<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                              __________________

                                   Form 10-K

             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                      SECURITIES AND EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 1999       Commission File Number 0-23160

                              __________________

                                 ANESTA CORP.
            (Exact name of registrant as specified in its charter)



               Delaware                                   87-0424798
    (State or other jurisdiction of                    (I.R.S. Employer
    incorporation or organization)                     Identification No.)


                4745 Wiley Post Way, Salt Lake City, Utah 84116
         (Address of principal executive offices, including zip code)

                                (801) 595-1405
             (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:  Common Stock, $.001
                                   Par Value


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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to be
the best of the 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 the Common Stock held by non-
affiliates of the Registrant, based upon the last sale price of the Common Stock
reported on the National Association of Securities Dealers Automated Quotation
National Market System was $148,505,627 as of March 21, 2000.*

     The number of shares of Common Stock outstanding was 13,372,432 as of March
21, 2000.

____________________
* Excludes 5,478,655 shares of Common Stock held by directors and officers and
stockholders whose beneficial ownership exceeds five percent of the shares
outstanding at March 21, 2000. Exclusion of shares held by any person should not
be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control with
the Registrant.
<PAGE>

Except for the historical information contained herein, the following Report
contains forward-looking statements which involve risks and uncertainties. When
used in this report, the words "intend," "anticipate," "believe," "estimate,"
"plan" and "expect" and similar expressions as they relate to the Company are
included to identify forward-looking statements. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of the risk factors discussed in this report under the
heading "Risk Factors".


                                    PART I


ITEM 1.   BUSINESS
-------


Introduction

Anesta Corp. (Anesta or the Company) is a leader in the development of new
pharmaceutical products for oral transmucosal drug administration. The Company's
products are based on its proprietary oral transmucosal system (OTS/(TM)/) for
drug delivery. Anesta's principal product is Actiq/(R)/(oral transmucosal
fentanyl citrate), an OTS fentanyl product, which was approved by the U.S. Food
and Drug Administration (FDA) on November 4, 1998. Actiq is the first product
specifically designed, studied and approved for breakthrough cancer pain. Actiq
is indicated for the management of breakthrough cancer pain in patients with
malignancies who are already receiving and who are tolerant to opioid therapy
for their underlying persistent cancer pain.

Breakthrough cancer pain is a sporadic flare of severe cancer pain that "breaks
through" the patient's regular medication for persistent cancer pain.
Breakthrough cancer pain is a component of chronic cancer pain that is
particularly difficult to treat due to its severity, rapid onset and
unpredictability. The Company believes that more than 800,000 patients
experience breakthrough cancer pain representing approximately one-half of all
cancer pain patients in the United States.

Anesta's OTS consists of a drug matrix that is mounted on a handle or other
controlling device. The OTS is designed to achieve rapid absorption of certain
potent drugs through the oral mucosa, the lining of the mouth, and into the
bloodstream, producing rapid onset of the desired therapeutic effect. Anesta's
OTS allows the caregiver or patient to monitor the onset of action, remove the
unit and stop administration of the drug once the desired therapeutic effect has
been achieved or side-effects appear.

On March 13, 2000, Anesta announced that it had renegotiated the U.S. marketing
rights for Actiq with Abbott Laboratories Hospital Products Division (Abbott).
Anesta will have primary responsibility for the sales and marketing of Actiq in
the U.S. Abbott will continue to manufacture and distribute Actiq in the U.S.

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Anesta has also entered into collaborations with Grupo Ferrer Internacional S.A.
(Ferrer) for Spain and Portugal, Laboratoire L. Lafon (Lafon) for France,
Swedish Orphan AB (SWO) for Scandinavia (Denmark, Finland, Iceland, Norway, and
Sweden), and Elan Pharma International, a unit of Elan Corporation, plc, (Elan)
for Austria, Belgium, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands,
Philippines, Switzerland, Taiwan and the United Kingdom. These agreements grant
exclusive marketing, sales and distribution rights for Actiq, Fentanyl Oralet
and any future OTS fentanyl products.

Anesta is also developing other product candidates using its proprietary OTS
drug delivery platform. Currently, the Company has seven investigational product
candidates undergoing clinical evaluation. OTS fentanyl for acute pain is the
subject of ongoing Phase 2/3 clinical trials. The Company is in late Phase 2
clinical trials for OTS nicotine. OTS etomidate for short-acting sedation is in
early Phase 2 clinical trials. OTS piroxicam, a non-opioid drug to treat pain,
and OTS droperidol, a drug to treat nausea and vomiting, are in Phase I clinical
trials. Anesta filed two Investigational New Drug applications (IND) for two new
product candidates in late 1999. One IND was for OTS scopolamine, a drug to
treat motion sickness and the second IND was for OTS prochlorperazine, a drug to
treat nausea and vomiting. Anesta continues to evaluate various compounds and is
conducting preclinical research with various compounds using its OTS technology.

In February 1999, the Company entered into a 12-month option agreement with
Novartis involving the Company's proprietary OTS for drug delivery. Under the
terms of the option agreement, Novartis and the Company assessed the
worldwide commercial opportunity of potential products combining Novartis
compounds with the Company's OTS. Currently, the Company and Novartis are in
discussions about the possibility of a definitive licensing agreement.

Background on Drug Delivery Methods

Drug delivery is the method of delivering an active pharmaceutical compound to
the body in a manner which is designed to optimize therapeutic effect and/or
minimize side effects. For many chronic indications, such as certain types of
heart disease, it is often advantageous to have sustained release of the active
compound over a long period of time. However, for many acute indications, the
opposite pharmacokinetic profile is desired: an easily-controlled rapid onset of
action and rapid clearance from the blood stream. By providing for more accurate
dosing, greater convenience, or lower cost, a variety of novel drug delivery
technologies have been widely accepted by physicians, patients, and payors.
Existing drug delivery systems include the following:

Tablets and capsules. Orally delivered tablets or capsules are convenient and
cost-effective, but they generally do not provide rapid onset of action. Also,
some drugs do not achieve adequate bioavailability if administered as a tablet
or capsule due to degradation of the drug by the stomach and liver.

                                       3
<PAGE>

Infusions and injections. Infusions and injections provide rapid onset of
action. Infusion techniques can titrate potent drugs with very rapid changes in
effect. However, infusions and injections are invasive and can be painful to
some patients. Infusions and injections generally must be administered by
trained medical professionals and are often inconvenient and expensive.

Transdermal patches. Transdermal delivery systems, which allow absorption of
drugs through the skin, are convenient and easy to use, and provide a relatively
steady rate of drug delivery. However, a transdermal patch may take four to ten
hours to achieve therapeutic blood levels. In addition, drug absorption into the
bloodstream may continue for hours after removal of the patch. This slower onset
of action and inability to quickly stop absorption limit the usefulness of
transdermal patches in some applications and present safety concerns in some
clinical situations. For example, patients in acute pain cannot wait several
hours for pain relief and may need to be hospitalized to obtain injections or
infusions of fast-acting medication.

Transnasal and inhalation. Nasal spray, dry powder and aerosolized inhalation
delivery systems are designed to provide rapid onset of action or to deliver
drugs that are not orally bioavailable. Nasal sprays can cause irritation and
can be difficult to administer in some patients. In addition, it can be
difficult for a patient to titrate or control the dose of the product using
nasal or inhalation delivery systems.

Anesta's Proprietary OTS for Drug Delivery

Anesta's proprietary OTS is designed to address the medical need for a
convenient, non-invasive, cost-effective drug delivery system that provides
rapid onset of therapeutic action. The OTS allows the caregiver or patient to
control drug administration until the desired effect is achieved and quickly
stop administration if side effects appear. The OTS consists of a dissolvable,
non-dissolvable, or device-based drug matrix, which is mounted on a handle or
other controlling device. The drug is released from the matrix in the mouth,
allowing rapid absorption through the oral mucosal tissues and into the
bloodstream. There is also slower absorption through the gastrointestinal tract.
Oral transmucosal drug delivery achieves rapid absorption of many drugs because
the oral mucosa are significantly more permeable than the skin, have a large
surface area and are highly vascularized. However, not all drugs are appropriate
for oral mucosa delivery with the Company's technology.

For certain drugs or applications, Anesta believes that its OTS can provide one
or more of the following therapeutic advantages over other available methods of
drug administration:

Rapid Onset of Action. The efficacy of many systemic drugs is related to their
blood concentration. The more rapidly an effective blood concentration is
reached, the sooner the drug provides therapeutic effect. The Anesta OTS enables
drugs to cross the oral mucosa and be absorbed rapidly into the bloodstream,
thus achieving a therapeutic blood concentration more rapidly than tablets,
capsules or transdermal patches.

                                       4
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Dose-to-Effect Control. The stomach and the liver may significantly degrade
drugs delivered by tablets or capsules. Thus, tablets and capsules often contain
higher doses of a drug than are necessary to achieve a therapeutic effect,
potentially leading to over-medication and side effects. Continuous infusion
therapy can alleviate these dosing problems, but may lead to increased cost,
patient inconvenience and patient noncompliance with prescribed dosing regimens.
Anesta's OTS allows the caregiver or patient to monitor the onset of action and
remove the unit to stop administration of the drug once the desired therapeutic
effect has been achieved or side effects appear. This can avoid doses that are
higher than necessary to achieve safe and effective therapy, an important and
beneficial element of control.

Rapid Termination of Drug Delivery. In certain applications, it is desirable to
stop drug administration once the desired effect has been obtained. For example,
if a patient receives a sedative in connection with a brief outpatient
procedure, substantially all of the sedative effect should be gone before the
patient can be discharged. The drug contained in a tablet or capsule may
dissolve and continue to be absorbed into the bloodstream over a period of
hours. Similarly, when a transdermal patch is removed, the drug that has already
accumulated within the skin will continue to be absorbed into the bloodstream
for a number of hours. Thus, drug absorption from tablets, capsules and
transdermal patches may continue longer than necessary or desired. By contrast,
once Anesta's OTS is removed, absorption of the drug through the oral mucosal
tissues into the bloodstream stops almost immediately.

Improved Safety. Removing the unit limits further absorption of the drug into
the body if a patient has an adverse reaction. Because the dosage unit can be
removed immediately, the amount of the drug delivered to the patient may be
lower than if a tablet, capsule, transdermal patch or injection had been
administered.

Cost-Effective. Traditionally, when rapid onset of action is critical, infusions
or injections have been required. Infusions and injections generally are given
by a skilled caregiver and may require that a catheter be inserted. In contrast,
the patient simply places the OTS dosage unit in his or her mouth. Thus, Anesta
believes that its OTS may offer a more cost-effective means of delivering
certain drugs that are now given by infusion or injection.

Greater Patient and Caregiver Convenience. The Company's OTS is easily
administered, comfortable, non-threatening and allows a caregiver or the patient
the ability to titrate drug administration.

Anesta's Business Objectives and Strategy

Anesta intends to be the leader in the oral transmucosal delivery of drugs.
Anesta's near-term objectives are increased sales of Actiq in the United States
and commercialization of Actiq in Europe. Anesta's longer-term strategy is to
develop and commercialize a range

                                       5
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of products based upon its proprietary OTS. Anesta is pursuing these objectives
with the following strategies:

Increased Sales of Actiq in the United States. Effective April 2000, Anesta has
responsibility for the sales and marketing of Actiq in the United States. To
maintain and increase sales of the product, Anesta has retained a contract sales
organization to recruit and retain a field sales organization to sell Actiq. In
addition, Anesta has a regional medical liaison field organization which
provides technical and clinical assistance to the field sales organization.
Anesta will manage the field organizations, and the marketing strategies and
tactics with its internal sales and marketing group.

Commercialize Actiq Internationally. On August 18, 1999, Anesta UK LTD. (Anesta
UK), a wholly owned subsidiary of Anesta, announced the filing of an abridged
Marketing Authorization Application (MAA) for Actiq with the Medicines Control
Agency (MCA) in the United Kingdom. If approved, Actiq would be the first
product of its kind in the United Kingdom to be specifically indicated for the
management of breakthrough pain in patients already receiving maintenance opioid
therapy for chronic pain.

Leverage OTS Technology Platform. Anesta plans to leverage its proprietary OTS
platform technology across a number of therapeutic areas. The Company will focus
its product development program on large markets where the Company's OTS
technology may offer benefits over existing therapies. The Company intends to
continue developing new pharmaceutical products by applying its OTS to approved
drugs, both proprietary and generic, where existing methods of drug delivery
have therapeutic or clinical limitations. The Company intends to continue to
expand its proprietary position by pursuing patent protection in the United
States and key international markets for its OTS and for dosage forms that
incorporate such technology.

Maximize Value From Products. Anesta intends to capture a substantial portion of
the future economic benefits from its approved products and product candidates.
By selectively investing in multiple aspects of the drug development and
commercialization process, such as manufacturing and clinical development, in
addition to research and formulation, Anesta believes it will be able to form
more economically and strategically attractive partnerships with larger
pharmaceutical companies.

Anesta's Products and Development Programs

The Company's research and development activities involve formulation and
analytical methods development, in vitro and in vivo proof-of-concept testing,
manufacturing process development, quality control and quality assurance
programs, preclinical and clinical research, regulatory documentation and
interaction with the FDA and other regulatory agencies to gain marketing
approval for its products.

                                       6
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The following table identifies the potential therapeutic indications for and
current status of Anesta's approved products and the primary products that are
in research and development.

<TABLE>
<CAPTION>
       Programs and Products               Indication                           Status(1)
       ---------------------               ----------                           ---------
<S>                                        <C>                                  <C>
OTS fentanyl Program

Actiq (U.S.)(2)                            Breakthrough cancer pain             NDA Approved
Fentanyl Oralet(2)                         Sedation and analgesia; surgical     NDA Approved
                                           premedication
Actiq (International)(3)                   Breakthrough pain                    MAA Filed (U.K.)

OTS fentanyl(2)                            Acute pain                           Phase 2/3

Other OTS Product Candidates

OTS nicotine                               Smoking cessation                    Phase 2
OTS etomidate                              Short-acting sedation                Phase 2
OTS piroxicam                              Mild to moderate pain                Phase 1
OTS droperidol                             Nausea and vomiting                  Phase 1
OTS scopolamine                            Motion sickness                      IND Filed
OTS prochlorperazine                       Nausea and vomiting                  IND Filed
</TABLE>
__________

(1) See "Business -- Government Regulation" for a description of the various
    phases of clinical testing.

(2) Abbott is Anesta's contract manufacturer for this product in the United
    States.  See "-- Collaborative Relationships."

(3) Sales and distribution rights to this product have been granted to Ferrer,
    Lafon, SWO and Elan. See "-- Introduction" for the specific countries for
    each partner.

                                       7
<PAGE>

Actiq for Breakthrough Cancer Pain

Breakthrough Cancer Pain. In recent years, there has been growing awareness that
millions of cancer patients do not receive adequate pain relief. Inadequate pain
management leads to debilitation and reduced quality of life and places
increased stress on interpersonal relationships with family, friends and
caregivers. Many clinicians believe that improving a patient's control over pain
also helps in the patient's ability to fight the underlying disease.

One of the most challenging components of cancer pain is breakthrough pain -- a
transitory flare of moderate to severe pain occurring on a background of
controlled persistent pain in patients receiving chronic opioid therapy.
Breakthrough pain may be related to a specific activity or may occur
spontaneously and be totally unpredictable. When related to a specific activity
such as walking or eating, it may be termed incident pain. The Company believes
that over 800,000 cancer patients in the United States suffer from breakthrough
pain, representing over half of all U.S. cancer patients who experience moderate
to severe pain.

Breakthrough cancer pain typically develops rapidly and often reaches maximum
intensity in three to ten minutes. It has a variable duration of 30 minutes to
several hours. These episodes can be excruciatingly painful and debilitating.
Opioid tablets, capsules and elixirs are not optimal to treat breakthrough
cancer pain because they typically require 30 minutes or more to produce pain
relief. This slow onset of pain relief results in a "pain relief gap" for
patients or the painful and anxious wait between onset of breakthrough pain and
effective pain relief.

Physicians can attempt to manage breakthrough cancer pain by increasing the dose
of the around-the-clock, long-acting opioid analgesic until the patient no
longer experiences breakthrough pain. However, this approach frequently leads to
over-medication and an increase in undesirable side effects such as drowsiness
or severe constipation. Patients and their physicians often are forced to
balance effective pain relief against the side effects associated with higher
opioid doses. As a result, cancer patients may suffer one to four episodes of
breakthrough pain every day.

The only currently available treatments that adequately match the rapid onset of
pain relief to the rapid onset of breakthrough cancer pain are intravenous or
subcutaneous infusions or intramuscular injections of potent opioids. In many
settings, infusions or injections are unacceptable because they are invasive,
uncomfortable, inconvenient for patients and caregivers, and more costly than
less invasive methods. Some current practice guidelines teach against using
invasive means of treating pain if at all possible.

Product Attributes. There is a significant unmet need for a breakthrough cancer
pain treatment that provides rapid pain relief in a simple, oral, controllable,
safe and patient-friendly manner. Anesta believes that Actiq meets these
criteria, by providing onset of pain relief within 15 minutes in a form that
allows the patient to control the dose. Actiq is

                                       8
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more convenient, more user-friendly and less costly than many invasive methods
of drug delivery.

Actiq is a drug matrix containing the active drug fentanyl, attached to a
handle, which facilitates rapid absorption of the drug across the oral mucosa
and into the blood stream. The analgesic effects of fentanyl are directly
related to the blood level of the drug, with proper allowance for the three to
five minute delay across the blood-brain barrier. The generally observed 50%
bioavailability of Actiq is divided equally between rapid transmucosal and
slower gastrointestinal absorption.

Clinical Program and Data for the Actiq NDA. Anesta's clinical program for
breakthrough cancer pain NDA involved a total of 12 studies at 45 U.S. sites,
which evaluated six dosage strengths of Actiq ranging from 200 to 1600
micrograms. The Company's clinical trials specific to breakthrough cancer pain
enrolled 257 patients who received nearly 75,000 doses of Actiq. The average
duration of therapy in the long-term safety study was 149 days, with patients
using Actiq to treat an average of 2.4 episodes of breakthrough cancer pain per
day. Some patients completed more than 800 days of Actiq therapy.

In the Actiq pivotal study of 130 patients, the efficacy of Actiq was compared
against placebo. Actiq produced significantly larger decreases in pain intensity
and better pain relief scores than placebo at 15, 30, 45, and 60 minutes
(p 0.0001). The most common adverse events observed with Actiq use in
breakthrough cancer pain patients were somnolence, nausea, vomiting and
dizziness, which are generally associated with opioid therapy.

FDA Approval and Commercial Plans. On November 4, 1998, the FDA cleared Actiq
for marketing for use in the management of breakthrough cancer pain in patients
with malignancies who are already receiving and who are tolerant to opioid
therapy. Actiq is the first product specifically designed, studied and approved
for breakthrough cancer pain. The product was launched in March 1999 in the
United States. During 1999 a dedicated Abbott sales force sold Actiq in the
United States with support from Anesta's regional medical liaison field
personnel. On March 13, 2000, Anesta announced that it had renegotiated U.S.
marketing rights for Actiq with Abbott. Effective April 1, 2000, Anesta will
have primary responsibility for the sales and marketing of Actiq in the U.S.
Abbott will continue to manufacture and distribute Actiq in the U.S.

The marketing of Actiq is accompanied by a comprehensive risk management program
of educational and safe use messages, which inform health care professionals,
patients and their families of proper use, storage, handling and disposal of the
product. This program is designed to address three potential risk situations:
accidental ingestion by children, improper patient selection, and diversion and
abuse. The greatest risk of improper Actiq use is the potential for respiratory
depression, which could be life threatening. As with all strong pain medicines,
steps must be taken to prevent access to Actiq by anyone other than the person
for whom the product was prescribed.

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The proposed treatment plan for using Actiq for breakthrough cancer pain is
simple and consistent with current clinical practice guidelines. Physicians
prescribe an around-the-clock opioid analgesic for persistent cancer pain, using
conventional products such as sustained-release morphine tablets or fentanyl
transdermal patches. The patient is instructed to use Actiq when the patient
feels the onset of breakthrough cancer pain. As the drug matrix dissolves, the
Fentanyl is released for rapid absorption through the mucosal tissues into the
blood stream. Actiq is available in six dosage strengths. It is recommended that
all patients should start at the lowest dosage level (200 g) and increase to
higher dosage strengths as necessary to achieve therapeutic effect without
triggering unacceptable side effects.

Actiq is contraindicated in the management of acute or postoperative pain and
must not be used in opioid non-tolerant patients. It is intended to be used only
in the care of cancer patients by oncologists and pain specialists who are
skilled in the use of schedule II opioids to treat cancer pain.

International Commercialization of Actiq. The Company believes that there is a
significant market opportunity for Actiq to treat breakthrough pain outside of
the United States. However, the prevailing practices regarding use of potent
opioids to treat cancer pain vary significantly from country to country.

In order to address the international market opportunity, Anesta developed and
validated a second generation manufacturing process for Actiq. This new
manufacturing process yielded a formulation which was shown to be bioequivalent
to the original formulation. During 1999, Anesta manufactured Actiq for use in
clinical studies in the United Kingdom. The Company will seek appropriate
regulatory approval for its manufacturing facility located in Salt Lake City,
Utah.

Anesta's clinical research in the United Kingdom was completed in 1999. On
August 18, 1999, Anesta UK announced the filing of an abridged MAA for Actiq
with the MCA in the United Kingdom. If approved, Actiq would be the first
product of its kind in the United Kingdom to be specifically indicated for the
management of breakthrough pain in patients already receiving maintenance opioid
therapy for chronic pain. Subject to approval in the United Kingdom, Anesta will
work in collaboration with its European partners to request approval of Actiq in
the other member states of the European Union via the mutual recognition
process. The Company has entered into four European commercial partnerships for
Actiq.

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Fentanyl Oralet (OTS fentanyl) for Premedication

Anesta's first OTS fentanyl product, Fentanyl Oralet, was approved by the FDA in
October 1993 for use in children and adults as a premedication before surgery
and for sedation/analgesia prior to painful procedures in monitored anesthesia
settings. Fentanyl Oralet is available in four dosage strengths ranging from 100
to 400 micrograms. Most patients experience an onset of analgesia in six to
eight minutes, and sedation and reduced anxiety in 20 to 30 minutes. Side
effects are similar to those produced by other opioid products. Although the
market potential for Fentanyl Oralet is limited, Anesta believes that the
commercialization of Fentanyl Oralet has benefited Anesta by allowing the
Company's first product to be studied, approved and introduced in a controlled
clinical setting.

Other OTS Product Candidates

Anesta has seven OTS product candidates under clinical evaluation:

OTS nicotine for smoking cessation. Nicotine replacement therapy has become
established as a successful aid to smoking and tobacco cessation programs.
Nicotine replacement products that have been approved include a nicotine gum,
several transdermal nicotine patches, a nicotine nasal spray and a nicotine
inhaler. The nicotine gum and three nicotine transdermal patches have been
approved by the FDA as over-the-counter products. Smoking cessation experts
believe that increasing the availability and number of nicotine replacement
products will provide a public health benefit, as no single therapy will be
effective for all smokers desiring to quit. These experts foresee a need for a
broad range of readily available products and therapies to increase the success
rate of smoking cessation programs.

The pharmacokinetic profile and behavioral characteristics of OTS nicotine are
different from the other nicotine replacement products currently on the market.
Some smokers who have used OTS nicotine have commented that the ability to
control dosing by repeatedly inserting and removing the OTS nicotine unit from
their mouths has given them a greater ability to manage their urge to smoke.
This element of control is different from that offered by these other treatment
modalities. Anesta believes that this ability to titrate the dose of nicotine
and rapidly deliver adequate doses to the individual may more closely displace
the physiologic dependence and psychological craving effects of cigarettes. The
Company believes these properties of OTS nicotine may be especially effective in
the early stages of smoking cessation and in smoking relapse prevention.

Anesta has completed several Phase 2 clinical studies for OTS nicotine and has
studied the results from more than 400 smokers and nonsmokers dosed with OTS
nicotine. These studies have evaluated the effects of different dosage
strengths, the acceptability of different taste formulations, and the ability of
OTS nicotine to aid in smoking cessation with limited, short-term use and with
eight weeks of therapy. In early studies, OTS nicotine has been shown to (1)
increase blood concentrations in proportion to dose, (2) decrease the desire to
smoke at higher doses, and (3) exhibit a high patient acceptance of

                                       11
<PAGE>

the product. Side-effects observed with OTS nicotine were mild and typical of
those seen with nicotine administration. Clinical data from a larger Phase 2
study comparing smoking quit rates over an 8-week period of use showed that
smokers using OTS nicotine achieved quit rates of 21%, similar to both the
nicotine gum (16%) and the nicotine patch (21%).

OTS fentanyl for acute pain. There are multiple causes of acute pain including
surgery, trauma and conditions such as kidney stones. Acute pain usually
requires the rapid onset of pain relief. Historically, hospitalized patients
have received injections or infusions to receive rapid pain relief. More
recently, patient controlled devices with sophisticated microelectronics have
been introduced which allow patients to self-administer the pain medication
intravenously when they feel the need for pain relief. This method of patient
controlled analgesia has been shown to improve pain management while decreasing
the total daily dose of medication. The Company believes there are psychological
benefits to patients who gain more control over their analgesic therapy. Anesta
has completed several Phase 2/3 clinical studies for acute pain. A recent
clinical study of OTS fentanyl in 133 post-operative patients with acute pain
showed that the onset of meaningful pain relief occurred in under five minutes
in over 50% of the patients, and this onset of meaningful pain relief was
similar to that observed with administration of intravenous morphine. Duration
of action for OTS fentanyl ranged from two to three hours and depended on the
doses administered.

OTS etomidate for short acting sedation. OTS etomidate is designed to provide
sedation for patients undergoing various types of outpatient medical or dental
procedures, either where the procedure is not painful or where pain is managed
by other methods such as local or regional anesthesia. Anesta believes that
there is a need for a rapid onset, short duration sedative that allows patients
to have a rapid, clear-headed recovery and prompt discharge after an outpatient
procedure is completed. Target applications include various scope procedures,
biopsies, and dental procedures. Two Phase 1 clinical studies showed that OTS
etomidate delivers dose-related therapeutic blood levels to produce onset of
sedation in 10 to 20 minutes. Sedation continues for 30 to 40 minutes. Emergence
from sedation to a level indicative of recovery occurs 60 to 90 minutes after
taking the drug. Two Phase 2 clinical studies with OTS etomidate have been
completed. These studies were dose-ranging (with placebo) studies of
approximately 80 patients each in patients undergoing sigmoidoscopy or wisdom
tooth extraction.

OTS piroxicam for pain management. Anesta is conducting a Phase 1 clinical trial
with OTS piroxicam. The goal of the first clinical trial is to determine plasma
drug levels in normal volunteers. OTS piroxicam contains the active drug
piroxicam, a nonsteroidal anti-inflammatory agent. Drugs in this class can be
used to treat mild to moderate pain.

OTS droperidol for nausea and vomiting. Anesta is conducting a Phase 1 clinical
study with OTS droperidol. The goal of the first clinical trial is to determine
plasma drug levels in normal volunteers. OTS droperidol contains the active drug
droperidol, a dopamine-2 antagonist. Drugs in this class can be used to prevent
or relieve nausea and vomiting flowing surgery or following chemotherapy.

                                       12
<PAGE>

Anesta filed two new IND applications for OTS-based products in late 1999: OTS
scopolamine for motion sickness and OTS-prochlorperazine for treating nausea and
vomiting. Phase 1 clinical trials are scheduled for these compounds in 2000.

Research and Development

Anesta is conducting preclinical research and development with its OTS
technology in several therapeutic areas and will continue to evaluate additional
products and compounds using the OTS technology. Anesta has developed its
proprietary OTS products in collaboration with the University of Utah Research
Foundation (UURF) and Abbott. Future development projects may involve
collaboration with other research organizations and other established
pharmaceutical companies. The Company's primary emphasis is on basic and applied
research, product and process development, clinical research, regulatory
interactions and filings and commercial market development and preparation.
Since its inception, Anesta has managed most aspects of its clinical trials and
has prepared substantially all U.S. regulatory filings for its products. In
1999, 1998 and 1997, Anesta's research and development expenditures were
$9,840,000, $8,628,000 and $7,889,000 respectively.

Collaborative Relationships

Anesta's commercial strategy is to develop products independently and
collaborate, where appropriate, with established pharmaceutical companies and
institutions. Collaborative partners may provide financial resources, research
and manufacturing capabilities and marketing infrastructure to aid in the
commercialization of Anesta's product candidates in development. The Company may
license its technology or products to others and retain profit sharing, royalty,
manufacturing, co-marketing, co-promotion or similar rights. Any such
arrangements could limit the Company's flexibility in pursuing alternatives for
the commercialization of its product candidates.

Abbott Laboratories

In 1989, Anesta entered into a research and development, license, supply and
distribution agreement with Abbott. Under the agreement, as amended (1989
Agreement), Anesta granted to Abbott the exclusive right to make, use and market
in the United States OTS products resulting from technology owned or licensed by
Anesta consisting of OTS fentanyl. Under the 1989 Agreement, Abbott provided
development funding and milestone payments and is obligated to pay royalties and
other payments on product sales. In 1995, the Company entered into two
additional funding agreements with Abbott under which Abbott agreed to provide
to the Company $1,500,000 in each of 1995 and 1996 to fund the development of
Actiq for breakthrough cancer pain. Through December 31, 1999, Abbott had paid a
total of $10,050,000 for the development of Anesta's OTS fentanyl product line.
In connection with such development funding, Abbott was granted, and has
exercised, warrants to purchase 1,202,840 shares of the Company's common stock
at prices ranging from $1.00 to $2.40 per share.

                                       13
<PAGE>

On March 13, 2000, Anesta announced that it had renegotiated the U.S. marketing
rights for Actiq with Abbott. Effective April 2000, Anesta will have
responsibility for the sales and marketing of Actiq in the U.S. As part of the
renegotiation, Anesta will make cash payments to Abbott and is obligated to make
on-going earn-out payments to Abbott until the end of the first patent covering
oral transmucosal fentanyl citrate. Abbott will continue to manufacture Actiq
and Fentanyl Oralet for Anesta in the U.S. for a period of 24 to 36 months,
after which the right of Anesta to manufacture such products after such period
of time.

Anesta and Abbott have agreed to indemnify each other for certain liabilities
arising from the negligent or intentional acts or omissions of either party,
breaches of agreements between them, the lack of safety or efficacy of the
licensed products (depending on the source of the underlying liability) and
liabilities arising from actions taken by either company or its employees,
officers, directors or affilitates prior to the execution of the renegotiated
agreement.

Grupo Ferrer Internacional S.A.

In January 1998, the Company entered into an exclusive agreement with Ferrer, a
leading private Spanish pharmaceutical company, for the marketing, sales and
distribution rights of Anesta's OTS fentanyl product line, including Actiq, in
Spain and Portugal. Ferrer made a payment to the Company and Anesta will
manufacture such products for Ferrer.

Laboratoire L. Lafon

In June 1998, the Company entered into an exclusive agreement with Lafon, a
leading private French pharmaceutical company, for the marketing, sales and
distribution rights of Anesta's OTS fentanyl product line, including Actiq, in
France. Under terms of the agreement, Lafon made payments to the Company and
Anesta will manufacture such products for Lafon.

Swedish Orphan AB

In May 1999, the Company entered into an exclusive agreement with SWO, a leading
private Swedish pharmaceutical company, for the marketing, sales and
distribution rights of Anesta's OTS fentanyl product line, including Actiq, in
scandinavia (Denmark, Finland, Iceland, Norway and Sweden). Under terms of the
agreement, SWO made payments to the Company and Anesta will manufacture such
products for SWO.

Elan Pharma International

In September 1999, the Company entered into an exclusive agreement with Elan, a
leading public Irish pharmaceutical company, for the marketing, sales and
distribution rights of Anesta's OTS fentanyl product line, including Actiq, in
Austria, Belgium, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands,
Philippines, Switzerland, Taiwan and the United Kingdom. Under terms of the
agreement, Elan made payments to the Company and Anesta will manufacture such
products for Elan.

Novartis Consumer Health, Inc.

In February 1999, the Company entered into a 12-month option agreement with
Novartis involving the Company's proprietary OTS for drug delivery. Under the
terms of the option agreement, Novartis and the Company assessed the worldwide
commercial opportunity of potential products combining Novartis compounds with
the Company's OTS. Currently, the Company and Novartis are in discussions about
the possibility of a definitive licensing agreement.

                                       14
<PAGE>

University of Utah Research Foundation

In 1985, the Company obtained an exclusive worldwide license, including the
right to sublicense, from the UURF for all of the UURF's technology developed or
to be developed by Dr. Theodore H. Stanley, Founding Chairman of the Company,
and others under his direction at the University of Utah in (1) the field of
anesthetic and other drug delivery systems incorporating a matrix to deliver
compounds to the central nervous system via the mucosal tissues of the mouth,
pharynx and esophagus, (2) drug-based immobilization systems for human and
veterinary applications and (3) transdermal drug delivery systems. The Company
is obligated to pay certain royalties to the UURF subject to certain minimum
royalty payments. In addition, Anesta is obligated to pay to the UURF a higher
percentage of the royalties it receives in the event Anesta sublicenses the
licensed technology without any improvement or added value. The Company also has
an exclusive option with UURF to acquire an exclusive worldwide license to
similar technology and intellectual property that may be conceived, invented or
reduced to practice at the University of Utah after the date of its license
grant. Anesta has exercised such option as to all technology covered by its
patents and pending patent applications. The UURF exclusive worldwide license
terminates as to each country upon the expiration of the last patent in such
country relating to the licensed technology.

Manufacturing

Anesta has a manufacturing facility capable of producing quantities of its
proprietary OTS products for research and development, including clinical
studies. Anesta has developed manufacturing capacity to support commercial
distribution of Actiq for international markets. Abbott is Anesta's contract
manufacturer for Actiq and Fentanyl Oralet, subject to the right of Anesta to
manufacture such products in the future.

The Company continues to develop manufacturing processes and to expand its
production capacity for OTS products in order to support larger scale clinical
studies and cost effective commercial production. A second generation OTS
manufacturing process has been developed and is designed to enable scale-up to
larger commercial volumes while reducing the unit cost of producing OTS
products. Anesta increased its manufacturing capacity and packaging capabilities
to support European clinical trials and to supply initial quantities of OTS
fentanyl products to commercial markets outside of the United States. The
Company believes it will be able to maintain compliance with current Good
Manufacturing Practice (cGMP) regulations enforced by the FDA's facilities
inspection program and related international regulations, as well as
requirements imposed by the U.S. Drug Enforcement Agency (DEA). The Company
maintains State and Federal licenses to conduct research, manufacture and export
controlled substances on Schedules II, III, IIIN, IV and V.

                                       15
<PAGE>

Competition

Anesta faces intense competition and technological change. Existing and future
products, therapies, technological approaches and delivery systems will compete
directly with the Company's products. Competing products may provide greater
therapeutic benefits for a specific indication, or may offer comparable
performance at a lower cost. Actiq faces competition from inexpensive oral
morphine tablets and more expensive but quick-acting invasive (intravenous,
intramuscular and subcutaneous) opioid delivery systems. Other technologies for
rapidly delivering opioids to treat breakthrough pain are being developed, at
least one of which is in clinical trials.

The Company competes with fully integrated pharmaceutical companies, smaller
companies that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have drug delivery products already
approved or in development and operate large, well-funded research and
development programs in these fields. Anesta's competitors may develop safer or
more effective drugs and achieve faster or broader regulatory approval, wider
availability of supply, more effective marketing and sales or superior
proprietary positions. Any products that Anesta develops may become obsolete
before recovery of any expenses incurred in connection with development of these
products.

Patents, Proprietary Rights and Licenses

The Company's success will depend, in part, on its ability to obtain and protect
patents, maintain trade secrets and operate without infringing on the
proprietary rights of others in the United States and other countries. Anesta's
products are based on 14 U.S. and 112 foreign patents for the OTS, which are
held by the University of Utah and its assignee, UURF. The Company has exclusive
world-wide licenses to these patents which cover the design and types of
pharmaceutical compounds in its products. The Company's success depends on the
continued validity of these patents. If either Anesta or the UURF fail to file,
prosecute or maintain any of the patents, Anesta could be severely damaged. The
Company intends to file additional patent applications relating to its
technology, products and processes. The Company will also direct the UURF to
file any additional patent applications relating to the technology it has
licensed. However, any of these patents or patent applications may be
challenged, invalidated or circumvented by the Company's competitors. These
patents may also fail to provide meaningful competitive advantages to the
Company. For example, another company may develop a way to deliver potent
opioids in a more cost-effective manner than Anesta's products without
infringing on its patents.

The basic technology underlying the Company's proprietary OTS was invented by
Dr. Stanley and Brian Hague, both employees of the Company, while employed at
the University of Utah. Anesta is the exclusive worldwide licensee of such
technology under patents held by the UURF. The license remains in effect for the
life of the covered patents. The U.S. patents expire on various dates ranging
from 2005 to 2009 and the

                                       16
<PAGE>

foreign patents expire on various dates ranging from 2006 to 2016. Anesta
maintains, at its expense, all U.S. patent rights with respect to the licensed
technology and files and prosecutes the relevant patent applications in the U.S.
and foreign countries. The OTS technology underlying Anesta's exclusive license
is covered by 14 issued U.S. patents, 112 issued foreign patents, four pending
U.S. patent applications and 12 pending foreign patent applications. The Company
also relies upon trade secrets, know-how, continuing technological innovations
and licensing opportunities to develop and maintain its competitive position.
The Company plans to prosecute and defend its technology and the patents and
patent applications being licensed from the UURF.

Intellectual property rights are uncertain and involve complex legal and factual
questions. The Company may be unknowingly infringing on the proprietary rights
of others and may be liable for that infringement, which could result in
significant costs. For example, the Company is not aware of any third party
intellectual property rights which would prevent the Company's use of its new
manufacturing method, although rights of this type may exist. The Company could
be forced to either seek a license to intellectual property rights of others or
alter its products or processes so that they no longer infringe the proprietary
rights of others. A license could be very expensive to obtain, or may not be
available at all. Similarly, changing products or processes to avoid infringing
the rights of others may be costly or impractical.

The Company is responsible for any patent litigation costs. If the Company were
to become involved in a dispute regarding intellectual property, it may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine who had the claimed rights first. Anesta may also
be forced to seek a judicial determination concerning the rights in question.
These types of proceedings may be costly and time consuming, even if the Company
eventually prevails. If the Company does not prevail, it might be forced to pay
significant damages, obtain a license or stop making a certain product.

Anesta also relies on trade secrets, proprietary know-how and confidentiality
provisions in agreements with collaborative partners, employees and consultants
to protect its intellectual property. Other parties may not comply with the
terms of their agreements with the Company and it may not be able to adequately
enforce its rights against these people.

It is the Company's policy to require its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with the Company is to be kept confidential and not
disclosed to third parties except in specific circumstances. In the case of
employees, the agreements provide that all inventions conceived by the
individual in the course of his or her employment shall be the exclusive
property of the Company.

                                       17
<PAGE>

Government Regulation

The Company's activities and products are subject to significant regulation by a
number of governmental entities, especially the FDA and DEA in the United States
and by comparable authorities in other countries. These entities regulate, among
other things, research and development activities and the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising,
promotion, distribution and sale of the Company's products. Product development
and approval within this regulatory framework takes a number of years and
involves the expenditure of substantial resources. Many products that appear
promising initially ultimately do not reach the market because they are found to
be unsafe (perhaps too toxic) or lack effectiveness, as demonstrated by testing
required by government regulation during the development process.

The activities required before a pharmaceutical product may be marketed in the
United States primarily begin with preclinical testing. Preclinical tests
include extensive laboratory evaluation of product chemistry and other end
points and animal studies to assess the potential safety of the product as
formulated. The FDA under a series of regulations called the Good Laboratory
Practice (GLP) regulations regulates almost all preclinical studies pertinent to
drug approval. Violations of these regulations can, in some cases, lead to
invalidation of the studies, requiring such studies to be repeated.

The entire body of preclinical development work necessary to administer
investigational drugs to volunteers or patients is submitted in an IND
submission to the FDA. FDA regulations provide that clinical trials may begin 30
days following the submission and receipt of an IND, unless the FDA advises
otherwise or requests additional information, clarification or additional time
to review the IND submission; it is generally considered good practice to obtain
affirmative FDA acquiescence before commencing trials. There is no assurance
that the submission of an IND will eventually allow a company to commence
clinical trials. Once trials have commenced, the FDA may stop the trials, or
particular types or parts of trials, by placing a "clinical hold" on such trials
because of concerns about, for example, safety of the product candidate being
tested or the adequacy of the trial design. Such holds can cause substantial
delay and in some cases may require abandonment of a product candidate.

Clinical testing involves the administration of a drug to healthy volunteers or
to patients under the careful supervision of a qualified principal investigator,
usually a physician, pursuant to a written protocol. Clinical tests pertinent to
an IND are usually conducted in the following sequential phases, although the
phases may overlap. Phase 1 trials generally involve administration of a drug
product to a small number of persons to determine aspects of safety, tolerance,
pharmacokinetic characteristics, and possible early data on effectiveness. Phase
2 trials generally involve administration of a product to a limited number of
patients with a particular disease to determine dosage, efficacy and safety.
Phase 3 trials generally examine the clinical efficacy and safety in an expanded
patient population at multiple clinical sites. Pivotal Phase 3 trials are trials
designed to demonstrate definitive efficacy and safety. At least one such trial
is required for FDA approval to market a drug. Each clinical study is conducted
under the auspices of an

                                       18
<PAGE>

independent Institutional Review Board (IRB) at every institution at which the
study will be conducted. An IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.

The regulatory process required to be completed by a company before a new drug
delivery system may be marketed in the United States depends significantly on
whether the drug (which will be delivered by the drug delivery system in
question) has existing approval for use and in what dosage forms. If the drug is
a new chemical entity that has not been approved, then the process includes (1)
preclinical laboratory and animal tests, (2) an IND application which has become
effective, (3) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug in its intended indication and (4) FDA
approval of an NDA. If the drug has been previously approved, then the approval
process is similar, except that certain toxicity tests normally required for the
IND may not be necessary. Even with previously approved drugs, additional
toxicity testing may be required when the delivery form is substantially
changed. Because the Company's OTS, by design, produces high drug concentrations
at the surface of the oral mucosa, new toxicity tests at this site may need to
be performed. In addition to the foregoing, the FDA requires proof that the
product delivers sufficient quantities of the drug to the bloodstream to produce
the desired therapeutic result.

The results of product development, preclinical studies and clinical studies and
other information are submitted to the FDA in an NDA seeking approval for the
marketing and interstate commercial shipment of the drug. The FDA may deny an
NDA if applicable regulatory criteria are not satisfied or may require
additional clinical or other testing. Even if such data are submitted, the FDA
may ultimately decide that the NDA does not satisfy the criteria for approval.
If the FDA does ultimately approve the product, it may require, among other
things, post-marketing testing, including potentially expensive Phase 4 studies,
and surveillance to monitor the safety and effectiveness of the drug. In
addition, the FDA may in some circumstances impose labeling and promotion
restrictions on the use of the drug that may be difficult and expensive to
administer. Product approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if serious problems occur after the product
reaches the market. Finally, the FDA requires reporting of certain adverse event
information that becomes known to a sponsor or manufacturer of an
investigational or approved drug.

Each domestic drug product manufacturing establishment must be registered with,
and essentially approved by, the FDA. In addition, each such establishment must
inform the FDA of every drug product it has in commercial distribution and keep
such list updated. Establishments handling controlled substances must be
licensed and are inspected by the DEA. Anesta has a current DEA license
appropriate for handling the substances it uses in its facilities. Domestic
establishments are also subject to inspection by the FDA for compliance with
cGMP regulations before or after an NDA has been filed and thereafter, at least
biannually. The labeling, advertising and promotion of drug products also must
be in compliance with pertinent FDA regulatory requirements. Failure to comply
with applicable requirements relating to production, distribution or promotion
of a drug product can lead to FDA demands that production and shipment cease,
and, in some

                                       19
<PAGE>

cases, that products be recalled, or to enforcement actions that can include
seizures, injunctions and criminal prosecution. Finally, manufacturers of drug
products seeking FDA approval via an NDA are also required, due to recently
introduced user fee requirements, to make payments to the FDA at various stages
of the approval process. In addition, such payments must also be made in
association with annual product and establishment registration.

To market its products abroad, the Company is also subject to numerous and
varying foreign regulatory requirements, implemented by foreign health
authorities, governing, among other things, the design and conduct of human
clinical trials, pricing regulations and obtaining marketing approval. The
approval procedure may vary among countries and can involve additional testing,
and the time required to obtain approval may differ from that required to obtain
FDA approval. At present, foreign marketing authorizations are applied for at a
national level, although within the European Union certain registration
procedures are available to companies wishing to market a product in more than
one European Union member country. The foreign regulatory approval process
includes all of the risks associated with obtaining FDA approval set forth
above. Approval by the FDA does not ensure approval by other countries.

Various aspects of the Company's business and operations are also regulated by a
number of other governmental agencies including the DEA, United States
Department of Agriculture, the Environmental Protection Agency, the Occupational
Safety and Health Administration as well as by other federal, state and local
authorities. In addition, international sales are regulated by numerous foreign
authorities. The Company currently maintains both State and Federal Controlled
Substance Registration Certificates to conduct research, manufacture and export
scheduled drugs.

Product Liability and Product Liability Insurance

The testing, marketing and sale of Anesta's products involves significant risks.
The Company may be held liable for adverse reactions resulting from the use of
our products. The Company's products involve a new method of delivery for potent
drugs that requires greater precautions to prevent unintended use. For example,
Anesta has worked with Abbott to develop a specific risk management program for
Actiq that is designed to prevent accidental ingestion by children, improper
patient selection, diversion and abuse. The failure of these measures could
result in harmful side effects or death. As a result, consumers, regulatory
agencies, pharmaceutical companies or others might make claims against Anesta.
The Company currently has clinical trial and product liability insurance
coverage. Anesta will seek to maintain and appropriately increase such insurance
coverage as development and commercialization of products progresses. Insurance
may not be available at a reasonable cost or in sufficient amounts to protect
the Company from liability claims. The obligation to pay any product liability
claim in excess of Anesta's insurance coverage or the recall of any of its
products could adversely affect its financial condition.

                                       20
<PAGE>

Human Resources

As of December 31, 1999, Anesta employed 88 individuals, of whom approximately
30 hold Ph.D., M.D. or other advanced degrees. Of its total workforce, 50
employees are engaged in research and development activities and 38 are devoted
to commercial, business development and administrative activities. A significant
number of the Company's management and professional employees have had prior
experience with major international pharmaceutical, biotechnology or medical
products companies. Anesta believes that it maintains good relations with its
employees. The Company's success will depend in large part upon its ability to
attract and retain these and future employees. The Company faces competition in
this regard from other companies, research and academic institutions and
government entities.

                                       21
<PAGE>

ITEM 2.   PROPERTIES
-------

On December 31, 1999, the Company's administrative offices, research
laboratories and clinical manufacturing facilities comprised approximately
45,824 square feet, located in Salt Lake City, Utah. The lease covering 51,104
square feet of facilities expires March 31, 2000, with two five-year renewal
options. In February 2000, the Company renegotiated the lease for 3 years with
two three-year renewal options. The Company anticipates that its current
facilities will meet the Company's research and development needs through 2000
and has an option to occupy the additional 5,280 square feet of space, if
needed.

ITEM 3.   LEGAL PROCEEDINGS
-------

The Company is not party to any legal proceedings.


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

No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year ended December 31, 1999

                                       22
<PAGE>

                                    PART II


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


     The Common Stock (Nasdaq symbol NSTA) began trading publicly in the over-
the-counter market through the Nasdaq National Market on January 28, 1994. Prior
to that date, there was no public market for the Common Stock. The following
table presents quarterly information on the price range of the Common Stock.
This information indicates the high and low sale prices reported by the Nasdaq
National Market System. These prices do not include retail markups, markdowns or
commissions.

                                High             Low
                               ------           ------

          Fiscal 1998:
          First Quarter        $21.75           $15.63
          Second Quarter        20.38            13.75
          Third Quarter         18.63            11.63
          Fourth Quarter        27.63            13.25

          Fiscal 1999:
          First Quarter        $29.38           $16.75
          Second Quarter        22.88            12.50
          Third Quarter         19.75             7.38
          Fourth Quarter        18.63             8.13


          As of March 21, 2000 there were approximately 178 holders of record of
the Common Stock.

          The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore, does not anticipate
paying cash dividends in the foreseeable future.

                                       23
<PAGE>

ITEM 6.           SELECTED FINANCIAL DATA

The following selected financial data of Anesta Corp. for the five years ended
December 31, 1999 are derived from the audited financial statements and notes
thereto of Anesta Corp., certain of which are included herein. The selected
fianacial data should be read in conjunction with Anesta Corp.'s Financial
Statements and the Notes thereto included elsewhere herein.

<TABLE>
<CAPTION>
(In thousands, except per share data)
                                                                       1999          1998          1997        1996        1995
---------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>                                          <C>             <C>           <C>        <C>         <C>
Statement of             Revenues:
Operations Data:           Product sales                              $ 2,232         $ 193         $ 184      $   92      $   61
Years ended                Royalty revenue                                 62             6             5           3         102
December 31,               Contract research/license agreements         4,221           476                     1,503       1,514
                                                                     ---------   -----------   -----------  ----------  ---------
                             Total revenues                             6,515           675           189       1,598       1,677

                         Operating costs and expenses:
                           Cost of goods sold                             671            54            52          27          19
                           Royalties                                       34             3             3           3           3
                           Research and development                     9,840         8,627         7,889       8,304       5,228
                           Depreciation and amortization                  313           296           269         237         158
                           Marketing, general and administrative        9,017         8,586         6,368       3,537       2,219
                                                                     ---------   -----------   -----------  ----------  ---------

                         Loss from operations                         (13,360)      (16,891)      (14,392)    (10,510)     (5,950)
                         Non operating income, net                      3,892         1,190         1,845       1,820       1,250
                         Provision for income taxes                       (20)          (16)           (2)
                                                                     ---------   -----------   -----------  ----------  ----------
                         Loss before cumulative effect
                           of change in accounting                     (9,488)      (15,717)      (12,549)     (8,690)     (4,700)
                         Cumulative effect of change
                           in accounting                                                                                   (1,041)
                                                                     ---------   -----------   -----------  ----------  ----------
                         Net loss                                    $ (9,488)    $ (15,717)    $ (12,549)   $ (8,690)   $ (5,741)
                                                                     ---------   -----------   -----------  ----------  ----------
                         Basic and diluted loss per common share:
                           Loss before cumulative effect
                             of change in accouting                   $ (0.72)      $ (1.59)      $ (1.32)    $ (1.02)    $ (0.65)
                           Cumulative effect of change
                             in accounting                                                                                  (0.15)
                                                                     ---------   -----------   -----------  ----------  ---------

                         Net loss per common share                    $ (0.72)      $ (1.59)      $ (1.32)    $ (1.02)    $ (0.80)
                                                                     ---------   -----------   -----------  ----------  ---------

                         Weighted average shares outstanding           13,227         9,898         9,500       8,499       7,177
                                                                     ---------   -----------   -----------  ----------  ----------

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

Balance Sheet Data:      Cash, cash equivalents,
At December 31,            certificate of deposit and
                           marketable debt securities                $ 72,818      $ 82,335      $ 29,676    $ 41,359    $ 21,844

                         Total assets                                  78,209        85,129        32,712      43,959      24,242
                         Long-term obligations, including
                           current portion                              2,000         1,750         2,000       1,350       1,516
                         Accumulated deficit                          (58,167)      (48,679)      (32,962)    (20,413)    (11,719)
                         Stockholders' equity                          72,426        80,019        29,198      41,115      21,677
</TABLE>

                                       24
<PAGE>

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


Overview

Anesta has two products that have been approved by the FDA, Actiq and Fentanyl
Oralet, and a number of other product candidates in various stages of
preclinical and clinical development. All of these products and product
candidates use Anesta's proprietary OTS for drug delivery. Actiq is indicated
only for the management of breakthrough cancer pain in patients with
malignancies who are already receiving and who are tolerant to opioid therapy
for their underlying persistent cancer pain. Actiq was approved by the FDA in
November 1998 and its commercial launch was in March 1999. Anesta's first
product, Fentanyl Oralet, was developed for premedication before surgery or
painful procedures in monitored anesthesia settings and was approved by the FDA
in October 1993. Commercial sales of Fentanyl Oralet have not been and are not
expected to be significant.

In March 2000, Anesta renegotiated the U.S. marketing rights for Actiq and
Fentanyl Oralet with Abbott. Under terms of the agreements, Anesta will have
primary responsibility for sales and marketing in the United States. As part of
the renegotiation, Anesta will make cash payments to Abbott and is obligated to
make on-going earn-out payments to Abbott until the end of the first patent
covering oral transmucosal fentanyl citrate. Abbott will continue to manufacture
Actiq and Fentanyl Oralet for Anesta in the U.S. for a period of 24 to 36
months, after which the right of Anesta to manufacture such products after such
period of time. Anesta will recognize revenue when Abbott ships product against
a customer order. Anesta's gross margin therefore is directly affected by
Abbott's manufacturing costs. Anesta is also obligated to pay a small royalty on
its sales of Actiq and Fentanyl Oralet to the UURF.

Effective April 2000, Anesta has responsibility for the sales and marketing of
Actiq in the United States. To maintain and increase sales of the product,
Anesta has retained a contract sales organization to recruit and retain a field
sales organization to sell Actiq. In addition, Anesta has a regional medical
liaison field organization which provides technical and clinical assistance to
the field sales organization. Anesta will manage the field organizations and the
marketing strategies and tactics with its internal sales and marketing group.
These activities will significantly increase marketing, general and
administrative expenses in the future.

In 1995, Anesta reacquired from Abbott commercial rights to all OTS fentanyl
products, including Actiq and Fentanyl Oralet, outside the United States. Anesta
intends to commercialize Actiq internationally through collaborations with
corporate partners. Anesta has entered into collaborations with Ferrer for
distribution in Spain and Portugal, with Lafon for distribution in France, with
SWO in Scandinavia and with Elan in the other major western European markets and
parts of Asia. Anesta is pursuing registration of Actiq in the United Kingdom,
the largest cancer pain market in Europe, and if that registration is obtained,
Anesta intends to seek approvals in other European Union countries under the
European Union's mutual recognition process.

Anesta has devoted most of its resources since its inception in 1985 to the
research and development of Fentanyl Oralet, Actiq and other product candidates,
as well as the commercialization of Fentanyl Oralet and Actiq.

Results of Operations

Years Ended December 31, 1999, 1998 and 1997

Revenues. Total revenues increased by $5,840,000 or 865% during 1999 as compared
to 1998 and $485,800 or 257% during 1998 as compared to 1997. The increase in
1999 is primarily a result of product sales subsequent to the launch of Actiq in
the U.S. and upfront fees paid by Elan, Novartis, Lafon and SWO upon execution
of their collaborative agreements. The increase in 1998 is primarily a result of
a contract research payment made by Abbott upon FDA approval of Actiq and from
upfront fees paid by Ferrer and Lafon upon execution of their collaborative
agreements.

                                       25
<PAGE>

Operating Costs and Expenses. Research and development expenses increased by
$1,213,000 or 14% during 1999 as compared to 1998 and increased by $738,600 or
9% during 1998 as compared to 1997. The increase in 1999 is primarily due to
expenditures related to the filing for approval of Actiq with the MCA in the
United Kingdom, filing of two IND applications and manufacturing clinical trial
material. The increase in 1998 is primarily due to expenditures related to
activities surrounding the approval of Actiq in the United States, filing two
IND applications and manufacturing clinical trial material. The Company expects
that its research and development expenses will increase in the future as a
result of increased expenses related to the hiring of additional personnel,
preclinical studies, clinical trials, product development, manufacturing process
development activities and clinical trial material manufacturing.

Depreciation expense increased by $13,000 or 5% during 1999 as compared to 1998
and $27,000 or 10% during 1998 as compared to 1997. The increase in 1999 and
1998 is due primarily to the Company's remodeling of additional facilities.

Marketing, general and administrative expenses increased by $434,000 or 5%
during 1999 as compared to 1998 and by $2,218,000 or 35% during 1998 as compared
to 1997. The increase in 1999 and 1998 is due primarily to higher expenditures
for personnel, corporate development activities, European operations, marketing
research and Actiq launch marketing activities. The Company expects that its
marketing and general and administrative expenses will significantly increase in
the future as a result of the increased support required for Actiq marketing and
sales activities, European operations, including Actiq pre-launch activities in
Europe and corporate development activities.

Non Operating Income (Expense). Interest income increased by $2,683,000 during
1999 as compared to 1998 and decreased $659,000 during 1998 as compared to 1997.
The increase during 1999 is due to investment of funds received from the
Company's secondary public offering completed in December of 1998. The decrease
during 1998 compared to 1997 is primarily due to a reduction in the amount of
invested funds. Interest expense decreased by $19,000 during 1999 as compared to
1998 and increased by $4,000 during 1998 as compared to 1997. The change in both
years is primarily due to interest expense related to borrowings on the
Company's revolving/term loan.

Income Taxes. The provision for income taxes for the years ended December 31,
1999, 1998 and 1997 relates solely to state income taxes. The Company recognized
no tax benefit from its losses in those years. The Company's ability to realize
the benefit of the deferred tax asset related to its net operating loss and
research and development tax credit carryforwards will depend on the generation
of future taxable income. Because the Company's operations are not currently
generating taxable income, the Company believes a full valuation allowance
should be provided (See Note 8 to Financial Statements).

Net Loss. As a result of the changes in total revenues, the changes in research
and development expenditures and the increase in marketing, general and
administrative activities and other factors discussed above, the net loss for
1999 was $9,488,000 or $0.72 per share as compared to $15,717,000 or $1.59 per
share for 1998 and $12,549,000 or $1.32 per share for 1997.

Liquidity and Capital Resources

As of December 31, 1999, the Company had cash and cash equivalents totaling
$11,746,000, $2,040,000 in a certificate of deposit used as collateral for a
revolving/term loan and $59,032,000 in marketable debt securities which are
available for sale. Thus cash, cash equivalents, certificate of deposit and
marketable debt securities totaled

                                       26
<PAGE>

$72,818,000 as of December 31, 1999. In December 1998, the Company closed a
secondary offering of 3,250,000 shares of common stock at an offering price of
$21.25 per share resulting in net proceeds to the Company of $64,478,000. Cash
in excess of immediate requirements is invested according to the Company's
investment policy, which provides guidelines with regard to liquidity and
return, and, wherever possible, seeks to minimize the potential effects of
concentration of credit risk.

The Company's use of cash in operating activities decreased by $2,824,000 during
1999 as compared to 1998 and increased by $1,451,000 during 1998 as compared to
1997. The changes in cash used is a direct result of the changes in total
revenues, the increase in research and development expenditures, marketing,
general and administrative activities and other factors discussed above.

During 1999, the Company made capital expenditures of $648,000 as compared to
$108,000 and $895,000 in 1998 and 1997 respectively. The increase in capital
expenditures in 1999 was due to the Company's remodeling of facilities. In order
to finance the capital expenditures, the Company, in January 1995, secured a
revolving/term loan in the amount of $1,500,000. This loan converted to a 10
year term loan on May 15, 1995. In March 1997, the Company borrowed an
additional $800,000 and in July 1999 the Company borrowed an additional
$500,000. During 1999 and 1998, the Company made principal payments of $250,000
and in 1997, the Company made a principal payment of $150,000. The loan is
collateralized by a $2,040,000 certificate of deposit. During 1999, the Company
realized cash proceeds of $2,108,000 relating to the exercise of stock options
as compared to $1,928,000 and $615,000 in 1998 and 1997 respectively.

The Company's future capital requirements could be substantial and will depend
on, and could increase as a result of, many factors, including progress of the
Company's research and development programs; the results and costs of
preclinical and clinical testing of the Company's products, if developed; the
time and costs involved in obtaining regulatory approvals; the costs involved in
filing patents; the time and costs involved in developing and maintaining
collaborative research relationships; the costs associated with potential
commercialization of its products; and administrative and legal costs. The
Company believes that existing capital resources will be sufficient to meet the
Company's capital needs through at least the end of 2001.

The Company believes that it is prudent to monitor existing cash balances in
order to fund the activities which the Company believes are necessary to
continue its growth. Therefore, the Company periodically evaluates market
conditions and various financing alternatives for obtaining funds to augment
existing cash balances.

New Accounting Pronouncements

The Company has reviewed all other recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on the results
of operations or financial position of the Company. Based on that review, the
Company believes that none of these pronouncements will have a significant
effect on current or future earnings or operations.

                                       27
<PAGE>

                                 RISK FACTORS


Our Ability to Achieve Profitability Depends on the Success of Actiq

We must successfully commercialize Actiq to achieve profitability. Actiq uses a
new method of oral transmucosal drug delivery and we cannot assure you that
physicians or patients will use Actiq. Although Actiq was approved by the FDA in
November 1998, and was commercially launched in March 1999, a limited number of
patients have used Actiq, and it is uncertain whether additional patients will
use patients will use Actiq to treat their breakthrough cancer pain.
Recommendations and endorsements by influential physicians will be essential for
market acceptance of Actiq, and we may not be able to obtain these
recommendations and endorsements. In addition, many other factors influence the
adoption of new pharmaceuticals, including marketing and distribution
restrictions, adverse publicity, product pricing, and reimbursement by third
party payors. Third party payors may not agree to reimburse patients for the
cost of using Actiq. If Actiq does not achieve adequate sales, our business and
financial condition would be materially and adversely affected.

Factors that will impact the commercial success of the product include:

 . Anesta's ability to develop its own sales and marketing capabilities;
 . Abbott's ability to manufacture sufficient quantities of Actiq while
   following strict regulatory requirements;
 . Physicians' willingness to prescribe Actiq for breakthrough cancer pain; and
 . Use of Actiq by cancer patients who suffer from breakthrough cancer pain.

We do not control some of these factors and cannot assure investors that Actiq
will be successfully commercialized. We, along with Abbott, must make every
effort through a comprehensive risk management program to reduce the
inappropriate use of Actiq. These and other factors that may prevent successful
commercialization of Actiq are discussed in greater detail in the risk factors
that follow. If Actiq is not commercially successful, we will experience
significant operating losses and our viability will be dependent upon developing
other commercial products.

Lack of Sales and Marketing Experience

We have had no experience in selling and marketing products without
collaborative partners. We have retained a contract sales organization to assist
us in our sales force efforts for an initial period of one year. There can be no
assurance that the sales efforts of the contract sales organization or our
internal marketing and sales personnel will be successful in promoting the sale
and use of Actiq. In particular, factors that may inhibit our efforts to
commercialize Actiq without a strategic marketing partner include:

 . The inability of either our contract sales organization or us to recruit and
  retain adequate numbers of effective sales personnel;

                                       28
<PAGE>

 . The inability of sales personnel working on our behalf to gain access to or
  persuade adequate numbers of physicians treating cancer patients with
  breakthrough cancer pain to prescribe Actiq;
 . The lack of complementary products to be offered by sales personnel working on
  our behalf, which may put us at a competitive disadvantage against companies
  with broader product lines; and
 . Unforeseen costs associated with creating an independent sales force and
  marketing organization.

Marketing and sales efforts will be critical to the commercial success of Actiq
and our Company. If we are not successful in establishing an effective sales
force with our contract sales organization, our business will be materially and
adversely affected.

We Depend on Abbott to Manufacture and Distribute Actiq

Abbott is currently the only approved commercial manufacturer of Actiq and
Abbott has the exclusive right to distribute Actiq in the United States.

The manufacturing process for Actiq is strictly regulated by the FDA and
involves certain supplies, such as child-resistant product packaging, that
involve long lead times. Abbott may not be able to predict or respond to product
demand for Actiq in a timely manner. Abbott and Anesta have the right to
terminate our collaboration in certain circumstances, so even if Abbott does not
perform in a satisfactory manner, we may not be able to seek another
manufacturing partner for Actiq in the United States. We do not currently have
adequate resources to distribute Actiq on our own. If Abbott does not
satisfactorily perform under the supply agreement, our financial condition will
be materially and adversely affected.

International Commercialization of Actiq Faces Significant Obstacles

We plan to commercialize Actiq internationally through collaborative
relationships with foreign partners. We have limited foreign regulatory,
clinical and commercial resources. We have entered into relationships with
Ferrer for Spain and Portugal, with Lafon for France, with SWO for Scandinavia
(Denmark, Finland, Iceland, Norway, and Sweden) and with Elan for Austria,
Belgium, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Philippines,
Switzerland, Taiwan, and the United Kingdom. These and other potential future
partners are critical to our international success. We may not be able to enter
into collaboration agreements with appropriate partners for important foreign
markets on acceptable terms, or at all. Existing or future collaborations with
foreign partners may not be effective or profitable for us.

We will need to obtain approvals from the appropriate regulatory, pricing and
reimbursement authorities to market Actiq internationally. We are currently
seeking approval for Actiq in the United Kingdom and upon approval we plan to
seek additional approvals in other European Union countries. We submitted the
MAA in the United Kingdom in August 1999 and are awaiting the determination of
the MCA. Pursuing

                                       29
<PAGE>

foreign regulatory approvals will be time-consuming and expensive. We may not
obtain any foreign regulatory approval for Actiq. The regulations can vary among
countries and foreign regulatory authorities may require different or additional
clinical trials than we conducted to obtain FDA approval for Actiq. In addition,
adverse clinical trial results, such as death or injury due to side effects,
could jeopardize not only foreign regulatory approval, but may also lead to
marketing restrictions or product withdrawal in the United States. Actiq may
also face foreign regulatory requirements applicable to controlled substances.

Foreign collaborative partners may not be effective in their efforts to sell
Actiq even if regulatory approvals are obtained. The factors affecting product
pricing strategy and availability of reimbursement vary from country to country,
and we and our partners may not develop a viable strategy to address these
issues. Prevailing practices regarding treatment of cancer pain also differ from
country to country, and factors unique to a particular market may prevent or
limit market acceptance of Actiq. If we do not establish and maintain effective
relationships with foreign collaborative partners, and successfully address the
other challenges of foreign markets, our financial condition could be adversely
affected. It may be difficult and expensive to terminate a relationship with a
foreign collaborative partner, even if termination is permitted by the
collaboration agreement. Doing business abroad involves other risks, including
risk of losses or reduced market opportunities due to tariffs, trade barriers,
changes in currency exchange rates, export or import controls, restrictions on
convertibility of foreign currencies or transfer of funds, and political and
economic risks. Furthermore, international intellectual property rights may not
be as comprehensive or provide the same level of protection as the U.S. laws.

We Are Subject To Extensive Government Regulation

The FDA must approve our new products before they can be marketed in the United
States. Before we can file a New Drug Application (NDA) with the FDA, the
product candidate must undergo extensive clinical trials. The regulatory process
is expensive and time consuming, and any NDA that we submit may not be approved.
Our product candidates must also be approved by foreign governments before the
product can be sold in other countries as discussed under the heading
"International Commercialization of Actiq Faces Significant Obstacles" above.

Any regulatory approval of a product is limited to specific therapeutic uses for
which the product has demonstrated safety and efficacy in clinical testing. In
addition, approval may be contingent on post-marketing studies. A pharmaceutical
product remains subject to extensive regulation even after approval. The FDA and
state regulatory authorities stringently apply and enforce regulatory
requirements for drug manufacturing and related activities. The FDA or state
regulatory authorities could restrict an approved product or manufacturer, order
withdrawal of a product or shut down a manufacturing facility if they discover a
significant problem or a violation of applicable regulations.

                                       30
<PAGE>

The FDA can impose significant restrictions on the marketing and distribution of
approved products. We have developed with Abbott, in consultation with the FDA,
a comprehensive risk management program for Actiq that includes significant
restrictions on the manner in which Actiq will be marketed and sold. The program
was developed in response to the concerns expressed by the FDA in its not-
approvable letter in November 1997. The program is designed to prevent
accidental ingestion by children, improper patient selection and diversion or
abuse of the product. Developing this program was a time consuming process and
delayed the regulatory approval of Actiq for approximately one year. Because our
future products may also involve the delivery of potent drugs, we may experience
similar delays.

Any products that we develop in the future will be subject to rigorous
regulatory review. We may not be able to establish that any future products are
safe and effective or obtain FDA approval. Regulatory concerns or changes could
delay or prevent approval of new products. For example, the FDA imposed
significant restrictions on Abbott's sales and distribution of Fentanyl Oralet
in 1994 after it had approved the product. Although these restrictions were
relaxed in 1996, we believe those restrictions limited the market acceptance of
Fentanyl Oralet. As a part of the Actiq comprehensive risk management plan, all
educational and promotional materials must be submitted to, and reviewed by, the
FDA. Future restrictions on the marketing or sales of our products could limit
sales. See "Business -- Government Regulation."

Our Products Contain Controlled Substances

The active ingredient in Actiq and Fentanyl Oralet is fentanyl citrate
(fentanyl), which is a controlled substance regulated by the DEA. Fentanyl is
listed by the DEA as a Schedule II substance, which means that its manufacture,
shipment, sale and use is subject to the highest degree of regulation and
accountability. The amount of fentanyl that Abbott can obtain is limited by the
DEA and Abbott's quota may not be sufficient to meet potential demand. Future
products may also contain substances regulated by the DEA.

Products containing controlled substances may generate public controversy.
Opponents of these products may seek restrictions on marketing and withdrawal of
regulatory approval. In addition, these opponents can generate negative
publicity in an effort to bring about rejection of a product by the medical
community. For example, a public interest group attempted to block FDA approval
of Fentanyl Oralet. Following FDA approval of Fentanyl Oralet in 1993, the group
unsuccessfully urged the FDA to withdraw its approval. Political pressures and
adverse publicity could lead to delays and increased expenses and limit or
restrict the introduction and marketing of our products. If the FDA withdrew the
approval of, or placed additional significant restrictions on, the marketing of
Actiq, our business could be materially and adversely affected.

                                       31
<PAGE>

We Face Product Liability Risks and May Not Be Able To Obtain Adequate Insurance

The testing, marketing and sale of our products involves significant risks. We
may be held liable for adverse reactions resulting from the use of our products.
Our products involve a new method of delivery for potent drugs that requires
greater precautions to prevent unintended use. For example, we have worked with
Abbott to develop a specific risk management program for Actiq that is designed
to prevent accidental ingestion by children, improper patient selection,
diversion and abuse. The failure of these measures could result in harmful side
effects or death. As a result, consumers, regulatory agencies, pharmaceutical
companies or others might make claims against us. We currently have clinical
trial and product liability insurance with aggregate coverage of $10 million. We
will seek to maintain and appropriately increase such insurance coverage as
development and commercialization of our products progresses. Insurance may not
be available at a reasonable cost or in sufficient amounts to protect us from
liability claims. The obligation to pay any product liability claim in excess of
our insurance coverage or the recall of any of our products could adversely
affect our financial condition.

We Face Intense Competition and Technological Change

We face intense competition and technological change. Existing and future
products, therapies, technological approaches and delivery systems will compete
directly with our products. Competing products may provide greater therapeutic
benefits for a specific indication, or may offer comparable performance at a
lower cost. Actiq faces competition from inexpensive oral morphine tablets and
quick-acting intravenous opioid delivery systems. Other technologies are being
developed for rapidly delivering opioids to treat breakthrough pain, at least
one of which is currently in clinical trials.

We compete with fully integrated pharmaceutical companies, smaller companies
that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have drug delivery products already
approved or in development and operate large, well-funded research and
development programs in these fields. Our competitors may develop safer or more
effective drugs and achieve faster or broader regulatory approval, wider
availability of supply, more effective marketing and sales or superior
proprietary positions. Any products that we develop may become obsolete before
we recover any expenses incurred in connection with development of these
products.

                                       32
<PAGE>

Our Ability to Develop Additional Products is Uncertain

Our future success depends, in part, on our ability to develop additional
commercial products. While we have conducted clinical trials for OTS nicotine,
OTS etomidate, OTS piroxicam, and OTS droperidol, we have not yet determined
that these or other product candidates have medical benefits that justify the
significant additional costs that would be necessary to commercialize them. Even
if we determine that a product candidate has medical benefits, the cost of
commercializing that product candidate may be too high to justify development.
If health insurance companies and other third party payors decide not to
reimburse patients for purchasing our products, sales could be severely limited.
In addition, competitors may develop products that are more effective, cost less
or are ready for commercial introduction before our products. If we are unable
to develop additional, commercially viable products, our future prospects will
be limited.

Clinical Trials Are Expensive and Uncertain

Extensive and costly clinical trials must be conducted to demonstrate a
product's safety and efficacy before it can be approved by the FDA or other
regulatory authorities. A product candidate that appears to be safe and
effective in early testing may not ultimately prove to be safe and effective
when tested in a larger number of patients. We may also encounter problems in a
clinical trial that significantly delay or cause us to terminate the clinical
trial program. Any adverse clinical event could cause delays or prevent us from
commercializing additional products.

Limited Manufacturing Experience

We have developed an alternative manufacturing method which we believe could
lower costs and increase applicability to a variety of compounds. We have
manufactured OTS products for clinical trials using this method. We intend to
apply this new manufacturing method to produce products for foreign markets.
However, we have never manufactured commercial quantities of our products using
this or any other method. We have limited experience with regulatory approvals
of manufacturing processes. This new method may prove to be too expensive,
complex or unsuited for some applications and may not be approvable by the FDA
or other regulatory authorities. We may not be able to develop a manufacturing
process that produces adequate amounts of our products at an acceptable cost.
The FDA and other regulatory authorities require that our products be
manufactured according to rigorous standards, which may significantly increase
our costs and may even prevent us from making our products in amounts sufficient
to meet market demand. If we change our approved manufacturing process, the FDA
will require a new approval before the process could be used. Failure to develop
our manufacturing capabilities may mean that even if we develop promising new
products, we may not be able to produce them profitably.

                                       33
<PAGE>

We Will Need To Find Corporate Partners For Our New Products

To commercialize any of our current product candidates, we will need to
establish relationships with corporate partners. We may seek an additional
strategic partner to assist us in commercializing Actiq. Although we are
developing our own marketing and sales capabilities for Actiq, we do not
currently have the sales, marketing, manufacturing or distribution capabilities
that would allow us to sell our products alone. As a result, we will need to
develop relationships with companies that have these capabilities to
commercialize any new products or develop the internal capabilities to perform
these functions. We may not be able to find partners who will agree to sell and
distribute our products on favorable terms, or at all. Even if we form corporate
partnerships, those relationships may not be advantageous to us for a variety of
reasons, including inadequate attention or resource commitments by the partner,
management turnover, changing market conditions and competitive developments. If
we are unable to form successful corporate partnerships for a product, we may be
unable to commercialize that product profitably.

Our Success Depends On Protecting Our Intellectual Property

Our success will depend, in part, on our ability to obtain and protect patents,
maintain trade secrets and operate without infringing on the proprietary rights
of others in the United States and other countries. Our products are based on 14
U.S. and 112 foreign patents for the OTS, which are held by the University of
Utah and its assignee, UURF. We have exclusive, world-wide licenses to these
patents which cover the design and types of pharmaceutical compounds in our
products. Our success depends on the continued validity of these patents. If
either we or the UURF fail to file, prosecute or maintain any of the patents,
our business could be severely damaged. We intend to file additional patent
applications relating to our technology, products and processes. We will also
direct the UURF to file any additional patent applications relating to the
technology we have licensed. However, any of these patents or patent
applications may be challenged, invalidated or circumvented by our competitors.
These patents may also fail to provide meaningful competitive advantages to us.
For example, another company may develop a way to deliver potent opioids in a
more cost-effective manner than our products without infringing on our patents.

Intellectual property rights are uncertain and involve complex legal and factual
questions. We may be unknowingly infringing on the proprietary rights of others
and may be liable for that infringement, which could result in significant
liability for us. For example, we are not aware of any third party intellectual
property rights which would prevent our use of our new manufacturing method,
although rights of this type may exist. We could be forced to either seek a
license to intellectual property rights of others or alter our products or
processes so that they no longer infringe on the proprietary rights of others. A
license could be very expensive to obtain, or may not be available at all.
Similarly, changing our products or processes to avoid infringing on the rights
of others may be costly or impractical.

                                       34
<PAGE>

We are responsible for any patent litigation costs. If we were to become
involved in a dispute regarding intellectual property, whether ours or that of
another company, we may have to participate in interference proceedings declared
by the U.S. Patent and Trademark Office to determine who had the claimed rights
first. We may also be forced to seek a judicial determination concerning the
rights in question. These types of proceedings may be costly and time consuming
for us, even if we eventually prevail. If we do not prevail, we might be forced
to pay significant damages, obtain a license or stop making a certain product.

We also rely on trade secrets, proprietary know-how and confidentiality
provisions in agreements with collaborative partners, employees and consultants
to protect our intellectual property. Other parties may not comply with the
terms of their agreements with us and we may not be able to adequately enforce
our rights against these people.

Uncertainty Of Pharmaceutical Pricing, Reimbursement And Healthcare Reform
Measures

The availability of reimbursement by governmental and other third party payors
affects the market for any pharmaceutical product. These third party payors
continually attempt to contain or reduce the costs of healthcare. In the United
States and in certain foreign jurisdictions there have been a number of
legislative and regulatory proposals to change the healthcare system, and
further proposals are likely. The potential for adoption of these proposals
affects our ability to raise capital, obtain additional collaborative partners
and market our products. We could experience pricing pressure on our current and
future products due to the trend toward managed health care, the increasing
influence of health maintenance organizations, and additional legislative
proposals. We may not be able to sell our products profitably if reimbursement
is unavailable or limited in scope.

We Have Not Been Profitable and May Require Additional Financing

We have not been profitable since our inception in August 1985. As of December
31, 1999 we had an accumulated deficit of approximately $58.2 million. We expect
to continue to incur losses through at least 2000. We may never realize
significant revenues or be profitable. Factors that will influence our
profitability include the success of Actiq, the development and
commercialization of additional products, timing and difficulty of obtaining
regulatory approvals and competition.

Most of our funding has come from research and development fees, licensing
agreements and the sale of stock. We may have to raise additional funds through
collaborative relationships or public and private financings. Additional
financing may not be available on favorable terms, or at all. If we raise
additional funds by selling equity securities, the share ownership of our
existing investors could be diluted or the new equity purchasers may obtain
terms that are better than those of our existing investors. Lack of financing
may delay, reduce or eliminate some of our programs or force us to relinquish
rights to technology, product candidates or products.

                                       35
<PAGE>

We Need to Attract and Retain Key Employees and Consultants and Manage Growth

Attracting and retaining qualified employees, consultants and advisors is
critical to our success. We will need to hire additional qualified personnel
with expertise in research and development, clinical testing, government
regulation, manufacturing and marketing. We compete for qualified individuals
with numerous pharmaceutical, health products and biotechnology companies,
universities and other research institutions. We may not be able to attract and
retain these types of individuals.

With the commercialization of Actiq and continued development of product
candidates, our operations may expand in the future. Any significant growth will
place demands on our management and operational resources. These demands may
include hiring additional people, capital improvements and changing
relationships with corporate partners. In order to manage growth effectively, we
must implement and improve our operational systems, procedures and controls.
Failure to properly manage our growth could result in loss of market
opportunities and materially damage our financial condition.

Universities and medical institutions conduct clinical development under
agreements with us. We depend on principal investigators to conduct our clinical
development activities. These collaborators are not our employees and we do not
control their activities. Our collaborators may also have relationships with
other commercial entities, some of whom may compete with us.

We Are Subject To Anti-Takeover Provisions

Our Certificate of Incorporation and Bylaws contain provisions which may
discourage takeover attempts, including transactions in which stockholders might
receive a premium for their shares. This may limit stockholders' ability to
approve a transaction that stockholders may think is in their best interest. Our
Certificate of Incorporation and Bylaws require that any action required or
permitted to be taken by our stockholders must be taken at a properly called
meeting of stockholders. Special stockholder meetings may be called only by the
Board of Directors, the Chairman of the Board or the President. In addition, the
Board of Directors has the authority, without stockholder action, to fix the
rights and preferences of and issue shares of Preferred Stock, which may have
the effect of delaying or preventing a change in control.

Highly Volatile Stock Price

The market price of our Common Stock has been highly volatile and is likely to
continue to be volatile. Factors affecting our stock price include: fluctuations
in our operating results, announcements of technological innovations or new
commercial therapeutic products by us or our competitors, published reports by
securities analysts, progress with clinical trials, governmental regulation,
changes in reimbursement policies, developments

                                       36
<PAGE>

in patent or other proprietary rights, developments in our relationship with
collaborative partners, public concern as to the safety and efficacy of our
products and general market conditions.

Our Operations Involve Hazardous Materials

Our research and manufacturing activities involve the controlled use of
hazardous materials. Although we believe that our safety procedures for these
materials comply with governmental standards, we cannot eliminate the risk of
accidental contamination or injury from these materials. In the event of an
accident or environmental discharge, we could be held liable for any resulting
damages, which could exceed our financial resources.

Absence Of Dividends

We intend to retain any future earnings to finance the growth and development of
our business and we do not plan to pay cash dividends in the foreseeable future.

                                       37
<PAGE>

ITEM 8.
-------
                       Report of Independent Accountants
                       ---------------------------------


To the Shareholders of Anesta Corp.:

In our opinion, the accompanying balance sheets and the related statements of
operations and comprehensive loss, stockholders' equity, and cash flows present
fairly, in all material respects, the financial position of Anesta Corp. (the
"Company") at December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.


/s/ PricewaterhouseCoopers LLP


Salt Lake City, Utah
February 18, 2000, except as to the
information presented in Note 14 for
which the date is March 13, 2000

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<PAGE>

                                 ANESTA CORP.

                                BALANCE SHEETS
                       as of December 31, 1999 and 1998
                                  ___________


   ASSETS                                            1999             1998
                                                 -------------   --------------


Current assets:
   Cash and cash equivalents                      $11,746,093      $55,889,226
   Current portion of certificate of deposit          340,000          255,000
   Marketable debt securities,
      available-for-sale                           59,031,849       24,661,040
   Accounts receivable                              1,956,357          276,476
   Prepaid expenses and other current assets          667,960          194,802
                                                 ------------    -------------
         Total current assets                      73,742,259       81,276,544
                                                 ------------    -------------


Property and equipment, at cost:

   Furniture and equipment                          1,099,529          947,598
   Leasehold improvements                           2,813,166        2,330,136
   Accumulated depreciation                        (1,447,484)      (1,151,126)
                                                 ------------    -------------
                                                    2,465,211        2,126,608
                                                 ------------    -------------



Other assets:

   Certificate of deposit                           1,700,000        1,530,000
   Other assets                                       301,327          196,202
                                                 ------------    -------------
                                                    2,001,327        1,726,202
                                                 ------------    -------------

         Total assets                             $78,208,797      $85,129,354
                                                 ------------    -------------




   LIABILITIES AND STOCKHOLDERS' EQUITY        1999                   1998
                                            ------------          ------------


Current liabilities:
   Accounts payable                         $    409,584          $  1,478,521
   Accrued liabilities:
      Accrued compensation                       655,870             1,117,909
      Other                                      139,062               236,783
   Current portion of unearned revenues          746,389               299,296
   Current portion of note payable               333,333               250,000
                                            ------------          ------------
         Total current liabilities             2,284,238             3,382,509

Unearned revenues                              1,831,759               227,500
Note payable                                   1,666,667             1,500,000
                                            ------------         -------------
         Total liabilities                     5,782,664             5,110,009
                                            -------------        --------------

Commitments (Note 11)


Stockholders' equity:
   Common stock, par value,
   $.001 per share; Authorized:
      35,000,000 shares; Issued:
      13,311,839 shares
      in 1999 and 13,054,934 shares
      in 1998                                     13,312                13,055
   Additional paid-in capital                130,742,839           128,634,691
   Accumulated deficit                       (58,166,809)          (48,679,075)
   Accumulated other comprehensive
   income (loss)                                (163,209)               50,674
                                           -------------         -------------
         Total stockholders' equity           72,426,133            80,019,345
                                           -------------         -------------
         Total liabilities and
         stockholders' equity               $ 78,208,797          $ 85,129,354
                                          --------------         --------------

                    The accompanying notes are an integral
                       part of the financial statements


                                       39
<PAGE>

                                 ANESTA CORP.

                           STATEMENTS OF OPERATIONS
                            AND COMPREHENSIVE LOSS
             for the years ended December 31, 1999, 1998 and 1997
                                   ________

<TABLE>
<CAPTION>
                                                                           1999             1998             1997
                                                                       -----------     -------------     ------------
<S>                                                                    <C>             <C>               <C>
Revenues:
   Product sales                                                       $ 2,231,732     $     193,531     $    183,752
   Royalty revenue                                                          62,275             5,744            5,449
   Revenues from contract research/license agreements                    4,221,148           475,704
                                                                       -----------     -------------     ------------

     Total revenues                                                      6,515,155           674,979          189,201
                                                                       -----------     -------------     ------------

Operating costs and expenses:
   Cost of goods sold                                                      671,366            53,804           52,082
   Royalties                                                                34,410             2,989            2,838
   Research and development                                              9,840,204         8,627,606        7,889,021
   Depreciation                                                            309,652           296,241          269,595
   Marketing, general and administrative                                 9,019,525         8,585,679        6,368,094
                                                                       -----------     -------------     ------------

     Total costs and expenses                                           19,875,157        17,566,319       14,581,630
                                                                       -----------     -------------     ------------

     Loss from operations                                              (13,360,002)      (16,891,340)     (14,392,429)

Non operating income (expense):
   Interest income                                                       4,016,267         1,333,597        1,992,739
   Interest expense                                                       (124,289)         (142,916)        (139,407)
   Other                                                                       459               201           (8,215)
                                                                       -----------     -------------     ------------

     Loss before provision for income taxes                             (9,467,565)      (15,700,458)     (12,547,312)

Provision for income taxes                                                 (20,169)          (16,411)          (1,741)
                                                                       -----------     -------------     ------------

     Net loss                                                           (9,487,734)      (15,716,869)     (12,549,053)
                                                                       -----------     -------------     ------------

Other comprehensive income (loss):
     Foreign currency translation adjustment                                (8,754)           15,604
     Unrealized gain (loss) on marketable debt
      securities, available-for-sale                                      (205,129)           26,663            9,710
                                                                       -----------     -------------     ------------

        Total other comprehensive income (loss)                           (213,883)           42,267            9,710
                                                                       -----------     -------------     ------------

        Comprehensive loss                                             $(9,701,617)    $ (15,674,602)    $(12,539,343)
                                                                       ===========     =============     ============

Basic and diluted loss per common share (Note 13)--

   Net loss per common share                                           $     (0.72)    $       (1.59)    $      (1.32)
                                                                       ===========     =============     ============

Weighted average shares outstanding                                     13,226,637         9,897,978        9,500,055
                                                                       ===========     =============     ============
</TABLE>

                    The accompanying notes are an integral
                       part of the financial statements

                                       40
<PAGE>

                                 ANESTA CORP.

                 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
           for the period from January 1, 1997 to December 31, 1999
                                   _________

<TABLE>
<CAPTION>
                                                                  Common Stock
                                                      ------------------------------------
                                                                              Additional    Accumulated   Treasury Stock
                                                                                                         -----------------
                                                        Shares    Amount   Paid-in Capital    Deficit    Shares    Amount
                                                      ----------  -------  ---------------  -----------  ------    -------
<S>                                                   <C>         <C>      <C>             <C>           <C>       <C>
Balance at January 1, 1997                             9,440,129  $ 9,440  $    61,531,623 ($20,413,153) $  345    ($4,226)

Exercise of stock options for cash and stock             105,716      105          530,788
Issuance of stock under stock
   purchase plan                                           5,965        6           84,054
Retirement of treasury stock in July 1997                   (345)                   (4,226)                (345)     4,226
Collection on notes receivable from
   issuance of common stock
Other comprehensive income
1997 net loss                                                                               (12,549,053)
                                                      ----------  -------  ---------------  -----------  ------    -------

Balance at December 31, 1997                           9,551,465    9,551       62,142,239  (32,962,206)      -          -

Exercise of stock options for cash and stock             244,300      245        1,889,684
Issuance of common stock for
   cash on December 17, 1998
   (at $21.25 per share), net of
   offering costs of $4,584,067                        3,250,000    3,250       64,475,183
Issuance of stock under stock
   purchase plan                                           9,169        9          127,585
Other comprehensive income
1998 net loss                                                                               (15,716,869)
                                                      ----------  -------  ---------------  -----------  ------    -------

Balance at December 31, 1998                          13,054,934   13,055      128,634,691  (48,679,075)      -          -

Exercise of stock options for cash and stock             250,178      250        2,016,521
Issuance of stock under stock
   purchase plan                                           6,727        7           91,627
Other comprehensive loss
1999 net loss                                                                                (9,487,734)
                                                      ----------  -------  ---------------  -----------  ------    -------

Balance at December 31, 1999                          13,311,839  $13,312  $   130,742,839 ($53,166,809)      -          -
                                                      ==========  =======  ===============  ===========  ======    =======

<CAPTION>
                                                       Notes
                                                    Receivable      Accumulated
                                                   from Issuance       Other
                                                     of Common      Comprehensive
                                                       Stock        Income (Loss)         Total
                                                   -------------    -------------      ------------
<S>                                                <C>              <C>                <C>
Balance at January 1, 1997                               ($7,000)         ($1,303)     $ 41,115,381

Exercise of stock options for cash and stock                                                530,893
Issuance of stock under stock
   purchase plan                                                                             84,060
Retirement of treasury stock in July 1997
Collection on notes receivable from
   issuance of common stock                                7,000                              7,000
Other comprehensive income                                                  9,710             9,710
1997 net loss                                                                           (12,549,053)
                                                   -------------    -------------      ------------

Balance at December 31, 1997                                   -            8,407        29,197,991

Exercise of stock options for cash and stock                                              1,889,929
Issuance of common stock for
   cash on December 17, 1998
   (at $21.25 per share), net of
   offering costs of $4,584,067                                                          64,478,433
Issuance of stock under stock
   purchase plan                                                                            127,594
Other comprehensive income                                                 42,267            42,267
1998 net loss                                                                           (15,716,869)
                                                   -------------    -------------      ------------

Balance at December 31, 1998                                   -           50,674        80,019,345

Exercise of stock options for cash and stock                                              2,016,771
Issuance of stock under stock
   purchase plan                                                                             91,634
Other comprehensive loss                                                 (213,883)       (9,701,617)
1999 net loss                                                                                     -
                                                   -------------    -------------      ------------

Balance at December 31, 1999                                   -        ($163,209)     $ 72,426,133
                                                   =============    =============      ============
</TABLE>

                    The accompanying notes are an integral
                       part of the financial statements

                                       41
<PAGE>

                                 ANESTA CORP.

                           STATEMENTS OF CASH FLOWS
             for the years ended December 31, 1999, 1998 and 1997
                                   ________

<TABLE>
<CAPTION>
                                                              1999            1998            1997
                                                          ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>
Cash flows from operating activities:
   Net loss                                               $ (9,487,734)   $(15,716,869)   $(12,549,053)
   Adjustments to reconcile net loss to net cash
    used in operating activities
     Depreciation                                              309,652         296,241         269,595
     (Gain) Loss on retirement of assets                          (332)          3,823          12,245
     Increase (decrease) due to changes in:
      Accounts receivable                                   (1,679,882)       (193,613)        402,785
      Prepaid expenses and other current assets               (473,159)        233,688        (136,507)
      Other assets                                            (105,124)          9,067         (89,796)
      Accounts payable                                      (1,068,937)        728,436         (85,299)
      Accrued liabilities                                     (559,760)        624,715         105,454
      Unearned revenues                                      2,051,352         176,796
                                                          ------------    ------------    ------------
       Net cash used in operating activities               (11,013,924)    (13,837,716)    (12,070,576)
                                                          ------------    ------------    ------------

Cash flows from investing activities:
   Capital expenditures                                       (648,411)       (108,186)       (894,791)
   Proceeds from sale of assets                                    489              50           1,621
   Purchases of marketable debt securities,
     available-for-sale                                    (79,553,714)    (28,925,882)    (12,754,249)
   Maturities and sales of marketable debt securities,
     available-for-sale                                     44,977,776      22,167,216      12,062,198
   Purchase of certificate of deposit                                                         (816,000)
   Proceeds from maturity of certificate of deposit           (255,000)        255,000         153,000
                                                          ------------    ------------    ------------
       Net cash used in investing activities               (35,478,860)     (6,611,802)     (2,248,221)
                                                          ------------    ------------    ------------

Cash flows from financing activities:
   Proceeds from issuance of notes payable                     500,000                         800,000
   Principal payments on notes payable                        (250,000)       (250,000)       (150,000)
   Net proceeds from issuance of common stock                2,108,405      66,812,375         614,954
   Collections on notes receivable from
     issuance of common stock                                                                    7,000
                                                          ------------    ------------    ------------
       Net cash provided by financing activities             2,358,405      66,562,375       1,271,954
                                                          ------------    ------------    ------------

Effect of exchange rate changes on cash                         (8,754)         15,604
                                                          ------------    ------------    ------------

Net increase (decrease) in cash and cash equivalents       (44,143,133)     46,128,461     (13,046,843)
Cash and cash equivalents at beginning of period            55,889,226       9,760,765      22,807,608
                                                          ------------    ------------    ------------
Cash and cash equivalents at end of period                $ 11,746,093    $ 55,889,226    $  9,760,765
                                                          ============    ============    ============


Supplemental disclosure of cash flow information:
   Cash paid during the year for interest                 $    129,714    $    144,035    $    136,715
   Cash paid during the year for taxes                          20,169          16,411           1,741
</TABLE>

                    The accompanying notes are an integral
                      part of these financial statements

                                       42
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

                                   ________


1.   Significant Accounting Policies:

Description of the Business

Anesta Corp. is involved in the development of new pharmaceutical products for
oral transmucosal drug administration.  Since its inception in August 1985,
Anesta has been a development stage company.  However, during the fourth quarter
of 1999, Anesta began generating sales from its principal product, Actiq, and
accordingly is no longer in the development stage. The Company's products are
based on its proprietary OTS for drug delivery. Anesta's principal product is
Actiq, an OTS fentanyl product, which was approved by the FDA on November 4,
1998.

Revenues recognized to date represent revenues under research and development
contracts, license agreements and sales of the Company's products, Fentanyl
Oralet and Actiq.  The Company's ability to achieve profitability depends in
part upon its ability alone, or with others, to commercialize successfully these
products, to complete development of its proposed products, to obtain required
regulatory approvals and to manufacture and market such proposed products.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.  Substantially all of
the Company's cash and cash equivalents are held in two financial institutions
in San Francisco, California.

Marketable Debt Securities

The Company's marketable debt securities are classified as available-for-sale
and carried at market value, with the unrealized gain or loss reflected as a
component of other comprehensive income (loss). Gross realized gains and losses,
with cost determined using the specific identification method, have not been
material.

Property and Equipment

Expenditures that materially increase asset lives are capitalized at cost, while
normal maintenance and repairs are expensed as incurred.  Depreciation is
reported on a straight-line basis over the shorter of the estimated useful lives
of the assets, or the term of the lease, which range from 3 to 15 years.

The cost and related accumulated depreciation of assets sold or otherwise
disposed of are removed from the accounts and the gain or loss is reflected in
the statements of operations and comprehensive loss.

Translation of Foreign Currency

Assets and liabilities of foreign operations, where the functional currency is
the local currency, are translated into U.S. dollars at the fiscal year end
exchange rate. The related translation adjustments are reflected as a component
of other comprehensive income, a separate component of stockholders' equity.
Revenues and expenses are translated using average exchange rates prevailing
during the year.

                                       43
<PAGE>

                   NOTES TO FINANCIAL STATEMENTS, Continued

                                   ________

1.   Significant Accounting Policies (Continued):

Net Loss Per Share

Basic and diluted earnings per share are computed in accordance with Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings per Share (EPS).
Basic EPS excludes dilution and is computed by dividing income or loss available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution from
securities or contracts to issue common stock.  Common equivalent shares are
excluded from the computation of diluted EPS when their effect is antidilutive.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting For Income Taxes. Deferred income taxes are provided for differences
between the financial statement and tax bases of assets and liabilities using
enacted future tax rates.

Revenue Recognition

The Company recognized revenues from contract research and license agreements
based on qualifying expenditures.  Where applicable, revenues from the licensing
of Anesta's technology, including milestone payments under license agreements,
are deferred and recognized on a straight-line basis over the defined period in
the related license agreement.  Research and development expense in the
accompanying statements of operations and comprehensive loss includes funded and
unfunded amounts.  Revenue from the sale of products manufactured by Abbott is
recognized when Abbott ships product against a customer order.

Estimates

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

Reclassifications

Certain prior year balances have been reclassified to conform with current year
presentation.

                                       44
<PAGE>

                   NOTES TO FINANCIAL STATEMENTS, Continued

                                   ________

2. Marketable Debt Securities:

The cost and estimated market value of marketable debt securities, available-
for-sale at December 31, 1999, are as follows:

<TABLE>
<CAPTION>
                                                         Gross        Gross       Estimated
                                                       Unrealized   Unrealized      Market
                                            Cost         Gains        Losses        Value
                                         -----------   ----------   ----------   -----------
     <S>                                 <C>           <C>          <C>          <C>
     Commercial Paper                    $22,151,274   $    6,453                $22,157,727
     Corporate Term Notes                 15,824,568                $  (73,244)   15,751,324
     Federal Home Loan Bank Notes          8,500,194                   (35,669)    8,464,525
     Certificates of Deposit               6,008,717                   (14,877)    5,993,840
     Federal National Mortgage Notes       4,985,522                   (46,772)    4,938,750
     U.S. Treasury Note                    1,006,890                    (5,950)    1,000,940
     Accrued Interest                        724,743                                 724,743
                                         -----------   ----------   ----------   -----------

                                         $59,201,908   $    6,453   $ (176,512)  $59,031,849
                                         -----------   ----------   ----------   -----------
</TABLE>

The cost and estimated market value of marketable debt securities, available-
for-sale at December 31, 1999, by contractual maturity, are shown below:

<TABLE>
<CAPTION>
                                                            Estimated
                                                             Market
                                                 Cost        Value
                                              -----------  -----------
     <S>                                      <C>          <C>
     Due in one year or less                  $51,402,038  $51,287,805
     Due after one year through five years      7,799,870    7,744,044
                                              -----------  -----------

                                              $59,201,908  $59,031,849
                                              -----------  -----------
</TABLE>

The cost and estimated market value of marketable debt securities, available-
for-sale at December 31, 1998, are as follows:

<TABLE>
<CAPTION>
                                                         Gross        Gross        Estimated
                                                      Unrealized    Unrealized      Market
                                            Cost         Gains        Losses         Value
                                        -----------   ----------    ----------    -----------
     <S>                                <C>           <C>           <C>           <C>
     Corporate Term Notes               $15,698,462   $   14,750                  $15,713,212
     Federal Home Loan Bank Notes         4,499,584       12,961                    4,512,545
     Federal National Mortgage Notes      2,967,280        5,540                    2,972,820
     Certificates of Deposit                999,537        1,663                    1,001,200
     Commercial Paper                       261,638          156                      261,794
     Accrued Interest                       199,469                                   199,469
                                        -----------   ----------    ----------    -----------

                                        $24,625,970   $   35,070                  $24,661,040
                                        -----------   ----------    ----------    -----------
</TABLE>

                                       45
<PAGE>

                   NOTES TO FINANCIAL STATEMENTS, Continued

                                   ________


3. Related Party Transactions:

The Company paid expenses of $314,108, $250,368 and $284,030 in 1999, 1998 and
1997, respectively, to the Stanley Research Foundation for preclinical and
clinical research.  The Stanley Research Foundation and its principal trustee
are shareholders of the Company.

4. Note Payable:

The note payable at December 31, 1999 and 1998 is comprised of the following:

<TABLE>
<CAPTION>
                                                                    1999         1998
                                                                    ----         ----
     <S>                                                         <C>          <C>
     Term note payable to a bank with interest
       payable monthly at 7%.  Principal payments of
       $333,333 are due each July through July 2005.
       The note is collateralized by a certificate of deposit
       in the amount of $2,040,000 at December 31, 1999.         $2,000,000   $1,750,000

            Current portion                                        (333,333)    (250,000)
                                                                 ----------   ----------

            Long-term portion                                    $1,666,667   $1,500,000
                                                                 ----------   ----------
</TABLE>

The Company's note payable matures in periods ending December 31, as follows:

               2000          $  333,333
               2001             333,333
               2002             333,333
               2003             333,333
               Thereafter       666,667
                             ----------
                             $2,000,000
                             ----------

Rates currently available to the Company for notes payable with similar terms
and maturities are used to estimate the fair value of notes payable.  At
December 31, 1999 and 1998, the carrying value of the note payable approximates
fair value.

                                       46
<PAGE>

                   NOTES TO FINANCIAL STATEMENTS, Continued

                                   ________

5. Stock Based Compensation Plan:

The Company maintains three stock option plans: the 1989 Stock Option Plan (the
"1989 Plan"), the 1993 Stock Option Plan (the "1993 Plan"), and the 1993 Non-
Employee Directors' Stock Option Plan (The "Non-Employee Directors' Plan").

The 1989 Plan provides for the issuance of nonqualified stock options ("NQSOs")
to employees of, directors of and consultants to the Company.  The 1993 Plan
provides for the issuance of Incentive Stock Options ("ISOs") to employees of
the Company and NQSOs to employees of, directors of and consultants to the
Company.  The Non-Employee Directors' Plan provides for the issuance of NQSOs to
non-employee members of the Company's Board of Directors who are not prohibited
by their employer from receiving options.  Additionally, the Company has granted
NQSOs to non-employee directors and consultants on an individual basis and not
under a plan.

Under the 1989 Plan, NQSOs to purchase a total of 250,000 shares were authorized
for issuance, of which none were outstanding and exercisable at December 31,
1999.  All options have been granted at the market price of the Company's common
stock at the date of grant.  The NQSOs vest over a period not to exceed four
years from the date of grant and terminate five years from the date of grant.

At the 1997 annual meeting, stockholders approved an amendment to the 1993 Plan
to increase the number of shares authorized for issuance from an aggregate of
750,000 shares to an aggregate of 1,500,000 shares.  At the 1998 annual meeting,
stockholders approved an amendment to the 1993 Plan to increase the number of
shares authorized for issuance from an aggregate of 1,500,000 shares to an
aggregate of 1,850,000 shares.  At the 1999 annual meeting, stockholders
approved an amendment to the 1993 Plan to increase the number of shares
authorized for issuance from an aggregate of 1,850,000 shares to an aggregate of
2,400,000 shares.  As of December 31, 1999, 1,539,579 options were outstanding
and 726,952 options were exercisable.  All options have been granted at the
market price of the Company's common stock at the date of grant.  The ISOs and
NQSOs vest over a period not to exceed four years from the date of grant and
terminate from five to ten years from the date of grant.

At the 1997 annual meeting, stockholders approved an amendment to the Non-
Employee Directors' Plan to increase the annual non-discretionary grant made to
each non-employee director by 3,500 shares, from 1,500 shares to 5,000 shares.
At the 1998 annual meeting, stockholders approved an amendment to the Non-
Employee Directors' Plan to increase the non-discretionary grant made to each
newly elected non-employee director from 10,000 shares to 15,000 shares, to
grant 2,000 shares per year to each non-employee director serving as a committee
chair, and to grant 400 shares to each non-employee director for each meeting of
the Board of Directors attended in person or by teleconference. At the 1999
annual meeting, stockholders approved an amendment to the Non-Employee
Directors' Plan to increase the number of shares authorized for issuance from an
aggregate of 150,000 shares to an aggregate of 350,000 shares. At December 31,
1999, 105,800 options were outstanding and 42,282 options were exercisable.  All
options have been granted at the market price of the Company's common stock at
the date of grant.  The NQSOs vest over a period not to exceed four years from
the date of grant and terminate five years from the date of grant.

The Company has granted NQSOs to purchase shares on an individual basis and not
under a plan, on terms similar to the 1989 Plan.  At December 31, 1999, 7,800
options were outstanding and 7,800 options were exercisable.

                                       47
<PAGE>

                   NOTES TO FINANCIAL STATEMENTS, Continued

                                   ________


5. Stock Based Compensation Plan (Continued):

The Company has adopted the disclosure provisions of SFAS No. 123.  Under these
provisions, the Company is allowed to continue to apply Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its option
plans.  Accordingly, no compensation expense has been recognized as options are
granted to employees and directors at the stock's then market price.  Had
compensation expense for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under the
option plans as recommended by SFAS No. 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                     1999           1998           1997
                                 ------------   ------------   ------------
  <S>               <C>          <C>            <C>            <C>
  Net loss          As reported  $ (9,487,734)  $(15,716,869)  $(12,549,053)
                    Pro forma    $(13,185,307)  $(16,617,806)  $(13,282,846)

  Loss per share    As reported  $      (0.72)  $      (1.59)  $      (1.32)
                    Pro forma    $      (1.00)  $      (1.68)  $      (1.40)
</TABLE>

  NOTE: Basic and diluted loss per share are the same.

The pro forma compensation expense may not be representative of such expense in
future years.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: expected
volatility of 77 -- 81 percent, risk-free interest rates of 4.4 -- 7.1 percent,
expected lives of 0.01 -- 10.0 years, and a dividend yield of zero for all
years.

Changes in all outstanding options are as follows:

<TABLE>
<CAPTION>
                                                1999                      1998                       1997
                                    -------------------------  -------------------------  -------------------------
                                    Shares   Weighted-Average  Shares   Weighted-Average  Shares   Weighted-Average
Fixed Options                        (000)    Exercise Price    (000)    Exercise Price    (000)    Exercise Price
                                    ------   ----------------  ------   ----------------  ------   ----------------
<S>                                 <C>      <C>               <C>       <C>              <C>      <C>
Outstanding at beginning of year     1,527       $ 12.18        1,341       $ 10.86        1,002       $  8.63
Granted                                462         11.50          479         13.70          458         14.48
Exercised                             (261)         8.41         (246)         7.82         (110)         5.48
Forfeited                              (74)        14.00          (47)        12.84           (9)        13.16
                                    ------       -------       ------       -------       ------       -------
Outstanding at end of year           1,653       $ 12.51        1,527         12.18        1,341       $ 10.86
                                    ======       =======       ======       =======       ======       =======

Options exercisable at year-end        777                        659                        536
Weighted-average fair value of
 options granted during the year    $ 8.63                     $11.00                     $11.96
</TABLE>

                                       48
<PAGE>

                   NOTES TO FINANCIAL STATEMENTS, Continued

                                   ________

5. Stock Based Compensation Plan (Continued):

The following table summarizes information about fixed stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
                                            Weighted-
                              Number         Average         Weighted-         Number
          Range of          Outstanding     Remaining         Average      Exercisable at  Weighted-Average
      Exercise Prices       at 12/31/99  Contractual Life  Exercise Price     12/31/99      Exercise Price
    -------------------     -----------  ----------------  --------------  --------------  ----------------
    <S>                     <C>          <C>               <C>             <C>             <C>
     $5.0376 - $ 7.5563          30,032        0.2  years  $         5.25          30,032  $           5.25
     $7.5564 - $10.0750           3,800        1.8                   9.30           3,000              9.25
    $10.0751 - $12.5938       1,039,130        7.3                  11.30         449,704             11.31
    $12.5939 - $15.1125         359,093        7.6                  13.87         208,232             13.83
    $15.1126 - $17.6313         183,124        6.0                  16.55          67,942             16.50
    $17.6314 - $20.1500          30,000        4.5                  18.57          16,248             18.64
    $20.1501 - $22.6688           4,800        4.1                  21.06             804             21.19
    $22.6689 - $25.1875           3,200        3.9                  23.97           1,072             23.97
                            -----------  ----------------  --------------  --------------  ----------------

                              1,653,179        7.0         $        12.51         777,034  $          12.37
                            ===========  ================  ==============  ==============  ================
</TABLE>

In November 1993, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan"), authorizing the issuance of 250,000 shares pursuant to
purchase rights granted to employees of the Company.  Participants may use up to
10% of their compensation to purchase the Company's common stock at the end of
each year at a price equal to 85% of the lower of the beginning or ending stock
price in the plan period.  As of December 31, 1999, there were 208,917 shares
available for issuance under the Purchase Plan.  Compensation expense under the
fair value method of SFAS No. 123 is not significant relative to shares
purchased under the Purchase Plan for  1999, 1998 and 1997.

6. Capital Stock:

The Company has 1,000,000 shares of authorized voting preferred shares with a
par value of $.001.  At December 31, 1999 and 1998 there were no voting
preferred shares issued and outstanding.  At the 1999 Annual Meeting,
stockholders approved an increase in authorized common stock from aggregate
15,000,000 shares to an aggregate of 35,000,000 shares.

7. Technology License Agreement:

In September 1985, the Company obtained an exclusive worldwide license from UURF
to use technology and knowledge developed or to be developed under Dr. Theodore
H. Stanley's direction at the University of Utah, for anesthetic and other drug
delivery systems based on oral transmucosal technology.  In return, the UURF
received 6,000 shares of Company stock and certain royalty rights based on
product sales incorporating the technology.

The license expires on the date of the last expiring patent, which occurs in
2014.

                                       49
<PAGE>

                   NOTES TO FINANCIAL STATEMENTS, Continued

                                   ________

8. Income Taxes:

As of December 31, 1999, net operating losses (NOLs) totaling approximately
$58.6 million are available to offset future taxable income, and research and
development (R&D) tax credits totaling approximately $1,381,000 are available to
offset future tax liabilities. The NOLs and the R&D tax credit carryforwards
expire from 2002 to 2020.

The Company's utilization of NOL carryforwards and R&D credits is limited to
approximately $7,802,000 annually as a result of an ownership change in 1996. In
addition to the limitation imposed in 1996, utilization of approximately
$1,380,000 of the NOLs against future taxable income will be subject to an
annual limitation of approximately $140,000 per year because of a cumulative
change in ownership within a three-year period exceeding 50%. Approximately
$110,000 of the R&D tax credit carryforwards is subject to the same annual
limitation, under the constraint that the total NOLs must be utilized before the
R&D credits may be used. To the extent the $140,000 annual limitation is not
fully utilized in any given year, the unused portion of the NOLs and the R&D tax
credit carryforwards are available for potential utilization in future years.

SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not be
realized. The Company's ability to realize the benefit of its deferred tax asset
will depend on the generation of future taxable income. Because the Company's
operations are not currently generating taxable income, the Company believes
that a full valuation allowance should be provided. The valuation allowance
increased $3,903,000 during 1999, $7,274,000 during 1998 and $5,170,000 during
1997 primarily as a result of the increase in net operating loss carryforwards.

The components of the net deferred tax asset as of December 31, 1999 and 1998
under SFAS 109 are as follows:

                                                      1999            1998
                                                      ----            ----

     Deferred tax assets (liabilities):
      Net operating loss carryforwards            $ 21,869,000    $ 18,182,000
      Charitable contribution
       carryforwards                                    80,000          64,000
      Research and development tax
      credit carryforwards                           1,381,000       1,111,000
      Depreciation                                     106,000         228,500
      Book/tax difference related to
      license agreements                               759,000         713,500
      Other                                                  -          (7,000)
      Valuation allowance                          (24,195,000)    (20,292,000)
                                                  ------------    ------------
      Net deferred tax asset                      $          -    $          -
                                                  ------------    ------------

                                       50
<PAGE>

                   NOTES TO FINANCIAL STATEMENTS, Continued

                                   ________


9. Research and Development:

In December 1989, the Company entered into a research and development, license,
supply and distribution agreement with Abbott.  Under the agreement as amended,
the Company granted to Abbott the exclusive right to make, use and sell in the
U.S., oral transmucosal products resulting from technology owned or licensed by
the Company, consisting of Oral Transmucosal Fentanyl Citrate (OTFC/(R)/) or
other central nervous system acting drugs or intermediates thereof used for
premedication, sedation, analgesia, diagnostic procedures, emergency room
procedures, post-operative pain, burn treatment or cancer-related pain
management.  The first product developed under this agreement is being marketed
for use in surgical premedication and for sedation/analgesia prior to diagnostic
or therapeutic procedures in hospital settings under Abbott's trademark Fentanyl
Oralet. The second product under the agreement is being marketed for
breakthrough cancer pain under Anesta's trademark Actiq (See Note 14).

Under the Company's agreements with Abbott, Abbott manufactures Anesta's OTS
fentanyl product line (Fentanyl Oralet and Actiq) and sells these products to
the Company at a price which reflects Abbott's cost of manufacturing.  The
Company then sells the products to Abbott at a price related to Abbott's selling
price which results in a gross profit to the Company ranging from approximately
40-70%.  In addition, the Company is entitled to receive a royalty from OTS
fentanyl product sales by Abbott.

By agreement, Abbott committed and paid a total of $10.05 million to the Company
to fund the clinical development of and to obtain the regulatory approval for
Fentanyl Oralet and Actiq. During 1998 and 1997 the Company received $300,000
and $375,000, and incurred $9,862,933 and $7,834,457 of costs relating to the
agreements, respectively. Revenue of $300,000 related to the agreements was
recognized in 1998. In connection with such development funding, Abbott was
granted, and has exercised, warrants to purchase 1,202,840 shares of the
Company's common stock at prices ranging from $1.00 to $2.40 per share.

                                       51
<PAGE>

                   NOTES TO FINANCIAL STATEMENTS, Continued

                                   ________


10. Unearned Revenues:

Effective August 31, 1995, the Company entered into an amendment to a prior
agreement between Abbott International (A.I.) and the Company to provide the
Company the right to terminate or cause to become nonexclusive A.I.'s license
rights to OTS fentanyl products in one or more countries in the world except the
U.S. The amendment also eliminated $100,000 of the $450,000 of unearned revenue,
which amount was recognized as royalty revenue during the year ended December
31, 1995. In January 1998, the Company exercised its right to terminate A.I.'s
license rights to OTS fentanyl products in all countries in the world except the
U.S. However, Abbott has agreed to be the Company's contract manufacturer and if
requested by the Company, both parties have agreed to consult with each other
regarding product supply by Abbott to any Anesta licensee.

On January 28, 1998, the Company announced the signing of an exclusive agreement
with Ferrer for the marketing, sales and distribution of Anesta's OTS fentanyl
product line, including Actiq, in Spain and Portugal.  Under terms of the
agreement, Ferrer made a payment to the Company in 1998, a portion of which will
be recognized as revenue in future years over the term of the agreement.  The
OTS fentanyl product line will be manufactured for Ferrer by Anesta, however,
the Company does not believe commercial manufacturing will begin before December
31, 2000.  Ferrer is a leading private Spanish pharmaceutical company.

On June 4, 1998, the Company announced the signing of an exclusive agreement
with Lafon  for the marketing, sales and distribution of Anesta's OTS fentanyl
product line, including Actiq, in France.  Under terms of the agreement, Lafon
made payments to the Company in 1998, a portion of which will be recognized as
revenue in future years.  The OTS fentanyl product line will be manufactured for
Lafon by Anesta, however, the Company does not believe commercial manufacturing
will begin before December 31, 2000.  Lafon is a leading private French
pharmaceutical company.

On February 23, 1999, the Company announced the signing of an option agreement
with Novartis involving the Company's proprietary OTS for drug delivery.  Under
terms of the agreement, Novartis made a payment to the Company in 1999, which
will be recognized as revenue over the term of the agreement.  Novartis and the
Company will assess the worldwide commercial opportunity of potential products
which combine the OTS with undisclosed compounds, with the goal of entering into
an exclusive licensing agreement.

On May 6, 1999, the Company announced the signing of an exclusive agreement with
SWO for the marketing, sales and distribution of Anesta's OTS fentanyl product
line, including Actiq, for Scandinavia (Denmark, Finland, Iceland, Norway, and
Sweden). Under terms of the agreement, SWO made a payment to the Company which
was recognized as revenue.  The OTS fentanyl product line will be manufactured
for SWO by Anesta, however, the Company does not believe commercial
manufacturing will begin before December 31, 2000.  SWO is a leading private
Swedish pharmaceutical company.

On October 6, 1999, the Company announced the signing of an exclusive agreement
with Elan for the marketing, sales and distribution of Anesta's OTS fentanyl
product line, including Actiq, for Austria, Belgium, Germany, Greece, Ireland,
Italy, Luxembourg, Netherlands, Philippines, Switzerland, Taiwan, and the United
Kingdom. Under terms of the agreement, Elan made payments to the Company, a
portion of which will be recognized as revenue in future years over the term of
the agreement.  The OTS fentanyl product line will be manufactured for Elan by
Anesta.  Elan is a leading public Irish pharmaceutical company.

                                       52
<PAGE>

                   NOTES TO FINANCIAL STATEMENTS, Continued

                                   ________


11. Leases:

In December 1994, the Company entered into a five year operating lease agreement
for a building which has two additional five-year renewal options.  In February
2000, the Company renegotiated this lease for three years with two additional
three-year renewal options.  During 1999, 1998 and 1997 the Company also entered
into operating lease agreements for furniture and equipment.

Future minimum rental payments under operating leases as of December 31, 1999
are as follows:

               2000    $1,345,180
               2001     1,213,192
               2002       913,973
               2003       271,264
                       ----------
                       $3,743,609
                       ----------

Total expense under operating lease agreements for 1999, 1998 and 1997 was
$1,285,841, $944,856, and $726,763, respectively.

12. Employee Benefits:

In October 1995, the Board of Directors approved the adoption of a 401(k)
Retirement Plan (the "401(k) Plan") effective January 1, 1996.  Under the terms
of the 401(k) Plan, all employees who are at least 21 years of age are eligible
to participate.  Participants may contribute up to 25% of their annual
compensation to the 401(k) Plan, subject to statutory limitations.  The Company
may make discretionary matching contributions to the 401(k) Plan equal to 25
percent of participant contributions up to 6% of participant compensation.  For
1999, 1998 and 1997, the Company declared and paid discretionary matching
contributions to the 401(k) Plan in the amount of $57,849, $52,959 and $40,784,
respectively.

13. Computation of Diluted Loss Per Share:

As of December 31, 1999, options to purchase 1,653,179 shares of common stock at
prices between $5.25 and $28.19 per share were outstanding. As of December 31,
1998, options to purchase 1,526,940 shares of common stock at prices between
$5.25 and $25.19 per share were outstanding.  As of December 31, 1997, options
to purchase 1,340,230 shares of common stock at prices between $0.80 and $19.25
were outstanding.  None of these options were included in the computation of
diluted loss per share because the effect would have been antidilutive.

14. Subsequent Events:

In March 2000, Anesta renegotiated the U.S. marketing rights for Actiq and
Fentanyl Oralet with Abbott. Under terms of the agreements, effective April 2000
Anesta will have responsibility for sales and marketing in the United States. As
part of the renegotiation, Anesta will make cash payments to Abbott and is
obligated to make on-going earn-out payments to Abbott until the end of the
first patent covering oral transmucosal fentanyl citrate. Abbott will continue
to manufacture Actiq and Fentanyl Oralet for Anesta in the U.S. for a period of
24 to 36 months, after which the right of Anesta to manufacture such products
after such period of time. Anesta will recognize revenue when Abbott ships
product against a customer order. Anesta's gross margin therefore is directly
affected by Abbott's manufacturing costs. Anesta is also obligated to pay a
small royalty on its sales of Actiq and Fentanyl Oralet to the UURF.

                                       53
<PAGE>

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

          Not applicable.

                                       54
<PAGE>

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------

          Incorporated by reference to the sections of the Company's 2000 Proxy
Statement, anticipated to be filed within 120 days of December 31, 1999,
entitled "Proposal 1--Election of Directors," and "Management."

ITEM 11.  EXECUTIVE COMPENSATION
-------

          Incorporated by reference to the section of the Company's 2000 Proxy
Statement, anticipated to be filed within 120 days of December 31, 1999,
entitled "Executive Compensation."

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------

          Incorporated by reference to the section of the Company's 2000 Proxy
Statement, anticipated to be filed within 120 days of December 31, 1999,
entitled "Security Ownership of Certain Beneficial Owners and Management."

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------

          Incorporated by reference to the section of the Company's 2000 Proxy
Statement, anticipated to be filed within 120 days of December 31, 1999,
entitled "Certain Transactions."

                                       55
<PAGE>

                                    PART IV


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

          (a)-1     Index to Financial Statements

                    The following documents are incorporated in Part II of this
Annual Report in Item 8.

          (a)-2     Financial Statement Schedules

                    None.

          (a)-3     Exhibits

                    The exhibits to this Annual Report on Form 10-K are listed
under Item 14(c) below.

                    The following management compensatory plans and arrangements
are required to be filed as exhibits to this Annual Report on Form 10-K pursuant
to Item 14(c):

                    Exhibit
                    Number         Description
                    ------         -----------

                    10.2**    Registrant's 1993 Stock Option Plan.
                    10.3**    Form of Incentive Stock Option Agreement under the
                              1993 Stock Option Plan, with related Schedule.
                    10.4**    Form of Nonstatutory Stock Option Agreement under
                              the 1993 Stock Option Plan.
                    10.5**    Employee Stock Purchase Plan and related offering
                              document.
                    10.11**   1993 Non-Employee Directors' Stock Option Plan.

          (b)       Reports on Form 8-K

                    None.

          (c)       Exhibits

                    Exhibit
                    Number         Description
                    ------         -----------

                    3.1**     Amended and Restated Certificate of Incorporation
                              of Registrant.
                    3.2**     Bylaws of Registrant.
                    4.1**     Specimen stock certificate.
                    4.2**     Reference is made to Exhibits 3.1 and 3.2.
                    10.1**    Form of Indemnity Agreement entered into directors
                              and executive between the Registrant and its
                              officers.
                    10.2**    Registrant's 1993 Stock Option Plan.
                    10.3**    Form of Incentive Stock Option Agreement under the
                              1933 Stock Option Plan, with related Schedule.
                    10.4**    Form of Nonstatutory Stock Option Agreement under
                              the 1993 Stock Option Plan.
                    10.5**    Employee Stock Purchase Plan and related offering
                              document.

                                       56
<PAGE>

                    10.6**         Technology License Agreement between the
                                   Registrant and the University of Utah
                                   Research Foundation, dated as of September
                                   16, 1985, as amended through December 3,
                                   1993. (With certain portions in brackets
                                   deleted)
                    10.7**         Research and Development, License, Supply and
                                   Distribution Agreement between the Registrant
                                   and Abbott Laboratories, dated as of December
                                   27, 1989, as amended through December 30,
                                   1992. (With certain portions in brackets
                                   deleted)
                    10.8**         Agreement between the Registrant and Abbott
                                   International Ltd., dated as of February 28,
                                   1991, as amended through September 16, 1991.
                                   (With certain portions in brackets deleted)
                    10.9**         Agreement between the Registrant, Stanley
                                   Research Foundation and TheraTech, Inc.,
                                   dated as of December 3, 1990. (With certain
                                   portions in brackets deleted)
                    10.10**        Northgate Business Center Lease between the
                                   Registrant and Medforte Research Foundation,
                                   dated as of October 1, 1990, as amended
                                   through May 1, 1993.
                    10.11**        1993 Non-Employee Directors' Stock Option
                                   Plan.
                    10.12**        Registration Rights Agreement between
                                   Registrant and certain stockholders named
                                   therein.
                    10.13***       Wiley Post Plaza Lease between the Registrant
                                   and Asset Management Services, dated as of
                                   December 7, 1994.
                    10.14****      Letter Agreement dated August 31, 1995,
                                   between the Company and Abbott Laboratories.
                    10.15****      Amendment to Agreement dated August 31, 1995,
                                   between the Company and Abbott International,
                                   Ltd.
                    10.16****      Funding Agreement dated September 8, 1995,
                                   between the Company and Abbott Laboratories.
                    10.17+         Option Agreement dated February 15, 1999
                                   between the Company and Novartis Consumer
                                   Health, Inc.
                    10.18+         Distribution, License and Supply Agreement
                                   dated December 7, 1999 between the Company
                                   and Elan Pharma International Limited.
                    11.1****       Statement regarding calculation of net income
                                   (loss) per share.
                    23.1           Independent Accountants' Consent Letter
                    24.1           Power of Attorney. Reference is made to page
                                   58.
                    27.1           Financial Data Schedule.

____________________

+      Certain confidential information contained in this exhibit, marked by
       brackets, has been omitted and filed separately with the Securities and
       Exchange Commission based upon a request for confidential treatment
       pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as
       amended.
**     Previously filed with the Commission as an exhibit to the Company's
       Registration Statement on Form S-1 (File No. 33-72608) and incorporated
       herein by reference thereto.
***    Previously filed with the Commission as an exhibit to the Company's 1994
       Annual Report on Form 10-K (File No. 0-23160) and incorporated herein by
       reference thereto.
****   Previously filed with the Commission as an exhibit to the Company's
       September 30, 1995 Form 10-Q (File No. 0-23160) and incorporated herein
       by reference thereto.
*****  Previously filed with the Commission as an exhibit to the Company's 1995
       Annual Report on Form 10-K (File No. 0-23160) and incorporated herein by
       reference thereto.

                                       57
<PAGE>

                                 ANESTA CORP.
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Salt Lake City,
State of Utah, on the 30th day of March, 2000.

                               ANESTA CORP.


                            By /s/ Thomas B. King
                               ----------------------------------------------
                               Thomas B. King
                               President, Chief Executive Officer and Director

                               POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas B. King and Roger P. Evans, or any of
them, his or her attorney-in-fact, each with the power of substitution, for him
or her in any and all capacities, to sign any amendments to this Report, and to
file the same, with exhibits thereto and other documents in connections
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.

     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 and on the dates indicated.

         Signature                   Title                         Date
         ---------                   -----                         ----


     /s/ Thomas B. King       President, Chief Executive         March 30, 2000
-----------------------------
Thomas B. King                Officer and Director (Principal
                              Executive Officer)


     /s/ William C. Moeller   Chairman of the Board and          March 30, 2000
-----------------------------
William C. Moeller            Treasurer


     /s/ Theodore H. Stanley  Founding Chairman of the Board     March 30, 2000
-----------------------------
Theodore H. Stanley, M.D.


     /s/ Roger P. Evans       Vice President, Finance and        March 30, 2000
-----------------------------
Roger P. Evans, CPA           Administration (Principal
                              Financial and Accounting
                              Officer)


     /s/ Emanuel M. Papper    Director                           March 30, 2000
-----------------------------
Emanuel M. Papper, M.D., Ph.D.

                                       58
<PAGE>

         Signature                   Title                         Date
         ---------                   -----                         ----


     /s/ Daniel L. Kisner     Director                           March 30, 2000
-----------------------------
Daniel L. Kisner, M.D.


     /s/ Richard P. Urfer     Director                           March 30, 2000
-----------------------------
Richard P. Urfer


     /s/ Richard H. Leazer    Director                           March 30, 2000
-----------------------------
Richard H. Leazer

                                       59