<PAGE>

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

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

(Mark One)

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

  For Fiscal Year Ended December 31, 2000

                                      OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

  For the Transition Period from       to

                           Commission File 000-26929

                               ----------------
                              ADOLOR CORPORATION
            (Exact name of registrant as specified in its charter)

               Delaware                              31-1429198
     (State of other jurisdiction                   (IRS Employer
   of incorporation or organization)            Identification Number)


    620 Pennsylvania Avenue, Exton,                     19341
             Pennsylvania                             (Zip Code)
    (Address of principal executive
               offices)

                                (484) 595-1500
             (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(b) of the Act:
                                     None

          Securities registered pursuant to Section 12(g) of the Act:

           (Title of class)                (Name of each exchange on which
    Common Stock, $0.001 par value                   registered)
                                                       NASDAQ

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

  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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes[X]  No [_]

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

  The approximate aggregate market value of Common Stock held by non-
affiliates of the Company was $396,847,849 as of March 26, 2001. (For purposes
of determining this amount only, the Company has defined affiliates as
including (a) the executive officers named in Part I of this 10-K report, (b)
all directors of the Company and (c) each stockholder that has informed the
Company by March 26, 2001 that it is the beneficial owner of 10% or more of
the outstanding common stock of the Company.)

  The number of shares of the Company's Common Stock outstanding as of March
26, 2001 was 27,944,852 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission in
connection with the Company's Annual Meeting of Stockholders for the fiscal
year ended December 31, 2000 are incorporated by reference into Part III of
this Report.

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<PAGE>

                               ADOLOR CORPORATION

                                   FORM 10-K

                               December 31, 2000

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
 Item                                                                  Page No.
 ----                                                                  --------
 <C>  <S>                                                              <C>
                                  PART I

  1.  Business......................................................       1
  2.  Properties....................................................      20
  3.  Legal Proceedings.............................................      20
  4.  Submission of Matters to a Vote of Security Holders...........      20

                                  PART II

  5.  Market for Registrant's Common Equity and Related Stockholder
      Matters.......................................................      21
  6.  Selected Consolidated Financial Data..........................      22
  7.  Management's Discussion and Analysis of Financial Condition
      and Results of Operations.....................................      24
  7A. Quantitative and Qualitative Disclosures About Market Risk....      29
  8.  Financial Statements and Supplementary Data...................      29
  9.  Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosures.....................................      29

                                 PART III

 10.  Directors and Executive Officers of the Registrant............      29
 11.  Executive Compensation........................................      29
 12.  Security Ownership of Certain Beneficial Owners and
      Management....................................................      29
 13.  Certain Relationships and Related Transactions................      29

                                  PART IV

 14.  Exhibits, Financial Statement Schedules and Reports on Form
      8-K...........................................................      30
 15.  Signatures....................................................      31
 16.  Exhibit Index.................................................      32
 17.  Index to Consolidated Financial Statements....................     F-1
</TABLE>

                                       i
<PAGE>

  This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 as amended, and
Section 21E of the Securities Exchange Act. We have based these forward-
looking statements on our current expectations and projections about future
events. These forward-looking statements include statements about the
following:

          .our product development efforts and the implications of their
          preliminary results;

          .the commercialization of our products, including the development of a
          sales and marketing force;

          .our intentions regarding the establishment of collaborations;

          .anticipated operating losses and capital expenditures;

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

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

          .our intention to rely on third parties for manufacturing.

  In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "would," "expect," "plan,"
"anticipate," "believe," "estimate," "continue," or the negative of such terms
or other similar expressions. Factors that might cause or contribute to
discrepancies include, but are not limited to, those discussed elsewhere in
this Report and the risks discussed in our other Securities and Exchange
Commission ("SEC") filings including our Registration on Form S-1 declared
effective on November 13, 2000 by the SEC (File No. 333-96333).

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

  The following discussion should be read in conjunction with our audited
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Report.

                                    PART I

ITEM 1. BUSINESS

Our Company

  We are a therapeutic-based biopharmaceutical company. We discover, develop
and plan to commercialize proprietary pharmaceutical products for the
treatment of pain and the side effects that are caused by current pain
treatments. We have a portfolio of small molecule product candidates that are
in various stages of development ranging from preclinical studies to Phase I
through Phase II/III clinical trials. Our lead product candidate, ADL 8-2698,
is designed to selectively block the effects of narcotic analgesics on the
gastrointestinal tract. In Phase II clinical trials, ADL 8-2698 reduced post-
operative bowel dysfunction, or ileus, thereby speeding the recovery of normal
bowel function following abdominal surgery. In separate phase II clinical
trials, ADL 8-2698 has been shown to prevent or reverse symptoms of opioid
bowel dysfunction, including constipation, bloating and cramping, in patients
receiving chronic narcotic analgesics. Our analgesic product candidates are
designed to treat moderate-to-severe pain and itch. We are also developing a
combination narcotic analgesic product that is intended to reduce the most
prevalent and severe side effects of morphine and other narcotic analgesics,
such as constipation, nausea and vomiting. Since most of our product
candidates target peripheral opioid receptors (those outside of the central
nervous system), they should not exhibit the dose-limiting central nervous
system side effects of existing narcotic analgesics. We believe our product
candidates and drug discovery and development expertise have potential
applicability to a broad range of pain and itch conditions. For the year ended
August 31, 2000, combined prescription sales in the pain management market
were $11.4 billion in the United States, a 28% increase compared to the same
period in 1999, and are estimated to be in excess of $26 billion worldwide.

                                       1
<PAGE>

  Currently marketed analgesics have well-defined adverse side effects that
limit their ability to meet the needs of physicians and their patients.
Moreover, the increased emphasis on treating pain has highlighted the need for
improved products. We believe our product candidates address significant unmet
needs in the pain management market. In addition, we believe we may create new
pain management markets with some of our product candidates because their
mechanisms of action may provide effective pain relief or relief of narcotic
analgesic side effects in areas where existing analgesics or other symptom
management products have limited effectiveness.

  Our drug discovery capabilities and pipeline of product candidates originate
through a combination of internal research and development activities, in-
licensed technologies and in-licensed product candidates. Our initial drug
discovery and development activities focus on three aspects of pain
management:

  .  reversal or prevention of gastrointestinal effects of narcotic
     analgesics administered following surgical procedures or for the
     treatment of pain;

  .  novel mu and kappa analgesics that act on peripheral opioid receptors
     and not in the central nervous system; and

  .  narcotic analgesic products with significantly reduced side effects.

  In October 2000, we completed a Phase II clinical trial with our lead
compound, ADL 8-2698, for the treatment of post-operative ileus that
frequently follows abdominal surgery. We also completed multiple Phase I and
Phase II clinical trials that indicate that ADL 8-2698 may be effective in
preventing or reversing the severe constipating effects associated with opioid
bowel dysfunction. Based on our initial clinical results, we have conducted an
exploratory Phase I clinical trial for ADL 8-2698 co-administered with
morphine, with a goal of producing a combination narcotic analgesic product
that treats moderate-to-severe pain without inducing nausea or other adverse
gastrointestinal effects associated with current narcotic analgesic therapies.

  We have additional compounds in clinical development that target peripheral
opioid analgesia receptors. Our compound ADL 10-0101, which is being developed
for the treatment of visceral and post-operative pain, is in a Phase II
clinical trial for the treatment of visceral pain. In addition, ADL 10-0101 is
in a Phase I clinical trial for the treatment of dermal itch. We have
completed Phase II clinical trials for an eye drop formulation of ADL 2-1294
for the treatment of pain from corneal abrasion or ophthalmic surgery. We have
also completed two Phase I clinical trials with topical dermal formulations of
ADL 2-1294 where it demonstrated preliminary efficacy in the treatment of
dermal burn pain. An affiliate of GlaxoSmithKline, formerly SmithKline
Beecham, our development partner for the commercialization of the dermal
product candidate, is developing topical ADL 2-1294 under an exclusive license
from us for the treatment of dermal pain and itch. Santen Pharmaceutical Co.,
Ltd. is developing topical ADL 2-1294 under a worldwide license from us
(excluding South Korea and North Korea) for the treatment of ophthalmic pain.

  We plan to build a sales and marketing organization to sell our products to
hospitals, surgeons, oncologists and pain management specialists. We intend to
enter into strategic marketing agreements with, and grant additional licenses
to, pharmaceutical companies to gain access to broader market segments,
including general practitioners and international markets.

Overview Of Pain Management Industry

  Over 100 million patients experience acute or chronic pain annually in the
United States caused by headache, muscle strains and sprains, arthritis,
trauma, cancer, surgery and back injuries, among others. Because pain impairs
one's ability to carry out a productive life, pain in general and chronic pain
in particular are serious health and economic problems.

  There has been an increasing focus on pain management in the healthcare
industry. Recently published guidelines of the World Health Organization and
the United States Agency for Health Care Policy and Research encourage the use
of stronger analgesic therapy for treating cancer pain. In 1991, the American
Board of Medical

                                       2
<PAGE>

Specialties designated the treatment of pain as a recognized specialty for
physicians. The number of physicians receiving specialty training in pain
management increased from 446 in 1993, the first year in which certifications
were granted, to a total of over 2,200 in 1999. In addition, as of 1999, all
United States hospitals and health care facilities have been required to
assess the adequacy of pain treatment for each patient on a daily basis to
achieve accreditation by the Joint Commission on Accreditation of Healthcare
Organizations.

  Types of Pain. Pain is commonly classified into three broad categories based
upon its presumed cause and sensory characteristics: somatic pain, visceral
pain and neuropathic pain. Somatic pain can be produced by injuries to skin,
muscle, bones or joints and is typically characterized as a sharp pain that is
localized to an area of injury. Visceral pain can be produced by distention,
injury or inflammation of internal organs and is typically characterized by
diffuse, poorly localized, dull and vague pain. Neuropathic pain can be
produced by injuries or inflammation of nerves and is typically characterized
by diffuse, burning pain. Patients may simultaneously experience more than one
type of pain.

  Pain management market. Prescription pain management sales for the twelve
months ended August 31, 2000 were $11.4 billion in the United States. Growth
in the pain management market has been significant in recent years and is
expected to continue. The prescription pain management market in the United
States grew 6% per year from 1994 to 1998, and grew 28% between September 1,
1999 and August 31, 2000. This accelerating growth rate appears to be
primarily attributable to recent product introductions in this market. For
example, COX-2 inhibitors, which are non-narcotic prescription analgesics,
were introduced early in 1999, and had 1999 sales of $1.5 billion and sales
for the twelve months ended August 31, 2000 of approximately $3.2 billion. We
believe that the rapid acceptance of COX-2 inhibitors illustrates that there
are still many unmet medical needs in the pain management market and that
physicians are willing to prescribe new and improved products as they become
available.

  Sales of prescription pain management products in the United States are
shown in the following table:

<TABLE>
<CAPTION>
                                                                 U.S. Sales
                                                               ---------------
                                                               (For the twelve
                                                                months ended
                                                                 August 31)
                                                               ---------------
   Market Segment                                              1998 1999 2000
   --------------                                              ---- ---- -----
                                                                (In Billions)
   <S>                                                         <C>  <C>  <C>
   Moderate-to-severe pain (Narcotic analgesics).............. $2.7 $3.1 $ 3.7
                                                               ==== ==== =====
   Mild-to-moderate pain (NSAIDs, COX-2 inhibitors,
    Acetaminophen)............................................ $3.0 $3.6 $ 5.3
                                                               ==== ==== =====
   Topical pain, itch and special purpose analgesics
    (Corticosteroids, antihistamines)......................... $2.0 $2.2 $ 2.4
                                                               ==== ==== =====
     Total U.S. Pain Management Market........................ $7.7 $8.9 $11.4
                                                               ==== ==== =====
</TABLE>

  The pain management market for drugs used to treat patients with moderate-
to-severe and mild-to-moderate pain is growing due to the following factors:

  .  increasing recognition of the need for effective pain management and its
     therapeutic benefits;

  .  rapid market acceptance of new products with novel mechanisms of action;

  .  targeted markets that permit cost-effective selling and marketing; and

  .  growth in the aged population with an associated increased incidence of
     pain.

  Current therapies to counteract pain. Narcotic analgesics such as morphine
are considered the most effective analgesics and are widely used to treat
patients with moderate-to-severe pain. These narcotic analgesics produce pain
relief by stimulating opioid receptors in the central nervous system, which
consists of the brain and spinal cord. Advances in narcotic analgesics during
the past 20 years have primarily been in improved methods for the delivery of
existing narcotic analgesics rather than the discovery of new drugs. Patients
who suffer severe

                                       3
<PAGE>

pain may simultaneously receive more than one formulation of narcotic
analgesics and may receive other classes of analgesic medications.

  Non-narcotic analgesics, including acetaminophen and non-steroidal anti-
inflammatory drugs, or NSAIDs, such as ibuprofen, are widely used to treat
mild-to-moderate pain. NSAIDs are thought to produce analgesia by inhibiting
activity of cyclooxygenase enzymes (COX-l and COX-2), thereby reducing
inflammation at the site of injury or disease. Some NSAIDs require a
prescription and others are available as over-the-counter medications. Recent
advances in NSAID analgesia have focused on reducing adverse GI side effects.

  Deficiencies of current therapies to counteract pain. Although morphine and
other narcotic analgesics are considered the most effective analgesics, many
patients who use them do not obtain complete pain relief, and they are
ineffective for other patients. Narcotic analgesics also produce a wide range
of adverse side effects that may include opioid bowel dysfunction, sedation,
nausea, vomiting, decreased respiratory function, addiction and death. In
addition, due to their potential for abuse, narcotic analgesics are strictly
regulated by the United States Drug Enforcement Agency, or DEA, under the
Controlled Substances Act, which imposes strict registration, record-keeping
and reporting requirements, security controls and restrictions on narcotic
analgesic prescriptions.

  Although NSAIDs are generally effective for mild or moderate pain, many
patients are unable to tolerate NSAIDs because of GI side effects. Traditional
NSAIDs can produce significant adverse effects on the stomach and GI tract,
including GI ulcers and bleeding. In addition, prolonged use can cause liver
and kidney failure. COX-2 inhibitors appear to produce fewer GI ulcers than
NSAIDs but may be less effective for acute pain. For most patients with
moderate-to-severe pain, NSAIDs and COX-2 inhibitors do not produce complete
pain relief.

Background On Post-Operative Ileus

  Post-operative ileus is a form of temporary bowel dysfunction that regularly
follows abdominal surgery and certain other surgeries for hospitalized
patients. Post-operative ileus is characterized by abdominal distention, lack
of bowel sounds and lack of passage of flatus and stool. Other symptoms
include nausea, vomiting, bloating, and stomach cramps. These symptoms may
prevent drinking or eating, prolong recovery from surgery, and may extend
hospital length of stay. Clinical trials indicate that the use of narcotic
analgesics to treat post-operative pain delays recovery of normal bowel
function. Since virtually all patients receive morphine or other narcotic
analgesics for pain relief after major surgery, current post-operative pain
treatment may actually slow recovery of normal bowel function, delay time
until patients can drink or eat, delay hospital discharge and therefore
increase the cost of medical care.

  There are no effective United States Food and Drug Administration ("FDA")
approved treatments for post-operative ileus or for the prolonging effects of
narcotic analgesics on ileus. Of the approximately 30 million annual surgical
procedures in the United States, it is estimated that more than five million
patients are likely to experience post-operative ileus. Nearly all of the
patients having abdominal surgery will experience post-operative ileus, but
other surgical procedures may be less likely to produce post-operative ileus.
Our market research indicates that physicians will use a drug prophylactically
to prevent post-operative ileus when they believe that a patient has a
moderate to high probability of prolonged hospitalization due to post-
operative ileus. We believe that these patients will comprise the addressable
market for an ADL 8-2698 post-operative ileus product.

Background On Opioid Analgesia

  Pain transmission signals. When tissues such as the skin, muscles and joints
become inflamed or are injured, pain receptors in those tissues are activated,
and electrical pain signals are transmitted from the injured tissues through
nerve fibers into the spinal cord. Within the spinal cord, the electrical pain
signals are received by a second set of nerve fibers that continue the
transmission of the signal up the spinal cord and into the brain. Within the
brain, additional nerve fibers transmit the electrical signals to the "pain
centers" of the brain where these signals are perceived as pain. Pain
receptors are also present in internal, or visceral, organs such as the
intestines, uterus, cervix and bladder. These pain receptors also send pain
signals when the organs are inflamed or distended.

                                       4
<PAGE>

  Opioid receptors block pain transmission signals. Opioid receptors located
on the surface of nerves that transmit pain signals, block transmission of
pain when activated by drugs specific for those receptors. There are three
types of opioid receptors, mu, kappa and delta, each of which produces
analgesia. All marketed narcotic analgesic drugs interact with mu opioid
receptors in the brain and spinal cord. When these central nervous system
opioid receptors are activated with narcotic analgesics such as morphine, the
perception of pain is reduced. However, activating these opioid receptors in
the brain with morphine-like narcotic analgesics often results in serious side
effects such as sedation, decreased respiratory function and addiction.
Because of the potential to cause addiction, drugs that are able to activate
mu opioid receptors in the brain (morphine-like narcotic analgesics) are
regulated, or scheduled, under the Controlled Substances Act.

  Compounds that activate kappa opioid receptors in the brain also produce
analgesia and sedation but are far less likely than morphine to decrease
respiratory function. Studies in animals and humans suggest that opioid drugs
that activate the kappa receptors are unlikely to cause addiction. However,
prototype kappa opioid compounds that were designed to work in the brain have
produced adverse central nervous system side effects, including visual and
auditory disturbances, unpleasant mood changes and hallucinations. These side
effects have prevented the development of centrally-acting kappa analgesics
that act on receptors in the central nervous system.

Our Approach To Pain Management

  Peripheral opioid analgesia. Scientists have shown that mu and kappa opioid
receptors are present on nerve endings in the skin joints and visceral organs.
Activation of these opioid receptors, which are outside of the central nervous
system, with mu or kappa opioid analgesics reduces pain related to injury or
inflammation by decreasing pain transmission from the peripheral nerves into
the spinal cord. Proof-of-concept studies in animals and humans have shown
that small doses of morphine, applied locally to inflamed tissues such as
skin, joints and eyes are effective in reducing pain. These findings
demonstrate the effectiveness of stimulating peripheral mu opioid receptors to
produce pain relief. These findings have created the opportunity for us to
develop an entirely new class of analgesics that selectively stimulate opioid
receptors in inflamed tissues but do not stimulate opioid receptors in the
central nervous system thereby avoiding central nervous system side effects.
These pain medications are called peripheral analgesics. Our peripheral
analgesics are effective in preclinical studies of pain and itch, and our
peripheral kappa opioid analgesics are effective in blocking the visceral pain
originating from internal organs such as the bowel and cervix. In our
preclinical studies, our peripheral analgesics have delivered near complete
pain relief without detectable side effects at therapeutic doses. Because our
peripheral analgesics do not readily cross the blood-brain barrier and appear
to have limited or no effect on the brain at therapeutic doses, they do not
cause addiction or other adverse central nervous system side effects. These
peripheral analgesics should not cause sedation, decreased respiratory
function or addiction. As a result, we expect that these analgesics will not
be subject to United States Drug Enforcement Agency regulation under the
Controlled Substances Act.

  Peripheral opioid receptors in the GI tract. Just as there are opioid
receptors on peripheral nerves that regulate the transmission of pain signals
into the spinal cord, there are also opioid receptors in the GI tract that
regulate bowel functions such as motility and water absorption. Stimulation of
these bowel mu opioid receptors by morphine or other narcotic analgesics
causes constipation associated with opioid bowel dysfunction. Scientists have
shown that blocking these receptors with opioid receptor antagonist drugs
during administration of morphine or other narcotic analgesics prevents or
reverses the effects of opioid bowel dysfunction. However, currently available
opioid receptor antagonist drugs also cross the blood-brain barrier and have
the potential to reverse the analgesic properties of morphine and other
narcotic analgesics. These findings have created the opportunity to develop a
new class of therapeutics called GI tract-restricted narcotic antagonists. GI
tract-restricted narcotic antagonists, when co-administered with narcotic
analgesics, block the side effects of the narcotic analgesics on the GI tract
but do not block the desired analgesic activity of narcotic drugs because the
antagonists are not absorbed systemically and do not cross the blood-brain
barrier.

  Development of peripherally-restricted products. We use our biological,
chemical and analytical technology expertise to create proprietary peripheral
analgesics and GI tract-restricted narcotic antagonists.

                                       5
<PAGE>

Within our analgesia program, we use computer-assisted chemical design
technology and medicinal chemistry to synthesize compounds that do not readily
pass the blood-brain barrier into the central nervous system. We then use
cloned human kappa and delta opioid receptors to select the compounds that are
effective at very low concentrations and that are highly specific for one
receptor type (usually kappa) over other receptor types. We conduct
preclinical studies to confirm the analgesic activity of the compounds and to
confirm that the compounds are not passing through the blood-brain barrier to
give central nervous system side effects. We have demonstrated in a number of
preclinical trials of inflammatory and visceral pain that our peripherally
restricted kappa analgesics are as effective as narcotic analgesics, such as
morphine, without causing central nervous system side effects. In addition, we
have demonstrated that our peripheral kappa analgesics are active in
preclinical trials of itch. Similarly, we have shown in preclinical and
clinical trials that our GI tract-restricted narcotic antagonists, including
our lead compound ADL 8-2698, block the adverse side effects of narcotic
analgesics on the GI tract without blocking analgesia.

  Itch sensations are carried by the same nerves that carry pain signals to
the brain, and we have found that many of our peripherally-restricted
analgesics are effective in treating itch in preclinical trials. These drugs
may be effective as topical, injectable or oral medications for relieving itch
in a wide variety of diseases including eczema and allergic dermatitis.

  Peripherally-active analgesics may not be effective in relieving all types
of pain. Therefore, the development of centrally-active analgesics with
reduced side effects is one of our longer-term goals. We believe that
centrally-acting compounds have the ability to treat nerve damage pain and
some cancer pain.

Our Strategy

  Our goal is to become a leading discoverer, developer and marketer of
proprietary pain management pharmaceuticals. We plan to pursue this objective
by implementing the following strategies:

  Pioneering the use of peripheral opioid receptors in pain management. We
focus on clinical conditions that can be treated by either stimulating or
blocking peripheral opioid receptors. These conditions include opioid bowel
dysfunction, inflammatory pain and itch and visceral pain. We have broad
biological and chemical expertise to support drug discovery. Our leading
technology includes our expertise in opioid receptors in analgesic pathways,
cloned human opioid, orphan and chimeric receptors and the chemical synthesis
of compounds that do not readily cross the blood-brain barrier. We are using
our knowledge about opioid receptors to develop ADL 8-2698, ADL 2-1294, ADL
10-0101, ADL 10-0116 and ADL 1-0398, all of which are peripherally restricted
opioid receptor compounds, for a variety of these clinical indications.

  Pursuing clinical indications that allow rapid demonstration of efficacy. We
try to expedite drug development by targeting pain management indications in
which animal pharmacology experiments are predictive of efficacy in humans,
established and reproducible clinical end points are available and relatively
short and inexpensive clinical trials are possible and appropriate. For
instance, in our peripheral kappa opioid analgesic program for inflammatory
pain, we have chosen to examine clinical indications such as visceral pain and
burn pain rather than arthritis pain because the first two clinical
indications can be tested in much shorter and less expensive clinical trials.
We intend to study the arthritis pain indication at a later time.

  Implementing a commercial strategy that will combine marketing and product
development alliances with our own product development and sales
organization. We plan to maintain commercial rights in the United States for a
number of our product candidates. We intend to market certain of our product
candidates to surgeons, hospitals, oncologists and pain management
specialists. In addition, we have established and will continue selectively to
establish collaborations with pharmaceutical companies and leading academic
institutions to enhance our research, development and commercialization
activities. We have licensed topical ADL 2-1294 to an affiliate of
GlaxoSmithKline for treatment of dermal pain and itch and to Santen
Pharmaceutical Co., Ltd., for treatment of ophthalmic pain. We believe our
broad biological and chemical expertise to support drug discovery will
continue to generate opportunities for collaborative arrangements.

                                       6
<PAGE>

  Managing risk by creating a portfolio of product candidates. We have a
portfolio of product candidates in clinical development, each of which is
being developed for multiple indications. We conduct multiple parallel
clinical trials and examine multiple clinical indications on all of our
product candidates. For example, ADL 8-2698 is being evaluated in parallel
clinical trials for reversal of opioid bowel dysfunction, treatment of post-
operative ileus and prevention of narcotic analgesic-induced nausea.

  Developing non-DEA regulated products. We develop product candidates that do
not (unless used in combination with narcotic analgesics) contain regulated
controlled substances. We believe this lack of regulation by the United States
Drug Enforcement Agency, or DEA, will give our products a competitive
advantage in markets such as the out-patient care market in which non-
addictive products are favored. For example, patients with mild-to-moderate
pain are not routinely treated with narcotic analgesics because of the
addictive potential of these regulated products. We believe our peripheral
kappa analgesics will be effective in relieving pain and will not be regulated
by the DEA.

Products in Research and Development

  Our current product candidates according to clinical indication and stage of
development are:

<TABLE>
<CAPTION>
Product Candidate (Mode of
Delivery)                   Clinical Indication                    Development Stage
--------------------------  -------------------                    -----------------
<S>                         <C>                                    <C>
Reversal of Narcotic
 Analgesic-Induced
 GI Side Effects
  GI Tract-Restricted mu
   Antagonists
ADL 8-2698 (oral).........  Post-operative ileus                     Phase II/III
ADL 8-2698 (oral).........  Opioid bowel dysfunction                 Phase II

Treatment of Pain or Itch
  Peripherally Restricted
   kappa Opioid Analgesics
ADL 10-0101 (injectable)..  Visceral pain                            Phase II
ADL 10-0101 (injectable)..  Dermal itch                              Phase I
ADL 10-0101 (topical).....  Ophthalmic itch                          Preclinical
ADL 10-0116 (oral)........  Inflammatory/visceral pain and itch      Preclinical
ADL 1-0398 (oral).........  Inflammatory/visceral pain and itch      Research

  Peripherally Restricted
   mu Opioid Analgesics
ADL 2-1294 (topical)......  Ophthalmic pain                          Phase II
ADL 2-1294 (topical)......  Dermal pain                              Phase I
ADL 2-1294 (topical)......  Dermal itch                              Phase I
ADL 2-1294 (injectable)...  Joint pain                               Preclinical

  Centrally-Active Oral
   Analgesics
ADL 8-2698 combination
 with narcotic opioid
 analgesic................  GI side effect-free narcotic analgesic   Phase I
</TABLE>

 GI Tract-Restricted mu Antagonists

  ADL 8-2698

  ADL 8-2698 is a peripherally-acting, GI tract-restricted mu opioid receptor
antagonist. ADL 8-2698 is designed to block the adverse side effects of
narcotic analgesics on the GI tract without blocking their beneficial
analgesic effects. We are developing ADL 8-2698 to treat or prevent post-
operative ileus and opioid bowel dysfunction. More than 330 volunteers and
patients have received ADL 8-2698 in one Phase II/III, seven Phase II and six
Phase I opioid bowel dysfunction, post-operative ileus and safety clinical
studies in progress and completed to date.

                                       7
<PAGE>

  Post-operative ileus

  Post-operative ileus is a form of temporary bowel dysfunction that regularly
follows abdominal surgery and certain other surgeries for hospitalized
patients. Post-operative ileus is characterized by abdominal distention, lack
of bowel sounds and lack of passage of flatus and stool. Other symptoms
include nausea, vomiting, bloating, and stomach cramps. These symptoms may
prevent eating and normal oral intake of fluids, prolong recovery from
surgery, and may extend hospital length of stay. Clinical trials indicate that
the use of narcotic analgesics to treat post-operative pain delays recovery of
normal bowel function. Since virtually all patients receive morphine or other
narcotic analgesics for pain relief after major surgery, current post-
operative pain treatment may actually slow recovery of normal bowel function,
delay time until patients can eat, delay hospital discharge and therefore
increase the cost of medical care. By reducing the duration of post-operative
ileus, we believe that ADL 8-2698 will speed recovery of bowel function,
reduce nausea and vomiting, improve the nutritional and physical status for
patients and reduce costs for hospitals and insurance companies by speeding
recovery from ileus, which may result in earlier discharge of patients from
hospitals.

  Development stage. We recently finished a 78 patient Phase II clinical trial
which compared two doses of ADL 8-2698 vs. placebo in patients undergoing
partial colectomy or simple or radical hysterectomy surgical procedures. An
initial analysis of these data shows a dose-dependent effect and that patients
receiving the higher dose of ADL 8-2698 experienced shorter time to the first
flatus (P<0.04), time to first bowel movement (P<0.02), time to eating a solid
diet (P=0.0001), and time to discharge from the hospital (P=0.0001). The time
to first flatus was reduced by 15 hours; all other measures were reduced by 24
hours or more. No patients experienced serious adverse side effects in this
trial that were judged by the clinical investigator to be related to the
activity of ADL 8-2698. The 26 patients treated with the higher dose of ADL 8-
2698 actually experienced fewer overall adverse effects than the 26 patients
in the placebo-treated group. We believe that ADL 8-2698 blocked the adverse
gastrointestinal effects of morphine or other narcotic analgesics that were
used for post-operative pain relief. In particular, none of the 26 patients
receiving the higher dose of ADL 8-2698 experienced post-operative vomiting
compared to 23% in the placebo control group (P<0.03). Twenty seven percent of
the patients receiving the higher dose of ADL 8-2698 experienced clinically
relevant post-operative nausea compared to 63% of the placebo control group
(P=0.003). ADL 8-2698 did not reduce the beneficial analgesic effects of
systemic narcotic analgesics used in this trial. These results suggest that
ADL 8-2698 may speed recovery of normal bowel function after surgery. We are
now conducting a Phase II/III clinical study that will further define the
active dose range for ADL 8-2698.

  In March 2001, we began enrollment in a multicenter Phase III clinical trial
of ADL 8-2698 which is expected to enroll 180 patients between the ages of 18
and 80 years old from 15 hospitals throughout the U.S. This trial will
duplicate the Phase II studies, using the same end-points and study design.
The only differences will be an increased number of patients enrolled and the
adding of a second, higher dose of ADL 8-2698 to determine whether the length
of hospital stay might be shortened further.

  Opioid bowel dysfunction

  Coordinated rhythmic contractions of the intestines move the intestinal
contents forward as a part of the normal digestive process.

  When morphine, codeine, oxycodone, hydrocodone or similar narcotic
analgesics enter the gastrointestinal tract, they activate opioid receptors
and disrupt the normal rhythmic movements. This disruption may cause
uncoordinated non-propulsive intestinal contractions or cramps. The dose of
morphine required to disrupt bowel function is lower than the dose of morphine
required to produce pain relief. Morphine can produce symptoms of opioid bowel
dysfunction that include hard, dry stools, straining with bowel movements and
inability to completely evacuate the bowels. Patients may also experience
abdominal cramping or spasms with bloating and abdominal distention. The
discomfort associated with opioid bowel dysfunction can be so severe as to
limit dosing of the narcotic analgesic and therefore reduce the degree of pain
relief.


                                       8
<PAGE>

  When taken orally, ADL 8-2698 selectively blocks the intestinal opioid
receptors, restoring normal bowel function. Because only traces of ADL 8-2698
are absorbed from the bowel into the bloodstream, it is considered a GI tract-
restricted narcotic antagonist. Morphine and other narcotic analgesics are
still absorbed normally into the blood stream and produce their desired
analgesic effects in the brain.

  Laxative and stool lubricant medications are used in an attempt to treat
opioid bowel dysfunction in patients receiving chronic narcotic analgesic
therapy, but they are only fully effective in a limited patient population.
Clinical trials and interviews with medical care givers indicate that as many
as 80% of patients receiving chronic narcotic analgesics experience moderate
to severe opioid bowel dysfunction. Market research indicates that over 2.7
million patients receive chronic morphine or other narcotic analgesics for
pain. These patients comprise our potential population for the use of ADL 8-
2698 to prevent or treat opioid bowel dysfunction.

  Development stage. Four Phase II opioid bowel dysfunction trials were
designed to identify the active dose range of ADL 8-2698 for reversing severe
opioid bowel dysfunction in patients receiving chronic narcotic analgesic
therapy. ADL 8-2698 reversed opioid bowel dysfunction on 82% to 100% of the
days when patients received ADL 8-2698. All patients who received ADL 8-2698
responded on at least one day that they received active drug. At therapeutic
doses, side effects were generally absent or mild and consisted of those
expected to occur during acute reversal of opioid bowel dysfunction such as
abdominal cramping, gas and nausea. After receiving a dose 12 times higher
than the minimally effective dose, one patient developed severe abdominal
cramps, diarrhea, nausea and vomiting. This case represents the only serious
adverse event in all 12 clinical trials completed to date that was judged by
the clinical investigator to be probably related to the activity of ADL 8-
2698. We expect to start Phase III clinical trials for opioid bowel
dysfunction in 2001.


 Peripherally Restricted kappa Opioid Analgesics

  We use advanced chemical design technology to create proprietary topical,
injectable and oral peripheral kappa opioid receptor-specific compounds that
do not cross the blood-brain barrier at therapeutic doses. These compounds are
significantly more effective than acetaminophen or NSAIDs and are equally
effective as narcotic analgesics in relieving inflammatory pain in preclinical
trials. We expect to develop oral formulations to address broader markets in
chronic inflammatory pain, such as the market for prescription arthritis pain
products, that accounted for approximately $4.6 billion in United States
prescription sales in the twelve months ended August 31, 2000. We believe
these peripheral kappa opioid analgesics will be the first opioid analgesics
to address the pain of chronic inflammatory disease without producing adverse
psychological effects associated with central kappa opioid analgesics,
including visual and auditory disturbances, unpleasant mood changes and
hallucinations. Preclinical studies show that our peripheral kappa opioid
analgesics are particularly effective against visceral pain. Because of these
preclinical results, we have begun clinical trials for the treatment of
visceral pain in humans.

  ADL 10-0101

  ADL 10-0101 is our first peripheral kappa opioid analgesic product
candidate. Preclinical trials suggest that ADL 10-0101 may be effective in
treatment of inflammatory pain, itch and visceral pain. Because ADL 10-0101
does not readily cross the blood-brain barrier and enter the brain, we expect
ADL 10-0101 to avoid central nervous system side effects at therapeutic doses.

  Visceral pain

  Visceral pain can be caused by inflammation or distention of abdominal
organs as a result of surgical or diagnostic procedures or from acute or
chronic disease. Preclinical data indicated that our peripheral kappa opioid
analgesics are more effective than morphine and other narcotic analgesics for
blocking pain in visceral organs. Data from the United States Centers for
Disease Control and Prevention, or CDC, indicate that there are over 12
million annual cases of acute abdominal pain and 5.4 million GI endoscopy
diagnostic office procedures, a portion of which we believe will comprise our
potential patient population for an injectable ADL 10-0101 product.

  Development stage. We completed a Phase I clinical trial in the third
quarter of 1999. In this study, the dose was increased until a dose-limiting
adverse side effect was observed. At the highest dose, ADL 10-0101 produced
visual and auditory disturbances, unpleasant mood changes and hallucinations.
We began a Phase II

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<PAGE>

clinical trial in patients, using doses below those which caused adverse side
effects in volunteers, to evaluate efficacy of ADL 10-0101 in the treatment of
visceral pain. We expect to complete enrollment for this trial in the first
quarter of 2001. We expect to begin several additional Phase II studies in
2001.

  Traumatic injury pain

  Traumatic dermal injury pain may be caused by burns, abrasions or surgical
procedures. Minor traumatic injury pain is currently treated with over-the-
counter medications containing emollients or local anesthetics. Emollients are
soothing but have little or no analgesic activity; local anesthetics have a
relatively short duration of action and may be irritating to the skin.
Moderate-to-severe traumatic injury pain is frequently treated with NSAIDs or
narcotic analgesics. We believe that ADL 10-0101 may produce greater analgesia
with fewer side effects than existing medications for inflammatory pain. Data
from the CDC indicate that there are over 44 million annual cases of
inflammatory pain, a portion of which we believe will comprise the potential
market for an ADL 10-0101 product.

  Development stage. We recently completed a pilot Phase I clinical trial,
using doses below those that cause adverse side effects in volunteers, to
assess safety and preliminary efficacy of ADL 10-0101 for relieving
experimental thermal burn pain. This study did not show a beneficial effect of
ADL 10-0101. We plan to reevaluate this clinical study and may do further
tests in a different traumatic injury pain model or with higher drug doses
after we complete our current visceral pain and dermal itch clinical studies.

  Dermal itch

  Dermal itch results from eczema, allergic dermatitis, or exposure to harsh
chemicals or plants. Minor dermal itch is currently treated with over-the-
counter medications containing emollients, local anesthetics, antihistamines,
or corticosteroids. Local anesthetics may be irritating to the skin and
corticosteroids cause skin thinning and other adverse effects with chronic
use. Moderate-to-severe itch is frequently treated with prescription
corticosteroids or with oral antihistamines, both of which may cause serious
side effects when used acutely or chronically, including sedation and adverse
effects on the immune system and on the regulation of normal body hormones. We
believe that ADL 10-0101 for dermal itch may produce greater relief with fewer
side effects than existing medications. Data from the CDC indicate that there
are over 14 million annual cases of chronic dermal itch, a portion of which we
believe will constitute the potential market for a dermal anti-itch product.

  Development stage. Preclinical trials indicate that ADL 10-0101 may be
effective in treating itch. Based on these results, we recently completed a
Phase I clinical trial, using doses below those that cause adverse side
effects in volunteers, to assess safety and preliminary efficacy of ADL 10-
0101 for relieving dermal itch and are currently analyzing the data from the
trial. If our clinical trial shows that ADL 10-0101 is effective, we may
develop a topical product.

  Ophthalmic itch

  Ophthalmic itch may be caused by allergies, colds, flu, inflammation,
infection, surgery or exposure to irritants. Minor ophthalmic itch is
currently treated with over-the-counter eye drops and allergy medications.
More severe itch is treated with prescription corticosteroids, antihistamines
or other anti-inflammatory drugs formulated as either eye drops or oral
medications. Market research indicates that there are over 7.9 million
patients annually who have eye itch from conjunctivitis, keratitis, uveitis or
following ophthalmologic surgery. We believe these patients comprise our
potential population for use of ADL 10-0101 to treat ophthalmic itch.

  Development stage. We have completed preclinical eye safety studies with an
ophthalmic solution of ADL 10-0101. Based on these results, we may file an
Investigational New Drug Application ("IND") for this product in 2001. If our
clinical trial shows that ADL 10-0101 is effective, we may develop a topical
ophthalmic product.

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<PAGE>

  ADL 10-0116

  Chronic Inflammatory/Visceral Pain and Itch

  ADL 10-0116 is our second-generation peripheral kappa opioid analgesic
compound. In preclinical inflammatory pain trials, ADL 10-0116 demonstrated a
long duration of action. In addition, ADL 10-0116 was shown to be active when
administered orally. As an orally-active drug, ADL 10-0116 may expand the
market that can be achieved with ADL 10-0101 by treating acute and chronic
pain conditions in clinical indications where an injectable product would not
be used.

  Moderate-to-severe pain often requires the use of narcotic analgesics.
Preclinical data indicated that our peripheral kappa opioid analgesics are as
effective as narcotic analgesics for inflammatory pain and more effective than
narcotic analgesics for blocking pain in visceral organs. Data from the CDC
indicate that there are over 44 million patients who have chronic inflammatory
musculoskeletal pain and 12 million cases of acute abdominal pain that we
believe will constitute a portion of the addressable market for an oral
peripheral kappa opioid analgesic product.

  Development stage. This product candidate is in preclinical development and
is expected to enter clinical trials in 2001.

  ADL 1-0398

  Chronic inflammatory/visceral pain

  ADL 1-0398 is another second generation peripheral kappa opioid analgesic
similar to ADL 10-0116. The compound is active in multiple types of
inflammatory pain in preclinical trials. In addition, ADL 1-0398 has greater
peripheral restriction than other peripheral kappa opioid analgesics.

  Development stage. This product candidate is in preclinical research.

 Peripherally Restricted mu Opioid Analgesics

  ADL 2-1294

  The active ingredient in all of our formulations containing ADL 2-1294 is
loperamide, the same active ingredient in the over-the-counter anti-diarrheal
product, Imodium(R) A-D. The compound patent for loperamide has expired, but
we have secured method-of-use and formulation patents for a number of pain and
itch indications. Loperamide, like morphine, is a potent mu opioid receptor
stimulant. Unlike morphine, loperamide does not readily cross the blood-brain
barrier to enter the central nervous system. The compound is also very poorly
absorbed from the intestinal tract following oral administration. As a result,
the compound does not cause sedation or depress respiratory function, is not
considered to be addictive and is the only mu opioid agonist that is not
scheduled as a controlled substance. When applied locally to sites of
inflammation or irritation, ADL 2-1294 is as effective as morphine in
preclinical models of inflammatory pain and is effective in preclinical trials
for the relief of itch. Pain from burns and other dermal injuries was selected
as the initial clinical target for topical formulations of ADL 2-1294. We have
also evaluated ophthalmic and injectable formulations for the treatment of
pain. An affiliate of GlaxoSmithKline licensed the rights to develop and
market ADL 2-1294 topical formulations for dermal itch and pain and the Santen
Pharmaceutical Company of Japan licensed the worldwide rights, except in South
Korea and North Korea, to develop and market ADL 2-1294 ophthalmic
formulations for ophthalmic pain. Kwang Dong Pharmaceutical Co., Ltd. licensed
the right to develop and market dermal formulations of ADL 2-1294 in South
Korea and North Korea.

  Ophthalmic pain

  We are targeting ophthalmic pain that results from corneal abrasion or
surgery. Eye drops containing corticosteroids or an anti-inflammatory NSAID
are often used following corneal surgery or corneal abrasion but

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<PAGE>

may inhibit wound healing and cause other adverse side effects. Our
collaborators have demonstrated the efficacy of eye drops containing morphine
for pain control following ophthalmic surgery. ADL 2-1294 activates the same
receptors as morphine and has the competitive advantage that it is not a
controlled substance and therefore will not have prescription restrictions
imposed by the DEA. We believe that eye drops containing ADL 2-1294 will be
more effective and produce fewer adverse side effects than current therapy.
Data from the CDC indicate that there are 5.7 million annual cases of surgery
on eyes or injury to the cornea that we believe will compose the addressable
market for an ophthalmic peripheral mu analgesic product.

  Development stage. Our Phase II study demonstrated that ADL 2-1294 reduced
the severity of pain following corneal abrasions and surgeries to a greater
extent than placebo. ADL 2-1294 resulted in a 58% reduction of pain, and this
effect was statistically significant (P=0.05). In addition, a Phase II pilot
study suggested that topical administration of ADL 2-1294 was as effective as
topical morphine in reducing corneal pain. Some patients experienced transient
stinging associated with administration of eye drops containing ADL 2-1294. We
believe that the efficacy of ADL 2-1294 can be improved by optimizing its
formulation.

  Dermal pain

  Dermal pain may be caused by trauma, burns, abrasions or surgical
procedures. Minor dermal pain is currently treated with over-the-counter
medications containing emollients or local anesthetics. Moderate-to-severe
dermal pain is frequently treated with NSAIDs or narcotic analgesics. We
believe that a topical formulation of ADL 2-1294 for dermal pain may produce
greater analgesia with fewer side effects than existing medications. Data from
the CDC indicate that there are 14.5 million annual cases of dermal pain
requiring emergency room treatment that we believe will comprise our potential
patient population for a topical ADL 2-1294 dermal analgesic product.

  Development stage. Topically applied ADL 2-1294 was determined to be safe
and had preliminary analgesic efficacy in our Phase I safety and efficacy burn
pain trials. These two Phase I studies demonstrated statistically significant
analgesic efficacy in burn pain (P<0.05) without dermal or systemic side
effects. We initiated a Phase II study evaluating efficacy in treating pain
associated with skin graft surgery but stopped the study because of slow
enrollment.

  Based in part on preliminary data generated in our Phase I trials, an
affiliate of GlaxoSmithKline licensed the rights to develop and market ADL 2-
1294 topical formulations for dermal pain.

  Dermal itch

  Dermal itch results from eczema, allergic dermatitis, or exposure to harsh
chemicals or plants. Minor dermal itch is currently treated with over-the-
counter medications containing emollients, local anesthetics, antihistamines,
or corticosteroids. Local anesthetics may be irritating to the skin and
corticosteroids cause skin thinning and other adverse effects with chronic
use. Moderate-to-severe itch is frequently treated with prescription
corticosteroids or with oral antihistamines, both of which may cause serious
side effects when used acutely or chronically, including sedation and adverse
effects on the immune system and on the regulation of normal body hormones.

  We believe that a topical formulation of ADL 2-1294 for dermal itch may have
greater efficacy and produce fewer side effects than existing medications. ADL
2-1294 may be prepared in different formulations for use in both the
prescription and over-the-counter drug markets. Data from the CDC indicate
that there are 14 million annual cases of chronic dermal itch that we believe
will comprise our potential patient population for a dermal ADL 2-1294 anti-
itch product.

  Development stage. Based in part on preliminary data generated in our Phase
I trials, an affiliate of GlaxoSmithKline licensed the rights to develop and
market ADL 2-1294 formulations for a topical ADL 2-1294 dermal anti-itch
product.

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<PAGE>

  Joint pain

  Joint pain after arthroscopic surgery limits mobility and recovery.
Injection of morphine into a joint can reduce pain and speed recovery from
arthroscopic surgery. ADL 2-1294 demonstrated analgesic efficacy in
preclinical studies of joint pain. We have incorporated ADL 2-1294 into two
prototypic formulations suitable for delivery to joints following surgical
procedures. These formulations may also provide benefits after injection into
painful inflamed joints as an alternative to cortisone therapy. In addition,
preclinical safety studies found no dose-limiting side effects that would
prevent advancement into clinical development. Recent market research
indicates that, in the United States, there are 1.1 million outpatient
arthroscopic knee surgical procedures and 2.7 million patients who receive
local injections of corticosteroids for joint pain that we believe will
comprise our potential patient population for a long-acting analgesic
injectable product.

  Development stage. This product is in preclinical development.

 Centrally-Active Oral Analgesics

  We expect centrally-acting narcotic analgesics to be more effective than
peripheral opioid analgesics in a number of non-inflammatory painful
conditions such as nerve damage or neuropathic pain as well as most cancer
pain. However, morphine and other narcotic analgesics have dose-limiting side
effects that limit their effectiveness. One of our longer-term goals is to use
our technology to create centrally-acting opioid analgesics with significantly
fewer side effects or greater efficacy to more effectively treat non-
inflammatory indications that would be particularly responsive to opioid
analgesics. We are developing an opioid combination product that we expect to
have fewer side effects than currently marketed centrally-acting narcotic
analgesics. We believe this product will provide significant advances on
current narcotic analgesic therapy.

  ADL 8-2698 Combination With Narcotic Opioid Analgesic

  GI side effect-free narcotic analgesic

  Acute nausea or vomiting occurs in up to 33% of patients who receive oral
narcotic analgesics and in up to 80% of patients who receive injectable
narcotic analgesics following surgery or trauma. This is due in part to direct
effects of narcotic analgesics on the GI tract. Data from one of our Phase I
clinical trials suggested that ADL 8-2698 may reduce the severity of nausea
caused by morphine. We believe that a single capsule combining both ADL 8-2698
and a short acting oral narcotic analgesic, in a fixed dose, will produce a
new narcotic analgesic combination product that produces less nausea and
vomiting than currently available narcotic analgesics.

  Development stage. A Phase I clinical trial suggested a trend for reduced
severity of morphine-induced nausea, but the difference was not statistically
significant (P=0.07). Data from our Phase II post-operative ileus trial showed
that the higher dose of ADL 8-2698 produced more than a 50% reduction in
moderate to severe post-operative nausea compared to placebo-treated patients
(P=0.003) and that it completely eliminated post-operative vomiting (P=0.026)
in patients receiving intravenous narcotic analgesics for post-operative pain
control. We recently conducted a Phase I clinical trial to evaluate the
ability of ADL 8-2698 to block morphine-induced nausea, but the amount of
nausea experienced by both placebo and drug treated subjects in this trial was
much lower than expected and insufficient to make any conclusions about the
effectiveness of ADL 8-2698. We plan to repeat this study with a revised
protocol designed to produce more narcotic-induced nausea in order to
determine the effectiveness of ADL 8-2698 in reducing narcotic analgesic-
induced nausea.

Commercialization Strategy

  We have developed a balanced commercialization strategy that combines
utilizing strategic alliances with major pharmaceutical partners to access
broad distribution networks or markets outside the United States with a
combination of co-promotion agreements with major pharmaceutical companies and
our marketing and sales activities inside the United States. We intend to
develop a sales and marketing management team and may use a

                                      13
<PAGE>

contract sales force for marketing certain of our products to focused market
segments including surgeons, hospitals, oncologists and pain management
specialists.

  We pursue strategic relationships that are intended to offer us independence
and flexibility in the development and commercialization of our products. We
have chosen to license technology to major pharmaceutical companies that have
broad marketing capabilities in therapeutic areas outside of our focus and to
companies in geographic areas where we do not expect to have direct sales
capabilities.

Our Strategic Relationships

 GlaxoSmithKline Affiliate

  In July 1999, we licensed worldwide rights (excluding South Korea and North
Korea) to the development and commercialization of our product candidate ADL
2-1294 to SB Pharmaco Puerto Rico Inc., an affiliate of GlaxoSmithKline, for
the topical indications of dermal pain and itch. We retain the prescription
rights to ADL 2-1294 for certain topical dermal indications as well as rights
outside the topical dermal field, including ophthalmic, mucosal, post-
operative and joint pain indications.

  Under the license agreement, we received a $500,000 up-front license fee. In
the event that ADL 2-1294 receives regulatory approval in the United States,
the European Union and Japan for a total of at least six clinical indications
and is successfully launched commercially in prescription and over-the-counter
forms in each of those jurisdictions, we would be entitled to up to $38.5
million of milestone payments prior to 2018. We could also earn additional
milestone payments of up to $6.0 million in the event that an additional six
indications using ADL 2-1294 are developed and approved for sale in the United
States, the European Union or Japan. Achieving these milestones is subject to
numerous uncertainties, including risks related to product development and
testing, regulatory approval and market acceptance. In addition, we will
receive royalties based on product sales, if any. SB Pharmaco will be
responsible for all development costs.

  SB Pharmaco can terminate the agreement on a country by country basis, in
its entirety, or on a product by product basis if it determines that the
product is not marketable in a specified territory. Upon termination in this
circumstance, all of the rights granted to SB Pharmaco under the license
agreement in the relevant country or for the relevant product will terminate
and revert to us.

  In connection with this collaboration, S.R. One, Limited, an affiliate of
GlaxoSmithKline purchased $2.5 million in series F mandatorily redeemable
preferred stock, and we granted S.R. One a warrant to purchase shares of
preferred stock convertible into an aggregate of 25,000 shares of common stock
for an aggregate exercise price of $125,000. The warrant was exercised in
connection with the closing of our initial public offering. S.R. One also
agreed to purchase an additional $500,000 of our common stock upon the
successful completion of the second pivotal clinical trial for the first
prescription or over-the-counter product candidate under our license agreement
with SB Pharmaco.

 Santen Pharmaceutical Co., Ltd.

  On April 25, 2000, we entered into a license agreement with Santen
Pharmaceutical Co., Inc. granting Santen an exclusive royalty bearing license
to develop and sell products in the field of ophthalmic pain in all countries
other than South and North Korea. Santen will pay us royalties on annual net
sales of the products. Santen will pay us $1,000,000 when gross sales in major
markets achieve $75,000,000 and an additional payment of $1,500,000 when
aggregate sales achieved is $150,000,000. A $500,000 payment was paid to us
upon execution of agreement.

  We retain the exclusive right to market and sell products, if any, developed
under the development and license agreement in the United States to hospitals
for emergency room physicians, and we retain a co-exclusive right with Santen
to market and sell products, if any, in the United States to hospitals other
than for emergency room physicians.

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<PAGE>

  Under the development and license agreement, we will receive up to an
aggregate $5.5 million from milestone payments upon the satisfaction of
certain clinical and regulatory milestones. In addition, we will receive
royalties based on product sales, if any, and may receive up to an aggregate
$2.5 million in sales bonuses if Santen reaches certain sales targets.

  Santen can terminate the agreement for any reason upon 60 days written
notice. If Santen terminates the license agreement, all of the rights granted
to Santen will terminate and revert to us. In addition, we have the right to
use Santen technology under terms negotiated in good faith.

 Shire Pharmaceuticals, plc

  In June 1998, we entered into a license agreement with Roberts Laboratories
Inc. under which we licensed the compound that is the basis of our ADL 8-2698
product candidates. Roberts recently merged with Shire Pharmaceuticals, plc.
Roberts had licensed the compound from Eli Lilly and Company in November 1996.
The license agreement affords us an exclusive worldwide license to make, use,
sell or import the compound.

  Under the license agreement, we paid a $300,000 up-front license fee to
Roberts, and Roberts is entitled to receive milestone payments upon the
satisfaction of certain clinical and regulatory milestones. In addition, we
are required to pay Eli Lilly a milestone payment on behalf of Roberts. Both
Roberts and Eli Lilly will receive royalties based on product sales, if any.
We will be responsible for all development costs. In 1999, we paid $300,000 to
Roberts to exercise certain licensing rights as defined in the agreement. We
may pay up to $1.9 million in additional future milestone payments under this
agreement.

  Eli Lilly consented to the assignment by Roberts to us of Roberts' rights
and obligations of Roberts' license agreement with Eli Lilly.

  The agreement expires upon the later of either the life of the last to
expire of Lilly's patents encompassing the licensed compound or fifteen years
from November 5, 1996. Upon expiration of the agreement, we will have a fully
paid up license.

Other Relationships

  In November 1997, we entered into a license agreement with Kwang Dong
Pharmaceutical Co., Ltd. relating to the development and commercialization in
South Korea and North Korea of our product candidate ADL 2-1294 for the
indication of topical dermal pain. In addition, in November 1997, we entered
into a stock purchase agreement with Kwang Dong pursuant to which Kwang Dong
purchased for $1.2 million, 960,000 shares of our series D convertible
preferred stock. The license agreement with Kwang Dong provides for, among
other things, our transfer to Kwang Dong of technology and data developed by
us relating to the topical formulation of ADL 2-1294. We devoted significant
internal efforts and expenditures to the development of a formulation for this
indication. To date, we have not transferred sufficient technology under the
license agreement to allow commercialization of ADL 2-1294 in South and North
Korea. As a result, we do not anticipate material revenues under the license
agreement in the foreseeable future. In July 1999, we entered into an
agreement with SB Pharmaco for the worldwide (excluding South Korea and North
Korea) development and commercialization of ADL 2-1294 for the topical
indications of dermal pain and itch.

  We have licensed technology from academic institutions and entities
including the University of California at Los Angeles, the University of
California at San Diego, the University of Minnesota, Oregon Health Sciences
University and Arch Development Corporation.

  We licensed from the University of California at Los Angeles the right to
use cloned delta opioid receptors to discover new drugs. The term of the
license agreement is tied to the lifetime of the valid and existing patents
licensed under the agreement and is currently expected to expire in 2016.

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<PAGE>

  We licensed from the University of California at San Diego the right to
develop and commercialize ADL 2-1294, loperamide, as a peripheral opioid
analgesic for pain. The term of the license agreement is tied to the lifetime
of the valid and existing patents licensed under the agreement and is
currently expected to expire in 2015.

  We licensed from the University of Minnesota the right to develop and
commercialize peripheral kappa opioid analgesics discovered at the University
of Minnesota. The term of the license agreement is tied to the lifetime of the
valid and existing patents licensed under the agreement and is currently
expected to expire in 2017.

  We licensed from Oregon Health Sciences University the right to use the
human orphanin FQ opioid receptor ligand in our research program. The license
expires in 2015.

  We licensed from Arch Development Corporation the right to use cloned
mammalian kappa receptors to discover new drugs. The term of the license
agreement is tied to the lifetime of the valid and existing patents licensed
under the agreement and is currently expected to expire in 2017.

Competition

  Our success will depend, in part, upon our ability to achieve market share
successfully at the expense of existing and established products in the
relevant target markets. We believe that our ability to compete successfully
is based on our technical expertise in peripheral opioid analgesia and our
ability to maintain advanced scientific technologies, to develop a
differentiated product pipeline, to obtain successful regulatory approval for
novel pain management pharmaceuticals, and to sustain patent protection for
our portfolio.

  Many companies currently sell either generic or proprietary narcotic
analgesic formulations. In addition, a number of technologies are being
developed to increase narcotic analgesic potency as well as to provide
alternatives to narcotic analgesic therapy for pain management. Several of
these technologies are in clinical trials or are awaiting approval from the
FDA. Several potential competitors are developing new products for the
treatment of opioid bowel dysfunction.

  Merck KGA is developing asimadoline (Phase II) as a peripherally selective
kappa opioid analgesic for the treatment of pain associated with arthritis.

  The University of Chicago is sponsoring clinical studies of
methylnaltrexone, a peripheral mu opioid receptor antagonist, under a
physician-sponsored IND. We do not know of any commercial organization that is
developing this product.

  There may be additional competitive products about which we are not aware.

Intellectual Property

  We seek United States and international patent protection for major
components of our technology. We also rely on trade secret protection for
certain of our confidential and proprietary information, and we use license
agreements both to access external technologies and assets and to convey
certain intellectual property rights to others. Our commercial success will be
dependent in part on our ability to obtain commercially valuable patent claims
and to protect our intellectual property portfolio.

  As of December 31, 2000, we owned or had rights, whether by geography, by
field or otherwise, to approximately 42 issued patents, of which 25 are issued
in the United States, and we owned 17 United States patent applications and
numerous foreign patent applications relating to technologies used in our
business.

  We have or have licensed patents and patent applications related to (i) ADL
2-1294, (ii) peripheral kappa analgesics, (iii) ADL 8-2698 and (iv) opioid
receptors and ligands. The patents related to ADL 2-1294 expire

                                      16
<PAGE>

between 2015 and 2018. The patents related to kappa receptor analgesics expire
between 2016 and 2019. The patents related to ADL 8-2698 expire between 2011
and 2013. The patents related to opioid receptors and ligands expire in 2016.
These expiration dates are all based on the presumption that the applicable
maintenance fees are paid and the patents are not held to be invalid.

  The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including ours, are generally uncertain and involve complex legal
and factual questions. Our business could be hurt by any of the following:

  .  the pending patent applications to which we have rights may not result
     in issued patents;

  .  the claims of any patents which are issued may not provide meaningful
     protection;

  .  we may not be successful in developing additional proprietary
     technologies that are patentable;

  .  patents licensed or issued to us or our customers may not provide a
     basis for commercially viable products or provide us with any
     competitive advantages and may be challenged by third parties; and

  .  others may have patents that relate to our technology or business.

  In addition, patent law relating to the scope of claims in the technology
field in which we operate is still evolving. The degree of future protection
for some of our rights, therefore, is uncertain. Furthermore, others may
independently develop similar or alternative technologies, duplicate any of
our technologies, and if patents are licensed or issued to us, design around
the patented technologies licensed to or developed by us. In addition, we
could incur substantial costs in litigation if we have to defend ourselves in
patent suits brought by third parties or if we initiate such suits.

  Enactment of legislation implementing the General Agreement on Tariffs and
Trade has resulted in certain changes to United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of 17
years from the date of issuance. The new term of United States patents will
commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years,
a 20-year term from the effective date of filing may result in a substantially
shortened period of patent protection which may harm our patent position. If
this change results in a shorter period of patent coverage, our business could
be harmed to the extent that the duration and level of the royalties we are
entitled to receive from our partners are based on the existence of a valid
patent covering the product subject to the royalty obligation.

  With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade secret
protection and confidentiality agreements to protect our interests. We believe
that several elements of our drug discovery system involve proprietary know-
how, technology or data that are not covered by patents or patent
applications. We have taken security measures to protect our proprietary know-
how and technologies and confidential data and continue to explore further
methods of protection. While we require all employees, consultants and
potential business partners to enter into confidentiality agreements, we
cannot be certain that proprietary information will not be disclosed, that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets, or
that we can meaningfully protect our trade secrets. In the case of
arrangements with our potential business partners that require the sharing of
data, our policy is to make available to our potential business partners only
such data as is relevant to our agreements with such customers, under
controlled circumstances, and only during the contractual term of those
agreements, and subject to a duty of confidentiality on the part of our
customer. However, such measures may not adequately protect our data. Any
material leak of confidential data into the public domain or to third parties
may cause our business, financial condition and results of operations to be
harmed.

  We are a party to various license agreements that give us rights to use
technologies and biological materials in our research and development
processes. We may not be able to maintain such rights on commercially
reasonable terms, if at all. Failure by us to maintain such rights could harm
our business.

                                      17
<PAGE>

Manufacturing

  We own no manufacturing facilities. We contract with qualified third parties
for the manufacture of bulk active pharmaceutical ingredients and production
of clinical/commercial supplies. The ingredients and supplies comply with
current good manufacturing practices procedures reviewed by the FDA (cGMPs).
We have entered into an agreement with Oread Laboratories, Inc. under which
Oread is manufacturing the ADL 8-2698 active pharmaceutical ingredient. We
have also engaged Torcan Chemical Ltd. for production of clinical and
commercial supplies of ADL 8-2698 for backup or expansion of our commercial
manufacturing program.

  We have contracted with Pharmaceutics International Inc. for supply of
finished product and packaging of ADL 8-2698.

  We maintain confidentiality agreements with potential and existing contract
manufacturers for both active drug and formulated product in order to protect
our proprietary rights. Earlier stage new chemical entities are synthesized in
our laboratories, and scaleup quantities and good manufacturing practices
materials for preclinical toxicology evaluations are conducted by qualified
third parties in strict compliance with cGMPs.

Government Regulation

  In the United States, pharmaceutical products intended for therapeutic or
diagnostic use in humans are subject to rigorous FDA regulation. The process
of completing clinical trials and obtaining FDA approvals for a new drug is
likely to take a number of years and require the expenditure of substantial
resources. There can be no assurance that any product will receive FDA
approval on a timely basis, if at all.

 The drug approval process

  The usual steps required before a new pharmaceutical product for use in
humans may be marketed in the United States include:

  .  preclinical studies,

  .  submission to the FDA of an Investigational New Drug application (IND),
     which must become effective before human clinical trials commence,

  .  adequate and well-controlled human clinical trials to establish the
     safety and efficacy of the product,

  .  submission to the FDA of a New Drug Application (NDA), and

  .  FDA approval of the NDA prior to any commercial sale or shipment of the
     product.

  Preclinical studies include laboratory evaluation of product chemistry and
formulation, as well as preclinical studies, to assess the potential safety
and efficacy of the product. The results of the preclinical studies are
submitted to the FDA as a part of an IND and are reviewed by the FDA prior to
the commencement of human clinical trials. Unless the FDA objects to, or
otherwise responds to, an IND submission, the IND becomes effective 30 days
following its receipt by the FDA.

  Human clinical trials are typically conducted in three sequential phases
that may overlap:

  .  Phase I: The drug is initially introduced into healthy human subjects or
     patients and tested for safety, dosage tolerance, absorption,
     metabolism, distribution and excretion. In addition, it is sometimes
     possible to assess efficacy in Phase I trials for analgesia.

  .  Phase II: This phase involves studies in a limited patient population to
     identify possible adverse effects and safety risks, to determine the
     efficacy of the product for specific targeted diseases and to determine
     dosage tolerance and optimal dosage.

  .  Phase II/III: Data from Phase II clinical trials can be considered to
     fulfill Phase III criteria in certain situations. This can occur when a
     dose tested in a Phase II study is proven to be the optimal dose and
     this dose is also statistically more effective than placebo.
     Classification of the data as Phase III can only be determined after the
     study is complete and the data analyzed.

                                      18
<PAGE>

  .  Phase III: When Phase II evaluations demonstrate that a dosage range of
     the product is effective and has an acceptable safety profile, Phase III
     trials are undertaken to further evaluate dosage, clinical efficacy and
     to further test for safety in an expanded patient population at
     geographically dispersed clinical study sites.

  Scientists use statistical techniques to compare responses produced by drugs
versus placebos in clinical trials of drug effectiveness. Statistical analyses
estimate the probability that a positive effect is actually produced by the
drug. This probability is expressed as a "P-value" which refers to the
likelihood that a drug response occurred just "by chance." When a P-value is
reported as P<0.05, the probability that the drug produced its effect "by
chance" is less than 5% and the probability that the drug produced a
reproducible positive effect is greater than 95%. When a P-value is reported
as P<0.01, the probability that the drug produced the positive effect is
greater than 99%. These values are reported in several instances above to
indicate how certain we are that we have obtained beneficial responses in our
clinical drug trials. P-values greater than 0.05 and equal to or less than
0.10 are generally not considered statistically significant by themselves but
may indicate a strong trend in data that provide support for further clinical
research.

 Efficacy studies for analgesics

  Analgesic efficacy can initially be assessed in Phase I clinical trials.
Human experimental pain models represent an important link between preclinical
research and clinical trials in patients. We use validated human experimental
pain models, such as the burn pain model, to evaluate efficacy of our products
during some of our Phase I clinical trials. Historical results from
preclinical and earlier clinical trials may not be predictive of the results
of later trials.

  For analgesic drugs, Phase II efficacy studies have sometimes served as
pivotal studies. Phase III studies for these products normally focus greater
attention on safety in larger patient populations rather than on efficacy.
There can be no assurance that Phase I, Phase II, or Phase III testing will be
completed successfully within any specified time period, if at all, with
respect to any of our products subject to such testing. Furthermore, the FDA
may suspend clinical trials at any time if there is concern that the
participants are being exposed to an unacceptable health risk.

  The results of pharmaceutical development, preclinical studies, and clinical
trials are submitted to the FDA in the form of an NDA for approval of the
marketing and commercial shipment of the product. The FDA may require
additional testing or information before approving the NDA. The FDA may deny
an NDA approval if safety, efficacy, or other regulatory requirements are not
satisfied. Moreover, if regulatory approval of the product is granted, such
approval may require post-marketing testing and surveillance to monitor the
safety of the product or may entail limitations on the indicated uses for
which the product may be marketed. Finally, product approval may be withdrawn
if compliance with regulatory standards is not maintained or if problems occur
following initial marketing.

 Other regulatory requirements

  The FDA mandates that drugs be manufactured in conformity with GMP
regulations. If approval is granted, requirements for labeling, advertising,
record keeping and adverse experience reporting will apply. Failure to comply
with these requirements could result, among other things, in suspension of
regulatory approval, recalls, injunctions or civil or criminal sanctions. We
may also be subject to regulations under other federal, state, and local laws,
including the Occupational Safety and Health Act, the Environmental Protection
Act, the Clean Air Act, national restrictions on technology transfer, and
import, export, and customs regulations. In addition, any of our products that
contains one of our product candidates in combination with narcotic analgesics
will be subject to DEA regulations relating to manufacturing, storage,
distribution and physician prescribing procedures. There can be no assurance
that any portion of the regulatory framework under which we currently operate
will not change and that such change will not have a material adverse effect
on our current and anticipated operations.

                                      19
<PAGE>

  Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign countries
must be obtained prior to the commencement of clinical trials and subsequent
sales and marketing efforts in those countries. The approval procedure varies
in complexity from country to country, and the time required may be longer or
shorter than that required for FDA approval.

  The Controlled Substances Act imposes various registration, record-keeping
and reporting requirements, procurement and manufacturing quotas, labeling and
packaging requirements, security controls and a restriction on prescription
refills on certain pharmaceutical products. A principal factor in determining
the particular requirements, if any, applicable to a product is its actual or
potential abuse profile. A pharmaceutical product may be "scheduled" as a
Schedule I, II, III, IV or V substance, with Schedule I substances considered
to present the highest risk of substance abuse and Schedule V substances the
lowest.

Employees

  As of December 31, 2000, we had 56 full-time employees and two part-time
employees, including 15 employees with Ph.D. or M.D. degrees. Thirty-six of
our employees are engaged in research and development activities. Most of our
senior management and professional employees have had prior experience in
pharmaceutical or biotechnology companies. None of our employees is covered by
collective bargaining agreements. We believe that our relations with our
employees are good.

ITEM 2. PROPERTIES

  We currently occupy three suites with a combined 24,340 square feet of
leased office and laboratory space in Malvern, Pennsylvania. The leases expire
in November 2001 and October 2004, and we have an option to renew the leases.
We also occupy approximately 20,000 square feet of additional office space in
Exton, Pennsylvania, which accommodates our product development and
administrative staff. The lease expires in October 2002. We believe that these
facilities will be adequate to meet our near-term space requirements and that
suitable additional space will be available to use, when needed, on
commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

  We are not a party to any legal proceedings.

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

  As of October 11, 2000, our stockholders approved the following actions by
written consent in accordance with the procedure established in Section 228 of
the Delaware General Corporation Law.

    (a) a reverse stock split at the rate of one (1) share of Common Stock
  for every five (5) shares of Common Stock in issue as of the close of
  business on the record date;

    (b) restatement of our Amended and Restated Certificate of Incorporation
  providing for the reverse stock split and a new class of preferred
  securities;

    (c) amendment of our Amended and Restated 1994 Equity Compensation Plan
  which provides that the total number of shares subject to options granted
  under that Plan may not exceed 3,950,000; and

    (d) ratification of our prior authorization to take any steps deemed
  necessary, appropriate or advisable in preparation for the initial public
  offering as recommended by the Board of Directors.

                                      20
<PAGE>

  The number of votes cast for, against and withheld from the Written Consent
of Stockholders is set forth below.

<TABLE>
<CAPTION>
     Class of Stock                                    For     Against Withheld
     --------------                                 ---------- ------- ---------
   <S>                                              <C>        <C>     <C>
   Common Stock....................................  8,534,996     0   1,615,025
   Series A Preferred Stock........................  6,000,000     0           0
   Series B Preferred Stock........................ 22,958,335     0     148,810
   Series C Preferred Stock........................ 13,814,286     0           0
   Series E Preferred Stock........................ 11,366,367     0           0
   Series F Preferred Stock........................  2,625,000     0           0
   Series G Preferred Stock........................ 11,756,000     0     550,000
   Series H Preferred Stock........................ 20,588,235     0   3,333,190
</TABLE>

                                    PART II

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

  (a) Our common stock is traded on the Nasdaq National Market under the
symbol "ADLR". The initial public offering of our stock occurred on November
13, 2000 at an initial price of $15.00 per share. The price range per share
reflected in the table below is the highest and lowest sale price for our
stock as reported by the Nasdaq National Market during each quarter our common
stock has been publicly traded.

<TABLE>
<CAPTION>
                                                                  Period From
                                                               November 13, 2000
                                                                    Through
                                                               December 31, 2000
                                                               -----------------
   <S>                                                         <C>
   Price range per share:
     Low......................................................      $14.875
     High.....................................................      $24.625
</TABLE>

  As of March 26, 2001, the last reported sale price for our common stock on
the Nasdaq National Market was $17.625 per share.

  (b) Holders. As of March 26, 2001, there were approximately 144 holders of
record of our common stock.

  (c) Dividends. We have never declared or paid cash dividends on our capital
stock, and we do not intend to pay cash dividends in the foreseeable future.
We plan to retain any earnings for use in the operation of our business and to
fund future growth.

  (d) Sale of Unregistered Securities.

    (1) In January 2000, we issued an aggregate of 12,306,000 shares of
  series G mandatorily redeemable convertible preferred stock at a purchase
  price of $1.00 per share, for aggregate consideration of $12,306,000. Of
  that amount, we issued 250,000 shares to Technology Leaders II, L.P. Dr.
  Moller, one of our directors, is the managing director of the general
  partner of the general partner of Technology Leaders II, L.P. We also
  issued 2,500,000 shares to ARCH Venture Fund III, L.P. Mr. Nelsen, a
  director of ours, is the general partner of the general partner of the
  general partner of ARCH Venture Fund III, L.P. We also issued 273,000
  shares to WPG Enterprise Fund II, L.L.C. and 227,000 shares to Weiss, Peck
  & Greer Venture Associates III, L.L.C. Ms. Feeney, one of our directors,
  was nominated to our board by Weiss, Peck & Greer Venture Partners III, the
  Fund Investment Advisory Member of WPG Enterprise Fund II, L.L.C. and
  Weiss, Peck & Greer Venture Associates III, L.L.C., and was a general
  partner of Weiss, Peck & Greer Venture Partners, from 1989 to 1999. On the
  closing of the initial public offering, the series G preferred stock
  automatically converted into 2,461,000 shares of common stock.

                                      21
<PAGE>

    (2) In July 2000, we issued an aggregate of 23,921,425 shares of series H
  mandatorily redeemable convertible preferred stock at a purchase price of
  $1.53 per share, for aggregate consideration of $36,600,000. Of that
  amount, we issued 163,399 shares to ARCH Venture Fund III, L.P. Mr. Nelsen,
  a director of ours, is the general partner of the general partner of the
  general partner of ARCH Venture Fund III, L.P. We also issued 36,425 shares
  to Technology Leaders II, L.P. and 28,934 shares to Technology Leaders II
  Offshore C.V. Dr. Moller, one of our directors, is the managing director of
  the general partner of the general partner of both of these entities. We
  also issued 65,359 shares to S.R. One Limited, an affiliate of
  GlaxoSmithKline. On the closing date of our initial public offering, the
  Series H preferred stock automatically converted into an aggregate of
  4,784,285 shares of common stock.

    (3) The sale and issuance of securities in the transactions described
  above were exempt from registration under the Securities Act in reliance on
  Section 4(2) of the Securities Act as transactions by an issuer not
  involving a public offering, where the purchasers were sophisticated
  investors who represented their intention to acquire securities for
  investment only and not with a view to distribution and received or had
  access to adequate information about the Company, or in reliance on Rule
  701 promulgated under the Securities Act.

  (e) Use of Proceeds From Registered Securities.

  In our initial public offering, we sold 6,000,000 shares of our common stock
on November 14, 2000. Upon the exercise of the underwriter's over-allotment
option, we sold an additional 900,000 shares of common stock. The effective
date of the registration statement on Form S-1 for the 6,900,000 shares of
common stock sold in our initial public offering was November 13, 2000 and the
file number is 333-96333. The managing underwriters of our initial public
offering were Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman
Brothers Inc. and Pacific Growth Equities, Inc.

  The price to the public of the 6,900,000 shares of common stock sold in our
initial public offering was $15.00 per share and the gross proceeds were
$103,500,000. The total underwriting discounts and commissions were
$7,245,000. The net proceeds were $95,376,000. The total costs and expenses
incurred in the offering, exclusive of the underwriting discount, were
approximately $879,000.

  We are using the net proceeds for general corporate purposes, including the
continued development of existing product candidates, manufacturing,
commercialization expenditures, research and development for additional
product opportunities, hiring of sales, marketing, development, research and
administrative personnel, expansion of our facilities and working capital. We
may also use a portion of the net proceeds to acquire or invest in businesses,
products or technologies that are complementary to our own.

 Options to Purchase Common Stock

  We have granted from time to time stock options to our employees, directors,
advisory board members and certain employees of our partner companies. For the
year ended December 31, 2000, options to purchase 1,748,635 shares of our
common stock were granted at a weighted average exercise price of $2.82 per
share.

ITEM 6. SELECTED FINANCIAL DATA

  The following selected financial data should be read in conjunction with our
consolidated financial statements and the related notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Report. The consolidated statement of operations
data except as otherwise indicated below for the three years ended December
31, 2000, and as of December 31, 1999 and 2000, are derived from our audited
financial statements which are included elsewhere in this Report. The
statement of operations data for the years ended December 31, 1996 and 1997
and the balance sheet data as of December 31, 1996, 1997 and 1998 are derived
from audited financial statements not included in this Report. Historical
results are not necessarily indicative of the results to be expected in the
future and should be read in conjunction with the financial statements and
notes thereto that are incorporated by reference into this Report.

                                      22
<PAGE>

  Please see Note 2 to our consolidated financial statements for an
explanation of the method used to calculate the net loss allocable to common
stockholders, net loss per share and the number of shares used in the
computation of per share amounts.

<TABLE>
<CAPTION>
                                         Years Ended December 31,
                                -----------------------------------------------
                                 1996      1997      1998      1999      2000
                                -------  --------  --------  --------  --------
                                   (In thousands, except per share data)
<S>                             <C>      <C>       <C>       <C>       <C>
Consolidated Statements of
 Operations
Grant and license revenues....  $   --   $    --   $    150  $     11  $     44
Operating expenses incurred
 during the development stage:
Research and development......    3,695     3,700     7,074     7,398    15,884
General and administrative....      649     1,585     2,277     3,698     7,626
                                -------  --------  --------  --------  --------
Total operating expenses......    4,344     5,285     9,351    11,096    23,510
                                -------  --------  --------  --------  --------
Net interest income
 (expense)....................      272       486       385       404     2,228
                                -------  --------  --------  --------  --------
Net loss......................   (4,072)   (4,799)   (8,816)  (10,681)  (21,238)
Beneficial conversion feature
 on mandatorily redeemable
 convertible preferred stock..      --        --        --        --     48,906
Undeclared dividends
 attributable to mandatorily
 redeemable convertible
 preferred....................      764     1,408     1,704     2,430     4,103
                                -------  --------  --------  --------  --------
Net loss allocable to common
 stockholders.................  $(4,836) $ (6,207) $(10,520) $(13,111) $(74,247)
                                =======  ========  ========  ========  ========
Basic and diluted net loss per
 share allocable to common
 stockholders.................  $ (6.31) $  (6.80) $ (10.59) $ (12.55) $ (13.99)
Shares used in computing basic
 and diluted net loss per
 share allocable to common
 stockholders.................      766       912       993     1,045     5,307
<CAPTION>
                                            As of December 31,
                                -----------------------------------------------
                                 1996      1997      1998      1999      2000
                                -------  --------  --------  --------  --------
                                              (In thousands)
<S>                             <C>      <C>       <C>       <C>       <C>
Consolidated Balance sheet
 data
Cash, cash equivalents and
 short-term investments.......  $ 5,071  $ 10,710  $ 12,046  $  5,264  $131,630
Working capital...............    4,378     9,670    10,024     3,069   128,671
Total assets..................    5,738    11,508    12,773     6,258   135,610
Total long-term debt .........      255       174        66       --        215
Mandatorily redeemable
 convertible preferred stock..   11,105    21,375    30,475    33,000       --
Deficit accumulated during the
 development stage............   (6,708)  (11,507)  (20,322)  (31,004)  (52,242)
Total stockholders' equity
 (deficit)....................   (6,568)  (11,264)  (19,913)  (29,590)  129,040
</TABLE>

                                      23
<PAGE>

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

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

  The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the notes to those statements included elsewhere in this
Report. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated by forward-looking information due to factors discussed
under""Item 1. Business" elsewhere in this Report.

Overview

  We have devoted substantially all of our resources since we began our
operations in November 1994 to the discovery and development of proprietary
pharmaceutical products for the treatment of pain and the side effects that
are caused by current pain treatments. 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 $52.2 million through December 31, 2000.
These losses have resulted principally from costs incurred in research and
development activities and general and administrative expenses. We have four
product candidates in Phase III or Phase II clinical trials and several
compounds in Phase I clinical trials and preclinical studies.

  Our revenues in the near term are expected to consist primarily of milestone
payments on certain of our product candidates licensed to others for
development. The most significant of these licenses is to an affiliate of
GlaxoSmithKline for the development of ADL 2-1294 for topical treatment of
dermal pain and itch. We also have a license with Santen Pharmaceutical Co.,
Ltd. for the development of ADL 2-1294 for the treatment of ophthalmic pain.
These payments are dependent on continued development and achievement of
certain clinical and regulatory milestones by licensees and will not, in any
event, be material relative to our operating expenses. In the event that our
development efforts or those of our licensees result in regulatory approval
and successful commercialization of our product candidates, we will generate
revenues from sales of our products and from the receipt of royalties on sales
of licensed products. Product revenues will depend on our ability to receive
regulatory approvals for, and successfully market, our product candidates.

  We expect to incur additional operating losses for at least the next several
years. Research, development and clinical trial costs relating to product
candidates will continue to increase. Manufacturing, marketing and sales costs
will increase as we prepare for the commercialization of ADL 8-2698 which,
assuming regulatory approval, we expect to occur in 2003.

  We intend to expand our marketing activities in 2001 and 2002 in preparation
for the establishment of a sales force for our product candidates in the
United States. In international markets, we intend to rely on collaborations
with pharmaceutical companies to market and sell our product candidates rather
than establish our own sales force.

Milestone Payments, Royalties and License Fees

  We paid Roberts Laboratories, Inc., which recently merged with Shire
Pharmaceuticals, plc, a total of $600,000 through December 31, 2000 for the
exclusive worldwide license to ADL 8-2698. Our license agreement with Roberts
requires us to make payments to Roberts if and when two milestones are
achieved. Roberts licensed the rights to ADL 8-2698 from Eli Lilly, 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 ADL 8-2698.
We will be required to pay royalties to Eli Lilly and Roberts on any sales of
ADL 8-2698.

                                      24
<PAGE>

  Under an agreement with Oregon Health Sciences University, we paid Oregon
Health Sciences University a non-creditable, non-refundable license issuance
fee for a nonexclusive license for the use of patented inventions conceived
which relate to an opioid receptor. There are no other payments or royalties
under this agreement.

  Under an agreement with Arch Development Corporation, the technology
transfer office of the University of Chicago, we obtained an exclusive
worldwide license covering the nucleotide sequence encoding the mammalian
kappa opioid receptor and related opioid receptor technologies. We reimbursed
Arch Development Corporation for certain patent expenses incurred as of the
date of the agreement and will reimburse Arch Development Corporation for
future patent expenses. In addition we will make a license payment, milestone
payments and royalty payments on future net sales of products discovered, if
any, utilizing this technology.

Results of Operations

 Years Ended December 31, 2000 and 1999

  Grant and license revenues. Our grant and license revenues were $43,860 and
$10,965 for the year ended December 31, 2000 and 1999, respectively. Revenues
recognized for the year ended December 31, 2000 consisted of $26,316 which is
a portion of the $500,000 license fee received from an affiliate of
GlaxoSmithKline on signing that agreement in July 1999, and $17,544 which is a
portion of the $500,000 license fee received from Santen Pharmaceutical Co.,
Ltd. on signing that agreement in April 2000. Revenue recognized for the year
ended December 31, 1999 consisted of the portion of the affiliate of the
GlaxoSmithKline agreement signed in July 1999. These revenues are being
recognized on a straight line basis over the remaining life of the patents
that were licensed in those collaborations.

  Research and development expenses. Our research and development expenses
consist primarily of salaries and other personnel-related expenses, costs of
clinical trials, costs to manufacture drug candidates, stock-based
compensation and other research expenses. Research and development expenses
increased to approximately $15.9 million for the year ended December 31, 2000
from $7.4 million for the year ended December 31, 1999. This increase is
primarily due to the costs of developing our product candidates as well as
higher personnel costs resulting from increased personnel. In the year 2000,
the costs of conducting Phase I, Phase II and the initiation of Phase III
clinical trial activities and the costs of manufacturing the clinical trial
materials for ADL 8-2698 increased by approximately $4.9 million compared to
the same period in 1999. Personnel costs increased by approximately $1.6
million in the year ended December 31, 2000 compared to the same period in
1999. Amortization of deferred stock-based compensation expenses increased by
$1.7 million in the year ended December 31, 2000 compared to the same period
in 1999. However, clinical development costs for ADL 2-1294 were lower by
approximately $0.8 million for the year ended December 31, 2000 compared to
the same period in 1999 because the affiliate of GlaxoSmithKline and Santen
are now responsible for those costs.

  General and administrative expenses. Our general and administrative expenses
increased to approximately $7.6 million for the year ended December 31, 2000
from approximately $3.7 million in the same period in 1999, an increase of
$3.9 million. The increase is primarily due to approximately $1.2 million of
higher amortization of deferred stock-based compensation expense,
approximately $1.3 million for higher personnel expenses related to additional
personnel and approximately $1.1 million of expenses which were incurred in
connection with our postponed initial public offering in April 2000.

  Net interest income (expense). Our interest income increased from $424,667
for the year ended December 31, 1999 to $2.3 million for the year ended
December 31, 2000 due to investment returns on the proceeds from the sale of
our initial public offering in November 2000 and the sale of Series G and H
preferred stock in January 2000 and July 2000, respectively. Our interest
expense represents interest incurred on equipment financing facility and the
financing of insurance premiums.

  Net loss. Our net loss for the years ended December 31, 1999 and 2000 was
$10.7 million and $21.2 million, respectively. The increase in the net loss
reflects higher costs associated with the expansion of Phase II

                                      25
<PAGE>

clinical development and manufacturing costs for ADL 8-2698, increased
staffing levels and costs for the postponed initial public offering.

  Net loss allocable to common stockholders. Our net loss allocable to common
stockholders was approximately $13.1 million for the year ended December 31,
1999 compared to approximately $74.2 million in the same period of 2000. The
increase reflects the increase in the net loss of $10.5 million, an increase
in undeclared dividends and accretion of offering costs related to the
convertible preferred stock of $1.7 million and a beneficial conversion on
mandatorily redeemable Series G and H convertible preferred stock of $12.3
million and $36.6 million respectively.

  Beneficial Conversion Feature. In January 2000, we sold 12,306,000 shares of
mandatorily redeemable Series G convertible preferred stock for net proceeds
of $12.3 million. In July 2000, we sold 23,921,425 shares of mandatorily
redeemable convertible Series H preferred stock for net proceeds of $36.6
million. After evaluating the fair value of our common stock in contemplation
of the Company's initial public offering, we determined that the issuance of
the Series G and H convertible preferred stock resulted in a beneficial
conversion feature calculated in accordance with Emerging Issues Task Force
consensus No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features." Because the shares of Series G and H mandatorily
redeemable convertible preferred stock were issued below the deemed fair value
of our common stock, a beneficial conversion feature of $48.9 million was
reflected in calculating the net loss allocable to common shareholders for the
year ended December 31, 2000.

 Years Ended December 31, 1999 and 1998

  Grant and license revenues. Our grant and license revenues were $10,965 for
the year ended December 31, 1999 compared to $149,983 in the same period in
1998, a decrease of $139,018. The revenue of $10,965 in 1999 represents a
portion of the $500,000 license fee received from an affiliate of
GlaxoSmithKline on signing the agreement in July 1999. This revenue is being
recognized over the remaining life of the patents that were licensed in that
collaboration. Revenues in 1998 included $99,983 from a Phase I federal Small
Business Innovation Research, or SBIR, grant and $50,000 from contract
research revenue. We have no future obligations in connection with these
revenues.

  Research and development expenses. Our research and development expenses
increased from approximately $7.1 million for the year ended December 31, 1998
to approximately $7.4 million in the same period in 1999. Clinical development
costs for dermal pain and itch indications of ADL 2-1294 were lower by
approximately $2.5 million in 1999 compared to 1998 because an affiliate of
GlaxoSmithKline licensed the rights to those indications and is now
responsible for the development expenses. In 1999, research and development
costs increased by approximately $2.1 million for the initiation of the Phase
I and Phase II clinical program for ADL 8-2698 and increased by approximately
$1.0 million for the initiation of the Phase I and Phase II clinical trials
for ADL 10-0101. Research and development expenses for ADL 2-1294 for the
treatment of ophthalmic pain decreased in 1999 compared to 1998 by
approximately $0.2 million.

  General and administrative expenses. Our general and administrative expenses
increased to approximately $3.7 million for the year ended December 31, 1999
compared to $2.3 million in the same period in 1998, an increase of
approximately $1.4 million. This increase is primarily due to approximately
$776,000 of higher compensation expense relating to stock option grants,
approximately $226,000 for higher payroll expenses related to additional
personnel and approximately $478,000 in increased consulting and professional
fees.

  Net interest income (expense). Our interest income was approximately the
same for the years ended December 31, 1999 and 1998 at $424,667 and $412,975,
respectively, because we had approximately the same average invested balances
in both years. Our interest expense for the same periods was $21,142 and
$28,028. Interest expense represents interest incurred on an equipment
financing facility.

  Net loss. Our net loss was approximately $10.7 million for the year ended
December 31, 1999 compared to approximately $8.8 million in the same period of
1998. The increase reflects costs associated with expanded Phase II clinical
development costs together with higher personnel related costs.

                                      26
<PAGE>

  Net loss allocable to common stockholders. Our net loss allocable to common
stockholders was approximately $10.5 million for the year ended December 31,
1998 compared to approximately $13.1 million in the same period of 1999. The
increase reflects the increase in the net loss of approximately $1.9 million
and an increase in undeclared dividends attributable to mandatorily redeemable
convertible preferred stock of approximately $726,000.

Liquidity and capital resources

  As of December 31, 2000, we had cash, cash equivalents and short term
investments of approximately $131.6 million, and working capital was
approximately $128.7 million.

  From inception through December 31, 2000, net cash used in operating
activities was approximately $42.7 million. Net cash used in investing
activities since inception was approximately $66.6 million for the acquisition
of laboratory equipment, leasehold improvements and furniture and fixtures and
office equipment, and the net purchases of short-term investments.

  From inception through December 31, 2000, we had financed our operations
primarily from the net proceeds generated from the issuance of mandatorily
redeemable convertible preferred stock (preferred stock) and the issuance of
common stock in our initial public offering. As of December 31, 2000, we had
received total net proceeds of approximately $79.1 million from the sales of
mandatorily redeemable convertible preferred stock. On November 13, 2000 and
November 30, 2000, we received net proceeds of approximately $95.4 million
from the sale of common stock, including the exercise of the over-allotment,
from our initial public offering.

  Our capital expenditures in the year 2000 were approximately $1.0 million.

  We lease three of our corporate and research and development facilities
under operating leases expiring on November 30, 2001, October 15, 2002 and
October 4, 2004. Current total minimum annual payments under these leases are
$688,296 for 2001, $450,292 for 2002, $67,638 for 2003 and $53,405 for 2004.

  Research and development expenditures, including clinical trials, are
expected to increase as we continue to develop new product candidates. We
expect that our operating expenses and capital expenditures will increase in
future periods as a result of the manufacturing scale-up in anticipation of
commercialization of our product candidates, assuming we receive the necessary
regulatory approvals. The initiation of commercial activities will require the
hiring of additional staff to coordinate contract-manufacturing services at
multiple locations. Sales and marketing activities will require hiring and
training of a sales and marketing staff in 2001 and 2002. As of December 31,
2000, 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 Lilly). We also intend to hire
additional research and development, clinical and administrative staff. Our
capital expenditure requirements will depend on numerous factors, including
the progress of our research and development programs, the time required to
file and process regulatory approval applications, the development of
commercial manufacturing capability, the ability to obtain additional
licensing arrangements, and the demand for our product candidates, if and when
approved by the FDA or other regulatory authorities.

  Future compensation expense relating to all options outstanding at December
31, 2000 is estimated to be approximately $5,855,000, $5,490,000, $5,110,000
and $1,670,000 for the years ending December 31, 2001, 2002, 2003 and 2004,
respectively. Compensation expense relating to the non-employee portion of
options granted is subject to change each reporting period based upon changes
in the fair value at the Company's common stock, estimated volatility and the
risk free interest rate until the new-employee completes his or her
performance under the option agreement.

  We believe that our current cash and investment position will be sufficient
to fund our operations and capital expenditures at least through the fourth
quarter of 2002.

                                      27
<PAGE>

Income Taxes

  As of December 31, 2000 we had approximately $26,259,000 of Federal and
$26,683,000 of state net operating loss carryforwards available to offset
future taxable income. The Federal and state net operating loss carryforwards
will begin expiring in 2009 and 2005, respectively, if not utilized. In
addition, the utilization of the state net operating loss carryforwards is
subject to a $2 million annual limitation. At December 31, 2000, we also had
approximately $547,000 of Federal and $35,000 of state research and
development tax credit carryforwards, which begin expiring in 2011, and are
available to reduce Federal and state income taxes.

  The Tax Reform Act of 1986 (the Act) provides for a limitation on the annual
use of net operating loss and research and development tax credit
carryforwards (following certain ownership changes, as defined by the Act)
that could significantly limit our ability to utilize these carryforwards. We
may have experienced various ownership changes, as defined by the Act, as a
result of past financings. Additionally, because United States tax laws limit
the time during which these carryforwards may be applied against future taxes,
we may not be able to take full advantage of these attributes for Federal
income tax purposes.

ITEM 7A. 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 instrument will be
redeemed at its stated or face value. Due to the short duration and nature of
these instruments, we do not believe that we have a material exposure to
interest rate risk related to our investment porfolio. The investment porfolio
at December 31, 2000 was 64.2 million and the weighted-average interest rate
was approximately six percent (6%).

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial
statements filed herewith is found at "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K."

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

  Not applicable.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  The Company incorporates by reference the information contained under the
captions "Election of Directors, Item 1 on Proxy Card" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in its Definitive Proxy Statement
relative to its annual meeting of stockholders, to be filed within 120 days
after the end of the year covered by this Report pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended.

ITEM 11. EXECUTIVE COMPENSATION

  The Company incorporates by reference the information contained under the
captions "Compensation Table" in its Definitive Proxy Statement relative to
its annual meeting of stockholders, to be filed within 120

                                      28
<PAGE>

days after the end of the year covered by this Report pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The Company incorporates by reference the information contained under the
caption "Security Ownership of Certain Beneficial Owners and Directors and
Officers" in its Definitive Proxy Statements relative to its annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Report pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The Company incorporates by reference the information contained under the
caption "Certain Relationships and Related Transactions" in its Definitive
Proxy Statement relative to its annual meeting of stockholders, to be filed
within 120 days after the end of the year covered by this Report pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.

                                      29
<PAGE>

                                    PART IV

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

  (a) 1. Financial Statements

     Reference is made to the Index to Consolidated Financial Statements on
     Page F-1.

    2. Financial Statement Schedules

     None

  (b)   Report of Form 8-K

     None

  (c)   Exhibits

  The following is a list of exhibits required by Item 601 of Regulation S-K
to be filed as part of this Report. Where so indicated by footnote, exhibits
which were previously filed are incorporated by reference. For exhibits
incorporated by reference, the location of the exhibit in the previous filing
is indicated in parentheses.

  Reference is made to the Exhibit Index on p. 32.

                                      30
<PAGE>

                                  SIGNATURES

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

Date: March 30, 2001                      Adolor Corporation

                                                    /s/ John J. Farrar
                                          By: _________________________________
                                            Name: John J. Farrar
                                            Title: President, Chief Executive
                                                   Officer and Director

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities set forth above.

<TABLE>
<CAPTION>
                 Signature                                     Title
                 ---------                                     -----

<S>                                         <C>
            /s/ John J. Farrar              President, Chief Executive Officer and
___________________________________________  Director (Principal Executive Officer)
              John J. Farrar

            /s/ Peter J. Schied             Vice President, Chief Financial Officer and
___________________________________________  Secretary (Principal Financial Officer)
              Peter J. Schied

          /s/ Frank Baldino, Jr.            Director
___________________________________________
            Frank Baldino, Jr.

            /s/ Ellen M. Feeney             Director
___________________________________________
              Ellen M. Feeney

             /s/ Paul Goddard               Director
___________________________________________
               Paul Goddard

            /s/ David M. Madden             Director
___________________________________________
              David M. Madden

         /s/ C. Christopher Moller          Director
___________________________________________
           C. Christopher Moller

           /s/ Robert T. Nelsen             Director
___________________________________________
             Robert T. Nelsen

            /s/ Claude H. Nash              Director
___________________________________________
              Claude H. Nash
</TABLE>

                                      31
<PAGE>

                                 EXHIBIT INDEX

  The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Report. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits incorporated
by reference, the location of the exhibit in the previous filing is indicated
in parentheses.

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
   3.1   Amended and Restated Certificate of Incorporation of Adolor.*

   3.2   Restated Bylaws of Adolor.*

   4.1   Series A Convertible Preferred Stock Purchase Agreement among Opian
         Pharmaceuticals, Inc. and the parties set forth therein, dated
         November 7, 1994 (incorporated by reference to Exhibit 4.1 to the
         Registration Statement filed by the Company on February 8, 2000
         (Registration No. 333-96333)).

   4.2   Series B Convertible Preferred Stock Purchase Agreement among Adolor
         and the parties set forth therein, dated March 1, 1996 (incorporated
         by reference to Exhibit 4.2 to the Registration Statement filed by the
         Company on February 8, 2000).

   4.3   Series C Convertible Preferred Stock Purchase Agreement among Adolor
         and the parties set forth therein, dated March 1, 1997 (incorporated
         by reference to Exhibit 4.3 to the Registration Statement filed by the
         Company on February 8, 2000).

   4.4   Stock Purchase Agreement between Adolor and Kwang Dong Pharmaceutical
         Company, dated November 5, 1997 (incorporated by reference to Exhibit
         4.4 to the Registration Statement filed by the Company on February 8,
         2000).

   4.5   Series E Convertible Preferred Stock Purchase Agreement among Adolor
         and the parties set forth therein, dated December 8, 1998
         (incorporated by reference to Exhibit 4.5 to the Registration
         Statement filed by the Company on February 8, 2000).

   4.6   Series F Convertible Preferred Stock Purchase Agreement among Adolor
         and the parties set forth therein, dated July 26, 1999 (incorporated
         by reference to Exhibit 4.6 to the Registration Statement filed by the
         Company on February 8, 2000).

   4.7   Series G Convertible Preferred Stock Purchase Agreement among Adolor
         and the parties set forth therein, dated January 10, 2000
         (incorporated by reference to Exhibit 4.7 to the Registration
         Statement filed by the Company on February 8, 2000).

   4.8   Registration Rights Agreement among Opian Pharmaceuticals, Inc. and
         the parties set forth therein, dated November 4, 1994 (incorporated by
         reference to Exhibit 4.8 to the Registration Statement filed by the
         Company on February 8, 2000).

   4.9   Amendment No. 1 to Registration Rights Agreement among Adolor and the
         parties set forth therein, dated February 27, 1996 (incorporated by
         reference to Exhibit 4.9 to the Registration Statement filed by the
         Company on February 8, 2000).

   4.10  Amendment No. 2 to Registration Rights Agreement among Adolor and the
         parties set forth therein, dated May 1, 1997 (incorporated by
         reference to Exhibit 4.10 to the Registration Statement filed by the
         Company on February 8, 2000).

   4.11  Amendment No. 3 to Registration Rights Agreement among Adolor and the
         parties set forth therein, dated December 8, 1998 (incorporated by
         reference to Exhibit 4.11 to the Registration Statement filed by the
         Company on February 8, 2000).

   4.12  Amendment No. 4 to Registration Rights Agreement among Adolor and the
         parties set forth therein, dated July 26, 1999 (incorporated by
         reference to Exhibit 4.12 to the Registration Statement filed by the
         Company on February 8, 2000).
</TABLE>

                                      32
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  4.13   Amendment No. 5 to Registration Rights Agreement among Adolor and the
         parties set forth therein, dated January 10, 2000 (incorporated by
         reference to Exhibit 4.13 to the Registration Statement filed by the
         Company on February 8, 2000).

  4.14   Form of Common Stock Certificate (incorporated by reference to Exhibit
         4.14 to Amendment No. 3 to the Registration Statement filed by the
         Company on March 21, 2000).

  4.15   Series H Convertible Preferred Stock Purchase Agreement among Adolor
         and the parties set forth therein, dated July 6, 2000 (incorporated by
         reference to Exhibit 4.15 to Amendment No. 8 to the Registration
         Statement filed by the Company on October 23, 2000).

  4.16   Amendment No. 6 to Registration Rights Agreement among Adolor and the
         parties set forth therein, dated June 29, 2000 (incorporated by
         reference to Exhibit 4.16 to Amendment No. 8 to the Registration
         Statement filed by the Company on October 23, 2000).

  4.17   Rights Agreement, dated as of February 20, 2001, between Adolor and
         StockTrans, Inc., as Rights Agent (incorporated by reference to
         Exhibit 4.1 to Form 8-K filed by the Company on February 23, 2000),
         which included as Exhibit B thereto the Form of Rights Certificate,
         incorporated by reference to Exhibit 1.1 to the Company's Registration
         Statement on Form 8-A, dated February 22, 2001.

  10.1   Form of Amended and Restated 1994 Equity Compensation Plan
         (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the
         Registration Statement filed by the Company on February 18, 2000).

  10.2   Option and License Agreement between Adolor and Roberts Laboratories,
         Inc., dated June 10, 1998 (incorporated by reference to Exhibit 10.2
         to Amendment No. 1 to the Registration Statement filed by the Company
         on February 18, 2000).**

  10.3   License Agreement between Adolor and Kwang Dong Pharmaceutical
         Company, dated November 5, 1997 (incorporated by reference to Exhibit
         10.2 to Amendment No. 1 to the Registration Statement filed by the
         Company on February 18, 2000).**

  10.4   License Agreement between Adolor and SB Pharmaco Puerto Rico Inc.,
         dated July 26, 1999 (incorporated by reference to Exhibit 10.4 to
         Amendment No. 3 to the Registration Statement filed by the Company on
         March 21, 2000).**

  10.5   Development and License Agreement between Adolor and Santen
         Pharmaceutical Co., Ltd., dated April 25, 2000 (incorporated by
         reference to Exhibit 10.5 to Amendment No. 10 to the Registration
         Statement filed by the Company on November 9, 2000).**

  10.6   Sublease Agreement between Adolor and Environ Products, Inc., dated
         October 11, 2000 (incorporated by reference to Exhibit 10.6 to
         Amendment No. 8 to the Registration Statement filed by the Company on
         October 23, 2000).

  10.7   Letter Agreement between Opian Pharmaceuticals, Inc. and John J.
         Farrar, dated October 9, 1994 (incorporated by reference to Exhibit
         10.7 to Amendment No. 8 to the Registration Statement filed by the
         Company on October 23, 2000).

  10.8   Letter Agreement between Adolor and Alan L. Maycock dated January 6,
         1995 (incorporated by reference to Exhibit 10.8 to Amendment No. 8 to
         the Registration Statement filed by the Company on October 23, 2000).

  10.9   Letter Agreement between Adolor and Peter J. Schied dated April 23,
         1997 (incorporated by reference to Exhibit 10.9 to Amendment No. 8 to
         the Registration Statement filed by the Company on October 23, 2000).

  10.10  Letter Agreement between Adolor and Andrew Reddick dated March 27,
         2000 (incorporated by reference to Exhibit 10.10 to Amendment No. 8 to
         the Registration Statement filed by the Company on October 23, 2000).
</TABLE>

                                       33
<PAGE>

<TABLE>

<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  10.11  Agreement between Adolor and Randall L. Carpenter dated September 14,
         2000 (incorporated by reference to Exhibit 10.11 to Amendment No. 8 to
         the Registration Statement filed by the Company on October 23, 2000).

  10.12  Letter Agreement between Adolor and Pacific Growth Equities, Inc.,
         dated May 2, 2000 (incorporated by reference to Exhibit 10.12 to
         Amendment No. 9 to the Registration Statement filed by the Company on
         November 8, 2000).

  23.1   Consent of KPMG LLP.*
</TABLE>

--------
 *Filed herewith.
**Confidential Treatment Granted.

                                       34
<PAGE>

  The following Consolidated Financial Statements, and the related Notes
thereto, of Adolor Corporation and the Report of Independent Auditors are
filed as a part of this Form 10-K.

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Independent Auditors' Report.............................................. F-2
Financial Statements:
  Consolidated Balance Sheets at December 31, 1999 and 2000............... F-3
  Consolidated Statements of Operations for the years ended December 31,
   1998, 1999 and 2000, and for the period from August 9, 1993 (inception)
   to December 31, 2000................................................... F-4
  Consolidated Statements of Comprehensive Loss for the years ended
   December 31, 1998, 1999 and 2000, and for the period from August 9,
   1993 (inception) to December 31, 2000.................................. F-5
  Consolidated Statements of Stockholders' Equity (Deficit) for the period
   from August 9, 1993 (inception) to December 31, 1993, and for the years
   ended December 31, 1994, 1995, 1996, 1997, 1998, 1999 and 2000......... F-6
  Consolidated Statements of Cash Flows for the years ended December 31,
   1998, 1999 and 2000, and for the period from August 9, 1993 (inception)
   to December 31, 2000................................................... F-8
  Notes to Consolidated Financial Statements.............................. F-9
</TABLE>

                                      F-1
<PAGE>

                         Independent Auditors' Report

The Board of Directors and Stockholders
Adolor Corporation:

  We have audited the accompanying consolidated balance sheets of Adolor
Corporation and Subsidiary (a development-stage company) as of December 31,
1999 and 2000, and the related consolidated statements of operations,
comprehensive loss, stockholders' equity (deficit) and cash flows for each of
the years in the three-year period ended December 31, 2000 and for the period
from August 9, 1993 (inception) to December 31, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

  We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Adolor
Corporation and Subsidiary (a development-stage company) as of December 31,
1999 and 2000, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2000, and for
the period from August 9, 1993 (inception) to December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.

                                                    /s/ KPMG LLP

Philadelphia, Pennsylvania
March 2, 2001, except as to the
 second paragraph of note 8,
 which is as of March 22, 2001

                                      F-2
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                     December 31,  December 31,
                                                         1999          2000
                                                     ------------  ------------
<S>                                                  <C>           <C>
                      Assets
Current assets:
 Cash and cash equivalents.........................  $  3,472,164  $ 67,392,849
 Short-term investments............................     1,791,531    64,237,605
 Prepaid expenses and other current assets.........       190,893     2,503,248
                                                     ------------  ------------
 Total current assets..............................     5,454,588   134,133,702
 Equipment and leasehold improvements, net.........       765,504     1,390,450
 Other assets......................................        38,298        86,007
                                                     ------------  ------------
 Total assets......................................  $  6,258,390  $135,610,159
                                                     ============  ============
       Liabilities and Stockholders' Deficit
Current liabilities:
 Notes payable--current portion....................  $     65,703  $    521,053
 Accounts payable..................................       564,742     1,696,975
 Accrued expenses..................................     1,729,119     3,192,533
 Deferred licensing fees...........................        26,316        52,632
                                                     ------------  ------------
 Total current liabilities.........................     2,385,880     5,463,193
 Notes payable, less current portion...............           --        214,819
 Deferred licensing fees...........................       462,719       892,543
                                                     ------------  ------------
 Total liabilities.................................     2,848,599     6,570,555
                                                     ------------  ------------
Commitments and Contingencies
Mandatorily redeemable convertible preferred stock,
 at redemption value (aggregate liquidation value
 of $39,443,518 at December 31, 1999):
 Series A, $0.01 par value; 6,000,000 shares
  authorized, issued and outstanding at December
  31, 1999.........................................     1,500,000           --
 Series B, $0.01 par value; 23,107,145 shares
  authorized; 22,869,049 shares issued and
  outstanding at December 31, 1999.................     9,605,000           --
 Series C, $0.01 par value; 13,814,286 shares
  authorized, issued and outstanding at December
  31, 1999.........................................     9,670,000           --
 Series D, $0.01 par value; 960,000 shares
  authorized, issued and outstanding at December
  31, 1999.........................................     1,200,000           --
 Series E, $0.01 par value; 11,366,667 shares
  authorized; 11,366,667 shares issued and
  outstanding at December 31, 1999.................     8,525,000           --
 Series F, $0.01 par value; 2,625,000 shares
  authorized, 2,500,000 shares issued and
  outstanding at December 31, 1999.................     2,500,000           --
 Series G, $0.01 par value; 12,306,000 shares
  authorized; none issued and outstanding at
  December 31, 1999 and 2000.......................           --            --
 Series H, $0.01 par value; 23,921,569 shares
  authorized; none issued and outstanding at
  December 31, 1999 and 2000.......................           --            --
                                                     ------------  ------------
                                                       33,000,000           --
                                                     ------------  ------------
Stockholders' equity (deficit):
 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; 1,055,012 and
  27,944,852 shares issued and outstanding at
  December 31, 1999 and 2000, respectively.........           106         2,794
 Additional paid-in capital........................     3,530,018   200,335,775
 Notes receivable for stock options................           --     (1,056,488)
 Deferred compensation.............................    (2,116,644)  (18,125,961)
 Unrealized gains on available for sale
  securities.......................................           --        125,581
 Deficit accumulated during the development stage..   (31,003,689)  (52,242,097)
                                                     ------------  ------------
 Total stockholders' equity (deficit)..............   (29,590,209)  129,039,604
                                                     ------------  ------------
 Total liabilities and stockholders' equity
  (deficit)........................................  $  6,258,390  $135,610,159
                                                     ============  ============
</TABLE>
          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

                     CONSOLIDATED STATEMENTS OF OPERATIONS

     Years ended December 31, 1998, 1999 and 2000, and for the period from
                August 9, 1993 (inception) to December 31, 2000

<TABLE>
<CAPTION>
                                                                  Period from
                                                                   August 9,
                                                                      1993
                                                                  (inception)
                                Year ended December 31,                to
                          --------------------------------------  December 31,
                              1998         1999         2000          2000
                          ------------  -----------  -----------  ------------
<S>                       <C>           <C>          <C>          <C>
Grant and license
 revenues...............  $    149,983       10,965       43,860       204,808
                          ------------  -----------  -----------  ------------
Operating expenses
 incurred during the
 development stage:
  Research and
   development..........     7,074,011    7,398,468   15,884,100    39,962,042
  General and
   administrative.......     2,276,450    3,697,484    7,626,455    16,233,938
                          ------------  -----------  -----------  ------------
    Total operating
     expenses...........     9,350,461   11,095,952   23,510,555    56,195,980
                          ------------  -----------  -----------  ------------
Other income (expense):
  Interest income.......       412,975      424,667    2,282,907     3,991,486
  Interest expense......       (28,028)     (21,142)     (54,620)     (242,411)
                          ------------  -----------  -----------  ------------
                               384,947      403,525    2,228,287     3,749,075
                          ------------  -----------  -----------  ------------
Net loss................    (8,815,531) (10,681,462) (21,238,408)  (52,242,097)
Undeclared dividends and
 accretion of offering
 costs attributable to
 mandatorily redeemable
 convertible preferred
 stock..................     1,704,022    2,429,884    4,102,796    10,546,314
Beneficial conversion
 feature on mandatorily
 redeemable convertible
 preferred stock........           --           --    48,905,779    48,905,779
                          ------------  -----------  -----------  ------------
Net loss allocable to
 common stockholders....  $(10,519,553) (13,111,346) (74,246,983) (111,694,190)
                          ============  ===========  ===========  ============
Basic and diluted net
 loss per share
 allocable to common
 stockholders (note 2)..  $     (10.59)      (12.55)      (13.99)
                          ============  ===========  ===========
Shares used in computing
 basic and diluted net
 loss per share
 allocable to common
 stockholders (note 2)..       992,907    1,044,571    5,307,375
                          ============  ===========  ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

                        STATEMENTS OF COMPREHENSIVE LOSS

                 Years ended December 31, 1998, 1999 and 2000,
         and the period August 9, 1993 (Inception) to December 31, 2000

<TABLE>
<CAPTION>
                                                                  Period from
                                                                   August 9,
                                                                      1993
                                                                  (inception)
                                Year ended December 31,                to
                         ---------------------------------------  December 31,
                            1998          1999          2000          2000
                         -----------  ------------  ------------  ------------
<S>                      <C>          <C>           <C>           <C>
Net loss................ $(8,815,531) $(10,681,462) $(21,238,408) $(52,242,097)
                         -----------  ------------  ------------  ------------
Other comprehensive
 income (loss):
  Unrealized gains on
   available for sale
   securities...........         --            --        125,581       125,581
                         -----------  ------------  ------------  ------------
  Comprehensive loss.... $(8,815,531) $(10,681,462) $(21,112,827) $(52,116,516)
                         -----------  ------------  ------------  ------------
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

  For the period from August 9, 1993 (inception) to December 31, 1993, for the
                                  years ended
            December 31, 1994, 1995, 1996, 1997, 1998, 1999 and 2000

<TABLE>
<CAPTION>
                                                                              Unrealized   Deficit
                            Common stock                                       gain on   accumulated      Total
                          ---------------- Additional                         available  during the   stockholders'
                           Number           paid-in     Notes      Deferred    for sale  development     equity
                          of shares Amount  capital   receivable compensation securities    stage       (deficit)
                          --------- ------ ---------- ---------- ------------ ---------- -----------  -------------
<S>                       <C>       <C>    <C>        <C>        <C>          <C>        <C>          <C>
Inception, August 9,
 1993...................       --    $--        --       --             --       --                           --
 Net income (loss)......       --     --        --       --             --       --             --            --
                           -------   ----   -------      ---       --------      ---     ----------    ----------
Balance, December 31,
 1993...................       --     --        --       --             --       --             --            --
 Issuance of common
  stock to founder in
  November 1994 at $.001
  per share.............   100,000     10    12,490      --         (12,400)     --             --            100
 Issuance of restricted
  stock to an officer
  and consultant in
  November 1994 at $.003
  per share.............   545,411     55    68,157      --         (66,767)     --             --          1,445
 Amortization of
  deferred
  compensation..........       --     --        --       --          15,182      --             --         15,182
 Net loss...............       --     --        --       --             --       --        (243,423)     (243,423)
                           -------   ----   -------      ---       --------      ---     ----------    ----------
Balance, December 31,
 1994...................   645,411     65    80,647      --         (63,985)     --        (243,423)     (226,696)
 Issuance of common
  stock for technology
  license agreements in
  December 1995 at $.125
  per share.............    50,000      5     6,245      --             --       --             --          6,250
 Value attributed to
  issuance of warrants..       --     --     60,000      --             --       --             --         60,000
 Amortization of
  deferred
  compensation..........       --     --        --       --          16,692      --             --         16,692
 Exercise of common
  stock options.........     4,914    --        616      --             --       --             --            616
 Net loss...............       --     --        --       --             --       --      (2,392,480)   (2,392,480)
                           -------   ----   -------      ---       --------      ---     ----------    ----------
Balance, December 31,
 1995...................   700,325     70   147,508      --         (47,293)     --      (2,635,903)   (2,535,618)
 Issuance of restricted
  stock to director in
  May 1996 at $.21 per
  share.................    20,000      2     4,198      --             --       --             --          4,200
 Deferred compensation
  resulting from grant
  of options............       --     --      3,168      --          (3,168)     --             --            --
 Amortization of
  deferred
  compensation..........       --     --        --       --          17,669                     --         17,669
 Exercise of common
  stock options.........   104,221     10    18,572      --             --       --             --         18,582
 Net loss...............       --     --        --       --             --       --      (4,071,758)   (4,071,758)
                           -------   ----   -------      ---       --------      ---     ----------    ----------
Balance, December 31,
 1996...................   824,546     82   173,446      --         (32,792)     --      (6,707,661)   (6,566,925)
 Deferred compensation
  resulting from grant
  of options............       --     --    270,720      --        (270,720)     --             --            --
 Amortization of
  deferred
  compensation..........       --     --        --       --          82,249      --             --         82,249
 Exercise of common
  stock options.........   101,759     10    19,428      --             --       --             --         19,438
 Net loss...............       --     --        --       --             --       --      (4,799,035)   (4,799,035)
                           -------   ----   -------      ---       --------      ---     ----------    ----------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--Continued

  For the period from August 9, 1993 (inception) to December 31, 1993, for the
                                  years ended
            December 31, 1994, 1995, 1996, 1997, 1998, 1999 and 2000

<TABLE>
<CAPTION>
                                                                                   Unrealized   Deficit
                            Common stock                                            gain on   accumulated      Total
                          ----------------- Additional                             available  during the   stockholders'
                          Number of           paid-in      Notes       Deferred     for sale  development     equity
                            shares   Amount   capital    receivable  compensation  securities    stage       (deficit)
                          ---------- ------ -----------  ----------  ------------  ---------- -----------  -------------
<S>                       <C>        <C>    <C>          <C>         <C>           <C>        <C>          <C>
Balance, December 31,
 1997...................     926,305     92     463,594         --      (221,263)       --    (11,506,696)  (11,264,273)
 Deferred compensation
  resulting from grant
  of options............         --     --      217,121         --      (217,121)       --            --            --
 Amortization of
  deferred
  compensation..........         --     --          --          --       145,227        --            --        145,227
 Exercise of common
  stock options.........      99,913     11      21,779         --           --         --            --         21,790
 Net loss...............         --     --          --          --           --         --     (8,815,531)   (8,815,531)
                          ---------- ------ -----------  ----------  -----------    -------   -----------   -----------
Balance, December 31,
 1998...................   1,026,218    103     702,494         --      (293,157)       --    (20,322,227)  (19,912,787)
 Issuance of common
  stock for services in
  April 1999 at $3.736
  per share.............       3,570    --       13,339         --           --         --            --         13,339
 Deferred compensation
  resulting from grant
  of options............         --     --    2,806,195         --    (2,806,195)       --            --            --
 Amortization of
  deferred
  compensation..........         --     --          --          --       982,708        --            --        982,708
 Exercise of common
  stock options.........      25,224      3       7,990         --           --         --            --          7,993
 Net loss...............         --     --          --          --           --         --    (10,681,462)  (10,681,462)
                          ---------- ------ -----------  ----------  -----------    -------   -----------   -----------
Balance, December 31,
 1999...................   1,055,012    106   3,530,018         --    (2,116,644)       --    (31,003,689)  (29,590,209)
 Notes granted to
  employees for stock
  options...............         --     --          --   (1,056,488)         --         --            --     (1,056,488)
 Deferred compensation
  resulting from grant
  of options............         --     --   19,936,828         --   (19,936,828)       --            --            --
 Amortization of
  deferred
  compensation..........         --     --          --          --     3,927,511        --            --      3,927,511
 Accretion of Series H
  preferred stock
  issuance costs........         --     --     (281,794)        --           --         --            --       (281,794)
 Exercise of common
  stock options.........   1,171,419    116   1,393,123         --           --         --            --      1,393,239
 Unrealized gain on
  investments...........         --     --          --          --           --     125,581           --        125,581
 Conversion of preferred
  shares................  18,818,421  1,882  80,381,821         --           --         --            --     80,383,703
 Net Proceeds from
  Initial Public
  Offering..............   6,900,000    690  95,375,779         --           --         --            --     95,376,469
 Net loss...............         --     --          --          --           --         --    (21,238,408)  (21,238,408)
                          ---------- ------ -----------  ----------  -----------    -------   -----------   -----------
Balance, December 31,
 2000...................  27,944,852 $2,794 200,335,775  (1,056,488) (18,125,961)   125,581   (52,242,097)  129,039,604
                          ========== ====== ===========  ==========  ===========    =======   ===========   ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

     Years ended December 31, 1998, 1999 and 2000, and for the period from
                August 9, 1993 (inception) to December 31, 2000

<TABLE>
<CAPTION>
                                                                    Period from
                                                                     August 9,
                                                                       1993
                                  Year ended December 31,          inception) to
                            -------------------------------------  December 31,
                               1998         1999         2000          2000
                            -----------  -----------  -----------  -------------
<S>                         <C>          <C>          <C>          <C>
Net cash flows from
 operating activities:
Net loss..................  $(8,815,531) (10,681,462) (21,238,408)  (52,242,097)
 Adjustments to reconcile
  net loss to net cash
  used in operating
  activities:
 Non-cash compensation
  expense.................      145,227      982,708    3,927,511     5,187,238
 Non-cash warrant value...          --           --           --         60,000
 Depreciation and
  amortization expense....      202,346      267,622      375,871     1.090,985
 Issuance of common stock
  for technology license
  agreements..............          --           --           --          6,250
 Changes in assets and
  liabilities:
  Prepaid expenses and
   other current assets...       60,590      (68,184)  (2,312,355)   (2,503,248)
  Other assets............          --        (5,378)     (47,709)      (86,007)
  Accounts payable........      378,608     (359,496)   1,132,233     1,696,975
  Accrued expenses........      579,302      597,877    1,463,414     3,192,533
  Deferred licensing
   fees...................          --       489,035      456,140       945,175
                            -----------  -----------  -----------   -----------
   Net cash used in
    operating activities..   (7,449,458)  (8,777,278) (16,243,303)  (42,652,196)
                            -----------  -----------  -----------   -----------
Net cash flows from
 investing activities:
 Purchases of equipment
  and leasehold
  improvements............     (191,357)    (448,309)  (1,000,816)   (2,468,095)
 Purchases of short-term
  investments.............   (3,045,281)  (2,221,062) (73,806,621)  (96,341,908)
 Maturities of short-term
  investments.............    5,892,160    2,502,853   11,486,128    32,229,884
                            -----------  -----------  -----------   -----------
   Net cash provided by
    (used in) investing
    activities............    2,655,522     (166,518) (63,321,309)  (66,580,119)
                            -----------  -----------  -----------   -----------
Net cash flows from
 financing activities:
 Net proceeds from
  issuance of mandatorily
  redeemable convertible
  preferred stock and
  Series B warrants.......    9,100,000    2,525,000   47,101,909    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.................       21,790        7,993      336,750       410,914
 Proceeds from notes
  payable--related
  parties.................          --           --           --      1,000,000
 Proceeds from notes
  payable.................          --           --       957,126     1,402,111
 Payment of notes
  payable.................     (144,464)     (89,764)    (286,957)     (666,239)
 Net proceeds from IPO....          --           --    95,376,469    95,376,469
                            -----------  -----------  -----------   -----------
   Net cash provided by
    financing activities..    8,977,326    2,443,229  143,485,297   176,625,164
                            -----------  -----------  -----------   -----------
Net increase (decrease) in
 cash and cash
 equivalents..............    4,183,390   (6,500,567)  63,920,685    67,392,849
Cash and cash equivalents
 at beginning of year.....    5,789,341    9,972,731    3,472,164           --
                            -----------  -----------  -----------   -----------
Cash and cash equivalents
 at end of year...........  $ 9,972,731    3,472,164   67,392,849    67,392,849
                            ===========  ===========  ===========   ===========
Supplemental disclosure of
 cash flow information:
 Cash paid for interest...  $    28,028       21,142       54,620       152,536
                            ===========  ===========  ===========   ===========
Supplemental disclosure of
 noncash financing
 activities:
 Deferred compensation
  from issuance of common
  stock, restricted common
  stock and common stock
  options.................  $   217,121    2,806,195   19,936,828    23,313,199
 Issuance of common stock
  for technology license
  agreements or for
  services................          --        13,339          --         19,589
 Conversion of Series A
  through H preferred
  stock for common stock            --           --    80,383,703    80,383,703
 Conversion of stock
  subscription to Series D
  mandatorily redeemable
  preferred stock.........      600,000          --           --        600,000
 Conversion of bridge
  financing, including
  accrued interest, to
  Series B mandatorily
  redeemable preferred
  stock...................          --           --           --      1,019,787
                            ===========  ===========  ===========   ===========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                      F-8
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. ORGANIZATION AND BUSINESS ACTIVITIES

  Adolor Corporation (together with its subsidiaries, "Adolor" or the
"Company") is a development-stage pharmaceutical company engaged in the
development of peripheral and central analgesics based on opiate receptors and
opiate-like receptors. The Company commenced operations on November 7, 1994.
The Company is currently devoting substantially all of its efforts toward
conducting pharmaceutical discovery and development, licensing technology,
obtaining regulatory approval for products under development, negotiating
strategic corporate relationships, recruiting personnel and raising capital.

  The accompanying consolidated financial statements include the results of
operations of the Company for the period from August 9, 1993 (inception) to
December 31, 2000.

  The Company has licensed its core technology from certain universities and
research institutions in exchange for present and future cash payments and, in
certain instances, common stock. The cost of obtaining such technology has
been charged as incurred, to research and development expense in the
accompanying consolidated statements of operations because the core technology
which was licensed had not reached technological feasibility and had no
alternative future uses.

  The Company has not generated any product sales revenues and has not yet
achieved profitable operations. There is no assurance that profitable
operations, if ever achieved, could be sustained on a continuing basis. In
addition, development activities and clinical and pre-clinical testing and
commercialization of the Company's proprietary technology will require
significant additional financing. The Company's deficit accumulated during the
development stage through December 31, 2000, aggregated approximately $52.2
million, and the Company's management expects to incur substantial and
increasing losses in future periods. Further, 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.

  The Company plans to finance its future operations with a combination of
license payments, equity offerings, payments from strategic research and
development and marketing arrangements, and revenues from future product
sales, if any. The Company has not generated positive cash flows from
operations, and 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 planned products. The Company believes that its
current financial resources and sources of liquidity are adequate to fund
operations for at least the next year based on a level of research and
development and administrative activities necessary to achieve its short-term
objectives.

2. BASIS OF ACCOUNTING AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

Cash and Cash Equivalents

  The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
cash and cash equivalents are held in United States financial institutions or
obligations of the United States Treasury. The carrying amount of cash and
cash equivalents approximates its fair value due to its short-term nature.

                                      F-9
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)


 Marketable Securities

  The Company's entire portfolio of marketable securities is currently
classified as available for sale and is stated at fair value as determined by
quoted market values. All marketable securities, including securities with
maturities in excess of one year, are classified as current, as management can
sell them any time at their option. Changes in the net unrealized holding
gains and losses are included as a separate component of stockholders' equity
and comprehensive loss. For purposes of determining gross realized gains and
losses, the cost of marketable securities sold is based upon specific
identification. The Company has not experienced any significant realized gains
or losses on its investments through December 31, 2000.

Concentration of Credit Risk

  The Company invests its excess cash and short-term investments in accordance
with a policy objective that seeks to ensure both liquidity and safety of
principal. The policy limits investments to certain types of instruments
issued by the U.S. Government and Institutions with strong investment grade
credit ratings and places restrictions on their terms and concentrations by
type and issuer.

Equipment and Leasehold Improvements

  Equipment, consisting of computer, office and laboratory equipment,
furniture and fixtures and leasehold improvements, are recorded at cost.
Depreciation and amortization is provided using the straight-line method over
the estimated useful lives of the assets or lease term, whichever is shorter,
generally three to seven years. Expenditures for repairs and maintenance are
expensed as incurred.

Revenue Recognition

  Contract revenues are earned and recognized according to the provisions of
each agreement. Non-refundable contract milestone payments are recognized as
revenues upon the completion of the milestone event or requirement and when
the Company's significant performance obligations have been satisfactorily
completed. Payments, if any, received in advance of performance under a
contract are deferred and recognized as revenue when earned. Up-front
licensing fees are deferred and amortized over the estimated performance
period. Grant revenue is recognized over the period the related research is
performed.

Research and Development

  Research and product development costs are expensed as incurred. Costs
incurred under research agreements with third parties are expensed as incurred
and in accordance with the specific contractual performance terms of such
research agreements.

Accounting for Income Taxes

  Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits which are not expected to be
realized. The effect on deferred income tax assets and liabilities of a change
in tax rates is recognized in the period that such tax rate changes are
enacted.


                                     F-10
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

Use of Estimates

  The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.

Stock-Based Compensation

  The Company accounts for share option issuances to employees and members of
the Board of Directors in accordance with the provisions of APB No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, deferred compensation is recorded to the extent that the current
estimated fair value of the underlying stock exceeds the exercise price of the
options on the date of grant. Such deferred compensation is amortized on a
straight-line basis over the respective vesting periods of such option grants.
The Company has adopted the disclosure requirements of SFAS No. 123
"Accounting for Stock-Based Compensation" which allows entities to continue to
apply the provisions of APB No. 25 for financial reporting purposes and
provide pro forma net loss and net loss per share footnote disclosures for
employee stock option grants. Transactions with nonemployees, in which goods
or services are the consideration received for the issuance of equity
instruments, are accounted for on a fair-value basis in accordance with SFAS
No. 123 and EITF Issue No. 96-18.

Segment Information

  The Company is managed and operated as one business. The entire business is
managed by a single management team that reports to the chief executive
officer. The Company does not operate separate lines of business or separate
business entities with respect to any of its product candidates. Accordingly,
the Company does not prepare discrete financial information with respect to
separate product areas or by location and does not have separately reportable
segments as defined by SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."

Net Loss per Share

  Net loss per share is computed in accordance with SFAS No. 128, "Earnings
Per Share," by dividing the net loss allocable to common stockholders by the
weighted average number of shares of common stock outstanding. Net loss
allocable to common stockholders is calculated as the net loss plus preferred
dividends accrued for the respective period, whether or not declared plus the
beneficial conversion feature on mandatorily redeemable convertible preferred
stock. The numerator and the denominator used in computing both basic and
diluted net loss per share allocable to common stockholders are equal.

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, 1999
and 2000, all of the short-term investments were deemed as "available for
sale" investments.

                                     F-11
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)


  The following summarizes the "available for sale" investments at December
31, 1999 and 2000:

<TABLE>
<CAPTION>
                                              Gross      Gross
                                            unrealized unrealized
                                   Cost       gains      losses   Fair value
                                ----------- ---------- ---------- -----------
   <S>                          <C>         <C>        <C>        <C>
   Obligations of U.S.
    Government................. $ 1,791,531       --        --    $ 1,791,531
                                -----------  --------   -------   -----------
     December 31, 1999......... $ 1,791,531       --        --    $ 1,791 531
                                ===========  ========   =======   ===========
   Commercial paper............ $12,412,679    12,346       --    $12,425,025
   Corporate Bonds.............  51,699,345   151,103    37,868    51,812,580
                                -----------  --------   -------   -----------
     December 31, 2000......... $64,112,024  $163,449   $37,868   $64,237,605
                                ===========  ========   =======   ===========
</TABLE>

  Investments at December 31, 1999 had no unrealized gains or losses as fair
value approximated cost. At December 31, 2000, maturities of investments were
as follows:

<TABLE>
   <S>                                  <C>         <C>      <C>     <C>
   Less than 1 year....................  43,488,369   52,234  36,121  43,504,482
   Due in 1-2 years....................  20,623,655  111,215   1,747  20,733,123
                                        ----------- -------- ------- -----------
     December 31, 2000................. $64,112,024 $163,449 $37,868 $64,237,605
                                        =========== ======== ======= ===========
</TABLE>

4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

  Equipment and leasehold improvements consist of the following:

<TABLE>
<CAPTION>
                                                                December 31,
                                                            --------------------
                                                               1999      2000
                                                            ---------- ---------
   <S>                                                      <C>        <C>
   Laboratory, computer and office equipment............... $1,244,665 2,114,749
   Furniture, fixtures and leasehold improvements..........    222,614   353,346
                                                            ---------- ---------
                                                             1,467,279 2,468,095
   Less accumulated depreciation and amortization..........    701,775 1,077,645
                                                            ---------- ---------
                                                            $  765,504 1,390,450
                                                            ========== =========
</TABLE>

5. ACCRUED EXPENSES

  Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                December 31,
                                                            --------------------
                                                               1999      2000
                                                            ---------- ---------
   <S>                                                      <C>        <C>
   Consulting and contracted research...................... $1,403,566 2,335,517
   Professional fees.......................................    270,727   319,493
   Payroll and related costs...............................     31,475   537,523
   Other...................................................     23,351       --
                                                            ---------- ---------
                                                            $1,729,119 3,192,533
                                                            ========== =========
</TABLE>

                                     F-12
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)


6. NOTES PAYABLE

  In October 1996, the Company executed a secured equipment loan agreement to
finance the purchase of computers, software, laboratory and office equipment,
and furniture. At December 31, 1999, the Company had loan draws totaling
$65,703 outstanding under this agreement. The loans are secured by the
equipment financed at interest rates ranging from 13.55% to 19.13%.

  In March 2000 and December 2000, the Company entered into loan agreements to
finance the Company's insurance policies. The balance on these loans as of
December 31, 2000, is $5,488 and $730,384, respectively, are due in January
2001 and May 2002, and bear interest at 6.7%.

7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

  The Company issued 6,000,000 shares of its Series A mandatorily redeemable
convertible preferred stock (Series A) in November 1994 at a price of $0.25
per share. Total proceeds to the Company were $1,500,000.

  In October 1995, the Company issued convertible promissory notes in the
principal amount of $1,000,000 to the Series A stockholders (Bridge Note).
These notes accrued interest at 5.75% per annum. Principal plus accrued
interest on the Bridge Note totaling $1,019,787 were converted into 2,428,063
shares of Series B at a price of $0.42 per share in March 1996.

  In conjunction with the Bridge Note, the Company issued warrants to purchase
238,096 shares of Series B at the fair value of the Series B at the date of
issuance ($0.42 per share). These warrants are exercisable until the earlier
of the closing of an initial public offering or October 2000. The fair value
of such warrants at their issuance date aggregated $60,000, which amount was
charged to interest expense in 1995. During the year ended December 31, 2000,
178,572 of these warrants were exercised for proceeds of $75,000. The balance
were exercised through a cashless exercise.

  In March 1996, the Company issued 20,440,986 shares of its Series B at a
price of $0.42 per share. Series B purchasers included the holders of the
Series A, certain officers of the Company and other investors.

  In May 1997, the Company sold 13,814,286 shares of its Series C mandatorily
redeemable preferred stock (Series C) at a price of $0.70 per share. The total
proceeds received by the Company was $9,670,000.

  In November 1997, the Company entered into a certain license agreement (see
note 9) and a stock purchase agreement with Kwang Dong Pharmaceutical Co.
(Kwang Dong). Pursuant to the stock purchase agreement, the Company agreed to
issue to Kwang Dong 960,000 shares of the Company's Series D mandatorily
redeemable convertible preferred stock (Series D) for $1,200,000. As of
December 31, 1997, the Company had received $600,000. In February 1998, the
Company received the additional $600,000 from Kwang Dong and issued the
960,000 shares of Series D.

  In December 1998, the Company sold 11,333,334 shares of its Series E
mandatorily redeemable convertible preferred stock (Series E) at a price of
$0.75 per share. The total proceeds received by the Company was $8,500,000. An
additional 33,333 shares of Series E was sold in January 1999 for $25,000.

  In July 1999, the Company entered into a license agreement (see note 9) and
a stock purchase agreement with an affiliate of GlaxoSmithKline (SB). Pursuant
to the stock purchase agreement, the Company sold 2,500,000 shares of its
Series F at a price of $1.00 per share to SB. The total proceeds received by
the Company was $2,500,000. In connection with Series F, the Company granted a
warrant to purchase 125,000 shares of

                                     F-13
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

Series F at $1.00 per share at any time prior to the earlier of the closing of
an initial public offering or August 2004. SB will purchase an additional
$500,000 of either common stock subsequent to an initial public offering of
the Company's common stock or preferred stock prior to an initial public
offering of the Company's common stock, upon the successful completion of the
second pivotal clinical trial for the first prescription or over-the-counter
product candidate under the license agreement that the Company has entered
into with SB. If the purchase occurs prior to an initial public offering of
the Company's common stock, the purchase price of the preferred stock will be
the fair market value of the Company's preferred stock at the date of purchase
as determined by the Company's Board of Directors. If the purchase occurs
subsequent to an initial public offering of the Company's common stock, the
purchase price of the common stock will be the fair value of the Company's
common stock as listed on the principal national securities exchange on which
the common stock is then listed.

  In January 2000, we issued an aggregate of 12,306,000 shares of series G
mandatorily redeemable convertible preferred stock at a purchase price of
$1.00 per share, for aggregate consideration of $12,306,000. Of that amount,
we issued 250,000 shares to Technology Leaders II, L.P. Dr. Moller, one of our
directors, is the managing director of the general partner of the general
partner of Technology Leaders II, L.P. We also issued 2,500,000 shares to ARCH
Venture Fund III, L.P. Mr. Nelsen, a director of ours, is the general partner
of the general partner of the general partner of ARCH Venture Fund III, L.P.
We also issued 273,000 shares to WPG Enterprise Fund II, L.L.C. and 227,000
shares to Weiss, Peck & Greer Venture Associates III, L.L.C. Ms. Feeney, one
of our directors, was nominated to our board by Weiss, Peck & Greer Venture
Partners III, the Fund Investment Advisory Member of WPG Enterprise Fund II,
L.L.C. and Weiss, Peck & Greer Venture Associates III, L.L.C., and was a
general partner of Weiss, Peck & Greer Venture Partners, from 1989 to 1999. On
the closing of the initial public offering, the series G preferred stock
automatically converted into 2,461,200 shares of common stock. The issuance of
these securities resulted in a $12,306,000 beneficial conversion feature which
increased net loss per share allocable to common stockholders in the first
quarter of 2000. The beneficial conversion feature cannot exceed the proceeds
from the sale of the securities.

  In July 2000, we issued an aggregate of 23,921,425 shares of series H
mandatorily redeemable convertible preferred stock at a purchase price of
$1.53 per share, for aggregate consideration of $36,600,000. Of that amount,
we issued 163,399 shares to ARCH Venture Fund III, L.P. Mr. Nelsen, a director
of ours, is the general partner of the general partner of the general partner
of ARCH Venture Fund III, L.P. We also issued 36,425 shares to Technology
Leaders II, L.P. and 28,934 shares to Technology Leaders II Offshore C.V. Dr.
Moller, one of our directors, is the managing director of the general partner
of the general partner of both of these entities. We also issued 65,359 shares
to S.R. One Limited, an affiliate of GlaxoSmithKline. On the closing date of
our initial public offering, the Series H preferred stock automatically
converted into an aggregate of 4,784,285 shares of common stock. The Company
incurred approximately $1.8 million of offering cost which were accreted
through the date of the conversion. The charge for the year ended December 31,
2000, prior to the conversion was $281,794. The issuance of these securities
resulted in a $36.6 million beneficial conversion feature which increased the
net loss per share allocable to common stockholders in the third quarter of
2000. The beneficial conversion feature cannot exceed the proceeds from the
sale of the securities.

  The holders of the above mandatorily redeemable convertible preferred stock
voted together with all other classes and series of stock of the Company as a
single class on all actions to be taken by the stockholders of the Company.
Each share of preferred stock entitled the holder to an equal number of votes
as the number of common shares into which each share of preferred stock was
convertible.

  The preferred stockholders were entitled to a liquidation preference over
all other types of capital stock. Each series of preferred shares were
entitled to a specified amount of cumulative accrued and unpaid dividends

                                     F-14
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

ranging from $0.02 to $0.12 per share, whether or not declared. Such
cumulative dividends for the preferred shares outstanding as of the date of
the initial public offering was approximately $10,264,520.

  Each share of outstanding mandatorily redeemable convertible preferred stock
was converted into common stock at a conversion ratio of 5-for-1 upon the
consummation of the initial public offering in November 2000. Additionally,
with the closing of the initial public offering, all dividends ceased to
accrue and were no longer payable.

  All of the Series A, B, C, D, E, F, G and H mandatorily redeemable
convertible preferred stock were converted into shares of common stock on a
five-for-one basis in connection with the Company's initial public offering.

8. COMMON STOCK AND COMMON STOCK OPTIONS

  On March 28, 2000, the Company filed a Restated Certificate of Incorporation
which, changed the number of authorized shares of common stock to 96,024,821
and authorized 1,000,000 shares of undesignated preferred stock, and effected
a reverse stock split of its common stock on a 1-for-4.5 basis. In July 2000,
the reverse stock split and the authorization of the undesignated preferred
stock was reversed.

  On September 13, 2000 the Board of Directors approved a reverse stock split
of its common stock on a 1-for-5 basis, changed the number of authorized
shares of common stock to 99,000,000 and authorized 1,000,000 shares of
undesignated preferred stock which actions became effective on March 22, 2001.
All common share, options, and per share amounts in the accompanying financial
statements have been retroactively adjusted to reflect the reverse stock split
for all periods presented.

  In November 1994 (commencement of operations), the Company issued 100,000
shares of common stock to an investor at a price of $.001 per share. The
difference between the fair value of such stock and the price paid at the
issuance date aggregated $12,400, which amount was charged to operations in
1994.

  In November 1994, the Company issued 453,280 shares of restricted common
stock to an executive officer of the Company at a price of $.003 per share and
92,131 shares of restricted common stock to a scientific consultant at a price
of $.003 per share. These shares vested ratably over 48 months. The difference
between the fair value of such stock and the per share price paid at the
issuance date aggregated $66,767 which amount was recorded as deferred
compensation and was amortized to operations over the vesting period.
Compensation expense related to these shares aggregated $16,692 in 1997,
$13,910 in 1998 and none in 1999 or 2000. In addition, in May 1996, the
Company issued 20,000 shares of restricted common stock to a director for cash
at a price of $0.21 per share (the fair value at date of grant as determined
by the Board of Directors). These shares vest ratably over 48 months, and are
subject to the Company's right of repurchase of unvested shares in certain
circumstances.

  We sold 6,000,000 shares of our common stock on November 14, 2000. Upon the
exercise of the underwriter's over-allotment option, we sold an additional
900,000 shares of common stock. The effective date of the registration
statement on Form S-1 for the 6,900,000 shares of common stock sold in our
initial public offering was November 13, 2000 and the file number is 333-
96333.

  The price to the public of the 6,900,000 shares of common stock sold in our
initial public offering was $15.00 per share and the gross proceeds were
$103,500,000. The total underwriting discounts and commissions were
$7,245,000. The net proceeds were $95,376,000. The total costs and expenses
incurred in the offering, exclusive of the underwriting discount, were
approximately $879,000.


                                     F-15
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

 Shareholder Rights Plan

  The Company's Board of Directors adopted a Shareholder Rights Plan (the
"Plan") in February 2001. Under the Plan, preferred stock purchase rights were
distributed as a dividend at the rate of one Right for each share of Common
Stock outstanding as of the close of business on February 20, 2001. Each Right
entitles the holder to purchase one ten-thousandth of a share of newly created
Series A Junior Participating Preferred Stock of Adolor at an exercise price
of $155.00 per Right. In general, the Rights will be exercisable if a person
or group becomes the beneficial owner of 15% or more of the outstanding Common
Stock of Adolor or announces a tender offer for 15% or more of the Common
Stock of Adolor. The Board of Directors will in general be entitled to redeem
the Rights for $.0001 per Right at any time prior to the occurrence of the
stock acquisition events described above. If not redeemed, the Rights will
expire on February 19, 2011.

 Stock Options

  The Company granted 606,060 common stock options in January 2000 at exercise
prices of $2.25 per share for which a compensation charge amounting to
approximately $7,446,000 will be recorded over the respective vesting periods
of the options based on a fair value of $14.40 per share on the grant date. In
addition, between March and June 2000, the Company granted 376,428 common
stock options at an exercise price of $2.50 per share for which a compensation
charge amounting to approximately $4,479,000 will be recorded over the
respective vesting periods of the options. From July 1 to September 30, 2000,
the Company granted 649,548 stock options at exercise prices ranging from
$2.75 to $3.50 per share for which a total compensation charge of
approximately $7.1 million based on the fair value of the common stock on the
grant date of $14.40 per share will be recorded over the four-year vesting
periods of the options. From October 1 to November 6, 2000, the company
granted 96,600 stock options at an exercise price of $3.50 per share for which
a total compensation charge of approximately $1,117,190 based on the fair
value of common stock on the grant date of $14.40 per share will be recorded
over the four-year vesting period of the options. On October 4, 2000, a grant
of 20,000 stock options was awarded to an officer of the company at an
exercise price of $3.50 per share for which a total compensation charge of
$218,000 based on a fair value of common stock on grant date of $14.40 per
share will be recorded over a six-month vesting period of the options. Future
compensation expense relating to such option grants will be approximately $5.5
million for each of the years ending December 31, 2001 through 2003, and $1.7
million for the year ending December 31, 2004.

  During March 2000, certain officers and employees exercised options to
purchase 472,067 shares of common stock. The exercised options are scheduled
to vest monthly over four years, during which time the Company has the right
to repurchase any unvested shares. In connection with such exercises, the
employees delivered promissory notes to the Company in the aggregate amount of
approximately $1,062,200 as consideration for the exercise price. As of
December 31, 2000, two employees have been terminated, which reduced the notes
receivable to $1,056,488. The promissory notes are full recourse and are
secured by shares of the Company's common stock. The promissory notes accrue
interest at an annual rate of 6.80% and are payable in March 2007. As the
makers of the promissory notes sell the shares of the Company's common stock
that secure the notes, the makers are required to repay the principal amounts
due under the notes secured by the sold shares. As of December 31, 2000,
376,425 shares were subject to buyback at the purchase price paid by the
employee.

  The Company's 1994 Amended and Restated Equity Compensation Plan, as
amended, (the 1994 Plan) allows the granting of incentive and nonqualified
stock options to employees, directors, consultants and contractors to purchase
an aggregate of 3,950,000 shares of the Company's common stock. The options
are exercisable generally for a period of six to seven years from the date of
grant and vest over terms ranging from immediately to four years.

                                     F-16
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)


  A summary of activity under the 1994 Plan from January 1, 1998 to December
31, 2000, is as follows:

<TABLE>
<CAPTION>
                                                                      Exercise
                                                          Number of     price
                                                           options    per share
                                                          ----------  ---------
   <S>                                                    <C>         <C>
   Balance, January 1, 1998..............................    683,745  $.126-.50
     Granted.............................................    209,636    .35-.35
     Exercised...........................................    (99,913)  .126-.35
     Cancelled...........................................    (65,014)  .126-.35
                                                          ----------
   Balance, December 31, 1998............................    728,454   .126-.50
     Granted.............................................    499,744  .376-1.50
     Exercised...........................................    (25,224) .126-.376
     Cancelled...........................................    (50,262)  .21-.376
                                                          ----------
   Balance, December 31, 1999............................  1,152,712  .126-1.50
     Granted.............................................  1,748,635  2.25-3.50
     Exercised........................................... (1,171,419)  .13-3.50
     Cancelled...........................................    (46,745)  .21-2.25
                                                          ----------
   Balance, December 31, 2000............................  1,683,183
                                                          ==========
</TABLE>

  AT DECEMBER 31, 2000, THE PLAN HAD THE FOLLOWING OPTIONS OUTSTANDING AND
EXERCISABLE BY PRICE RANGE, AS FOLLOWS:

<TABLE>
<CAPTION>
                                         Options Outstanding             Options Exercisable
                              ----------------------------------------- ----------------------
                                                            Weighted               Weighted
                                        Weighted average    average     Number     average
                               Number      remaining     exercise price   of    exercise price
   Range of exercise prices   of shares contractual life  (per share)   shares   (per share)
   ------------------------   --------- ---------------- -------------- ------- --------------
   <S>                        <C>       <C>              <C>            <C>     <C>
   $0.125-0.35.............     227,337       2.8            $ .24      152,883     $ .19
   $0.375-0.375............     269,745       5.1              .38       84,373       .38
   $0.50 -0.65.............      14,352       4.9              .60       11,226       .64
   $0.75 -1.50.............      24,986       6.0             1.33       12,462      1.33
   $2.25 -2.25.............      62,707       6.0             2.25       35,273      2.25
   $2.50 -2.50.............     335,305       6.4             2.50       58,972      2.50
   $2.75 -2.75.............      77,743       6.5             2.75        7,329      2.75
   $3.50 -3.50.............     671,008       6.7             3.50       87,795      3.50
                              ---------                                 -------
                              1,683,183                      $2.22      450,313     $1.42
                              =========                                 =======
</TABLE>

  The Company applies APB No. 25 in accounting for its stock option plan.
During the years ended December 31, 1998, 1999 and 2000, certain employees of
the Company were granted options to acquire 201,236, 450,576 and 1,657,035
shares of the Company's common stock, respectively. The weighted average fair
values of common stock for the years ended December 31, 1998, 1999 and 2000,
were $1.70 per share, $7.22 per share, and $14.40 per share, respectively. The
differences between the fair value, as determined by the Board of Directors,
prior to the Company's initial public offering and the respective exercise
prices at the grant dates has been recorded as deferred compensation
($205,651, $1,831,402 and $18,702,976 for 1998, 1999 and 2000, respectively)
which is being amortized on a straight-line basis to expense over the vesting
period of the options.

  Had the Company determined compensation cost for options granted during the
years ended December 31, 1998, 1999 and 2000 based on the minimum value method
prior to the initial public offering, at the grant date

                                     F-17
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

under SFAS No. 123, the Company's net loss and net loss per share would have
been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                              Years Ended December 31,
                                         -------------------------------------
                                            1998         1999         2000
                                         -----------  -----------  -----------
   <S>                                   <C>          <C>          <C>
   Net loss allocable to common
    stockholders:
     As reported.......................  (10,519,553) (13,111,346) (74,246,983)
     Pro forma under SFAS No. 123......  (10,527,468) (13,350,599) (74,536,116)
   Basic and diluted net loss per share
    allocable to common stockholders:
     As reported.......................  $    (10.59) $    (12.55) $    (13.99)
     Pro forma under SFAS No. 123......  $    (10.60) $    (12.78) $    (14.04)
</TABLE>

  Pro forma net loss reflects only options granted since 1995. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net loss amounts presented above because
compensation expense is recorded under SFAS 123 over the respective vesting
period of such options, and options granted by the Company prior to January 1,
1995 are not reflected in the pro forma net loss figures above.

  In April 1995 and December 1995, the Company issued 17,500 shares and 32,500
shares of common stock to a research institution and a researcher,
respectively, as compensation for certain technology license agreements.
Research and development expense of $6,250 was recognized in 1995 related to
the issuance of these shares. In 1998 and 1999 and December 31, 2000 the
Company issued 8,400, 46,168 and 91,600 stock options, respectively, to non-
employees. Such options vest over future service periods. The Company recorded
deferred compensation of $11,470, $974,793 and $1,233,852 in 1998, 1999 and
2000, respectively, based on the fair value as determined using a Black-
Scholes pricing model. Such deferred compensation is being amortized to
expense using the methodology prescribed in FASB Interpretation No. 28 over
the vesting period. The amount of amortization for the 1998, 1999 and 2000
grants is subject to change each reporting period based upon changes in the
fair value of the Company's common stock, estimated volatility and the risk
free interest rate until the non-employee completes his or her performance
under the option agreement.

  All options were granted with exercise prices less than the fair value of
the Company's common stock. The per share weighted-average minimum value of
the stock options granted to employees during 1998, 1999, and 2000 was $1.44,
$4.34 and $5.02 per share, respectively, on the date of grant. The per share
weighted-average fair value of stock options granted to non-employees during
1998, 1999, and 2000 was $1.37, $12.90 and $13.47 per share, respectively, on
the date of grant. Such values were determined using the minimum value method
for employees and a Black Scholes option-pricing model for non-employees with
the following weighted average assumptions: expected dividend yield 0%; risk
free interest rate of 4.465% for 1998, and 5.49% for 1999 and 6.5% for 2000;
volatility of 0% for employees and 60% for non-employees; an expected option
life of 4 years for employees and 10 years for non-employees. There were no
stock option grants in 2000 after the Company's initial public offering.

9. LICENSE AND RESEARCH AGREEMENTS

  On June 22, 1995, the Company and the University of California at San Diego
(UCSD) entered into an exclusive, worldwide license for certain technology
rights covered under UCSD patents. The Company paid a $10,000 license fee, and
committed to a $10,000 annual license maintenance fee. The Company also agreed
to bear UCSD's prosecution costs for patents covering the licensed technology.
Payments of $50,000 and $150,000

                                     F-18
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

are payable upon commencement of Phase III clinical trials and NDA filing,
respectively, and the agreement provides for royalties at various rates on
sales proceeds of products resulting from the licensed technology, if any.

  In November 1997, the Company entered into a license agreement with Kwang
Dong which granted them the rights in South Korea and North Korea to develop
and market one of the Company's compounds for certain indications. Under the
terms of the agreement, the Company will receive payments upon the achievement
of defined clinical and regulatory milestones of up to an aggregate of
$720,000, and royalties on any future sales proceeds in South Korea and North
Korea, if any, resulting from the licensed technology. The Company will supply
formulated bulk drug, including certain free amounts during the first year of
sales, and Kwang Dong will be responsible for clinical development and
regulatory approvals in South Korea and North Korea. The Company devoted
significant internal efforts and expenditures to the development of a
formulation for this indication. To date, the Company has not transferred
sufficient technology under the license agreement to allow commercialization
of ADL 2-1294 in South Korea and North Korea. As a result the Company does not
anticipate material revenues under the license agreement in the foreseeable
future. Kwang Dong also made an equity investment in the Company (see note 7).

  On June 10, 1998, the Company entered into an exclusive, world-wide license
agreement with Roberts Laboratories Inc., (Roberts) which recently merged with
Shire Pharmaceutical, plc, for technology relating to compound ADL 8-2698.
Upon signing the agreement the Company made a $300,000 nonrefundable payment
to Roberts which was recorded as research and development expense because the
licensed technology had not reached technological feasibility and had no
alternative future uses. The Company will also be required to make payments
totaling up to $2,200,000 upon the occurrence of future events. In addition,
royalties are payable from the sale proceeds of products resulting from the
licensed technology, if any. In 1999, the Company paid $300,000 to Roberts to
exercise certain licensing rights as defined in the agreement, which was
recorded as research and development expense.

  On July 26, 1999, the Company entered into a license agreement with SB
granting SB an exclusive license to certain of the Company's compounds for
certain indications in most of the world. SB may develop, at their own cost,
manufacture, market and sell any resulting products. Under the terms of the
agreement, the Company will receive milestone payments upon the achievement of
defined clinical and regulatory milestones, and royalties on any future sales
proceeds, if any, resulting from the licensed technology. The Company must
maintain the underlying patents and provide certain other information to SB.
Upon signing the agreement, the Company received a licensing fee of $500,000.
This licensing fee has been deferred and is being recognized over the
remaining life of the patents which is nineteen years. SB also made an equity
investment in the Company (see note 7). The proceeds received from the
licensing fee and the equity instrument have been allocated to their related
financial statement components based upon the amounts specified in the
separate agreements which represent management's estimate of the fair value of
such components.

  On April 25, 2000, the Company entered into a license agreement with Santen
Pharmaceutical Co., Ltd. granting Santen an exclusive royalty bearing license
to develop and sell products in the field of ophthalmic pain in all countries
other than South Korea and North Korea. Santen will pay Adolor royalties on
annual net sales of the products. Santen will pay Adolor $1,000,000 when gross
sales in major markets achieve $75,000,000 and an additional payment of
$1,500,000 when aggregate sales achieved is $150,000,000. A $500,000 payment
has been paid to Adolor upon execution of the agreement.

  The Company has entered into various licensing, research and other
agreements. Under these agreements, the Company is working in collaboration
with various other parties. Should any discoveries be made under such

                                     F-19
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

arrangements, the Company would be required to negotiate the licensing of the
technology for the development of respective discoveries, and possible
royalties on future product sales, if any. Under these agreements, the Company
would be obligated to make payments aggregating up to approximately $3,600,000
upon the achievement of certain milestones and to make future royalty payments
on sales proceeds of products, if any, a portion of which could be offset by
previously made milestone payments.

  The Company intends to expense to research and development expense milestone
payments that are required to be made upon the occurrence of future events
prior to NDA approval. The Company intends to capitalize payments that are
required to be made upon the occurrence of future events commencing with NDA
approval.

10. INCOME TAXES

  No federal and state taxes are payable as of December 31, 1999 and 2000. As
of December 31, 2000, the Company had approximately $26,259,000 of Federal and
$26,683,000 of state net operating loss carryforwards available of offset
future taxable income. The Federal and state net operating loss carryforwards
will expire as follows:

<TABLE>
<CAPTION>
                                                             State     Federal
                                                          ----------- ----------
   <S>                                                    <C>         <C>
   2005.................................................. $   450,000 $      --
   2006..................................................   1,232,000        --
   2007..................................................   2,063,000        --
   2008..................................................   3,519,000        --
   2009..................................................   3,938,000     33,000
   2010..................................................  15,481,000    482,000
   Thereafter............................................           0 25,744,000
                                                          ----------- ----------
                                                          $26,683,000 26,259,000
                                                          =========== ==========
</TABLE>

  In addition, the utilization of the state net operating loss carryforwards
is subject to a $2 million annual limitation. At December 31, 2000, the
Company also has approximately $547,000 of Federal and $35,000 of state
research and development tax credit carryforwards, which begin expiring in
2011, and are available to reduce Federal and state income taxes.

  The Tax Reform Act of 1986 (the Act) provides for a limitation on the annual
use of net operating loss and research and development tax credit
carryforwards (following certain ownership changes, as defined by the Act)
that could significantly limit the Company's ability to utilize these
carryforwards. The Company may have experienced various ownership changes, as
defined by the Act, as a result of past financings and the initial public
offering. Accordingly, the Company's ability to utilize the aforementioned
carryforwards may be limited. The Company has not yet determined whether or
not ownership changes, as defined by the Act, have occurred. Additionally,
because U.S. tax laws limit the time during which these carryforwards may be
applied against future taxes, the Company may not be able to take full
advantage of these attributes for Federal income tax purposes.

                                     F-20
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)


  Significant components of the Company's deferred tax assets and liabilities
are shown below. At December 31, 2000, a valuation allowance of $26,811,000
has been recognized to fully offset the deferred tax assets as realization of
such assets is not "more likely than not." SFAS 109 requires a valuation
allowance to reduce the deferred tax assets reported if based on weight of the
evidence it is more likely than not that some, or all, of the deferred tax
assets will not be realized. Realization of the Company's deferred tax assets
is dependent upon generating future taxable income. After considering all of
the evidence, including the Company's net losses since inception and the
uncertainty of future profitability, management has determined that a
valuation allowance is necessary to reduce the net deferred tax assets to
zero. The change in the valuation allowance in 1999 and 2000 were increases of
$3,394,401 and $14,056,000 respectively, related primarily to additional net
operating losses and capitalized research and development costs incurred by
the Company.

<TABLE>
<CAPTION>
                                                          1999         2000
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Deferred tax assets:
     Net operating loss carryforwards.................   4,368,000   10,923,000
     Capitalized research and development costs.......   7,329,000   12,151,000
     Tax credit carryforwards.........................     533,000      582,000
     Accrued expenses and other.......................     586,000    3,209,000
                                                       -----------  -----------
       Total deferred tax assets......................  12,816,000   26,685,000
     Less valuation allowance......................... (12,755,000) (26,811,000)
                                                       -----------  -----------
       Net deferred tax assets........................      61,000       54,000
   Deferred tax liability.............................     (61,000)     (54,000)
                                                       -----------  -----------
       Net deferred tax...............................         --           --
                                                       ===========  ===========
</TABLE>

11. COMMITMENTS

  Future minimum lease payments under non-cancelable operating leases for
office and laboratory space are as follows:

<TABLE>
<CAPTION>
   Year ending December 31,
   ------------------------
   <S>                                                                <C>
     2001............................................................ $  688,296
     2002............................................................    450,292
     2003............................................................     67,638
     2003............................................................     53,405
                                                                      ----------
                                                                      $1,259,631
                                                                      ==========
</TABLE>

  Rent expense was $237,351, $258,805 and $425,791 for the years ended
December 31, 1998, 1999 and 2000, respectively. In October 2000, we signed a
two-year lease for additional office space with the first year's minimum
rental payment of $465,000 and second year's minimum rental payment of
$485,000.

  The Company has an agreement with an officer to provide for certain payments
upon certain forms of termination of employment.

12. 401(k) PROFIT SHARING PLAN

  In 1995, the Company adopted a 401(k) Profit Sharing Plan (the 401(k) Plan)
available to all employees meeting certain eligibility criteria. The 401(k)
Plan permits participants to contribute up to 15% of their salary,

                                     F-21
<PAGE>

                       ADOLOR CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

not to exceed the limits established by the Internal Revenue Code. All
contributions made by participants vest immediately into the participant's
account. The Company is not required to make and did not make any contributions
to the 401(k) Plan in 1998, 1999 and 2000.

13. QUARTERLY INFORMATION (UNAUDITED)

  This table summarizes the unaudited results of operations for each quarter of
fiscal 2000 and 1999:

<TABLE>
<CAPTION>
                                                 Quarter Ended
                                   -------------------------------------------
                                   March 31  June 30  September 30 December 31
                                   --------  -------  ------------ -----------
                                   (In thousands, except Per share amounts)
   <S>                             <C>       <C>      <C>          <C>
   Fiscal 2000
     Revenue......................       7       11          13          13
     Net loss.....................  (4,032)  (4,970)     (4,642)     (7,594)
     Net loss allocable to common
      stockholders................ (17,292)  (5,593)    (42,727)     (8,635)
     Basic and diluted earnings
      per share...................  (12.61)   (3.78)     (23.90)       (.55)
   Fiscal 1999
     Revenue......................       0        0           5           6
     Net loss.....................  (1,974)  (2,488)     (3,165)     (3,054)
     Net loss allocable to common
      stockholders................  (2,485)  (2,987)     (3,721)     (3,918)
     Basic and diluted earnings
      per share...................   (2.41)   (2.88)      (3.55)      (3.72)
</TABLE>

                                      F-22