<PAGE>

================================================================================

                                  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, 2002

                                       OR

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

                        Commission File Number: 000-26929

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

                               ADOLOR CORPORATION
             (Exact Name of Registrant as Specified in its Charter)

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

                             620 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

     Number of shares outstanding of the issuer's Common Stock, par value $.0001
per share, as of August 5, 2002: 31,237,576 shares.

================================================================================

<PAGE>


================================================================================

                               ADOLOR CORPORATION

                                      INDEX

<TABLE>
<CAPTION>
<S>                                                                                                                            <C>
PART I.       FINANCIAL INFORMATION

ITEM 1.       Financial Statements:

              Consolidated Balance Sheets at June 30, 2002 and December 31, 2001 ........................................       1

              Consolidated Statements of Operations for three months ended June
              30, 2002 and 2001, six months ended June 30, 2002 and 2001 and the
              period from August 9, 1993 (inception) to June 30, 2002 ...................................................       2

              Consolidated Statements of Cash Flows for six months ended June
              30, 2002 and 2001 and the period from August 9, 1993 (inception)
              to June 30, 2002 ..........................................................................................       3

              Notes to Consolidated Financial Statements ................................................................       4

ITEM 2.       Management's Discussion and Analysis of Financial Condition and
              Results of Operations .....................................................................................       7

ITEM 3.       Quantitative and Qualitative Disclosures About Market Risk ................................................      20

PART II.      OTHER INFORMATION

ITEM 2.       Changes in Securities and Use of Proceeds .................................................................      21

ITEM 4.       Submission of Matters to a Vote of Security Holders .......................................................      21

ITEM 6.       Exhibits and Reports on Form 8-K ..........................................................................      21

              Signatures ................................................................................................      22
</TABLE>

                                       i

<PAGE>

PART I.     FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

                               ADOLOR CORPORATION
                          (A Development Stage Company)

                           Consolidated Balance Sheets
                                   Unaudited
                       June 30, 2002 and December 31, 2001

<TABLE>
<CAPTION>
                                                                          June 30, 2002    December 31, 2001
                                                                          -------------    -----------------
<S>                                                                       <C>              <C>
         Assets
Current assets:
      Cash and cash equivalents ......................................     $ 87,870,488       $ 50,017,499
      Short-term investments (Note 3) ................................       88,392,493        106,426,917
      Accounts receivable from collaboration agreements (Note 4)......        8,827,535                 --
      Prepaid expenses and other current assets ......................        3,968,669          4,234,509
                                                                           ------------       ------------
         Total current assets ........................................      189,059,185        160,678,925
      Equipment and leasehold improvements, net ......................        3,672,682          3,420,576
      Other assets ...................................................          193,498             82,035
                                                                           ------------       ------------
         Total assets ................................................     $192,925,365       $164,181,536
                                                                           ============       ============
         Liabilities and Stockholders' Equity
Current liabilities:
      Notes payable-current portion ..................................     $     88,088       $    214,819
      Accounts payable ...............................................        3,236,044          2,294,545
      Accrued expenses ...............................................       13,070,620          8,434,747
      Deferred licensing fees (Note 4)................................        4,192,980             26,316
                                                                           ------------       ------------
         Total current liabilities ...................................       20,587,732         10,970,427
Deferred licensing fees (Note 4)......................................       45,381,946            429,824
                                                                           ------------       ------------
         Total liabilities ...........................................       65,969,678         11,400,251
                                                                           ------------       ------------
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; 31,210,566
         and 31,104,304 shares issued and outstanding at
         June 30, 2002 and December 31, 2001, respectively ...........            3,121              3,110
      Additional paid-in capital .....................................      259,229,723        259,043,017
      Notes receivable for stock options .............................         (690,546)          (818,046)
      Deferred compensation ..........................................       (8,989,140)       (11,527,697)
      Unrealized gains on available for sale securities ..............          370,327            730,228
      Deficit accumulated during the development stage ...............     (122,967,798)       (94,649,327)
                                                                           ------------       ------------
         Total stockholders' equity ..................................      126,955,687        152,781,285
                                                                           ------------       ------------
         Total liabilities and stockholders' equity ..................     $192,925,365       $164,181,536
                                                                           ============       ============
</TABLE>

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

                                       1

<PAGE>

                               ADOLOR CORPORATION
                          (A Development Stage Company)

                      Consolidated Statements of Operations
                                   (Unaudited)
           Three months ended June 30, 2002 and 2001, six months ended
            June 30, 2002 and 2001 and the period from August 9, 1993
                          (inception) to June 30, 2002

<TABLE>
<CAPTION>
                                                                                                      Period from
                                                                                                     August 9, 1993
                                                  Three months ended          Six months ended       (inception) to
                                                       June 30,                   June 30,             June 30,
                                                  2002          2001        2002           2001          2002
                                                  ----          ----        ----           ----          ----
<S>                                            <C>          <C>          <C>           <C>            <C>
Revenues:
   Grant, contract, license and milestone
      revenue ...............................  $10,458,217  $    29,121  $ 10,775,556  $    562,216  $  12,367,167
                                               -----------  -----------  ------------  ------------  -------------
Operating expenses incurred during the
development stage:
      Research and development ..............   14,308,548    8,676,902    31,379,701    15,217,555    107,346,787
      Marketing, general and
      administrative ........................    5,984,672    3,142,521    10,074,349     6,158,104     41,537,328
                                               -----------  -----------  ------------  ------------  -------------
           Total operating expenses .........   20,293,220   11,819,423    41,454,050    21,375,659    148,884,115
                                               -----------  -----------  ------------  ------------  -------------
           Loss from operations .............   (9,835,003) (11,790,302)  (30,678,494)  (20,813,443)  (136,516,948)
Interest income .............................    1,118,797    1,867,273     2,376,783     3,979,624     13,848,856
Interest expense ............................      (10,202)     (41,505)      (16,760)      (80,114)      (299,706)
                                               -----------  -----------  ------------  ------------  -------------
                   Net loss .................  $(8,726,408) $(9,964,534) $(28,318,471) $(16,913,933) $(122,967,798)
                                               ===========  ===========  ============  ============  =============
Basic and diluted net loss per share: .......  $     (0.28) $     (0.34) $      (0.91) $      (0.59)
                                               ===========  ===========  ============  ============
Shares used in computing basic and
diluted net loss per share: .................   31,196,620   29,028,206    31,176,001    28,489,667
                                               ===========  ===========  ============  ============
</TABLE>

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

                                       2

<PAGE>

                               ADOLOR CORPORATION
                          (A Development Stage Company)

                      Consolidated Statements of Cash Flows
                                   (Unaudited)
                 Six months ended June 30, 2002 and 2001 and the
             period from August 9, 1993 (inception) to June 30, 2002

<TABLE>
<CAPTION>
                                                                                                                  Period from
                                                                                                                 August 9, 1993
                                                                                    Six months ended             (inception) to
                                                                                         June 30,                   June 30,
                                                                                   2002           2001                2002
                                                                                   ----           ----                ----
<S>                                                                           <C>            <C>                <C>
Cash flows from operating activities:
    Net loss ................................................................ $ (28,318,471) $ (16,913,933)     $ (122,967,798)
    Adjustments to reconcile net loss to net cash used in operating
activities:
       Non-cash compensation expense ........................................     2,463,617      2,934,099          13,837,636
       Non-cash warrant value ...............................................            --             --              60,000
       Issuance of common stock for bonus awards and employment agreement ...       118,326             --             118,326
       Depreciation and amortization expense ................................       659,618        314,187           2,624,294
       Issuance of common stock for technology license agreements ...........            --             --               6,250
    Changes in assets and liabilities:
       Prepaid expenses and other current assets ............................       265,840     (1,131,084)         (3,968,669)
       Accounts receivable from collaboration agreements ....................    (8,827,535)            --          (8,827,535)
       Other assets .........................................................      (111,463)          (157)           (193,498)
       Accounts payable .....................................................       941,499       (102,243)          3,236,044
       Deferred licensing fees ..............................................    49,118,786        (26,316)         49,574,926
       Accrued expenses .....................................................     4,635,873      1,905,420          13,070,620
                                                                              -------------  -------------      --------------
       Net cash provided by (used in) operating activities ..................    20,946,090    (13,020,027)        (53,429,404)
                                                                              -------------  -------------      --------------
 Cash flows from investing activities:
    Purchase of equipment and leasehold improvements ........................      (911,724)    (1,379,432)         (6,283,636)
    Purchase of short-term investments ......................................   (35,021,367)   (49,389,704)       (246,933,161)
    Maturities of short-term investments ....................................    52,695,890     31,628,645         158,910,995
                                                                              -------------  -------------      --------------
       Net cash provided by (used in) investing activities ..................    16,762,799    (19,140,491)        (94,305,802)
                                                                              -------------  -------------      --------------
 Cash flows from financing activities:
    Net proceeds from issuance of mandatorily redeemable
       convertible preferred stock and Series B warrants ....................            --             --          78,501,909
    Proceeds from Series D mandatorily redeemable convertible
       preferred stock subscription .........................................            --             --             600,000
    Net proceeds from issuance of restricted common stock and
       exercise of common stock options .....................................       146,391        161,814             864,641
    Proceeds from notes payable-related parties .............................            --             --           1,000,000
    Payment of notes payable ................................................      (302,906)      (292,616)         (1,578,231)
    Proceeds received on notes receivable ...................................       173,974        190,881             330,813
    Interest receivable converted to principal on notes .....................       (49,534)       (69,339)           (118,873)
    Proceeds from notes payable .............................................       176,175         88,033           1,666,319
    Net proceeds from IPO ...................................................            --             --          95,376,469
    Net proceeds from issuance of newly registered shares of common stock ...            --     59,832,650          58,962,647
                                                                              -------------  -------------      --------------
    Net cash provided by financing activities ...............................       144,100     59,911,423         235,605,694
                                                                              -------------  -------------      --------------

       Net increase in cash and cash equivalents ............................    37,852,989     27,750,905          87,870,488
Cash and cash equivalents at beginning of period ............................    50,017,499     67,392,849                  --
                                                                              -------------  -------------      --------------
Cash and cash equivalents at end of period .................................. $  87,870,488  $  95,143,754      $   87,870,488
                                                                              =============  =============      ==============
Supplemental disclosure of cash flow information:
Cash paid for interest ......................................................        16,760         48,909             209,831
Supplemental disclosure of noncash transactions:
Unrealized gains (losses) on available for sale securities ..................      (359,901)       361,084             370,327
Deferred compensation from issuance of common stock,
       restricted common stock and common stock options .....................       118,326        150,000          23,993,767
Issuance of common stock for technology license agreements or for services ..            --             --              19,589
Conversion of Series A through H preferred stock for common stock ...........            --             --          80,383,703
Conversion of stock subscription to Series D mandatorily redeemable
       preferred stock ......................................................            --             --             600,000
Conversion of bridge financing, including accrued interest, to
       Series B mandatorily redeemable preferred stock ......................            --             --           1,019,787
                                                                              =============  =============      ==============
</TABLE>

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

                                       3

<PAGE>

                               Adolor Corporation
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements

                                  June 30, 2002
                                   (Unaudited)

1.   ORGANIZATION AND BUSINESS ACTIVITIES

     Adolor Corporation (together with its subsidiary, "Adolor" or the
"Company") is a development-stage biopharmaceutical company engaged in the
development of proprietary pharmaceutical products for the treatment of pain and
to mitigate certain of the side effects that are caused by current pain
treatments. The Company has small molecule product candidates that are in
various stages of development ranging from discovery and preclinical studies to
Phase 1 through Phase 3 clinical trials. Adolor's lead product candidate,
alvimopan, which is also known as ADL 8-2698, is designed to selectively block
the effects of narcotic analgesics on the gastrointestinal tract. Alvimopan is
in Phase 3 clinical trials for two indications, the management of postoperative
ileus and the management of opioid bowel dysfunction. In April 2002, the Company
entered into a collaboration agreement with Glaxo Group Limited, an affiliate of
GlaxoSmithKline plc, for the exclusive worldwide development and
commercialization of alvimopan for certain indications.

     The accompanying consolidated financial statements include the results of
operations of the Company for the period from August 9, 1993 (inception) to June
30, 2002.

     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, 2002 aggregated approximately $123.0 million,
and the Company's management expects to continue to incur substantial losses
in future periods. The Company's future operations are dependent on
the success of the Company's research, development and licensing efforts and,
ultimately, upon regulatory approval and market acceptance of the Company's
proposed future products. There is no assurance that the Company will ever
become profitable or that profitable operations, if achieved, could be sustained
on a continuing basis.

     Though the Company reported a positive cash flow for the six months of 2002
as a result of the receipt of a one-time up-front non-refundable signing fee in
connection with the collaboration agreement the Company entered into with Glaxo
Group Limited, the Company does not expect to generate a positive cash flow from
operations for the next several years, if ever. Prior to exhausting our current
cash, we will need to raise additional funds to finance our 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, 2002 and for the periods ended June 30, 2002 and 2001, 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, 2001 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.

                                       4

<PAGE>

                               Adolor Corporation
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements

                                  June 30, 2002
                                   (Unaudited)

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 only comprehensive income item the Company has is
unrealized gains and losses on available for sale securities.

     The following reconciles net loss to comprehensive loss for the three and
six months ended June 30, 2001 and 2002:

<TABLE>
<CAPTION>
                                                                   Three months ended June 30,          Six months ended June 30,
                                                                      2002             2001              2002               2001
                                                                      ----             ----              ----               ----
<S>                                                               <C>             <C>               <C>               <C>
Net loss ........................................................ $(8,726,408)     $(9,964,534)      $(28,318,471)     $(16,913,933)
Other comprehensive income:
Unrealized gains (losses) on available for sale securities ......     151,255          (28,532)          (359,901)          361,084
                                                                  -----------      -----------       ------------      ------------
Comprehensive loss .............................................. $(8,575,153)     $(9,993,066)      $(28,678,372)     $(16,552,849)
                                                                  ===========      ===========       ============      ============
</TABLE>

3.   SHORT-TERM INVESTMENTS

     Short-term investments consist of fixed income securities with original
maturities of greater than three months including U.S. Treasury obligations and
corporate securities and high-grade commercial paper. At December 31, 2001 and
June 30, 2002, all of the short-term investments were deemed "available for
sale" investments.

     The following summarizes the "available for sale" investments at December
31, 2001 and June 30, 2002:

<TABLE>
<CAPTION>
                                                                                             Gross        Gross
                                                                                          unrealized    unrealized
                                                                             Cost            gains        losses       Fair value
                                                                             ----         ----------    ----------     ----------
<S>                                                                     <C>               <C>           <C>           <C>
U.S. Government obligations & agencies ...............................  $ 23,588,892       $ 27,972      $32,043      $ 23,584,821
Commercial paper .....................................................       497,309          1,326           --           498,635
Corporate bonds ......................................................    81,610,488        740,458        7,485        82,343,461
                                                                        ------------       --------      -------      ------------
December 31, 2001 ....................................................  $105,696,689       $769,756      $39,528      $106,426,917
                                                                        ============       ========      =======      ============

U.S. Government obligations & agencies ...............................  $ 11,681,225       $ 22,855      $    --      $ 11,704,080
Corporate bonds ......................................................    76,340,941        367,252       19,780        76,688,413
                                                                        ------------       --------      -------      ------------
June 30, 2002 ........................................................  $ 88,022,166       $390,107      $19,780      $ 88,392,493
                                                                        ============       ========      =======      ============

At June 30, 2002, maturities of investments were as follows:
Less than 1 year .....................................................  $ 86,989,962       $389,221      $19,780      $ 87,359,403
Due in 1-5 years .....................................................     1,032,204            886           --         1,033,090
                                                                        ------------       --------      -------      ------------
June 30, 2002 ........................................................  $ 88,022,166       $390,107      $19,780      $ 88,392,493
                                                                        ============       ========      =======      ============
</TABLE>

                                       5

<PAGE>

                               Adolor Corporation
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements

                                  June 30, 2002
                                   (Unaudited)

4.   COLLABORATION AGREEMENT

     In April 2002, the Company entered into a collaboration agreement with
Glaxo Group Limited, an affiliate of GlaxoSmithKline plc, for the exclusive
worldwide development and commercialization of alvimopan, which is also known as
ADL 8-2698. The companies have agreed to co-develop alvimopan for a number of
indications, both acute and chronic, which would involve the use of alvimopan in
in-patient and out-patient settings. Under the terms of the collaboration
agreement, Glaxo paid the Company a non-refundable and non-creditable signing
fee of $50 million during the quarter ended June 30, 2002 and the Company may
receive regulatory milestone payments of up to $220 million over the term of the
agreement upon the successful achievement, if any, of certain regulatory
objectives. As a result of the application of Staff Accounting Bulletin (SAB)
101, the $50 million signing fee is reflected in deferred licensing fees and
will be recognized as revenue through April 2014, the estimated performance
period. The milestone payments relate to substantive achievements in the
development lifecycle and, if achieved, will be recognized as revenue as they
are achieved.

     In the United States, both companies will co-develop and co-promote
alvimopan and share development expenses and commercial returns, if any. The
Company will lead the development, marketing, and co-promotion activities for
acute-care indications, and Glaxo Group Limited will lead the development,
marketing, and co-promotion activities for chronic care indications. Outside the
United States, Glaxo will be responsible for the development and
commercialization of alvimopan, and the Company will receive royalties on
revenues, if any.

     Under the terms of the collaboration agreement between Glaxo and the
Company for collaboration products being developed in the United States,
out-of-pocket costs and expenses from third parties for research and development
and marketing activities incurred by each company will be combined and each
company will pay its proportionate share of the total of such costs. To the
extent that the Company incurs out-of-pocket costs and expenses from third
parties that are in excess of its proportionate share of the total of such
expenses, Glaxo will make a payment to the Company for such excess amounts so
long as the total development budget for each such product is not in excess of
an amount approved by both companies. Such contract reimbursement amounts will
be recorded gross on the Company's consolidated statements of operations
pursuant to Emerging Issues Task Force (EITF) No. 99-19 and 01-14 as contract
reimbursement revenue. Alternatively, any amounts owed to Glaxo by the Company
would be classified as research and development expense or marketing expense, as
the case may be, during the period incurred in the Company's consolidated
statements of operations. Although the collaboration agreement was executed in
April 2002, the cost sharing arrangement described above is retroactive to
January 1, 2002. Accordingly, the Company recorded, as an account receivable
outstanding at the end of the period, contract reimbursement revenue of
$8,827,535 in the second quarter, which reflects reimbursement revenues of
$3,427,102 and $5,400,433 for the first and second quarters of 2002,
respectively.

5.    SUBSEQUENT EVENTS

     In August 2002, the Company entered into an agreement with Eli Lilly and
Company under which it obtained an exclusive license to six issued U.S. patents,
related foreign equivalents and know-how relating to peripherally selective
opioid antagonists. The Company paid Lilly $4 million upon signing the
agreement. Under the agreement the Company will be obligated to pay Eli Lilly an
additional $4 million upon acceptance of the first application for marketing
authorization for alvimopan, if achieved. The Company will be subject to
additional clinical and regulatory milestone payments on achievement of
milestones, if any, identified in the agreement and royalty payments to Lilly on
sales, if any, of new products utilizing the licensed technology.

                                       6

<PAGE>

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

Forward-Looking Statements

     Various statements made in this Report on Form 10-Q and in our other
reports and public filings are forward-looking within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements include,
but are not limited to, information about the following:

          .    our product development efforts including results from previous
               clinical trials;

          .    anticipated clinical trial initiation and completion dates and
               anticipated regulatory filing dates for our product candidates;

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

          .    anticipated operating losses and capital expenditures;

          .    our intentions regarding the establishment of collaborations;

          .    estimates of the market opportunity and the commercialization
               plans for our product candidates, including the development of a
               sales and marketing force; and

          .    our intention to rely on third parties for manufacturing.

     When used in this Report on Form 10-Q, the words "may", "will", "expect",
"anticipate", "intend", "plan", "believe", "seek", "estimate" and similar
expressions are generally intended to identify forward-looking statements, but
are not the exclusive expressions of forward-looking statements. Readers are
cautioned that such forward-looking statements are only projections of future
events and, because forward-looking statements involve risks and uncertainties,
there are important factors that could cause our actual results and financial
position to differ materially from those expressed or implied by these
forward-looking statements, including, but not limited to those discussed
elsewhere in this Report, including in the Certain Risks Related to Our Business
section of this Report, and the risks discussed in our other Securities and
Exchange Commission, or Commission, filings including our Registration Statement
on Form S-3 declared effective on July 23, 2001 by the Commission (File No.
333-64298) and our Report on Form 10-K for the annual period ended December 31,
2001, filed on April 1, 2002. Given the uncertainties affecting pharmaceutical
companies in the development stage, readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
made and which may turn out to be wrong due to inaccurate assumptions, unknown
risks, uncertainties or other factors. Furthermore, we undertake no obligation
to publicly update any forward-looking statements.

Collaboration Agreement

     In April 2002, we entered into a collaboration agreement with Glaxo Group
Limited, an affiliate of GlaxoSmithKline plc, for the exclusive worldwide
development and commercialization of alvimopan, which is also known as ADL
8-2698. We and Glaxo have agreed to co-develop alvimopan for a number of
indications, both acute and chronic, which would involve the use of alvimopan in
in-patient and out-patient settings. Under the terms of the agreement, Glaxo
paid us a non-refundable and non-creditable signing fee of $50 million during
the quarter ended June 30, 2002 and we may receive regulatory milestone payments
of up to $220 million over the term of the agreement upon the successful
achievement, if any, of certain regulatory objectives. As a result of the
application of SAB 101, the $50 million signing fee is reflected in deferred
licensing fees and will be recognized as revenue through 2014, the estimated
performance period. The milestone payments relate to substantive achievements in
the development lifecycle and, if achieved, will be recognized as revenue as
they are achieved.

     In the United States, we and Glaxo will co-develop and co-promote alvimopan
and share development expenses and commercial returns, if any. We will lead the
development, marketing and co-promotion activities for acute-care indications,
and Glaxo Group Limited will lead the development, marketing and co-promotion
activities for chronic care indications. Outside the United States, Glaxo will
be responsible for the development and commercialization of alvimopan, and we
will receive royalties on revenues, if any.

     Under the terms of our collaboration agreement with Glaxo for collaboration
products being developed in the United States, out-of-pocket costs and expenses
from third parties for research and development and marketing activities
incurred by each company will be combined, and each company will pay its
proportionate share of the total of such costs. To the extent that we incur
out-of-pocket costs and expenses from third parties that are in excess of its
proportionate share of the total of such expenses, Glaxo will make a payment to
us for such excess amounts; so long as the total development budget for each
such product is not in excess of an amount approved by both companies. Such
contract reimbursement amounts will be recorded gross on our consolidated
statement of operations pursuant to EITF No. 99-19 and 01-14 as contract
reimbursement revenue. Alternatively,

                                       7

<PAGE>

any amounts owed to Glaxo by us will be classified as research and development
expense or marketing expense, as the case may be, during the period incurred in
our consolidated statements of operations. Although the collaboration agreement
was executed in April 2002, the cost sharing arrangement described above is
retroactive to January 1, 2002. Accordingly, we recorded, as an account
receivable outstanding at the end of the period, contract reimbursement revenue
of $8,827,535 in the second quarter, which reflects reimbursement revenue of
$3,427,102 and $5,400,433 for the first and second quarters of 2002,
respectively.

     In August 2002, we entered into an agreement with Eli Lilly under which we
obtained an exclusive license to six issued U.S. patents, related foreign
equivalents and know-how relating to peripherally selective opioid antagonists.
We paid Lilly $4 million upon signing the agreement. Under the agreemenet we
will be obligated to pay Eli Lilly an additional $4 million upon acceptance of
the first application for marketing authorization for alvimopan, if achieved. We
will be subject to additional clinical and regulatory milestone payments on
achievement of milestones, if any, identified in the agreement and royalty
payments to Lilly on sales, if any, of new products utilizing the licensed
technology.

Overview

     We are a therapeutic-based development stage biopharmaceutical company. We
discover, develop and plan to commercialize proprietary pharmaceutical products
for the treatment of pain and to mitigate certain of the side effects that are
caused by current pain treatments. Our lead product candidate, alvimopan, is
currently in three Phase 3 clinical trials for the management of postoperative
ileus and one Phase 3 clinical trial for the management of opioid-induced bowel
dysfunction. Our other product candidates are in various stages of development
ranging from discovery and preclinical studies through early stage clinical
trials.

     We are a development stage pharmaceutical company and have not generated
any revenues from product sales. We have not been profitable and, since our
inception, we have incurred a cumulative net loss of approximately $123.0
million through June 30, 2002. These losses have resulted principally from costs
incurred in research and development activities and general and administrative
expenses and we expect to continue to incur substantial losses for at least the
next several years.

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 heavily dependant on the commercial success of our lead product
candidate, alvimopan, which may never be approved for commercial use, and if we
are unable to commercialize alvimopan, our ability to generate revenues and
achieve profitability will be impaired.

     We have invested a significant portion of our time and financial resources
since our inception in the development of alvimopan, and anticipate that for the
foreseeable future our potential to achieve profitability will be dependent on
its successful regulatory approval and commercialization. We or Glaxo Group
Limited, with which 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, we will have to submit, and the U.S. Food and Drug Administration, or
FDA, will have to approve, a New Drug Application, or NDA, for alvimopan. If our
NDA, if any, for alvimopan is not approved by FDA, or if approval is delayed,
our ability to achieve profitability will be impaired and our stock price will
be materially and adversely affected.

     Many factors could negatively affect the success of our efforts to develop
and commercialize alvimopan, including:

     . significant delays in completing clinical trials for alvimopan and
analyzing the results of those trials;

     . negative, inconclusive or otherwise unfavorable results from clinical
trials for alvimopan;

     . an inability to obtain, or a delay in obtaining, regulatory approval for
the commercialization of alvimopan, including an inability to obtain FDA
acceptance of the preclinical data package in support of alvimopan, an inability
to obtain FDA approval of our contract manufacturers' manufacture of alvimopan,
and an inability to obtain FDA approval of the clinincal trials data package in
support of alvimopan;

     . significant increases in the costs of clinical trials for alvimopan;

     . an inability to enter into, or a delay in entering into, additional
agreements with third parties for the manufacture of alvimopan in commercial
quantities on acceptable terms, or at all;

     . our inability, or the inability of Glaxo, to effectively market and sell
alvimopan, or our failure, or the failure of Glaxo, to devote sufficient
resources to the commercialization and further development of alvimopan; and

     . a failure to achieve market acceptance of alvimopan or inability to sell
alvimopan at a favorable price.

     If we are unable to commercialize alvimopan, our business and results of
operations will be harmed.

Our stock price may be volatile, and your investment in our stock could decline
in value.

     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 3 clinical trials of alvimopan that are currently underway. There can
be no assurance that the results of the Phase 3 clinical trials that are
currently underway will be positive. Failure of these results to be positive
would adversely impact the market price for our common stock.

     The following factors, in addition to the alvimopan risk factor above and
other risk factors described 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; and

..    period-to-period fluctuations in our financial results.

     In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against the 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.

Because our product candidates, including alvimopan, 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

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FDA and foreign regulatory authorities will approve them for commercial use. We
will need to conduct significant additional research, animal testing, or
preclinical testing, and human testing, or clinical trials, to demonstrate the
safety and efficacy of our product candidates to the satisfaction of the FDA and
foreign regulatory authorities to obtain product approval.

     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.

     Our product candidate alvimopan is in Phase 3 testing for the management of
postoperative ileus and opioid bowel dysfunction. These clinical trials are
testing whether alvimopan is able to selectively block the effects of narcotic
analgesics on the gastrointestinal tract. As combination studies 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. Assessing clinical trial results of alvimopan in
combination with narcotic analgesics may add to the complexity of analyzing
these results.

We may suffer significant setbacks in advanced clinical trials, even after
promising results in earlier trials. We may not be able to enroll a sufficient
number of patients to complete our clinical trials in a timely manner.

     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 products under development
will prevent receipt of FDA and foreign regulatory approvals and, ultimately,
commercialization of our product candidates.

     Regulatory clearance that we may receive, if any, 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 studies 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 tests are susceptible to varying interpretations which may delay,
limit or prevent regulatory approval. 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. 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 the following:

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

         .    variability in the number and types of patients available for
clinical studies;

         .    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;

         .    the product candidate may be too difficult to manufacture on a
large scale;

         .    the product candidate may be too expensive to manufacture or
market;

         .    the product candidate may not achieve broad market acceptance;

         .    others may hold proprietary rights that will prevent the product
candidate from being marketed; or

         .    others may market equivalent or superior products.

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, 2002 of approximately $176.3 million and anticipated cash flow
from existing collaborations will be sufficient to meet our currently estimated
operating and investing requirements into early 2004. We have generated
operating losses since we began operations in November 1994 and we 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, 2002, we have incurred a
cumulative net loss of approximately $123.0 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 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, size of patient
population, having to compete with other clinical trials for eligible patients,
geographical considerations and others. We contract with third parties to
conduct our clinical studies. We are subject to the risk that these third
parties fail to perform their obligations properly and in compliance with
applicable FDA regulations.

     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.

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 opioid analgesics or 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 commencing clinical trials in humans, we must submit and receive
approval from the FDA of an Investigational New Drug, or IND, application.
Clinical trials are subject to oversight by institutional review boards and the
FDA and:

.. must conform with the FDA's good laboratory practice regulations;
.. must meet requirements for institutional review board oversight;
.. must meet requirements for informed consent;
.. must meet requirements for good clinical practices;

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<PAGE>

..    are subject to continuing FDA oversight; and
..    may require large numbers of test subjects.

     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.

     Before receiving FDA approval to market a product, we must demonstrate that
the product candidate is safe and effective on the patient population that will
be treated. If we fail to comply with applicable FDA or other applicable
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 candidates 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 federal Drug Enforcement Agency 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.

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.

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 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 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, 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.

Third parties are conducting or will conduct many of our product development
activities and almost all of our manufacturing and marketing 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 direct our research,
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 commercialization of the
affected product candidates or research programs. 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.


     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.

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<PAGE>

     We may not be able to negotiate additional corporate collaborations on
acceptable terms, if at all, and these collaborations may not have success. Our
quarterly operating results may fluctuate significantly depending on the
initiation of new corporate collaboration agreements or the termination of
existing corporate collaboration agreements.

If we do not realize value from our retained commercialization rights, we may
not achieve our commercial objectives or profitability.

     If we do not effectively exploit the commercialization rights we have
retained, we may not achieve profitability. In most of our corporate
collaborations, we have retained various commercialization rights for the
development and marketing of pharmaceutical products, including rights for
specific pharmaceutical indications or in specified geographical regions. We may
take advantage of these currently retained rights directly or through
collaborations with others. The value of these rights, if any, will largely
derive from our ability, directly or with collaborators, to develop and
commercialize drugs, the success of which is also uncertain. The exploitation of
retained commercialization rights requires:

..    sufficient capital;
..    significant technological, product development, manufacturing and
     regulatory expertise and resources; and
..    marketing and sales personnel.

     We may not be able to develop or obtain these resources in sufficient
quantity or at a sufficient quality level to achieve our objectives. We will
need to rely on third parties for many of these resources. Our failure to
establish and maintain relationships to obtain these services cost-effectively
could materially reduce or eliminate our ability to realize value from our
retained commercialization rights.

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

     Other companies have product candidates in clinical trials to treat each of
the conditions for which we are seeking to discover and develop product
candidates. 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, alone or with our collaborators, or that they market before we market
any products we develop.

     Our competitors include fully integrated pharmaceutical companies and
biotechnology companies that currently have drug and target discovery efforts
and universities and public and private research institutions. In addition,
companies pursuing research in different but related fields represent
substantial competition. 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 parties for acquisitions, joint ventures or other collaborations;
     and
..    license the proprietary technology of institutions that is competitive with
     the technology we are practicing.

     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.

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.

     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 for which we
have paid Roberts Laboratories, Inc. and our license agreement with Eli Lilly
and Company to license intellectual property rights 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.

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Our agreements with our collaborators may not generate as much revenue as we
anticipate. 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 the
management of postoperative ileus and opioid bowel dysfunction. In addition, we
and Glaxo agreed in the collaboration agreement to co-develop alvimopan for a
number of other indications, both acute and chronic, which would involve the use
of alvimopan in out-patient settings. In the United States, we and Glaxo will
co-develop and co-promote alvimopan and share development expenses and
commercial returns. We have responsibility for the development, marketing, and
co-promotion strategy for acute-care indications, which will be targeted to
hospitals and surgeons. Glaxo has responsibility for the development, marketing,
and co-promotion for chronic-care indications targeted to community-based
physicians. We and Glaxo are required to use commercially reasonable efforts to
develop the indications for which we and they are respectively responsible. Upon
the occurrence of certain events set forth in the collaboration agreement,
either party may terminate the collaboration agreement with respect to the
collaboration products impacted by such events. We depend on Glaxo to provide us
with substantial assistance and additional expertise in the commercialization of
alvimopan. Any failure of Glaxo to diligently promote alvimopan could lead to
our loss of revenues from product sales and milestones due under our
collaboration agreement with Glaxo and would delay our achievement, if any, of
profitability. In the near term, our success will depend upon the success of our
collaboration with Glaxo to commercialize and further develop alvimopan.

     In April 2000, we granted Santen Pharmaceutical Co., Ltd. an exclusive
license to develop and commercialize ADL 2-1294 for the treatment of ophthalmic
pain in all countries other than South Korea and North Korea. Assuming defined
clinical and regulatory milestones are met and sales are achieved, Santen has
full control and authority over the development, registration and
commercialization of its product candidate, subject to its obligation to use
reasonable efforts to develop, obtain regulatory approval and market the product
candidate, taking into account the prospect for the product candidate. As a
result, we have no control over the further development of this product
candidate. Under our agreement with Santen, Santen has the right in some
circumstances to co-promote products it develops, pursuant to the license we
granted it with other partners. Santen may terminate its agreement at its
discretion on a country by country basis or on a product by product basis upon
written notice to us if it determines that circumstances do not warrant further
development of the product.

     We have obtained, and intend to obtain in the future, licensed rights to
certain proprietary technologies and compounds from other entities, individuals
and research institutions, for which we may be obligated to pay license fees,
make milestone payments and pay royalties. In addition, we have entered into,
and may in the future enter into, collaborative arrangements, including our
arrangements with Glaxo and Santen, 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 drug
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 and Santen, 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. In addition, our current strategic arrangements may not continue
and we may be unable to enter into future collaborations. 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.

It is difficult and costly to protect our intellectual property rights, and we
cannot ensure their protection.

     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. No
consistent policy regarding the breadth of claims allowed in biotechnology
patents has emerged to date. 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. The patent office has informed us that others may have patent applications
that may overlap with a patent application that we have in-licensed covering
certain receptors. We cannot assure you 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. Any legal
action against our collaborators or us claiming damages and seeking to enjoin
commercial activities relating to the affected 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 a substantial
portion of our managerial and financial resources.

     Although no third party has asserted a claim of infringement against us, we
are aware of an issued patent that has expired for non-payment of a maintenance
fee and that relates to methods of treatment of symptoms associated with the
cold and flu. It is possible that the patent could be reinstated and that a
claim could be asserted that certain ophthalmic uses of our ADL 2-1294 infringe
this issued patent. Based on our investigations to date, including discussions
with outside legal counsel, we do not believe that we infringe any valid and
enforceable claims of the patent, although we have not received an opinion of
patent counsel to that effect. If this patent is reinstated and is found to
contain claims infringed by the use of our ADL 2- 1294 product candidate and
such claims are ultimately found valid and enforceable, we may not be able to
obtain a license at a reasonable cost, or at all. In that event, we would have
to use an alternative method of delivery for ophthalmic products based on ADL
2-1294, which could materially reduce or eliminate the commercial viability of
our ADL 2-1294 for ophthalmic uses.

     Others may hold proprietary rights that will prevent our product candidates
from being marketed.

     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.

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<PAGE>

     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 this technology on commercially reasonable terms,
our product development and research may be delayed. In addition, we generally
do not control the prosecution of 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. For example, the
University of California, San Diego is prosecuting the patent for additional
claims regarding the use of ADL 2-1294 for the treatment of inflammatory pain.

     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.

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

     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 will depend on our collaborators
or third parties for the manufacture of compounds for preclinical, clinical and
commercial purposes in their manufacturing facilities. These manufacturers are
required to adhere to FDA requirements commonly known as current 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 do not have
control over compliance with these regulations by those manufacturing 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 our collaborators and suitable
alternatives may be unavailable. Consequently, our products may be subject to
delays in manufacture if collaborators or outside contractors give other
products greater priority than our products. For this and other reasons, our
collaborators or third parties may not be able to manufacture these products in
a cost-effective or timely manner. If the manufacture of these products is not
performed 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 do not intend to develop or acquire
facilities for the manufacture of product candidates for clinical trials or
commercial purposes in the foreseeable future.

If we are unable to create 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, marketing or distribution capability. 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 one or more
pharmaceutical companies with established distributions systems and direct sales
forces, including Glaxo in the case of alvimopan, 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 are likely to 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.

     The continuing efforts of government and third-party payors to contain or
reduce the costs of health care through various means will 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 similar government control. 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 insurance. Further, cost control initiatives could adversely affect our
collaborators' ability to commercialize our products, and our ability to realize
royalties from this commercialization.

     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;
..    private health insurers; and
..    other third-party payors.

                                       13

<PAGE>

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 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 transactions may result or how, when or if they will 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. Our inability to obtain sufficient
product liability insurance at an acceptable cost to protect against potential
product liability claims could prevent or inhibit the commercialization of
pharmaceutical products we develop, alone or with corporate collaborators. 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. While under various circumstances our corporate
collaborators will indemnify us against losses, indemnification may not be
available or adequate should any claim arise.

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 the
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 the 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 designed to encourage
parties seeking to acquire us to negotiate with and seek the approval of our
Board of Directors.

Critical Accounting Policies and Estimates

     During 2001, the staff of the United States Securities and Exchange
Commission released cautionary advice regarding critical accounting policies and
practices. The release defines critical policies and practices as items that are
most important to the portrayal of a company's financial condition and results,
and require management's most difficult, subjective or complex judgments, often
as a result of the need to make estimates about the effects of matters that are
inherently uncertain. As we progress in our development and move closer to
product approval and commercial operation, we may face such issues which require
increased levels of management estimation and complex judgment.

     The following are practices that could be considered to fall within the
realm of this cautionary advice:

     Stock  Compensation  - Our  practice of applying APB Opinion No. 25 to
account for our stock option plan rather than SFAS No. 123. If we adopted the
changes required by SFAS No. 123, the loss for the year ended December 31, 2001
would have increased by $842,817.

     Clinical Trial Expense Recognition - We enter into contracts with third
party vendors to perform clinical trials and the manufacture of drug candidates.
We recognize these expenses based on the percentage of completion method to
match the period in which they are incurring. These contracts can be terminated
by either party. The percentage of completion is based upon our estimates of the
percentage of the contract completed to date compared to the total contract.
Factors considered may include patient enrollment to date or patient visits,
among others.

     Collaborative Arrangement Revenues - We defer and recognize up-front
non-refundable fees over the performance period in situations where continuing
involvement exists. Substantive milestone fees are recorded when the event
related to the milestone is achieved. Reimbursement of third party costs
reimbursable under the terms of collaborative agreements are recorded as revenue
in the period the revenue is earned and the expense incurred.

                                       14

<PAGE>

Liquidity and Capital Resources

     We have experienced negative operating cash flows since our inception,
except for the second quarter of 2002 and we have funded our operations
primarily from the proceeds received from the sale of our common stock and our
mandatorily redeemable convertible preferred stock and license payments. Cash,
cash equivalents and short-term investments were approximately $176.3 million at
June 30, 2002, and approximately $156.4 million at December 31, 2001,
representing 91.4% and 95.3% of our total assets, respectively. We invest excess
cash in highly liquid investment-grade marketable securities including corporate
and United States government agency bonds.

     We believe that our current financial resources and sources of liquidity
are adequate to fund operations into early 2004 based on a 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, 2002 and 2001:

<TABLE>
<CAPTION>
                                                                           Six Months Ended June 30,
                                                                             2002            2001
                                                                             ----            ----
<S>                                                                     <C>              <C>
Net loss ............................................................   $(28,318,471)    $ (16,913,933)
Adjustments for non-cash operating items ............................      3,241,561         3,248,286
                                                                        ------------     -------------
Net cash operating loss .............................................    (25,076,910)      (13,665,647)
Net change in assets and liabilities ................................     46,023,000           645,620
                                                                        ------------     -------------
Net cash provided by (used in) operating activities .................     20,946,090       (13,020,027)
                                                                        ============     =============
Net cash provided by (used in) investing activities .................     16,762,799       (19,140,491)
                                                                        ============     =============
Net cash provided by financing activities ...........................        144,100        59,911,423
                                                                        ============     =============
</TABLE>

Net Cash Provided By (Used In) Operating Activities

Operating Cash Inflows

     Our operating cash inflows for 2002 have primarily been 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.

Operating Cash Outflows

     Our operating cash outflows for 2002 have continued to be primarily used
for research and development expenditures associated with our product
candidates, in particular including the costs of manufacturing the clinical
trial materials for alvimopan and for the compensation of our employees.

Operating Cash Flow Requirements Outlook

     We expect to continue to use cash, cash equivalents and short-term
investments to fund operating activities. Research and development expenditures,
including clinical trial expenditures, are expected to increase as we continue
to develop product candidates. We expect that our operating expenses will also
increase in future periods as a result of the manufacturing scale-up and in
preparation for potential commercialization of our product candidates, assuming
the success of our clinical trials and that we receive the necessary regulatory
approvals. Our collaboration agreement with Glaxo will reimburse us for a
portion of these development and promotional expenses paid to third parties. We
may also receive milestone payments if the milestone events are achieved.

     We paid Roberts Laboratories, Inc., which merged with Shire Pharmaceutical,
plc, a total of $600,000 through June 30, 2002 for the exclusive worldwide
license to alvimopan. Our license agreement with Roberts requires us to make
payments to Roberts if and when two milestone events are achieved. Roberts
licensed the rights to alvimopan from Eli Lilly & Company, and Eli Lilly
consented to the assignment by Roberts to us of Roberts' rights and obligations.
Under the agreement with Eli Lilly, we will make a milestone payment to Eli
Lilly if and when we receive FDA approval to sell alvimopan. We will be required
to pay royalties to Eli Lilly and Roberts on any sales of alvimopan.

     The initiation of commercial activities will require the hiring of
additional staff. Preparation for sales and marketing activities will require
hiring and training of a sales and marketing staff. As of June 30, 2002, we may
be required to pay up to an aggregate of $6.0 million upon the occurrence of
certain future clinical and regulatory events under various agreements
(including our agreement with Eli Lilly). We also intend to hire additional
research and development, clinical and administrative staff.

                                       15

<PAGE>

Net Cash Used In Investing Activities

     Our capital expenditures for the six months ended June 30, 2002 and 2001,
were $911,724 and $1,379,432 respectively and were primarily for the purchase of
laboratory equipment, furniture and fixtures, office equipment and leasehold
improvements in order to further expand our product development capabilities.

Investing Requirements Outlook

     We expect to require additional investments in leasehold improvements and
laboratory and office equipment to support the continued expansion of our
development and potential commercialization activities.

Net Cash Provided By (Used In) Financing Activities

     During the first six months of 2002 and 2001, we received $146,391 and
$161,814 respectively, from stock option exercises. We received additional
financing for the payment of insurance premiums of $176,175 and $88,033 in the
six months ended June 30, 2002 and 2001, respectively. In addition, $302,906 and
$292,616 was used to repay insurance loan obligations during the six months
ended June 30, 2002 and 2001, respectively. Payments on notes receivable for
purchase of stock options was $173,974 and $190,881 for the six months ended
June 30, 2002 and 2001, respectively. Additionally, interest converted to
principal on these notes was $49,534 and $69,339 for the six months ended June
30, 2002 and 2001, respectively.

Financing Requirements Outlook

     We do not expect sales, if any, to generate cash flow in excess of
operating expenses for at least the next several years, if at all. We expect to
continue to use 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 $176.3 million as of
June 30, 2002 will be sufficient to meet our currently estimated operating and
investing requirements into early 2004. Prior to exhausting our current cash, 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 development of certain of our products. We may
seek to obtain additional funds through equity or debt financings, or strategic
alliances with third parties either alone or in combination with equity. 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.

     The extent and timing of proceeds from future exercises of stock options,
if any, are primarily dependent upon the market price of our common stock, as
well as the exercise prices and expiration dates of the stock options.

                                       16

<PAGE>

Results of Operations

     This section should be read in conjunction with the more detailed
discussion under "Liquidity and Capital Resources."

Three Months Ended June 30, 2002 and 2001

     Grant, contract, license and milestone revenues. Our grant and license
revenues were $10,458,217 and $29,121 for the three months ended June 30, 2002
and 2001, respectively. Revenues recognized for the three months ended June 30,
2002 consisted of (a) $8,827,535 for the reimbursement of shared expenses with
Glaxo Group Limited, an affiliate of GlaxoSmithKline plc in connection with a
collaboration agreement executed in April 2002; (b) $868,056 which is a portion
of the $50,000,000 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 an 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. Revenues recognized for the three months ended
June 30, 2001 consisted of $6,579 which was a portion of the $500,000 license
fee received from an affiliate of GlaxoSmithKline on signing an agreement with
that affiliate in July 1999, $6,579 which is a portion of the $500,000 license
fee received from Santen Pharmaceutical Co., Ltd. on signing that agreement in
April 2000 and a patent cost reimbursement from Santen of $15,963. The license
fee revenues related to Santen are being recognized over the remaining life of
the patents that were licensed in those collaborations.

In connection with the collaboration agreement with Glaxo for the development of
products in the United States, we recorded in the second quarter as contract
reimbursement revenue the expected reimbursement of the excess of the
out-of-pocket research and development and marketing expenses that we incurred
over our proportionate share of the total of such expenses incurred by both
companies. The contract reimbursement revenue covered the period from January 1,
2002 to June 30, 2002. The amounts attributable to the first and second quarters
and the allocation of the amounts between research and development and marketing
expenses are as follows:

<TABLE>
<CAPTION>
                                                                         Six months ended
Contract reimbursement revenue          First quarter   Second quarter      June 30, 2002
------------------------------          -------------   --------------      -------------
<S>                                        <C>              <C>                <C>
Research and development                   $3,230,792       $5,000,450         $8,231,242
Marketing                                     196,310          399,983            596,293
                                           ----------       ----------         ----------
Total                                      $3,427,102       $5,400,433         $8,827,535
                                           ==========       ==========         ==========
</TABLE>

     This $8,827,535 has been recorded as an account receivable, while we expect
to collect this receivable, it is subject to review, verification and payment by
Glaxo. This is the first time we have submitted expenses to Glaxo for
reimbursement under the collaboration agreement.

     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 candidates, stock-based compensation
and other research expense. Research and development expenses increased to
approximately $14.3 million for the three months ended June 30, 2002 from
approximately $8.7 million for the three months ended June 30, 2001. This
increase was primarily due to the higher costs of developing our product
candidates as well as higher personnel costs resulting from increased staffing
levels. In the three months ended June 30, 2002, the costs of conducting Phase
1, Phase 2 and Phase 3 clinical trials and the costs of manufacturing the
clinical trial materials for alvimopan increased by approximately $4.2 million
compared to the same period in 2001. Personnel costs increased by approximately
$1.1 million in the three months ended June 30, 2002 compared to the same period
in 2001. Approximately $0.3 million was an increase in other expenses including
database services, office rent and depreciation in the three months ended June
30, 2002 compared to the same period in 2001.

     Marketing, general and administrative expenses. Our marketing, general and
administrative expenses increased to approximately $6.0 million for the three
months ended June 30, 2002 from approximately $3.1 million for the three months
ended June 30, 2001, an increase of approximately $2.9 million. The increase was
primarily due to approximately $0.7 million of higher payroll expenses related
to additional personnel, approximately $0.3 million of corporate legal fees,
approximately $0.4 million in marketing expenses, approximately $1.3 million for
financial advisory fees associated with the execution of the collaboration
agreement we entered into with Glaxo and an increase in other expenses including
insurance, office rent and office expense.

     Net interest income (expense). Our interest income decreased to
approximately $1.1 million for the three months ended June 30, 2002 from
approximately $1.9 million for the same period in 2001. Even though we had
received a $50.0 million signing fee from Glaxo in April 2002, our interest
income decreased because of a reduction in our cash balance resulting from
increased operating expenses and lower interest rates in the second quarter of
2002. Our interest expense represents interest incurred on the financing of
insurance premiums.

     Net loss. Our net loss for the three months ended June 30, 2002 and 2001
was approximately $8.7 million and $10.0 million, respectively. Although we had
higher costs associated with the expansion of Phase 3 clinical development,
higher costs of clinical trial materials for alvimopan and increased marketing,
our net loss decreased as a result of the recording of approximately $8.8
million of contract reimbursement revenue in the second quarter of 2002 from
Glaxo that were retroactive to January 2002. We expect to continue to incur
substantial losses in future periods.

                                       17

<PAGE>

Six Months Ended June 30, 2002 and 2001

     Grant, contract, license and milestone revenues. Our grant and license
revenues were $10,775,556 and $562,216 for the six months ended June 30, 2002
and 2001, respectively. Revenues recognized for the six months ended June 30,
2002 consisted of (a) $8,827,535 for the reimbursement of shared expenses with
Glaxo Group Limited, an affiliate of GlaxoSmithKline plc; (b) $868,056 which is
a portion of the $50,000,000 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; (e) $13,158 which is a portion of the $500,000 license
fee received from Santen on signing an agreement with Santen in April 2000 and
(f) $616,807 from a portion of the Small Business Innovation Research (SBIR)
grants awarded to us by the National Institutes of Health (NIH) in September
2001. Revenues recognized for the six months ended June 30, 2001 consisted of a
milestone payment of $500,000 from an affiliate of GlaxoSmithKline, $13,158
which was a portion of the $500,000 license fee received from the same affiliate
of GlaxoSmithKline on signing an agreement with that affiliate in July 1999, and
$13,158 which is a portion of the $500,000 license fee received from Santen
Pharmaceutical Co., Ltd. on signing that agreement in April 2000. The license
fee revenues related to Santen are being recognized over the remaining life of
the patents that were licensed in those collaborations.

In connection with the collaboration agreement with Glaxo for the development of
products in the United States, we recorded in the second quarter as contract
reimbursement revenue the expected reimbursement of the excess of the
out-of-pocket research and development and marketing expenses that we incurred
over our proportionate share of the total of such expenses incurred by both
companies. The contract reimbursement revenue covered the period from January 1,
2002 to June 30, 2002. The amounts attributable to the first and second quarters
and the allocation of the amounts between research and development and marketing
expenses are as follows:

<TABLE>
<CAPTION>
                                                                        Six months ended
Contract reimbursement revenue       First quarter    Second quarter       June 30, 2002
-------------------------------      -------------    --------------       -------------
<S>                                  <C>              <C>               <C>
Research and development                $3,230,792        $5,000,450          $8,231,242
Marketing                                  196,310           399,983             596,293
                                        ----------        ----------          ----------
Total                                   $3,427,102        $5,400,433          $8,827,535
                                        ==========        ==========          ==========
</TABLE>

     This $8,827,535 has been recorded as an account receivable, while we expect
to collect this receivable, it is subject to review, verification and payment by
Glaxo. This is the first time we have submitted expenses to Glaxo for
reimbursement under the collaboration agreement.

     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 candidates, stock-based compensation
and other research expense. Research and development expenses increased to
approximately $31.4 million for the six months ended June 30, 2002 from
approximately $15.2 million for the six months ended June 30, 2001. This
increase was primarily due to the higher costs of developing our product
candidates as well as higher personnel costs resulting from increased staffing
levels. In the six months ended June 30, 2002, the costs of conducting Phase 1,
Phase 2 and Phase 3 clinical trials and the costs of manufacturing the clinical
trial materials for alvimopan increased by approximately $13.2 million compared
to the same period in 2001. Personnel costs increased by approximately $2.4
million in the six months ended June 30, 2002 compared to the same period in
2001. Approximately $0.6 million was an increase in other expenses including
database services, office rent and depreciation in the six months ended June 30,
2002 compared to the same period in 2001.

     Marketing, general and administrative expenses. Our marketing, general and
administrative expenses increased to approximately $10.1 million for the six
months ended June 30, 2002 from approximately $6.2 million in the six months
ended June 30, 2001, an increase of approximately $3.9 million. The increase was
primarily due to approximately $1.0 million of higher payroll expenses related
to additional personnel, approximately $0.7 million of corporate legal fees,
approximately $0.4 million in marketing expenses, approximately $1.3 million for
consulting fees associated with the collaboration agreement with Glaxo and an
increase in other expenses including office expense and taxes.

     Net interest income (expense). Our interest income decreased to
approximately $2.4 million for the six months ended June 30, 2002 from
approximately $4.0 million for the same period in 2001. Even though we received
a $50.0 million signing fee from Glaxo in April 2002, our interest income
decreased because of a reduction in our cash balance resulting from increased
operating expenses and lower interest rates in the first six months of 2002. Our
interest expense represents interest incurred on the financing of insurance
premiums.

     Net loss. Our net loss for the six months ended June 30, 2002 and 2001 was
approximately $28.3 million and $16.9 million, respectively. The increase in the
net loss reflects higher costs associated with the expansion of Phase 3 clinical
development, higher costs of clinical trial materials for alvimopan, increased
marketing costs, and increased staffing levels. We expect to continue to incur
substantial losses in future periods.

Recently Issued Accounting Pronouncements

     In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
addresses significant issues regarding the recognition, measurement, and
reporting of costs associated with exit and disposal activities, including
restructuring activities. SFAS No. 146 also addresses recognition of certain
costs

                                       18

<PAGE>

related to terminating a contract that is not a capital lease, costs to
consolidate facilities or relocate employees, and termination of benefits
provided to employees that are involuntarily terminated under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The Company has
not yet determined the impact on its financial position or results of operations
from adopting SFAS No. 146.

                                       19

<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     A substantial portion of our assets are investment grade debt instruments,
such as direct obligations of the U.S. Treasury and corporate securities,
including commercial paper and corporate debt instruments. 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 instruments will be
redeemed at their 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 cash, cash
equivalents and investment portfolio at June 30, 2002 was $176.3 million and the
weighted average interest rate of that portfolio was approximately 2.74%.

                                       20

<PAGE>

PART II.    OTHER INFORMATION

ITEM 2.  Changes in Securities and Use of Proceeds

     Effective as of May 6, 2002, we issued 5,000 shares of our common stock
that were not registered under the Securities Act of 1933 to Bruce A. Peacock
pursuant to the terms of the Agreement dated April 22, 2002 between us and Mr.
Peacock pursuant to which Mr. Peacock became our President and Chief Executive
Officer and a Director. The issuance of the securities to Mr. Peacock was exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering.
Appropriate restrictive legends were affixed to the stock certificate issued to
Mr. Peacock. No underwriters were employed in this transaction.

ITEM 4.  Submission of Matters to a Vote of Security Holders

     On May 14, 2002, we held our Annual Meeting of Stockholders in Wayne,
Pennsylvania. The purposes of the meeting were to elect one director, to ratify
the appointment of KPMG LLP as our independent certified public accountants for
the fiscal year ending December 31, 2002, and to approve an amendment to our
Amended and Restated 1994 Equity Compensation Plan to increase by 800,000 shares
the number of shares of common stock authorized to be issued under the plan.

     Our stockholders voted as follows to elect one member of our Board of
Directors to serve as a member of the class indicated below:

          Nominee           Class        In Favor        Against       Abstain
          -------           -----         -------        -------       -------
Ellen M. Feeney        Class I         20,779,895           0          320,591

     In addition to Ms. Feeney, our incumbent directors with terms continuing
after our annual meeting are John J. Farrar, Ph.D., Paul Goddard, Ph.D., David
M. Madden, Claude H. Nash, Ph.D., Robert T. Nelsen and Bruce A. Peacock.

     In the vote to ratify the appointment of KPMG LLP as our independent
certified public accountants for the fiscal year ending December 31, 2002,
20,721,506 shares were voted in favor of ratification, 376,835 shares were voted
against ratification, and 2,145 shares abstained from voting.

     In the vote to approve an amendment to our Amended and Restated 1994 Equity
Compensation Plan to increase by 800,000 shares the number of shares of common
stock authorized to be issued under the plan, 20,591,586 shares were voted in
favor of the amendment, 491,930 shares were voted against the amendment, and
16,970 shares abstained from voting.

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 Amended and Restated 1994 Equity Compensation Plan.

         10.2 Letter Agreement between the Company and Martha E. Manning dated
June 20, 2002.

         (b) We filed the following Current Reports on Form 8-K during the
quarter ended June 30, 2002:

         We filed a Current Report on Form 8-K on April 29, 2002 to report,
         pursuant to Item 5, that Bruce A. Peacock had been elected to the
         positions of President, Chief Executive Officer and Director of the
         Company effective as of May 6, 2002.

         We filed a Current Report on Form 8-K on April 30, 2002 to report,
         pursuant to Item 5, that on April 14, 2002, we entered into a
         Collaboration Agreement with Glaxo Group Limited for the exclusive
         worldwide development and commercialization of alvimopan. We amended
         the Current Report on Form 8-K on June 21, 2002 to attach a copy of the
         Collaboration Agreement as an exhibit.

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<PAGE>

                                   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 13, 2002                By:  /s/ Bruce A. Peacock
                                          --------------------
                                          Bruce A. Peacock
                                          President and Chief Executive Officer

                                     By:  /s/ Peter J. Schied
                                          -------------------
                                          Peter J. Schied
                                          Senior Vice President and
                                          Chief Financial Officer

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