended June 30, | Six months ended June 30,
|---------------------------------------------------------- | --------------------------- | -------------------------
|
|Net loss                                                   |                             |                          
|Other comprehensive income (loss):                         |                             |                          
|Unrealized gains (losses) on available for sale securities |                             |                          
|                                                           |                             |                          
|Comprehensive loss                                         |                             |                          
|                                                           |                             |                          

# Adolor
Corporation (A Development Stage
Company)

# Notes to Consolidated
Financial Statements

# June 30, 2003 (Unaudited)

# 3.     SHORT-TERM INVESTMENTS

Short-term
investments consist of investment-grade fixed income securities with original maturities
of greater than three months including Corporate bonds and U.S. Treasury obligations. At
June 30, 2003 and December 31, 2002, all short-term investments were carried as
available for sale investments. All investment securities, including
securities with maturities in excess of one year, are classified as current, as they can
be sold at any time.

The
following summarizes the available for sale investments at June 30, 2003 and
December 31, 2002:

|                                       | Cost | GrossUnrealizedGains | GrossUnrealizedLosses | Fair Value 
|-------------------------------------- | ---- | -------------------- | --------------------- | -----------
|U.S. Government obligation & agencies  |      | $  14,004,296        |                       | $       114
|Corporate bonds                        |      | 99,057,852           |                       | 192,712    
|                                       |      |                      |                       |            
|June 30, 2003                          |      | $113,062,148         |                       | $192,826   
|                                       |      |                      |                       |            
|Corporate bonds                        |      | $112,953,120         |                       | $381,409   
|U.S. Government obligations & agencies |      | 4,020,173            |                       | 7,657      
|                                       |      |                      |                       |            
|December 31, 2002                      |      | $116,973,293         |                       | $389,066   
|                                       |      |                      |                       |            

|                                            |  |               |  |         
|------------------------------------------- |  | ------------- |  | --------
|At June 30, 2003, maturities of investments |  |               |  |         
|were as follows:                            | 
|Less than 1 year                            |  | $  90,766,468 |  | $192,712
|1-5 years                                   |  | 22,295,680    |  | 114     
|                                            |  |               |  |         
|June 30, 2003                               |  | $113,062,148  |  | $192,826
|                                            |  |               |  |         

# 4.    CONTRACT,
GRANT, LICENSE AND MILESTONE REVENUES

The
following summarizes revenues for the three and six months ended June 30, 2003 and 2002:

|                                      | Three months ended June 30, | Six months ended June 30,
|------------------------------------- | --------------------------- | -------------------------
|
|Collaborative agreement cost          |                             |                          
|reimbursement                         |                             | $4,078,171               
|Amortization of up-front license fees |                             | 1,041,668                
|Grant revenue                         |                             | --                       
|License and milestone payments        |                             | --                       
|                                      |                             |                          
|Total revenue                         |                             | $5,119,839               
|                                      |                             |                          

# Adolor Corporation (A Development Stage
Company)

# Notes to Consolidated
Financial Statements

# June 30, 2003(Unaudited)

In
April 2002, the Company entered into a collaboration agreement with Glaxo for the
exclusive worldwide development and commercialization of alvimopan for certain
indications. Under the terms of the agreement, Glaxo paid the Company a non-refundable and
non-creditable signing fee of $50.0 million during the quarter ended June 30, 2002. As a
result of the application of Staff Accounting Bulletin (SAB) 101, the $50.0 million
signing fee is reflected in deferred licensing fees and is expected to be recognized as
revenue on a straight-line basis through April 2014, the estimated performance period
under the collaboration agreement. Revenue of $1,041,668 and $2,083,337, respectively, was
recognized in the three and six months ended June 30, 2003 related thereto. The Company
may receive milestone payments of up to $220.0 million over the term of the agreement,
upon the successful achievement, if any, of certain clinical and regulatory objectives.
The milestone payments relate to substantive achievements in the development lifecycle and
will be recognized as revenue if and when the milestones are achieved.

The
Company and Glaxo agreed to develop alvimopan for a number of indications, both acute and
chronic, which would potentially involve the use of alvimopan in in-patient and
out-patient settings. In the United States, the Company and Glaxo intend to co-develop and
intend to co-promote alvimopan and share development expenses and commercial returns, if
any. The Company has the overall responsibility for development activities for acute-care
indications, such as postoperative ileus (POI), and Glaxo has overall
responsibility for development activities for chronic-care indications, such as opioid
bowel dysfunction (OBD). Outside the United States, Glaxo will be responsible
for the development and commercialization of alvimopan for all indications, and the
Company will receive royalties on sales revenues, if any. Glaxo has certain rights to
terminate the collaboration agreement, as well as certain rights to terminate its rights
and obligations with respect to the acute-care indications and/or chronic-care
indications.

External
expenses for research and development and marketing activities incurred by each company in
the United States are reimbursed by the other party pursuant to contractually agreed
percentages. Contract reimbursement amounts owed to the Company by Glaxo are recorded
gross on its consolidated statements of operations pursuant to Emerging Issues Task Force
(EITF) No. 99-19 and 01-14 as contract reimbursement revenue. Amounts reimbursable to Glaxo by the
Company are recorded as research and development expense or marketing expense, as
appropriate, on the Companys consolidated statements of operations. The Company
recorded contract reimbursement revenues of $4,078,171 and $9,255,522, respectively, in
the three and six months ended June 30, 2003 under this arrangement. As of June 30, 2003 and December 31,
2002, $9,255,522 and $7,502,379, respectively, were receivable from Glaxo for reimbursement of expenses
 incurred by the Company pursuant to the collaboration agreement.

In
April 2000, the Company entered into a license agreement with Santen Pharmaceutical Co.,
Ltd. granting Santen an exclusive royalty bearing license to develop and sell products in
the field of ophthalmic pain in all countries other than South Korea and North Korea. A
$500,000 non-refundable payment was paid to the Company upon execution of the agreement.
Such amount was recorded as deferred revenue and was being recognized over the remaining
patent life. In February 2003, Santen terminated this agreement and as a result, the
Company recognized $418,046 as revenue in the first quarter of 2003.

# Adolor Corporation(A Development Stage
Company)

# Notes to Consolidated
Financial Statements

# June 30, 2003(Unaudited)

# 5.     STOCK-BASED
COMPENSATION

The Company accounts for stock option issuances to employees and members of the Board
of Directors in accordance with the provisions of Accounting Principals Board
(APB) No. 25, Accounting for Stock Issued to Employees, and
related interpretations. The Company does not record compensation expense on such option
issuances when exercise prices equal fair market value at the date of grant.
In those instances when the current fair market value of the underlying stock exceeds the
exercise price of the options on the date of grant compensation expense is recorded on a
straight-line basis over the respective vesting periods of such
option grants. The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards (SFAS) No. 123 Accounting for Stock-Based
Compensation which allows entities to continue to apply the provisions of APB No. 25
for financial reporting purposes and provide pro forma net loss and pro forma net loss per
share disclosures in the notes to the financial statements. Transactions with
non-employees, in which goods or services are the consideration received for the issuance
of equity instruments, are accounted for on a fair-value basis.

In
December 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. This statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amended the disclosure
requirements of Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The disclosure requirements of
Statement No. 148, which were effective for financial statements issued after December 15,
2002, have been incorporated herein.

Had
the Company determined compensation cost under SFAS No. 123 for options granted based on
the fair value method the Companys net loss and net loss per share would have been
increased to the pro forma amounts indicated below:

|                                           | Three months ended June 30, | Six months ended June 30,
|------------------------------------------ | --------------------------- | -------------------------
|
|Net loss, as reported                      |                             |                          
|Add:  Stock-based employee compensation    |                             |                          
|expense included in reported net loss      |                             |                          
|Deduct:  Total stock-based employee        |                             |                          
|compensation expense determined under fair |                             |                          
|value based method                         |                             |                          
|                                           |                             |                          
|Pro forma net loss                         |                             |                          
|                                           |                             |                          
|Net Loss per share:                        |                             |                          
|Basic and diluted-as reported              |                             |                          
|Basic and diluted-pro forma                |                             |                          

# 6.     SUBSEQUENT EVENTS

On
July 23, 2003, the Company entered into an agreement with EpiCept Corporation (EpiCept), under which
the Company obtained exclusive rights to develop and commercialize in North America
EpiCepts sterile lidocaine patch which is being developed for the management of postoperative
incisional pain. The Company made a $2.5 million payment to EpiCept upon execution of the
agreement, which will be recorded as a research and development expense in the quarter ending September 30, 2003.  The Company may make
up to $20.0 million in additional developmental milestone payments
if certain clinical and regulatory achievements are reached.

# ITEM 2.    
MANANGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS                    OF
OPERATIONS

Forward-Looking Statements

This
Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking statements
include those which express plan, anticipation, intent, contingency or future development
and/or otherwise are not statements of historical fact. We have based these
forward-looking statements on our current expectations and projections about future events
and they are subject to risks and uncertainties known and unknown which could cause actual
results and developments to differ materially from those expressed or implied in such
statements. These forward-looking statements include statements about the following:

     our
product development efforts, including results from clinical trials;

     anticipated
dates of clinical trial initiation, completion, and announcement of trial results;

     anticipated
trial results and regulatory filing dates for our product candidates;

     the
status and anticipated timing of regulatory approval for our product candidates;

     analysis
and interpretation of data by regulatory authorities;

     anticipated
operating losses and capital expenditures;

     our
intentions regarding the establishment of collaborations;

     anticipated
efforts of our collaborators;

     estimates
of the market opportunity and the commercialization plans for our product candidates,
including our        plans for       the establishment of a sales force;

     our
intention to rely on third parties for manufacturing; and

     our
ability to raise additional capital.

In
some cases, you can identify forward-looking statements by terminology such as
may, will, should, could,
would, expect, plan, anticipate,
believe, estimate, target, goal,
continue, or the negative of such terms or other similar expressions. Factors
that might cause or contribute to differences include, but are not limited to, those
discussed elsewhere in this Report in Item 2 Managements Discussion and
Analysis of Financial Condition and Results of Operations, (including a subsection
thereof entitled Certain Risks Related to our Business) and discussed in our
other Securities and Exchange Commission (SEC) filings.

We
urge you to carefully review and consider the disclosures found in these filings, all of
which are available in the SEC EDGAR database at www.sec.gov and from us at
www.adolor.com. Given the uncertainties affecting pharmaceutical companies in the
development stage, you are cautioned not to place undue reliance on any such forward
looking statements, any of which may turn out to be wrong due to inaccurate assumptions,
unknown risks, uncertainties or other factors. We undertake no obligation to (and
expressly disclaim any such obligation to) publicly update or revise the statements made
herein or the risk factors that may relate thereto whether as a result of new information,
future events, or otherwise.

# Our Company

We
are a development stage biopharmaceutical corporation that was formed in 1993. We
specialize in the discovery, license, acquisition, development and commercialization of
prescription pain management products. We have a number of small molecule product
candidates that are in various stages of development ranging from preclinical studies to
Phase III clinical trials. Our lead product candidate, alvimopan, is designed to
selectively block the unwanted effects of opioid analgesics on the gastrointestinal tract.
Our other product candidates are being designed as analgesics to treat moderate-to-severe
pain conditions. Additionally, we are exploring the development of an analgesic product
candidate that would be a combination of alvimopan and an opioid that would be intended to
produce the pain relief of an opioid while reducing side effects, such as constipation,
nausea and vomiting.

Alvimopan
is being evaluated in acute and chronic indications. We have completed three Phase II
clinical trials studying the use of alvimopan for the management of postoperative ileus
(POI) that frequently follows abdominal surgery in which opioids are used for
pain relief. Subsequently we initiated our alvimopan POI Phase III program consisting of
four studies. Three of these studies (POI 14CL302, POI 14CL308 and POI 14CL313) are
double-blind, placebo-controlled multi-center studies each designed to enroll patients
scheduled to undergo certain types of major abdominal surgery and receiving opioids for
pain relief. Under the protocols, patients are randomized into three arms to receive
placebo, 6 mg or 12 mg doses of alvimopan. The primary endpoint in these three studies is
a composite measure of the time to recovery of both the upper and lower gastrointestinal
functions as defined by time to tolerability of solid foods and time to first flatus or
first bowel movement. The fourth POI clinical study in our Phase III program, POI 14CL306,
is a double-blind, placebo-controlled multi-center study designed to enroll patients
scheduled to undergo total abdominal simple hysterectomy and receiving opioids for pain
relief. Under this protocol, patients are randomized to receive either alvimopan 12 mg
(approximately 400 patients) or placebo (approximately 100 patients). This study was
designed to assess safety and will also assess efficacy.

In
April 2003, we announced top-line results of our first Phase III clinical study POI
14CL302, which enrolled approximately 450 patients. A statistically significant difference
was achieved in the primary endpoint of the study, time to recovery of gastrointestinal
function, in patients in the alvimopan 6 mg treatment group compared to patients in the
placebo group (Cox proportional hazard model, hazard ratio = 1.47; P<0.01). Time to
recovery of gastrointestinal function was a composite measure of the time to recovery of
both lower and upper gastrointestinal function as defined by time to first flatus or first
bowel movement and time to tolerability of solid foods, whichever occurred last. A
difference in favor of the alvimopan 6 mg treatment group versus placebo was observed for
all secondary endpoints, including time to hospital discharge order written. A positive
trend was observed in the primary endpoint of the study for the alvimopan 12 mg treatment
group; however, the difference from placebo was not statistically significant (Cox
proportional hazard model, hazard ratio = 1.23; P = 0.11). The results of this study have
not been submitted to or reviewed by the U.S. Food and Drug Administration (FDA) or any
other regulatory agency. The results from this study are not necessarily indicative of the
results that may be obtained in the other Phase III studies of alvimopan in postoperative
ileus, studies POI 14CL313, POI 14CL308 and POI 14CL306, which have not yet been completed
and analyzed.

Enrollment
in study POI 14CL313 has been completed at approximately 500 patients and enrollment in
study POI 14CL306 has also been completed at approximately 500 patients. Enrollment in
study POI 14CL308 is continuing and is expected to be completed in the second half of
2003.

In
April 2002, we entered into a collaboration agreement with Glaxo for the exclusive
worldwide development and commercialization of alvimopan for certain indications. The
companies have agreed to co-develop alvimopan for a number of indications, both acute and
chronic, which would potentially involve the use of alvimopan in in-patient and
out-patient settings. Under the terms of the collaboration agreement, Glaxo paid us a
non-refundable and non-creditable signing fee of $50.0 million during the quarter ended
June 30, 2002 and we may receive milestone payments of up to $220.0 million over the term
of the agreement upon the successful achievement, if any, of certain clinical and
regulatory objectives.

We
have also completed several Phase II and one Phase III clinical trial studying the use of
alvimopan for the reversal of the severe constipating effects associated with chronic use
of opioids. Overall responsibility for the development of alvimopan in chronic indications
is now carried on by Glaxo.

We
also have other compounds that are being designed to elicit potential analgesic effects by
targeting peripheral opioid receptors, including the kappa receptor. In April,
2003, we initiated two Phase II clinical studies involving two of our kappa agonist
compounds, ADL 10-0101 and ADL 10-0116, in standard pain models, third molar dental
extraction and bunionectomy. These studies have now been terminated following an
assessment of the data generated to date in the studies, which indicated that the balance
between therapeutic effect and safety did not warrant continuing the studies. We plan to
further review this data and evaluate whether to pursue these compounds in other clinical
models, and also evaluate other kappa compounds in our portfolio for consideration
of further study.

Finally,
we have been evaluating ADL 2-1294, a peripheral mu opioid agonist, in pre-clinical
development for treating a variety of pain conditions. The active ingredient of ADL 2-1294
is loperamide. We are currently in preclinical development exploring intra-articular
administration of ADL 2-1294 for relief of pain.

We
believe there are opportunities to expand our product portfolio by the acquisition or
in-licensing of products and/or product development candidates, and intend to explore and
evaluate such opportunities.

On July 23, 2003, we entered into an agreement with EpiCept, under which we obtained
exclusive rights to develop and commercialize in North America EpiCept's sterile lidocaine patch
which is being developed for the management of postoperative incisional pain.  We made a $2.5
million payment to EpiCept upon execution of the agreement, which will be recorded as a research
and development expense in the quarter ending September 30, 2003.  We may make up to $20.0 million in additional development milestone
payments if certain clinical and regulatory achievements are reached.

We
have a small marketing organization to support our development efforts. We plan to build a
sales force in the United States and expand our marketing organization to co-promote
alvimopan along with Glaxo to surgeons, oncologists and pain management specialists in
hospital-care settings, if regulatory approval is received. We intend to rely on Glaxo for
sales and marketing of alvimopan outside the United States. As we develop additional
product candidates we may enter into strategic marketing or co-promotion agreements with,
and grant additional licenses to, pharmaceutical companies to gain access to additional
markets both domestically and internationally.

We
have not generated any product sales revenues and have not achieved profitable operations.
Our deficit accumulated during the development stage aggregated approximately
$178.0 million through June 30, 2003, and we expect to continue to incur substantial
losses in future periods. A significant portion of our revenue recognized in 2002 and to
date in 2003 has been from reimbursement of expenses from Glaxo under our collaboration
agreement and it is expected that such revenues will be substantially reduced in future
periods as the related reimbursable expenses are expected to decrease. We are highly
dependent on the success of our research, development and licensing efforts and,
ultimately, upon regulatory approval and market acceptance of our products under
development, particularly our lead product candidate, alvimopan. We may never become
profitable and even if we become profitable, we may not be able to sustain profitability
on a continuing basis. We do not expect to generate a positive cash flow from operations
for the next several years, if ever. Prior to exhausting our current cash and short-term
investments, we will need to raise additional funds to finance our operating activities.
There are no assurances that we will be successful in obtaining an adequate level of
financing for the long-term development and commercialization of our product candidates.

# Collaboration Agreement
with Glaxo

In
April 2002, we entered into a collaboration agreement with Glaxo for the exclusive
worldwide development and commercialization of alvimopan for certain indications. Under
the terms of the collaboration agreement, Glaxo paid us a non-refundable and
non-creditable signing fee of $50.0 million during the quarter ended June 30, 2002. As a
result of the application of SAB 101, the $50.0 million
signing fee is reflected in deferred licensing fees and is expected to be recognized on a
straight-line basis through April 2014, the estimated performance period under the
collaboration agreement. We recognized revenue of $1,041,668 and $2,083,337, respectively,
in the three and six months ended June 30, 2003 related thereto. We may receive milestone
payments of up to $220.0 million over the term of the agreement upon the successful
achievement, if any, of certain clinical and regulatory objectives. The milestone payments
relate to substantive achievements in the development lifecycle and it is anticipated that
these will be recognized as revenue if and when the milestones are achieved.

We
and Glaxo have agreed to develop alvimopan for a number of indications, both acute and
chronic, which would potentially involve the use of alvimopan in in-patient and
out-patient settings. In the United States, we and Glaxo intend to co-develop and intend
to co-promote alvimopan and share development expenses and commercial returns, if any. We
have overall responsibility for development activities for acute-care indications such as
postoperative ileus, and Glaxo has overall responsibility for development activities for
chronic care indications such as opioid bowel dysfunction. Outside the United States,
Glaxo will be responsible for the development and commercialization of alvimopan for all
indications, and we will receive royalties on sales revenues, if any. Glaxo has certain
rights to terminate the collaboration agreement as well as certain rights to terminate its
rights and obligations with respect to the acute-care indications and/or chronic-care
indications.

External
expenses for research and development and marketing activities incurred by each company in
the United States are reimbursed by the other party pursuant to contractually agreed
percentages. Contract reimbursement amounts owed to us by Glaxo are recorded gross on our
consolidated statements of operations pursuant to EITF No.
99-19 and 01-14 as contract reimbursement revenue. Amounts owed to Glaxo by us are
recorded as research and development or marketing expense, as appropriate, on our
consolidated statement of operations.

We
recorded contract reimbursement revenue of $4,078,171 and $9,255,522, respectively, in the
three and six months ended June 30, 2003 under the Glaxo arrangement. These revenues
represent reimbursement of expenses incurred primarily in our POI development program. We
expect contract reimbursement revenues to decline in future periods because we expect the
costs

of the POI development program to decrease. We also expect that we will incur
expenses in connection with the OBD development program, including payments to Glaxo to
reimburse them for our proportionate share of expenses they incur.

# Liquidity and Capital
Resources

We
have experienced negative operating cash flows since our inception, and we have funded our
operations primarily from the proceeds received from the sale of our stock as well as
grant, license, milestone and contract revenues. Cash, cash equivalents and short-term
investments were $126,221,959 at June 30, 2003, and $153,984,609 at December 31, 2002,
representing 87.1% and 91.5% of our total assets, respectively. We invest excess cash in
highly liquid investment-grade marketable securities including Corporate bonds and United
States government and agency securities.

We
believe that our current financial resources and sources of liquidity are adequate to fund
operations into mid 2005 based on the level of research and development, marketing and
administrative activities necessary to achieve our short-term objectives.

The
following is a summary of selected cash flow information for the six months ended June 30,
2003 and 2002:

|                                                    | Six Months Ended June 30,
|--------------------------------------------------- | -------------------------
|
|Net loss                                            |                          
|Adjustments for non-cash operating items            |                          
|                                                    |                          
|Net cash operating loss                             |                          
|Net change in assets and liabilities                |                          
|                                                    |                          
|Net cash (used in) provided by operating activities |                          
|                                                    |                          
|Net cash (used in) provided by investing activities |                          
|                                                    |                          
|Net cash provided by financing activities           |                          
|                                                    |                          

# Net Cash (Used in)
Provided By Operating Activities

Net
operating cash outflows for the six months ended June 30, 2003 have resulted primarily
from research and development expenditures associated with our product candidates,
including clinical development and manufacturing costs for alvimopan, and from the
compensation of our employees.

Net
operating cash inflows for 2002 were primarily derived from a non-recurring,
non-refundable and non-creditable signing fee of $50.0 million with Glaxo, grant and
license revenues, and interest income on cash equivalents and short-term investments.

Accounts
receivable from collaboration agreements increased by $1,753,143 in the six months ended
June 30, 2003, relating to our collaboration agreement with Glaxo. In July 2003, we
received a payment of $5,080,464 from Glaxo.

Operating Cash Flow
Requirements Outlook

We
expect to continue to use cash, cash equivalents and short-term investments to fund
operating losses. We expect that our contract reimbursement revenue under our
collaboration agreement with Glaxo will decline in future periods because we expect
expenses related to the POI program to decrease as we complete our Phase III trials.
However, depending on the outcome of these clinical trials and the results of regulatory
reviews, these expenditures may increase due to the possible need to perform additional
development work. We expect that other operating expenses will increase in future periods
as a result of manufacturing scale-up efforts and in preparation for potential
commercialization of our product candidates. Further, we may in-license or acquire product
candidates which will require additional cash outlays, and we expect to use cash to reduce
our accrued liability balances as we pay amounts owed vendors and contractors who have
performed services on our behalf.

Under
the terms of the Glaxo agreement, we will reimburse Glaxo for external
expenses incurred by it in the development of alvimopan for certain indications in the
United States, pursuant to an agreed upon development plan and budget. We expect that as
Glaxo incurs increasing expenses under our collaboration related to the OBD program in the
United States, we will incur substantial expenses relating to reimbursements owed to
Glaxo. We also expect to continue to incur expenses on our own account in the development
of alvimopan, pursuant to an agreed upon development plan and budget, a portion of which
are reimbursable to us by Glaxo. We expect to record these expenses as incurred.

# Net Cash (Used in)
Provided By Investing Activities

Cash
used in investing activities for the six months ended June 30, 2003 relates primarily to
leasehold improvements undertaken in connection with our newly leased facility. Cash was
provided by maturities of investments in 2002.

Investing Requirements
Outlook

We
expect to use cash to complete our facility improvements in the third quarter of 2003 and
make additional investments in information technology, laboratory and office equipment to
support the continued expansion of our business.

# Net Cash Provided By
Financing Activities

Financing Requirements
Outlook

We
do not expect to generate sales and positive cash flows from operations for at least the
next several years, if ever. We expect to continue to use our cash, cash equivalents and
short-term investments to fund operating and investing activities. We believe that our
existing cash, cash equivalents and short-term investments of approximately $126.2 million
as of June 30, 2003 will be sufficient to meet our currently estimated operating and
investing requirements into mid 2005. Prior to exhausting our current cash reserves, we
will need to raise additional funds to finance our operating activities. If we do not
raise additional cash, we may be required to curtail or limit certain marketing support
and research and development activities. A curtailment of certain activities would delay
or possibly prevent development of certain of our products. We may seek to obtain
additional funds through equity or debt financings or strategic alliances with third
parties. These financings could result in substantial dilution to the holders of our
common stock. Any such required financing may not be available in amounts or on terms
acceptable to us.

# Results of Operations

# Three Months Ended June
30, 2003 and 2002

Contract,
grant, license and milestone revenues.   Our revenues were $5,119,839
and $10,458,217 for the three months ended June 30, 2003 and 2002, respectively. Revenues
recognized for the three months ended June 30, 2003 consisted of: (a) $4,078,171 for the
reimbursement of expenses from Glaxo in connection with our collaboration agreement; and
(b) $1,041,668 which represents amortization of the $50.0 million signing fee received
from Glaxo, which is expected to be amortized into revenue on a straight-line basis
through April, 2014. Revenues recognized for the three months ended June 30, 2002
consisted of: (a) $8,827,535 for the reimbursement of expenses from Glaxo; (b) $868,056
which represents amortization of the $50.0 million signing fee received from Glaxo;
(c) a milestone payment of $250,000 from Santen Pharmaceutical Co., Ltd.; (d) $6,579 which
is a portion of the $500,000 license fee received from Santen on signing the agreement
with Santen in April 2000 and (e) $506,047 from a portion of the Small Business Innovation
Research (SBIR) grants awarded to us by the National Institutes of Health (NIH) in
September 2001.

Our
revenues decreased in the three months ended June 30, 2003 as compared to the same period
of 2002 primarily from a decrease in the reimbursement of expenses pursuant to our
collaboration agreement with Glaxo. The Glaxo agreement was signed in April 2002, and the
revenues recognized in the second quarter of 2002 included $5.4 million and $3.4 million
for the reimbursement of expenses incurred in the second and first quarters of 2002,
respectively, as the reimbursement provisions of the agreement were retroactive to January
1, 2002.

Research
and development expenses.  Our research and development expenses consist
primarily of salaries and other personnel-related expense, costs of clinical trials, costs
to manufacture drug substance and drug product, stock-based compensation and other
research expenses. Research and development expenses decreased to approximately $13.5
million for the three months ended June 30, 2003 from approximately $14.3 million for the
three months ended June 30, 2002, principally relating to a decrease in expenditures
associated with our Phase III clinical trial program.

Marketing,
general and administrative expenses.  Our marketing, general and
administrative expenses decreased to approximately $3.7 million for the three months ended
June 30, 2003 from approximately $6.0 million in the three months ended June 30, 2002,
primarily due to costs associated with financial advisory fees and legal costs incurred in
2002 in connection with the execution of the Glaxo collaboration agreement, as well as
decreases in marketing related expenses.

Net
interest income (expense).  Our interest income decreased to approximately
$0.7 million for the three months ended June 30, 2003 from approximately $1.1 million for
the same period in 2002 due to a reduction in investments balances and lower interest
rates in 2003.

# Six Months Ended June
30, 2003 and 2002

Contract,
grant, license and milestone revenues.   Our revenues were $11,756,905
and $10,775,556 for the six months ended June 30, 2003 and 2002, respectively. Revenues
recognized for the six months ended June 30, 2003 consisted of: (a) $9,255,522

for the
reimbursement of expenses from Glaxo in connection with our collaboration agreement; (b)
$2,083,337 which represents amortization of the $50.0 million signing fee received
from Glaxo, which is expected to be amortized into revenue on a straight-line basis
through April, 2014; and (c) $418,046 which was recorded as revenue primarily related to
the termination of a license agreement we had with Santen Pharmaceutical Co., Ltd.
Revenues recognized for the six months ended June 30, 2002 consisted of: (a) $8,827,535
for the reimbursement of expenses from Glaxo; (b) $868,056 which represents
amortization of the $50.0 million signing fee received from Glaxo; (c) a patent agreement
fee of $200,000 from Toray Industries, Inc.; (d) a milestone payment of $250,000 from
Santen on signing an agreement with Santen in April, 2000; (e) $13,158 which represents
amortization of the $500,000 license fee from Santen; and (f) $616,807 from a portion
of the SBIR grants awarded to us by the NIH in September 2001.

Research
and development expenses.  Our research and development expenses consist
primarily of salaries and other personnel-related expense, costs of clinical trials, costs
to manufacture drug substance and drug product, stock-based compensation and other
research expenses. Research and development expenses decreased to approximately $28.7
million for the six months ended June 30, 2003 from approximately $31.4 million for the
six months ended June 30, 2002 principally relating to decreased costs associated with
conducting our Phase III clinical trial program.

Marketing,
general and administrative expenses.  Our marketing, general and
administrative expenses decreased to approximately $7.4 million for the six months ended
June 30, 2003 from approximately $10.1 million in the six months ended June 30, 2002,
primarily due to costs associated with financial advisory fees and legal fees incurred in
2002 in connection with the Glaxo collaboration and a decrease in marketing related
expenses.

Net
interest income (expense).  Our interest income decreased to approximately
$1.5 million for the six months ended June 30, 2003 from approximately $2.4 million for
the same period in 2002 due to a reduction in investments balances and lower interest
rates in 2003.

Net Loss Outlook

We
have not generated any product sales revenues and have not achieved profitable operations.
Our deficit accumulated during the development stage through June 30, 2003 aggregates
approximately $178.0 million, and we expect to continue to incur substantial losses in
future periods. We are highly dependent on the success of our research, development and
licensing efforts and, ultimately, upon regulatory approval and market acceptance of our
products under development. We may never become profitable and even if we become
profitable, we may not be able to sustain profitability on a continuing basis.

We
expect contract reimbursement revenues from Glaxo to decline in future periods as we
expect the costs of the POI development program to decrease. We also expect that we will
incur substantial expenses in connection with the OBD development program, including
payments to Glaxo for our proportionate share of expenses they incur.

# Certain Risks Related to
Our Business

As
further described herein, our performance and financial results are subject to risks and
uncertainties including, but not limited to, the following specific risks:

We are highly dependent on achieving success in the clinical testing, regulatory approval and
commercialization of          our lead product candidate, alvimopan, which
may never be approved for commercial use. If we are unable to
         commercialize alvimopan, our ability to generate revenues will be impaired and our
business will be harmed.

We
have invested a significant portion of our time and financial resources since our
inception in the development of alvimopan, and we anticipate that for the foreseeable
future our potential to achieve revenues from product sales will be dependent on its
successful clinical testing, regulatory approval in the United States and
commercialization. Drug development is a highly uncertain process. We or Glaxo, with whom
we are collaborating to develop alvimopan, may suffer significant setbacks in advanced
clinical trials of alvimopan, even after achieving potentially promising results in
earlier clinical trials. Even if the clinical trials of alvimopan are successful, prior to
commercialization of alvimopan in the United States, we will have to submit, and the
FDA will have to approve, a New
Drug Application (NDA) for alvimopan. If our NDA, if any, for alvimopan is not
approved by the FDA, or if approval is delayed, our ability to achieve revenues from
product sales will be impaired and our stock price will be materially and adversely
affected. FDA approval is contingent on many factors, including clinical trial results and
the evaluation of those results.

Our
alvimopan POI Phase III program consists of four studies. Three of these
studies (POI 14CL302, POI 14CL308 and POI 14CL313) are double-blind, placebo-controlled
multi-center studies each designed to enroll patients scheduled to undergo certain types
of major abdominal surgery and receiving opioids for pain relief. Under the protocols,
patients are randomized into three arms to receive placebo, 6 mg or 12 mg doses of
alvimopan. The primary endpoint in these three studies is

a composite measure of the time
to recovery of both the upper and lower gastrointestinal functions as defined by time to
tolerability of solid foods and time to first flatus or first bowel movement.

In
April 2003, we announced top-line results of our first Phase III clinical study (POI
14CL302) for alvimopan in the management of POI. A statistically
significant difference was achieved in the primary endpoint of the study, time to recovery
of gastrointestinal function, in patients in the alvimopan 6 mg treatment group compared
to patients in the placebo group (Cox proportional hazard model, hazard ratio = 1.47;
P<0.01). Time to recovery of gastrointestinal function was a composite measure of the
time to recovery of both lower and upper gastrointestinal function as defined by time to
first flatus or first bowel movement and time to tolerability of solid foods, whichever
occurred last. A difference in favor of the alvimopan 6 mg treatment group versus placebo
was observed for all secondary endpoints, including time to hospital discharge order
written. A positive trend was observed in the primary endpoint of the study for the
alvimopan 12 mg treatment group; however, the difference from placebo was not
statistically significant (Cox proportional hazard model, hazard ratio = 1.23; P = 0.11).

The
results of study POI 14CL302 have not been submitted to or reviewed by the FDA or any
other regulatory agency. The results from this study are not necessarily indicative of the
results that may be obtained in the phase III studies of alvimopan in POI
which have not yet been completed and analyzed. While we believe the results of
study POI 14CL302, if confirmed in our additional studies, support our goal of submitting a
New Drug Application for alvimopan, there can be no assurance that the FDA will concur
with that assessment. The difference from placebo was not statistically significant in the
12 mg treatment group, and there can be no assurance that this outcome will not occur
again in our further clinical testing, or that the 6 mg treatment group will again achieve
a statistically significant difference. There can also be no assurance that the outcome of
study POI 14CL302 or further studies will be considered clinically meaningful, and this
determination is necessary for approval of alvimopan for commercial sale.

Our
fourth POI clinical study in our Phase III program (POI 14CL306) is a double-blind,
placebo-controlled multi-center study designed to enroll patients
scheduled to undergo total abdominal simple hysterectomy and receiving opioids for pain
relief. Under this protocol, patients are randomized to receive either alvimopan 12 mg
doses (approximately 400 patients) or placebo (approximately 100 patients). This study was
designed to assess safety and will also assess efficacy.

Enrollment
in study POI 14CL313 has been completed at approximately 500 patients and enrollment in
study POI 14CL306 has also been completed at approximately 500 patients. Enrollment in
study POI 14CL308 is continuing and is expected to be completed in the second half of
2003.

Clinical
trials in our Phase III program use drug product incorporating active pharmaceutical
ingredient manufactured by two different contract manufacturing facilities, one of which
is no longer in business. Our efforts to obtain regulatory approval may be impaired as a
result of using material from two different contract manufacturing facilities.

The
results from any one or all of our clinical trials may be negative. Negative results from
one or more of these clinical trials will adversely affect our ability to obtain
regulatory approval for alvimopan. Adverse safety findings from one or more of these
studies will adversely affect our ability to obtain regulatory approval. Even if we
conclude that the results from our preclinical studies and clinical trials are positive,
the FDA may not agree with us because the FDA may evaluate the results by different
methods or conclude that the clinical trial results are not clinically meaningful or that
there were human errors in the conduct of the clinical trials or otherwise.

The
results of one or both of the dose comparisons in each study that includes multiple dose
comparisons may be negative. Because the studies are intended to be confirmatory and each
study involves multiple comparisons (i.e. two doses of alvimopan versus placebo), under
statistical techniques, statisticians control the overall study error rate (i.e. the
likelihood that the drug response occurred by chance) by requiring that each of the
multiple dose comparisons meet a P-value of P < 0.05 to show statistical significance.
In the event that one of the dose comparisons in any of these POI Phase III studies does
not reach a significance level of P < 0.05, the
other dose comparison in that study will need to reach a significance level of P <
0.025 to be considered statistically significant, as was the case in Study POI 14CL302.
We may not achieve positive statistical results in these studies.

To receive
regulatory approval for alvimopan, our contract manufacturers will be required to obtain
approval for their manufacturing facilities to manufacture alvimopan. To achieve this
approval, we will also be required to submit, in an NDA, information and data regarding
chemistry, manufacturing and controls which satisfies the FDA that our contract
manufacturers are able to make alvimopan in accordance with extensive regulatory
requirements, commonly known as current good manufacturing practices (cGMPs). FDA approval
for our contract manufacturing facilities to manufacture alvimopan may not be obtained. We
will be required to submit extensive preclinical data in our NDA, if any, which satisfies
the FDA regulatory requirements. We may fail to meet the FDAs standards on any one
of these or other elements required in an NDA.

Even
if we believe we have met the FDA guidelines for submission of data and information to the
NDA, if any, there is a risk that the FDA will require additional data and information
that we are unable to provide.

We
have completed several Phase II trials and one Phase III clinical trial studying the use of
alvimopan for the reversal of the severe constipating effects associated with chronic use
of opioids. The overall responsibility for the development of alvimopan in chronic
indications is now carried on by Glaxo. Additional long-term animal toxicity studies are
necessary to support further development of alvimopan in OBD. Adverse safety findings in
these long-term animal toxicity studies could adversely affect our prospects for
alvimopan, including its prospects for use in POI. Results from the
clinical studies conducted to date in OBD are not necessarily indicative of the results
that may be obtained in further OBD studies, or in clinical studies in the POI indication.
Additional studies for chronic OBD investigating longer duration of patient exposure and
different dosing strategies, as well as preclinical toxicology studies, will be required
prior to initiating the confirming clinical studies required to be successfully completed
before any NDA could be filed for use of alvimopan in OBD.

Our
alvimopan clinical trials are testing whether alvimopan is able to selectively block the
effects of narcotic analgesics on the gastrointestinal tract. As combination clinical
trials, they are subject to the risk that the use of alvimopan with narcotic analgesics
may result in unexpected toxicity, or increase the side effects associated with the
individual products to an unacceptable level, or interfere with the efficacy of the
narcotic analgesic. In addition, assessing clinical trial results of alvimopan in
combination with narcotic analgesics may add to the complexity of interpreting the study
results.

Our
stock price may be volatile, and your investment in our stock could decline in value. We
may become involved in         securities class action litigation.

The
market price for our common stock has been highly volatile and may continue to be highly
volatile in the future. The market price for our common stock is highly dependent on the
results of our clinical trials, in particular our Phase III clinical trials of alvimopan
in POI. There can be no assurance that accrual will be completed within expected
timeframes or that the results of any of our Phase III clinical trials will be positive.
Failure to achieve positive results in any or all of these studies would adversely impact
the market price of our common stock.

The
following factors, in addition to the factors described in the alvimopan risk factor above
and other risk factors contained in this document, may have a significant impact on the
market price of our common stock:

      developments
concerning our collaborations, including our collaboration with Glaxo;

      announcements
of technological innovations or new commercial products by our competitors or us;

      developments
concerning proprietary rights, including patents;

      publicity
regarding actual or potential medical results relating to products under development by
our competitors or us;

      regulatory
developments in the United States and foreign countries;

      litigation;

      economic
and other external factors or other disasters or crises;

      period-to-period
fluctuations in our financial results; and

      the
general performance of the equity markets and in particular, the biopharmaceutical sector
of the equity markets.

Following
periods of volatility and decline in the market price of a particular companys
securities, securities class action litigation has often been brought against that
company. We may become involved in this type of litigation in the future. Litigation of
this type is often extremely expensive and diverts managements attention and
resources.

If
we continue to incur operating losses for a period longer than anticipated, we may be
unable to continue our       operations.

We
believe our existing cash, cash equivalents and short-term investments as of June 30, 2003
of approximately $126.2 million will be sufficient to meet our currently estimated
operating and investing requirements into mid 2005. We have generated operating losses
since we began operations in November 1994. We expect to continue to generate such losses
and will need additional funds that may not be available in the future. We have no
products that have generated any revenue, and as of June 30, 2003, we have incurred a
cumulative net loss of approximately $178.0 million. Even if we succeed in developing a
commercial product, we expect to incur substantial losses for at least the next several
years and expect that these losses will increase as we expand our research and development
and sales and marketing activities. If we fail to obtain the capital necessary to fund our
operations, we will be forced to curtail our operations and we will be unable to develop
products successfully. We do not know whether additional financing will be available when
needed, or that, if available, we will obtain financing on terms favorable to our
stockholders or to us. If adequate funds are not available on acceptable terms, our
ability to fund our operations, products or

technologies or otherwise respond to
competitive pressures could be significantly delayed or limited, and we may have to reduce
or cease our operations. If additional funds become available there can be no assurance
that we can predict the time and costs required to complete development programs or that
we will not substantially exceed our budgets.

We
are dependent on our collaborators to perform their obligations under our collaboration
agreements. If conflicts        arise between our collaborators or advisors
and us, they may act in their self-interest.

In
April 2002, we and Glaxo entered into a collaboration agreement for the exclusive
worldwide development and commercialization of alvimopan for certain indications. We and
Glaxo agreed to develop alvimopan for a number of indications, both acute and chronic,
which would potentially involve the use of alvimopan in in-patient and out-patient
settings. In the United States, we and Glaxo intend to co-develop and intend to co-promote
alvimopan and share development expenses and commercial returns, if any. We have overall
responsibility for the development of acute-care indications, such as POI,
and Glaxo has overall responsibility for the development of chronic-care indications, such
as OBD. We and Glaxo are required to use commercially reasonable
efforts to develop the indications for which we and they are respectively responsible. We
depend on Glaxo to provide us with substantial assistance and expertise in the development
of alvimopan. Any failure of Glaxo to perform its obligations under our agreement could
negatively impact our product candidate, alvimopan, and could lead to our loss of
potential revenues from product sales and milestones that may otherwise become due under
our collaboration agreement and would delay our achievement, if any, of profitability. In
the near term, our success will largely depend upon the success of our collaboration with
Glaxo to further develop alvimopan and our success in obtaining regulatory approval to
commercialize alvimopan.

Glaxo
has certain rights to terminate the collaboration agreement. Glaxo also has the right to
terminate its rights and obligations with respect to the acute-care indications, or its
rights and obligations for the chronic-care indications. Glaxo has the right to terminate
the collaboration agreement for breach of the agreement by us or for safety related
reasons as defined in the collaboration agreement. Glaxos rights to terminate the
acute-care indications or the chronic-care indications are generally triggered by failure
to achieve certain milestones within certain timeframes, adverse product developments or
adverse regulatory events. If Glaxo terminates the collaboration agreement, our business
will be adversely affected.

We
have entered into, and may in the future enter into, collaborative arrangements, including
our arrangement with Glaxo, for the marketing, sales and distribution of our product
candidates, which require, or may require, us to share profits or revenues. We may be
unable to enter into additional collaborative licensing or other arrangements that we need
to develop and commercialize our product candidates. Moreover, we may not realize the
contemplated benefits from such collaborative licensing or other arrangements. These
arrangements may place responsibility on our collaborative partners for preclinical
testing, human clinical trials, the preparation and submission of applications for
regulatory approval, or for marketing, sales and distribution support for product
commercialization. We cannot be certain that any of these parties, including Glaxo, will
fulfill their obligations in a manner consistent with our best interests. These
arrangements may also require us to transfer certain material rights or issue our equity
securities to corporate partners, licensees and others. Any license or sublicense of our
commercial rights may reduce our product revenue. Moreover, we may not derive any revenues
or profits from these arrangements. Collaborators may also pursue alternative technologies
or drug candidates, either on their own or in collaboration with others, that are in
direct competition with us.

Our
corporate collaborators, including Glaxo, may determine not to proceed with one or more of
our drug discovery and development programs. If one or more of our corporate collaborators
reduces or terminates funding, we will have to devote additional internal resources to
product development or scale back or terminate some development programs or seek
alternative corporate collaborators.

Our
quarterly operating results may fluctuate significantly depending on the initiation of new
corporate collaboration agreements, the activities under current corporate collaboration
agreements or the termination of existing corporate collaboration agreements.

Because
our product candidates are in development, there is a high risk that further development
and testing will        demonstrate that our product candidates are not suitable for
commercialization.

We
have no products that have received regulatory approval for commercial sale. All of our
product candidates, including alvimopan, are in development, and we face the substantial
risks of failure inherent in  developing drugs based on new technologies. Our product
candidates must satisfy rigorous standards of safety and efficacy before the FDA and
foreign regulatory authorities will approve them for commercial use. To satisfy these
standards, we will need to conduct significant additional research, animal testing, or
preclinical testing, and human testing, or clinical trials.

Preclinical
testing and clinical development are long, expensive and uncertain processes. Failure can
occur at any stage of testing. Success in preclinical testing and early clinical trials
does not ensure that later clinical trials will be successful. Based on results at any
stage of clinical trials, we may decide to discontinue development of our product
candidates.

We
may suffer significant setbacks in advanced clinical trials, even after promising results
in earlier trials.

Product
candidates that appear to be promising at earlier stages of development may not reach the
market or be marketed successfully for a number of reasons, including, but not limited to,
the following:

      researchers
may find during later preclinical testing or clinical trials that the product candidate
is ineffective or has         harmful side effects;

      the
number and types of patients available for extensive clinical trials may vary;

      new
information about the mechanisms by which a drug candidate works may adversely affect its
development;

      one or
more competing products may be approved for the same or a similar disease condition,
raising the hurdles to         approval of the product candidate;

      the
product candidate may fail to receive necessary regulatory approval or clearance; or

      competitors may market equivalent or superior products.

If
we are unable to contract with third parties to manufacture our products in sufficient
quantities, at an acceptable        cost and in compliance with regulatory requirements, we
may be unable to obtain regulatory approvals, or to meet        demand for our products.

Completion of our clinical
trials and commercialization of our product candidates require access to, or development
of, facilities to manufacture a sufficient supply of our product candidates. We have
depended and expect to continue to depend on our collaborators or third parties for the
manufacture of our compounds for preclinical, clinical and commercial purposes in their
manufacturing facilities. We are highly dependent on our current contract manufacturers because we have
developed our manufacturing processes and controls with them. It is difficult and
expensive to change contract manufacturers for pharmaceutical products, particularly when
the products are under regulatory review in an NDA process.

To
receive regulatory approval for alvimopan, our contract manufacturers will be required to
obtain approval for their manufacturing facilities to manufacture alvimopan. FDA
approval for our contract manufacturing facilities to manufacture alvimopan may not be
obtained.

We
will also be required to submit, in an NDA, information and data regarding chemistry,
manufacturing and controls which satisfies the FDA that our contract manufacturers are
able to make alvimopan in accordance with extensive regulatory requirements, commonly
known as good manufacturing practices (cGMPs). Under cGMPs, our manufacturers will be
required to manufacture our products and maintain records in a prescribed manner with
respect to manufacturing, testing and quality control activities. We are dependent on our
third party manufacturers to comply with these regulations in the manufacture of our
products. The failure of any third party manufacturer to comply with applicable government
regulations could substantially harm and delay or prevent regulatory approval and
marketing of alvimopan. If these third party manufacturers fail to perform in compliance
with these regulations, we may be compelled to delay our development efforts. Our products
may be in competition with other products for access to facilities of third parties and
suitable alternatives may be unavailable. Consequently, our products may be subject to
delays in manufacture if outside contractors give other products greater priority than our
products. For this and other reasons, third parties may not be able to manufacture these
products in a cost-effective or timely manner. If the manufacture of these products does
not occur in a timely manner, the clinical trial development of our product candidates or
their submission for regulatory approval could be delayed, and our ability to deliver
products, if any are approved, on a timely basis could be impaired or precluded. We may
not be able to enter into necessary third-party manufacturing arrangements on acceptable
terms, if at all. Our dependence upon others for the manufacture of our products may
adversely affect our future profit margin and our ability to commercialize products, if
any are approved, on a timely and competitive basis.

We
have limited experience in conducting and managing the clinical trials necessary to obtain
regulatory approval.

We
have limited experience in managing clinical trials, and delays or terminations of
clinical trials we are conducting or may undertake in the future could impair our
development of product candidates. Delay or termination of any clinical trials could
result from a number of factors, including adverse events, stringent enrollment
requirements, slow rate of enrollment, competition with other clinical trials for eligible
patients, and geographical considerations and other factors. We contract with third
parties to conduct our clinical trials, including the clinical trials in our Phase III POI
program. We are subject to the risk that these third parties fail to perform their
obligations properly and in compliance with applicable FDA regulations.

The
concept of developing peripherally restricted opioid analgesics and narcotic antagonist
drugs is relatively new        and may not lead to commercially successful drugs.

Since there
are no products on the market comparable to our product candidates, we do not have any
historical or comparative sales data to rely upon to indicate that peripherally
restricted opioid analgesic or peripherally acting narcotic

antagonist drugs will achieve
commercial success in the marketplace. Market acceptance of our product candidates will
depend on a number of factors, including:

     perceptions
by members of the health care community, including physicians, of the safety and efficacy
of our       product        candidates;

     cost-effectiveness
of our product candidates relative to competing products;

     the
availability of government or third-party payor reimbursement for our product candidates;
and

      the
effectiveness of marketing and distribution efforts by us, our collaborators and our
licensees and distributors.

Other
products that are currently sold for pain management are already recognized as safe and
effective and have a history of successful sales in the United States and elsewhere. Our
new products in this area, if any, will be competing with drugs that have been approved by
the FDA and have demonstrated commercial success in the United States and elsewhere.

Our
product candidate alvimopan is under investigation in POI and OBD for use in patients
taking opioid        analgesics and reduction in the use of opioid analgesics would reduce
the potential market for alvimopan.

If
the use of drugs or techniques which reduce the requirement for mu-opioids
increases, the demand for alvimopan would be decreased. Various techniques to reduce the
use of opioids are used in an attempt to reduce the impact of opioid side effects. The use
of local anesthetics in epidural catheters during and after surgery with the continuation
of the epidural into the post-operative period can reduce or eliminate the use of opioids.
Non-steroidal inflammatory agents may also reduce total opioid requirements. Continuous
infusion of local anesthetic into a wound or near major nerves can reduce the use of
opioids in limited types of procedures and pain states. Novel analgesics which act at
non-mu-opioid receptors to provide pain relief or to enhance opioid analgesia are
under development but have not yet demonstrated wide clinical applicability in humans.
While each of these opioid alternatives has limitations and opioid use continues at
significant levels, further adoption of such alternatives would reduce potential future
demand for alvimopan.

If
competitors develop and market products that are more effective, have fewer side effects,
are less expensive than       our product candidates or offer other advantages our
commercial opportunities will be limited.

Other
companies have product candidates in clinical trials to treat the conditions for which we
are seeking to ultimately treat. These competing potential drugs may result in effective,
commercially successful products. Even if our collaborators or we are successful in
developing effective drugs, our products may not compete effectively with these products
or other successful products. Our competitors may succeed in developing products either
that are more effective than those that we may develop, or that they market before we
market any products we may develop.

Our
competitors include fully integrated pharmaceutical companies and biotechnology companies,
universities and public and private research institutions. Many of the organizations
competing with us have substantially greater capital resources, larger research and
development staffs and facilities, greater experience in drug development and in obtaining
regulatory approvals and greater manufacturing and marketing capabilities than we do.
These organizations also compete with us to:

     attract
qualified personnel;

     attract
partners for acquisitions, joint ventures or other collaborations; and

     license
proprietary technology that is competitive with our technology.

The
successful entrance by our competitors into partnering arrangements or license agreements
with academic research institutions will preclude us from pursuing those specific
opportunities. Since each of these opportunities is unique, we may not be able to find an
acceptable substitute.

Third parties are conducting or will conduct many of our product development activities and
almost all of our       manufacturing activities. If these third parties
fail to perform these functions satisfactorily and in compliance with       regulatory requirements,
our product development could be delayed.

We
rely, to a significant extent, on third parties to jointly conduct some research and
preclinical testing functions and to manufacture certain of our product candidates. If any
of these third parties breaches or terminates their agreement with us or otherwise fails
to conduct their activities successfully and in a timely manner, their actions could delay
or terminate the preclinical or clinical development or potential commercialization of the
affected product candidates or research program. We cannot control the amount and timing
of resources these third parties devote to our programs or product candidates. The failure
of any third party to comply with any governmental regulations would substantially harm
our development and marketing efforts and delay or prevent regulatory approval of our
product candidates. If these third parties fail to perform their obligations properly

and
in compliance with applicable regulations, we may be compelled to delay our development
efforts, and our business could be harmed.

Because
we are not certain we will obtain necessary regulatory approvals to market our products
in the United States       and foreign jurisdictions, we cannot predict whether or when we
will be permitted to commercialize any of our       products.

The
pharmaceutical industry is subject to stringent regulation by a wide range of authorities.
We cannot predict whether we will obtain regulatory clearance for any product candidate we
develop. We cannot market a pharmaceutical product in the United States until it has
completed rigorous preclinical testing and clinical trials and the FDAs extensive
regulatory clearance process. Satisfaction of regulatory requirements typically takes many
years, is dependent upon the type, complexity and novelty of the product and requires the
expenditure of substantial resources for research and development, testing, manufacturing,
quality control, labeling and promotion of drugs for human use. Since neither the FDA nor
international regulatory authorities have approved peripherally restricted narcotic
antagonist drugs for marketing, we do not know whether our research and clinical
approaches to developing new products for the pain management market will lead to drugs
that the FDA will consider safe and effective for indicated uses. Before receiving FDA
approval to market a product, we must demonstrate that the product candidate is safe and
effective in the patient population that will be treated. Outside the United States, our
ability to market a product is contingent upon receiving a marketing authorization from
the appropriate regulatory authorities. This foreign regulatory approval process includes
all of the risks associated with FDA clearance described above.

We
do not know whether our existing or any future clinical trials will demonstrate sufficient
safety and efficacy necessary to obtain the requisite regulatory approvals or will result
in marketable products. Our failure to adequately demonstrate the safety and efficacy of
our product candidates will prevent receipt of FDA and foreign regulatory approvals and,
ultimately, commercialization of our product candidates. Regulatory authorities may refuse
or delay approval as a result of many other factors, including changes in regulatory
policy during the period of product development and regulatory interpretations of clinical
benefit and clinical risk. Regulatory clearance that we may receive for a product
candidate will be limited to those diseases and conditions for which we have demonstrated
in clinical trials that the product candidate is safe and efficacious. Preclinical and
clinical trials of our product candidates, including alvimopan, may not display the safety
and efficacy necessary to obtain regulatory approvals. Drug development is a highly
uncertain process. Pharmaceutical and biotechnology companies have suffered significant
setbacks in advanced clinical trials, even after experiencing promising results in earlier
trials. Data obtained from non-clinical and clinical tests are susceptible to varying
interpretations which may delay, limit or prevent regulatory approval.

If
we receive regulatory approval for our product candidates and if we fail to comply with
applicable FDA post marketing regulations or other regulatory requirements, we could be
subject to criminal prosecution, civil penalties, recall or seizure of products, total or
partial suspension of production or injunction, as well as other regulatory actions
against our product or us. In addition, the federal Controlled Substances Act imposes
significant restrictions, licensing and regulatory requirements on the manufacturing,
distribution and dispensing of controlled substances. Therefore, we must determine whether
the DEA would consider any product to be a controlled substance. We believe that it is
unlikely that any of our product candidates other than those acting on the central nervous
system will be subject to regulation as controlled substances.

We
may not obtain FDA approval to conduct clinical trials that are necessary to satisfy
regulatory requirements.

Clinical
trials are subject to oversight by institutional review boards and the FDA and:

     must conform with the FDA's good clinical practice regulations;

     must meet requirements for institutional review board oversight;

     must meet requirements for informed consent;

     are subject to continuing FDA oversight; and

     may require large numbers of test subjects.

Before
commencing clinical trials in humans, we must submit and receive approval from the FDA of
an Investigational New Drug Application, or IND. We, or the FDA, may suspend clinical
trials at any time if the subjects participating in the trials are exposed to unacceptable
health risks, or if the FDA finds deficiencies in the IND application or the conduct of
the trials.

Our
business could suffer if we cannot attract, retain and motivate skilled personnel and
cultivate key academic       collaborations.

We
are a small company, and our success depends on our continued ability to attract, retain
and motivate highly qualified management and scientific personnel and on our ability to
develop and maintain important relationships with leading academic institutions and
scientists. Competition for personnel and academic collaborations is intense. In
particular, our product

development programs depend on our ability to attract and retain
highly skilled chemists, biologists and clinical development personnel. If we lose the
services of any of these personnel it could impede significantly the achievement of our
research and development objectives. Failure to negotiate additional acceptable
collaborations with academic institutions and scientists, or lack of success with respect
to our existing academic collaborations, may delay our product development programs. In
addition, we will need to hire additional personnel and develop additional academic
collaborations as we continue to expand our research and development activities. We do not
know if we will be able to attract, retain or motivate personnel or maintain
relationships.

Companies
and universities that have licensed product candidates to us for clinical development and
marketing are       sophisticated competitors that could develop similar products to compete
with products we hope to develop.

Licensing
product candidates from other companies, universities, or individuals does not prevent
them from developing non-identical but competitive products for their own commercial
purposes, nor from pursuing patent protection in areas that are competitive with us. The
individuals who created these technologies are sophisticated scientists and business
people who may continue to do research and development and seek patent protection in the
same areas that led to the discovery of the product candidates that they licensed to us.
The development and commercialization of successful new drugs from our research program is
likely to attract additional research by our licensors and by other investigators who have
experience in developing products for the pain management market. By virtue of the
previous research that led to the discovery of the drugs or product candidates that they
licensed to us, these companies, universities, or individuals may be able to develop and
market competitive products in less time than might be required to develop a product with
which they have no prior experience.

If
we breach our licensing agreements, we will lose significant benefits and may be exposed
to liability for damages.

We
may breach the agreements under which we license commercialization or development rights
and may thereby lose license rights that are important. We license rights to products and
technology that are relevant to our business, including among others our exclusive
worldwide license to alvimopan from Roberts Laboratories, Inc. and our license from Eli
Lilly relating to peripherally selective opioid antagonists. We are subject to various
obligations with respect to these agreements, including development responsibilities,
royalty and other payments and regulatory obligations. If we fail to comply with these
requirements or otherwise breach a license agreement or contract, the licensor or other
contracting party may have the right to terminate the license or contract in whole or in
part or change the exclusive nature of the arrangement. In such event we would not only
lose all or part of the benefit of the arrangement but also may be exposed to potential
liabilities for breach in the form of damages or other penalties.

It
is difficult and costly to protect our intellectual property rights, and we cannot ensure
the protection of these rights;       we may be sued by others for infringing their
intellectual property.

Our
commercial success will depend in part on obtaining patent protection on our products and
successfully defending these patents against third party challenges. The patent positions
of pharmaceutical and biotechnology companies can be highly uncertain and involve complex
legal and factual questions. Accordingly, we cannot predict the breadth of claims allowed
in our patents or those of our collaborators.

Others
have filed and in the future are likely to file patent applications covering products and
technologies that are similar, identical or competitive to ours. Others may have patents
or patent applications that may overlap with patents or a patent application that we have
in-licensed covering certain receptors. We cannot assure that any patent application owned
by a third party will not have priority over patent applications filed or in-licensed by
us, nor that we or our licensor will not be involved in interference proceedings before
the United States Patent and Trademark Office.

Although
no third party has asserted a claim of infringement against us, others may hold
proprietary rights that will prevent our product candidates from being marketed unless we
can obtain a license to those proprietary rights. Any patent related legal action against
our collaborators or us claiming damages and seeking to enjoin commercial activities
relating to our products and processes could subject us to potential liability for damages
and require our collaborators or us to obtain a license to continue to manufacture or
market the affected products and processes. We cannot predict whether we or our
collaborators would prevail in any of these actions or that any license required under any
of these patents would be made available on commercially acceptable terms, if at all.
There has been, and we believe that there will continue to be, significant litigation in
the industry regarding patent and other intellectual property rights. If we become
involved in litigation, it could consume substantial managerial and financial resources.

We
rely on trade secrets to protect technology in cases when we believe patent protection is
not appropriate or obtainable. However, trade secrets are difficult to protect. While we
require employees, academic collaborators and consultants to enter into confidentiality
agreements, we may not be able to protect adequately our trade secrets or other
proprietary information. Our research collaborators and scientific advisors have rights to
publish data and information in which we have rights. If we cannot maintain the
confidentiality of our technology and other confidential information in connection with
our collaborations, our ability to receive patent protection or protect our proprietary
information may be imperiled.

Others
may hold proprietary rights that will prevent our product candidates from being marketed
unless we are able to obtain a license to those proprietary rights. We are a party to
various license agreements that give us rights to use specified technologies in our
research and development processes. If we are not able to continue to license such
technology on commercially reasonable terms, our product development and research may be
delayed. In addition, we generally do not fully control the prosecution of patents
relating to in-licensed technology, and accordingly are unable to exercise the same degree
of control over this intellectual property as we exercise over our internally developed
technology.

If
we are unable to develop sales, marketing and distribution capabilities or enter into
agreements with third parties to       perform these functions, we will not be able to
commercialize products.

We
currently have no sales or distribution capability and limited marketing capabilities. In
order to commercialize products, if any are approved, we must internally develop sales,
marketing and distribution capabilities or make arrangements with third parties to perform
these services. If we obtain FDA approval, we intend to market some products directly and
rely on relationships with established pharmaceutical companies to market other products.
To market any of our products directly, we must develop a marketing and sales force with
technical expertise and with supporting distribution capabilities. We may not be able to
establish in-house sales and distribution capabilities or relationships with third
parties. To the extent that we enter into co-promotion or other licensing arrangements,
our product revenues may be lower than if we directly marketed and sold our products, and
any revenues we receive will depend upon the efforts of third parties, which efforts may
not be successful.

Our
ability to generate revenues will be diminished if we fail to obtain acceptable prices or
an adequate level of       reimbursement for our products from third-party payors.

Our
ability to commercialize pharmaceutical products, alone or with collaborators, may depend
in part on the extent to which reimbursement for the products will be available from:

     government and health administration authorities; or

     private health insurers and third party payors.

The
continuing efforts of government and third-party payors to contain or reduce the costs of
health care through various means may limit our commercial opportunity. For example, in
some foreign markets, pricing and profitability of prescription pharmaceuticals are
subject to government control. In the United States, we expect that there will continue to
be a number of federal and state proposals to implement pharmaceutical pricing and cost
control measures under government health care programs such as Medicare and Medicaid. In
addition, increasing emphasis on managed care in the United States will continue to put
pressure on the pricing of pharmaceutical products. Significant uncertainty exists as to
the reimbursement status of newly approved health care products. Cost control initiatives
could decrease the price that any of our collaborators or we would receive for any
products in the future and may impede patients ability to obtain reimbursement under
their insurance program for our products. Further, cost control initiatives could
adversely affect our collaborators ability to commercialize our products, and our
ability to realize royalties from such commercialization.

If
we engage in an acquisition or business combination, we will incur a variety of risks
that could adversely affect our       business operations or our stockholders.

From
time to time we have considered, and we will continue to consider in the future, if and
when any appropriate opportunities become available, strategic business initiatives
intended to further the development of our business. These initiatives may include
acquiring businesses, technologies or products or entering into a business combination
with another company. If we do pursue such a strategy, we could, among other things:

     issue equity securities that would dilute our current stockholders' percentage ownership;



     incur substantial debt that may place strains on our operations;



     spend substantial operational, financial and management resources in integrating new businesses, technologies and       products;



     assume substantial actual or contingent liabilities; or



     merge with or otherwise enter into a business combination with, another
company in which our stockholders would        receive cash or shares of the other company or a
combination of both on terms that our stockholders may not deem       desirable.



We
are not in a position to predict what, if any, collaborations, alliances or other
transactions may result or how, when or if these activities would have a material effect
on us or the development of our business.

If
product liability lawsuits are successfully brought against us, we may incur substantial
liabilities and may have to        limit or cease commercialization of our products.

The
testing and marketing of medical products entail an inherent risk of product liability. If
we cannot successfully defend ourselves against product liability claims, we may incur
substantial liabilities or be required to limit or cease commercialization of our
products. We currently carry clinical trial insurance but do not carry product liability
insurance. Our corporate collaborators or we may not be able to obtain insurance at a
reasonable cost, if at all. If we cannot obtain sufficient product liability insurance at
an acceptable cost to protect against potential product liability claims we may be
prevented from commercializing our products. We enter into indemnification agreements
where we indemnify third parties such as investigators for certain product liability
claims related to our products under investigation. These indemnification obligations may
cause us to pay significant sums of money for claims that are covered by these
indemnifications.

If
we use biological and hazardous materials in a manner that causes injury or violates
laws, we may be liable for       damages.

Our
research and development activities involve the controlled use of potentially harmful
biological materials as well as hazardous materials, chemicals and various radioactive
compounds. We cannot completely eliminate the risk of accidental contamination or injury
from the use, storage, handling or disposal of these materials. In the event of
contamination or injury, we could be held liable for damages that result, and any
liability could exceed our resources. We are subject to federal, state and local laws and
regulations governing the use, storage, handling and disposal of these materials and
specified waste products. The cost of compliance with these laws and regulations could be
significant.

Anti-takeover
provisions in our charter documents and under Delaware law may make an acquisition of us,
which        may be beneficial to our stockholders, more difficult.

Provisions
of our amended and restated certificate of incorporation and restated by laws, as well as
provisions of Delaware law, could make it more difficult for a third party to acquire us,
even if doing so would benefit our stockholders.

Our
amended and restated certificate of incorporation provides for our Board of Directors to
be divided into three classes, with the term of one such class expiring each year, and we
have eliminated the ability of our stockholders to consent in writing to the taking of any
action pursuant to Section 228 of the Delaware General Corporation Law.

In
addition, we adopted a shareholder rights plan, the effect of which may be to make an
acquisition of the company more difficult.

Under
our collaboration agreement with Glaxo, Glaxo has certain limitations on its ability to
acquire our securities.

# Recently Issued
Accounting Pronouncements

On
May 15, 2003, the FASB issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. The Statement requires issuers to classify as liabilities
(or assets in some circumstances) three classes of freestanding financial instruments that
embody obligations for the issuer.

Generally,
the Statement is effective for financial instruments entered into or modified after May
31, 2003 and is otherwise effective at the beginning of the first interim period beginning
after June 15, 2003.

The
Company did not enter into any financial instruments within the scope of the Statement
during June 2003. As a result of adopting the Statement in July 2003 for existing
financial instruments entered into on or before May 31, 2003, there was no impact on the
consolidated financial statements.

# ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A
substantial portion of our assets are investment grade debt instruments, including
corporate securities and direct obligations of the U.S. Treasury. The market value of such
investments fluctuates with current market interest rates. In general, as rates increase,
the market value of a debt instrument would be expected to decrease. The opposite is also
true. To minimize such market risk, we have in the past and, to the extent possible, will
continue in the future to hold such debt instruments to maturity at which time the debt
instrument will be redeemed at its stated or face value. Due to the short duration and
nature of these instruments, we do not believe that we have a material exposure to
interest rate risk related to our investment portfolio. Our investment portfolio at June
30, 2003 totaled approximately $113.2 million, and the weighted-average interest rate
return on the portfolio was approximately 1.97%, with maturities of investments ranging up
to 23 months.

# ITEM 4.     CONTROLS AND
PROCEDURES

For
the quarterly period ending June 30, 2003 we carried out an evaluation, under the
supervision and with the participation of our management, including our President and
Chief Executive Officer and our Senior Vice President, Chief Operating Officer and Chief
Financial Officer (the principal finance and accounting officer), of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to Rules
13a-15 and 15d-15 under the Exchange Act as of the end of the period covered by this
report. Our President and Chief Executive Officer and our Senior Vice President, Chief
Operating Officer and Chief Financial Officer concluded that there were no significant
changes in our disclosure controls and procedures or in other factors that could
significantly affect our disclosure controls and procedures during the quarterly period.
Based upon this evaluation, our President and Chief Executive Officer and our Senior Vice
President, Chief Operating Officer and Chief Financial Officer concluded that as of June
30, 2003, our disclosure controls and procedures have been designed and are being operated
in a manner that provides reasonable assurance that the information required to be
disclosed by the Company in reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the
SEC. The Companys management, including the Chief Executive Officer and Senior Vice
President, Chief Operating Officer and Chief Financial Officer, does not expect that our
disclosure controls or our internal controls will prevent all errors and all fraud. A
control system, no matter how well designed and operated, cannot provide assurance that
the objectives of the control system are met, and no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within a
company have been detected.

Additionally,
our President and Chief Executive Officer and Senior Vice President, Chief Operating
Officer and Chief Financial Officer determined that there were no changes in our internal
control over financial reporting during the quarterly period ended June 30, 2003, that
have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

# PART II.     OTHER
INFORMATION

# ITEM 1.     LEGAL PROCEEDINGS

In
December 2002, a complaint entitled Tajrezaei et al. v. Principal Life Insurance
Company and Adolor Corporation  was filed in the Philadelphia County Court of Common
Pleas. This complaint alleged, among other things, that we were negligent in failing to
notify a former employee of his conversion rights under a certain group life insurance
policy at the termination of his employment. The former employee died and the complaint
was filed on behalf of members of his immediate family. This case was removed to federal
court and has been resolved by out of court settlement. Adolors portion of the
settlement proceeds was paid by its insurer, and the settlement did not have a material
negative impact on our financial condition or results of operations.

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

On
May 13, 2003, we held our Annual Meeting of Stockholders in Malvern, Pennsylvania. The
following matters were submitted to a vote of security holders.

Our
stockholders voted to elect the following members of our Board of Directors for terms of 3
years each:

|NOMINEE          | IN FAVOR   | AGAINST | ABSTAIN
|---------------- | ---------- | ------- | -------
|Bruce A. Peacock | 25,544,930 | --      | 686,451
|David M. Madden  | 25,329,247 | --      | 902,134
|Robert T. Nelsen | 25,329,263 | --      | 902,118

Our
directors who continued after the meeting include two Class III directors whose term
expires in 2004, Paul Goddard, Ph.D., and Claude Nash, Ph.D. and one Class I director
whose term expires in 2005, Ellen Feeney.

Our
stockholders voted as follows to ratify the appointment of KPMG LLP as our independent
certified public accountants for the fiscal year ending December 31, 2003: 25,328,733
shares were voted in favor of ratification, 891,651 shares were voted against
ratification, and 10,997 shares abstained from voting.

Our
stockholders approved the Adolor Corporation 2003 Stock-Based Incentive Compensation Plan
(the Plan) as follows: 15,483,042 shares were voted in favor of the Plan,
4,752,747 shares were voted against the Plan, 23,526 shares abstained from voting, and
5,972,066 were broker non-votes.

# ITEM 6.     EXHIBITS AND
REPORTS ON FORM 8-K:

(a)    
          The following exhibits are filed as part of this Report on Form 10-Q:

10.1
Adolor Corporation Amended and Restated 1994 Equity Compensation Plan.1, 4

10.2
Adolor Corporation 2003 Stock-Based Incentive Compensation Plan.1, 4

10.3
Consulting Agreement between the Company and Paul Goddard dated as of July 28, 2003.1, 4

31.1
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.1

31.2 Certification
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.1

32.1  Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
                                 of 2002.1

32.2  Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
                                of 2002.1

_________________

1 Filed
herewith.

4 Compensation plan or
arrangement in which directors and executive officers are eligible to participate.

(b)    
               We filed the following Current Reports on Form 8-K during the quarter ended June
               30, 2003:

|(1) |  | We filed a Current Report on Form 8-K on April 2, 2003 to discuss the results of
               the Companys first Phase III Clinical Trial (POI 14CL302) for product
               candidate alvimopan in the management of postoperative ileus.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | We filed a Current Report on Form 8-K on April 14, 2003 to announce the
               retirement of Peter Schied, the Companys Senior Vice President and Chief
               Financial Officer, and the appointment of Michael Dougherty as Senior Vice
               President, Chief Operating Officer and Chief Financial Officer, both effective
               April 30, 2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | We filed a Current Report on Form 8-K on May 14, 2003 to report, pursuant to
               Item 12, the Companys financial results for the quarter ended March 31,
               2003.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# SIGNATURES

Pursuant to the requirements 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.

|                     | ADOLOR CORPORATION                                                                                   
|-------------------- | -----------------------------------------------------------------------------------------------------
|Date: August 7, 2003 | By: /s/ Bruce A. Peacock                                                                             
|                     | Bruce A. Peacock   President and Chief Executive Officer                                             
|                     | By: /s/ Michael R. Dougherty                                                                         
|                     | Michael R. Dougherty   Senior Vice President,   Chief Operating Officer and   Chief Financial Officer