ADOLOR CORP, S-1/A, 2000-10-23

ADOLOR CORP
S-1/A, 2000-10-23
PHARMACEUTICAL PREPARATIONS

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<PAGE>

As filed with the Securities and Exchange Commission on October 23, 2000.
Registration No. 333-96333
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

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

AMENDMENT NO. 8
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

Delaware 7841 31-1429198
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
Incorporation or Code Number)
Organization)

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371 Phoenixville Pike
Malvern, Pennsylvania 19355
(610) 889-5779
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)

---------------
John J. Farrar, Ph.D.
Chief Executive Officer
Adolor Corporation
371 Phoenixville Pike
Malvern, Pennsylvania 19355
(610) 889-5779
(Name, address including zip code, and telephone number, including area code,
of agent for service)

---------------
With Copies to:
James A. Lebovitz, Esquire Luci Staller Altman, Esquire
Stephen C. Costalas, Esquire David L. Concannon, Esquire
Dechert John Bessonette, Esquire
4000 Bell Atlantic Tower Brobeck, Phleger & Harrison LLP
1717 Arch Street 1633 Broadway, 47th Floor
Philadelphia, Pennsylvania 19103 New York, New York 10019
(215) 994-4000 (212) 581-1600
---------------

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion

Preliminary Prospectus dated October 23, 2000

P R O S P E C T U S
6,000,000 Shares

[LOGO OF ADOLOR CORPORATION]

Common Stock

-----------

This is Adolor Corporation's initial public offering. Adolor is selling all
of the shares.

We expect the public offering price to be between $15.00 and $17.00 per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National
Market under the symbol "ADLR."

Investing in the common stock involves risks that are described in the
"Risk Factors" section beginning on page 5 of this prospectus.

-----------

<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price............................... $ $
Underwriting discount............................... $ $
Proceeds, before expenses, to Adolor................ $ $
</TABLE>

The underwriters may also purchase up to an additional 900,000 shares of
common stock at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

The shares will be ready for delivery on or about , 2000.

-----------

Joint Lead Managers

Merrill Lynch & Co. Lehman Brothers

-----------

Pacific Growth Equities, Inc.

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The date of this prospectus is , 2000.
<PAGE>

[LOGO OF ADOLOR CORPORATION]
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 5
Note Regarding Forward-Looking Statements................................. 15
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Financial Data................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 28
Management................................................................ 49
Principal Stockholders.................................................... 59
Certain Relationships and Related Party Transactions...................... 62
Description of Capital Stock.............................................. 64
Shares Eligible for Future Sale........................................... 67
Underwriting.............................................................. 69
Legal Matters............................................................. 72
Experts................................................................... 72
Where You Can Find More Information....................................... 72
Index to Financial Statements ............................................ F-1
</TABLE>

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

You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
<PAGE>

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, especially the
risks of investing in our common stock discussed under "Risk Factors."

Overview

Combined 1999 prescription sales in the pain management market were $9.1
billion in the United States, a 24% increase compared to 1998, and are
estimated to be $25.8 billion worldwide. However, currently marketed analgesics
have significant side effects, limited efficacy or both. We believe that by
addressing these deficiencies, our product candidates will satisfy unmet needs
in the pain management market.

Currently marketed narcotics cross the blood-brain barrier and enter the
central nervous system. This can lead to certain side effects including
sedation and addiction. Most of our product candidates target peripheral opioid
receptors, which are pain relief receptors located outside of the central
nervous system. Our proprietary technology focuses on two of the three opioid
receptor types, mu and kappa, located in the peripheral nervous system.
Utilizing our proprietary technology, we are developing our product candidates
to provide the following benefits:

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

. creation of new analgesic products that do not enter the central
nervous system; and

. development of new analgesic products that have significantly
reduced side effects.

Our Product Candidates

ADL 8-2698

We are developing orally-administered ADL 8-2698 to block the adverse
gastrointestinal side effects of morphine and other narcotic analgesics without
blocking their beneficial pain-relieving effects. These gastrointestinal side
effects include narcotic bowel dysfunction, constipation, nausea and the effect
of narcotic analgesics on recovery of normal bowel function after surgery.

In a Phase II clinical trial with ADL 8-2698 in post-surgical ileus,
which is the delayed recovery of bowel function following surgery, ADL 8-2698
shortened the time to recovery of normal bowel function after surgery. In three
Phase II clinical trials of narcotic bowel dysfunction in patients receiving
chronic narcotic analgesics, ADL 8-2698 reversed narcotic bowel dysfunction in
100% of the patients treated. A Phase II clinical trial of analgesia
successfully showed that ADL 8-2698 did not reduce pain relief from morphine or
other narcotics. We have also completed a pilot Phase I clinical trial for the
reduction of narcotic-induced nausea. Results for all of these clinical trials
indicated that ADL 8-2698 blocks or reverses the effects of morphine and other
narcotic analgesics on the gastrointestinal tract without blocking the
beneficial pain relieving analgesic effects of narcotic analgesics.

1
<PAGE>

ADL 10-0101

We are developing ADL 10-0101, which is a peripheral kappa opioid
analgesic, to treat visceral and post-surgical pain, traumatic injury pain, and
dermal and ophthalmic itch. ADL 10-0101 does not readily cross the blood brain
barrier and enter the brain at therapeutic doses. We believe this compound will
be significantly more effective than acetaminophen and non-steroidal anti-
inflammatory drugs, or NSAIDs, and equally effective as narcotic analgesics,
without producing adverse central nervous system side effects.

An injectable form of ADL 10-0101 for visceral pain is currently in a
Phase II clinical trial. A topical eye drop formulation of ADL 10-0101 is in
preclinical safety studies for ophthalmic itch.

Additionally, we are developing two other peripheral kappa opioid
analgesics, ADL 10-0116 and ADL 1-0398. These analgesics have an even greater
ability than ADL 10-0101 to remain outside of the central nervous system. These
two compounds are active when administered orally in preclinical trials.

ADL 2-1294

We have targeted ADL 2-1294, a peripheral mu opioid analgesic, applied
topically or by injection, as a new treatment for ophthalmic pain, dermal pain
and itch, and joint pain. The product candidates' active ingredient,
loperamide, does not readily cross the blood brain barrier to enter the central
nervous system. Loperamide does not cause sedation or depress respiratory
function, is not considered to be addictive, and is not regulated as a
controlled substance.

An eye drop formulation of ADL 2-1294 has demonstrated in Phase II
studies a reduction of pain following corneal abrasions and surgeries. In Phase
I safety and efficacy trials, topical dermal formulations of ADL 2-1294 have
demonstrated efficacy in treating dermal burn pain. Based in part on data
generated in our clinical trials, an affiliate of SmithKline Beecham has
licensed the rights to develop and market ADL 2-1294 topical formulations for
dermal anti-itch and anti-pain applications.

Other Product Opportunities

We are conducting a Phase I clinical trial to evaluate ADL 8-2698 in
combination with a narcotic analgesic to produce a gastrointestinal side
effect-free narcotic analgesic. In addition, preclinical trials show that ADL
1-0386 inhibits the sedating effects of centrally-acting kappa opioid
analgesics. We are conducting preclinical research with ADL 1-0386 in
combination with a centrally-acting kappa opioid analgesic to produce a non-
sedating non-narcotic analgesic.

Our Strategy

We plan to become a leader in discovering, developing and marketing
proprietary pain management pharmaceuticals by:

. pioneering the use of peripheral opioid receptors to discover new
products;

. pursuing clinical indications that allow rapid demonstration of
efficacy;

. implementing a commercial strategy that will combine marketing and
product development alliances with our own product development and
sales organization;

. managing risk by creating a portfolio of product candidates; and

. developing non-addictive product candidates for the treatment of
moderate-to-severe pain.

Corporate Information

Our principal executive offices are located at 371 Phoenixville Pike,
Malvern, Pennsylvania 19355. Our telephone number is (610) 889-5779. Our
website is http://www.adolor.com. We do not intend the information found on our
website to be a part of this prospectus.

2
<PAGE>

The Offering

<TABLE>
<S> <C>
Common stock offered by Adolor.... 6,000,000 shares
Shares outstanding after the
offering......................... 26,849,406 shares
Use of proceeds................... We intend to use the net proceeds from this
offering for the continued development of
existing product candidates, research and
development of additional product
candidates, manufacturing,
commercialization and marketing
expenditures, expansion of our facilities,
working capital and potential acquisitions
of products, technologies or businesses.
Proposed Nasdaq National Market
symbol........................... ADLR
</TABLE>

Unless otherwise indicated, information in this prospectus assumes:

. the 1-for-5 reverse stock split of our common stock and the
conversion of all outstanding shares of our mandatorily redeemable
convertible preferred stock into an aggregate of 18,783,200 shares
of our common stock, including the shares of series H mandatorily
redeemable convertible preferred stock issued in July 2000, on the
closing of this offering;

. no exercise of the underwriters' over-allotment option; and

. the exercise and conversion of all outstanding warrants to purchase
shares of our mandatorily redeemable convertible preferred stock
into an aggregate of 36,905 shares of common stock on the closing
of this offering.

If the underwriters exercise their over-allotment option,
there will be 27,749,406 shares of common stock outstanding after
this offering.

This information above excludes:

. 1,156,920 shares issuable upon the exercise of options outstanding
as of June 30, 2000, at a weighted average exercise price of $1.29
per share of which options to purchase 363,529 shares of common
stock were then exercisable; and

. 649,548 shares issuable upon the exercise of options granted from
July 1 to September 29, 2000, at a weighted average exercise price
of $3.41 per share.

As of June 30, 2000, an additional 1,082,761 shares of
common stock were reserved for issuance under our Amended and
Restated 1994 Equity Compensation Plan.

3
<PAGE>

Summary Financial Information

The following table presents our summary consolidated financial data. You
should read this information together with our consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus and the information under "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Unaudited
---------------------------------
Six months ended Period from
Year ended December 31, June 30, August 9, 1993
--------------------------- ----------------- (inception) to
1997 1998 1999 1999 2000 June 30, 2000
------- -------- -------- ------- -------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of operations
data:
Grant and license
revenues............... $ -- $ 150 $ 11 $ -- $ 17 $ 178
Operating expenses
incurred during the
development stage:
Research and
development.......... 3,700 7,074 7,398 3,262 5,954 30,032
General and
administrative....... 1,585 2,277 3,698 1,408 3,394 12,002
------- -------- -------- ------- -------- -------
Total operating
expenses............... 5,285 9,351 11,096 4,670 9,348 42,034
Net interest income
(expense).............. 486 385 404 209 329 1,850
Net loss................ (4,799) (8,816) (10,681) (4,461) (9,002) (40,006)
Undeclared dividends
attributable to
mandatorily redeemable
convertible preferred
stock.................. 1,408 1,704 2,430 1,011 1,578 8,021
Beneficial conversion
feature of mandatorily
redeemable preferred
stock.................. -- -- -- -- 12,306 12,306
------- -------- -------- ------- -------- -------
Net loss allocable to
common stockholders.... (6,207) (10,520) (13,111) (5,472) (22,886) (60,333)
Basic and diluted net
loss per share
allocable to common
stockholders........... $ (6.81) $ (10.59) $ (12.55) $ (5.28) $ (15.47)
Shares used in computing
basic and diluted net
loss per share
allocable to common
stockholders........... 912 993 1,045 1,037 1,479
Pro forma basic and
diluted net loss per
share allocable to
common stockholders
(unaudited)............ $ (1.07) $ (1.50)
Shares used in computing
pro forma basic and
diluted share allocable
to common stockholders
(unaudited)............ 12,260 15,305
</TABLE>

<TABLE>
<CAPTION>
Unaudited
June 30, 2000
------------------------------
Pro Forma
Actual Pro Forma as adjusted
------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Balance sheet data:
Cash, cash equivalents and short-term
investments................................... $11,065 $11,065 $136,415
Working capital................................ 8,358 8,358 133,708
Total assets................................... 12,153 12,153 137,503
Mandatorily redeemable convertible preferred
stock......................................... 45,381 -- --
Deficit accumulated during the development
stage......................................... (40,006) (40,006) (40,006)
Total stockholders' equity (deficit)........... (37,152) 8,229 133,579
</TABLE>

Please see Note 2 to our financial statements for an explanation of the
method used to calculate the net loss and pro forma net loss per share and the
number of shares used in the computation of per share amounts.

The pro forma balance sheet data give effect to the conversion of the
shares of series A, B, C, D, E, F and G mandatorily redeemable convertible
preferred stock outstanding at June 30, 2000 into an aggregate of 13,998,914
shares of common stock.

The pro forma as adjusted balance sheet data give effect to:

. the sale of 4,784,286 shares of series H mandatorily redeemable
convertible preferred stock in July 2000 for proceeds of $36.6
million and the conversion of such shares into 4,784,286 shares of
common stock; and

. the assumed exercise of all outstanding warrants for mandatorily
redeemable convertible preferred stock and the conversion of such
shares into 36,905 shares of common stock for proceeds of $150,000,
and reflects the pro forma adjustments and the net proceeds of
$88.6 million from our sale of 6,000,000 shares of our common stock
in this offering at an assumed offering price to the public of
$16.00 per share after deducting underwriting discounts and
commissions and estimated offering expenses.

4
<PAGE>

RISK FACTORS

You should carefully consider the risks described below together with all
of the other information included in this prospectus before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or results of operations could be harmed. In that
case, the trading price of our common stock could decline, and you may lose all
or part of your investment.

Risks Related To Our Business

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

The extent of our future losses and the timing of profitability are
highly uncertain, and we may never achieve profitable operations. We have
generated operating losses since we began operations in November 1994. We have
been engaged in discovering and developing drugs since we began operations,
which requires significant research and development expenditures. We have no
products that have generated any revenue, and as of June 30, 2000, we had an
accumulated deficit of approximately $40.0 million. Even if we succeed in
developing a commercial product, we expect to incur losses for at least the
next several years and expect that these losses will increase as we expand our
research and development and sales and marketing activities. If the time
required to generate product revenues and achieve profitability is longer than
anticipated, we may be unable to continue our operations without additional
funding.

Our operating history provides you with a limited basis on which to make an
investment decision.

Successfully commercializing any of our product candidates entails
significant regulatory, manufacturing, sales and marketing, competitive and
financing risks. So far our operations have been limited to organizing and
staffing our company, conducting early stage research and development to
discover and develop drugs, and establishing strategic relationships we hope
will enable us successfully to develop and market drugs on a commercial basis.
These operations provide limited information for you to use in assessing our
ability to commercialize our product candidates and the advisability of
investing in our common stock.

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

We have no products that have received regulatory approval for commercial
sale. All of our product candidates, including ADL 8-2698, ADL 2-1294 and ADL
10-0101, are in development, and we face the substantial risks of failure
inherent in developing drugs based on new technologies.

Our product candidates must satisfy rigorous standards of safety and
efficacy before the United States Food and Drug Administration, or FDA, and
foreign regulatory authorities will approve them for commercial use. We will
need to conduct significant additional research, animal testing, or preclinical
testing, and human testing, or clinical trials, to demonstrate the safety and
efficacy of our product candidates to the satisfaction of the FDA and foreign
regulatory authorities to obtain product approval.

Preclinical testing and clinical development are long, expensive and
uncertain processes. It may take us several years to complete our testing, and
failure can occur at any stage of testing. Success in preclinical testing and
early clinical trials does not ensure that later clinical trials will be
successful. We may suffer significant setbacks in advanced clinical trials,
even after promising results in earlier trials. We may not be able to enroll a
sufficient number of patients to complete our clinical trials in a timely
manner. Based on results at any stage of clinical trials, we may decide to
discontinue development of our product candidates.

5
<PAGE>

We do not know whether our existing or any future clinical trials will
demonstrate sufficient safety and efficacy necessary to obtain the requisite
regulatory approvals or will result in marketable products. Our failure to
adequately demonstrate the safety and efficacy of our products under
development will prevent receipt of FDA and foreign regulatory approvals and,
ultimately, commercialization of our product candidates.

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

The pharmaceutical industry is subject to stringent regulation by a wide
range of authorities. We cannot predict whether we will obtain regulatory
clearance for any product candidate we develop. We cannot market a
pharmaceutical product in the United States until it has completed rigorous
preclinical testing and clinical trials and the FDA's extensive regulatory
clearance process. Satisfaction of regulatory requirements typically takes many
years, is dependent upon the type, complexity and novelty of the product and
requires the expenditure of substantial resources for research and development,
testing, manufacturing, quality control, labeling and promotion of drugs for
human use. Since neither the FDA nor international regulatory authorities have
approved peripherally restricted opioid analgesics or narcotic antagonist drugs
for marketing, we do not know whether our research and clinical approaches to
developing new products for the pain management market will lead to drugs that
the FDA will consider safe and effective for indicated uses.

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

. must conform with the FDA's good laboratory practice regulations;

. must meet requirements for institutional review board oversight;

. must meet requirements for informed consent;

. must meet requirements for good clinical practices;

. are subject to continuing FDA oversight; and

. may require large numbers of test subjects.

We or the FDA may suspend clinical trials at any time if the subjects
participating in the trials are exposed to unacceptable health risks or if the
FDA finds deficiencies in the IND application or the conduct of the trials.

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

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

Regulatory clearance that we may receive, if any, for a product candidate
will be limited to those diseases and conditions for which we have demonstrated
in clinical trials that the product candidate is safe and efficacious. We
cannot ensure that any compound developed by us, alone or with others, will
prove safe and efficacious in clinical trials and will meet all of the
applicable regulatory requirements needed to receive marketing clearance.

6
<PAGE>

Outside the United States, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authorities. This foreign regulatory approval process includes all of the risks
associated with FDA clearance described above.

Failure to attract, retain and motivate skilled personnel and cultivate key
academic collaborations will delay our product development programs and our
research efforts.

We are a small company with approximately 50 employees, and our success
depends on our continued ability to attract, retain and motivate highly
qualified management and scientific personnel and on our ability to develop and
maintain important relationships with leading academic institutions and
scientists. Competition for personnel and academic collaborations is intense.
In particular, our product development programs depend on our ability to
attract and retain highly skilled chemists, biologists and clinical development
personnel. If we lose the services of any of these personnel, in particular,
John J. Farrar, our President and Chief Executive Officer, it could impede
significantly the achievement of our research and development objectives. The
employment agreement that we have entered into with Dr. Farrar can be
terminated at any time by him or us. We have entered into an agreement with our
Vice President, Clinical Research & Development under which he will remain with
us through March 13, 2001 on a full-time basis and will be available to consult
with us on a part-time basis until September 14, 2001. Failure to attract a
qualified replacement may delay our product development program. Failure to
negotiate additional acceptable collaborations with academic institutions and
scientists, or lack of success with respect to our existing academic
collaborations, may delay our product development programs. In addition, we
will need to hire additional personnel and develop additional academic
collaborations as we continue to expand our research and development
activities. We do not know if we will be able to attract, retain or motivate
personnel or maintain relationships.

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

Since there are no products on the market comparable to our product
candidates, we do not have any historical or comparative sales data to rely
upon to indicate that peripherally restricted opioid analgesic or narcotic
antagonist drugs will achieve commercial success in the marketplace. Market
acceptance of our product candidates will depend on a number of factors,
including:

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

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

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

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

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

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

We rely, to a significant extent, on third parties to provide funding in
support of our research, to jointly conduct some research and preclinical
testing functions and to manufacture certain of our product candidates. If any
of these third parties breaches or terminates their agreement with us or
otherwise fails

7
<PAGE>

to conduct their activities successfully and in a timely manner, their actions
could delay or terminate the preclinical or clinical development or
commercialization of the affected product candidates or research programs. We
cannot control the amount and timing of resources these third parties devote to
our programs or product candidates.

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

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

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

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

. sufficient capital;

. significant technological, product development, manufacturing and
regulatory expertise and resources; and

. marketing and sales personnel.

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

If we fail to obtain the capital necessary to fund our operations, we will be
unable to develop products successfully.

We expect that we will require significant additional financing in the
future to fund operations. We do not know whether additional financing will be
available when needed, or that, if available, we will obtain financing on terms
favorable to our stockholders or to us. We have consumed substantial amounts of
cash to date and expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure and research and
development activities.

We believe that the net proceeds from the offering, existing cash and
investment securities and anticipated cash flow from existing collaborations
will be sufficient to support our current operating plan through the fourth
quarter of 2002. We have based this estimate on assumptions that may prove to
be wrong. Our future capital requirements depend on many factors that affect
our research, development, collaboration and sales and marketing activities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

To the extent we raise additional capital by issuing equity securities,
our stockholders may experience substantial dilution. To the extent we raise
additional funds through collaboration and

8
<PAGE>

licensing arrangements, we may be required to relinquish some rights to our
technologies or product candidates, or grant licenses on terms that are not
favorable to us. If adequate funds are not available, we will not be able to
continue developing our product candidates.

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

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

Our competitors include fully integrated pharmaceutical companies and
biotechnology companies that currently have drug and target discovery efforts
and universities and public and private research institutions. In addition,
companies pursuing research in different but related fields represent
substantial competition. Many of the organizations competing with us have
substantially greater capital resources, larger research and development staffs
and facilities, greater experience in drug development and in obtaining
regulatory approvals and greater manufacturing and marketing capabilities than
we do. These organizations also compete with us to:

. attract qualified personnel;

. attract parties for acquisitions, joint ventures or other
collaborations; and

. license the proprietary technology of institutions that is
competitive with the technology we are practicing.

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

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

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

Our agreements with our collaborators may not generate as much revenue as we
anticipate and may not generate any future revenue.

In July 1999 we granted SB Pharmaco Puerto Rico Inc., an affiliate of
SmithKline Beecham, an exclusive license to develop and commercialize ADL 2-
1294 for use in products designed to treat dermal pain and itch, muscle pain
and joint pain in all countries other than South Korea and North Korea.

9
<PAGE>

In April 2000, we granted Santen Pharmaceutical Co., Ltd. an exclusive license
to develop and commercialize ADL 2-1294 for the treatment of ophthalmic pain in
all countries other than South Korea and North Korea. Assuming defined clinical
and regulatory milestones are met and sales are achieved, the affiliate of
SmithKline Beecham and Santen have full control and authority over the
development, registration and commercialization of their respective product
candidates, subject to their obligations to use reasonable efforts to develop,
obtain regulatory approval and market their product candidates, taking into
account the prospect for these product candidates. As a result, we have no
control over the further development of these product candidates. Under our
agreements with the affiliate of SmithKline Beecham and with Santen, each
company has the right in some circumstances to co-promote products it develops,
pursuant to the license we granted it with other partners. The affiliate of
SmithKline Beecham and Santen may each terminate its agreement at its
discretion on a country by country basis or on a product by product basis upon
written notice to us if they determine that circumstances do not warrant
further development of the products. Also, if the affiliate of SmithKline
Beecham determines that payment of any of the agreed-upon milestones or
royalties would make development of the product commercially infeasible, the
affiliate of SmithKline Beecham has the right to adjust those payments
downwards. In November 1997, we entered into a license agreement with Kwang
Dong Pharmaceutical Co., Ltd. relating to the development and commercialization
in South Korea and North Korea of our product candidate ADL 2-1294 for the
indication of topical dermal pain. We devoted significant internal efforts and
expenditures to the development of a formulation for this indication. To date,
we have not transferred sufficient technology under the license agreement to
allow commercialization of ADL 2-1294 in South Korea and North Korea. As a
result, we do not anticipate material revenues under the license agreement in
the foreseeable future.

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

Our commercial success will depend in part on obtaining patent protection
on our products and successfully defending these patents against third party
challenges. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. No
consistent policy regarding the breadth of claims allowed in biotechnology
patents has emerged to date. Accordingly, we cannot predict the breadth of
claims allowed in our patents or those of our collaborators.

Others have filed and in the future are likely to file patent
applications covering products and technologies that are similar, identical or
competitive to ours. The patent office has informed us that others may have
patent applications that may overlap with a patent application that we have in-
licensed covering certain receptors. We cannot assure you that any patent
application owned by a third party will not have priority over patent
applications filed or in-licensed by us, nor that we or our licensor will not
be involved in interference proceedings before the United States Patent and
Trademark Office. Any legal action against our collaborators or us claiming
damages and seeking to enjoin commercial activities relating to the affected
products and processes could subject us to potential liability for damages and
require our collaborators or us to obtain a license to continue to manufacture
or market the affected products and processes. We cannot predict whether we or
our collaborators would prevail in any of these actions or that any license
required under any of these patents would be made available on commercially
acceptable terms, if at all. There has been, and we believe that there will
continue to be, significant litigation in the industry regarding patent and
other intellectual property rights. If we become involved in litigation, it
could consume a substantial portion of our managerial and financial resources.

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

10
<PAGE>

alternative method of delivery for ophthalmic products based on ADL 2-1294,
which could materially reduce or eliminate the commercial viability of our ADL
2-1294 for ophthalmic uses.

We rely on trade secrets to protect technology in cases when we believe
patent protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. While we require employees, academic collaborators and
consultants to enter into confidentiality agreements, we may not be able to
protect adequately our trade secrets or other proprietary information.

We are a party to various license agreements that give us rights to use
specified technologies in our research and development processes. If we are not
able to continue to license this technology on commercially reasonable terms,
our product development and research may be delayed. In addition, we generally
do not control the prosecution of in-licensed technology, and accordingly are
unable to exercise the same degree of control over this intellectual property
as we exercise over our internally developed technology. For example, the
University of California, San Diego is prosecuting the patent for additional
claims regarding the use of ADL 2-1294 for the treatment of inflammatory pain.

Our research collaborators and scientific advisors have rights to publish
data and information in which we have rights. If we cannot maintain the
confidentiality of our technology and other confidential information in
connection with our collaborations, our ability to receive patent protection or
protect our proprietary information may be imperiled.

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

Completion of our clinical trials and commercialization of our product
candidates require access to, or development of, facilities to manufacture a
sufficient supply of our product candidates. We will depend on our
collaborators or third parties for the manufacture of compounds for
preclinical, clinical and commercial purposes in their FDA-approved
manufacturing facilities. Our products may be in competition with other
products for access to these facilities and suitable alternatives may be
unavailable. Consequently, our products may be subject to delays in manufacture
if collaborators or outside contractors give other products greater priority
than our products. For this and other reasons, our collaborators or third
parties may not be able to manufacture these products in a cost-effective or
timely manner. If the manufacture of these products is not performed in a
timely manner, the clinical trial development of our product candidates or
their submission for regulatory approval could be delayed, and our ability to
deliver products, if any are approved, on a timely basis could be impaired or
precluded. We may not be able to enter into necessary third-party manufacturing
arrangements on acceptable terms, if at all. Our dependence upon others for the
manufacture of our products may adversely affect our future profit margin and
our ability to commercialize products, if any are approved, on a timely and
competitive basis. We do not intend to develop or acquire facilities for the
manufacture of product candidates for clinical trials or commercial purposes in
the foreseeable future.

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

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

11
<PAGE>

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

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

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

. government and health administration authorities;

. private health insurers; and

. other third-party payors.

If conflicts arise between our collaborators or advisors and us, they may act
in their self-interest, which may be adverse to your best interests.

If conflicts arise between us and our corporate or academic collaborators
or scientific advisors, the other party may act in its self-interest and not in
the interest of our stockholders. Some of our corporate or academic
collaborators are conducting multiple product development efforts within each
disease area that is the subject of the collaboration with us. Generally, in
each of our collaborations, we have agreed not to conduct independently, or
with any third party, any research that is competitive with the research
conducted under our collaborations. Our collaborations may have the effect of
limiting the areas of research that we may pursue, either alone or with others.
Our collaborators, however, may develop, either alone or with others, products
in related fields that are competitive with the products or product candidates
that are the subject of these collaborations. Competing products, either
developed by the collaborators or to which the collaborators have rights, may
result in their withdrawal of support for our product candidates.

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

The testing and marketing of medical products entail an inherent risk of
product liability. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities or be required to limit
commercialization of our products. Our inability to obtain sufficient product
liability insurance at an acceptable cost to protect against potential product
liability claims could prevent or inhibit the commercialization of
pharmaceutical products we develop, alone or with corporate collaborators. We
currently carry clinical trial insurance but do not carry product liability
insurance. Our corporate collaborators or we may not be able to obtain
insurance at a reasonable cost, if at all. While under various circumstances
our corporate collaborators will indemnify us against losses, indemnification
may not be available or adequate should any claim arise.

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

Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials,
chemicals and various radioactive compounds. We

12
<PAGE>

cannot completely eliminate the risk of accidental contamination or injury from
the use, storage, handling or disposal of these materials. In the event of
contamination or injury, we could be held liable for damages that result, and
any liability could exceed our resources. We are subject to federal, state and
local laws and regulations governing the use, storage, handling and disposal of
these materials and specified waste products. The cost of compliance with these
laws and regulations could be significant.

Risks Related To The Offering

If our directors, officers and largest stockholders choose to act together,
they may be able to control our management and operations, acting in their best
interests and not necessarily those of other stockholders.

Following completion of the offering, our directors, executive officers
and principal stockholders and their affiliates will beneficially own
approximately 57.76% of our common stock, based on their beneficial ownership
as of August 31, 2000. Accordingly, they collectively may have the ability to
determine the election of all our directors and to determine the outcome of
most corporate actions requiring stockholder approval. They may exercise this
ability in a manner that advances their best interests and not necessarily
those of other stockholders.

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

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

In addition, until November 2000, Section 203 of the Delaware General
Corporation Law may discourage, delay or prevent a third party from acquiring
us.

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

Prior to this offering, there has been no public market for our common
stock and an active public market for our common stock may not develop or
continue after the offering. The initial public offering price will be
determined by negotiations between the representatives of the underwriters and
us and may not be indicative of future market prices. Among the factors to be
considered in determining the initial public offering price of the common
stock, in addition to prevailing market conditions, will be:

. estimates of our business potential and earnings prospects;

. an assessment of our management; and

. the consideration of the above factors in relation to market
valuations of companies in related businesses.

The market prices for securities of biotechnology companies in general
have been highly volatile and may continue to be highly volatile in the future.
The following factors, in addition to other risk factors described in this
section, may have a significant impact on the market price of our common stock:

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

. developments concerning proprietary rights, including patents;

. developments concerning our collaborations;

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

. regulatory developments in the United States and foreign
countries;

13
<PAGE>

. litigation;

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

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

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

If our stockholders sell substantial amounts of our common stock after this
offering, the market price of our common stock may fall.

If our stockholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options, the market
price of our common stock may fall. These sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate.

Our management will have broad discretion in using the proceeds from this
offering, and therefore investors will be relying on the judgment of our
management to invest those funds effectively.

We intend to use the net proceeds from this offering to continue our
research and development efforts, commercialize our products, hire marketing,
research, development and administrative personnel, expand our facilities, for
working capital and for potential acquisitions of products, technologies or
businesses. We have not yet finalized the amount of net proceeds to be used
specifically for each of these purposes. Investors will be relying on the
judgment of our management regarding the application of these proceeds.

New investors will experience immediate and substantial dilution.

The purchase price of the shares of common stock offered by this
prospectus will be substantially higher than the unaudited pro forma tangible
book value of our outstanding equity shares. Any shares of common stock that
investors purchase in this offering will have a post-closing net tangible book
value per share of $11.02 per share less than the initial public offering price
paid, assuming an initial public offering price of $16.00 per share. Investors
who purchase shares in this offering will therefore experience immediate and
substantial dilution in the tangible net book value of their investment.

14
<PAGE>

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements under the captions
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere. These forward-
looking statements include statements about the following:

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

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

. our intentions regarding the establishment of collaborations;

. anticipated operating losses and capital expenditures;

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

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

. our intention to rely on third parties for manufacturing.

When used in this prospectus, we intend the words "believe,"
"anticipate," "estimate," "expect," "seek," "intend," and "may" to identify
forward-looking statements. Our forward-looking statements involve
uncertainties and other factors that may cause our actual results, performance
or achievements to be far different from that suggested by our forward-looking
statements. We discuss these factors in more detail elsewhere in this
prospectus, including under the captions "Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." You should not place undue reliance on our forward-
looking statements. We do not intend to update any of these factors or to
publicly announce the result of any revisions to any of these forward-looking
statements.

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

The safe harbor for forward-looking statements contained in the
Securities Litigation Reform Act of 1995 protects companies from liability for
their forward-looking statements if they comply with the requirements of the
Act. The Act does not provide this protection for initial public offerings and
is not available for our forward-looking statements.

15
<PAGE>

USE OF PROCEEDS

We estimate that the net proceeds from the sale of the 6,000,000 shares
of common stock that we are selling in this offering will be $88.6 million
after deducting underwriting discounts and commissions and estimated offering
expenses and assuming an initial public offering price of $16.00 per share. If
the underwriters' over-allotment option is exercised in full, we estimate that
the net proceeds will be approximately $102.0 million.

We anticipate using the net proceeds from the offering for general
corporate purposes, including the continued development of existing product
candidates, manufacturing, commercialization expenditures, research and
development for additional product opportunities, hiring of sales, marketing,
development, research and administrative personnel, expansion of our facilities
and working capital. We may also use a portion of the net proceeds to acquire
or invest in businesses, products, or technologies that are complimentary to
our own. While we periodically engage in preliminary discussions with respect
to acquisitions, we are not currently a party to any agreements or commitments,
and we have no understandings with respect to any acquisitions or investments.

The amounts and timing of our actual expenditures will depend on several
factors, including the progress of our product development efforts and the
amount of cash generated or used by our operations. We have not determined the
amount or timing of the expenditures in the areas listed above. Pending the use
of the net proceeds, we intend to invest the net proceeds in short-term,
investment-grade, interest-bearing instruments.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock.
We currently intend to retain our future earnings, if any, to support the
growth and development of our business and do not anticipate paying cash
dividends for the foreseeable future.

16
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2000:

. on an actual basis; and

. on a pro forma basis to give effect to:

. the conversion of all outstanding shares of our mandatorily
redeemable preferred stock, at June 30, 2000 into an aggregate
of 13,998,914 shares of our common stock on the closing of this
offering; and

. on a pro forma as adjusted basis to give effect to the
aforementioned pro forma adjustments and:

. the sale of shares of series H mandatorily redeemable
convertible preferred stock in July 2000 for $36.6 million and
the conversion of such shares into 4,784,286 shares of common
stock on the close of this offering;

. the assumed exercise of all outstanding warrants for
mandatorily redeemable convertible preferred stock for an
exercise price totaling $150,000 and the conversion of such
shares into 36,905 shares of common stock on the close of this
offering;

. the receipt of the estimated net proceeds of $88,600,000 from
our sale of 6,000,000 shares of common stock in this offering
at an assumed offering price of $16.00 per share, after
deducting underwriting discounts and commissions and estimated
offering expenses payable by us.

You should read this table in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and our
financial statements and the notes to those statements included elsewhere in
the prospectus.

<TABLE>
<CAPTION>
As of June 30, 2000
(unaudited)
--------------------------------
Pro Forma As
Actual Pro Forma Adjusted
-------- --------- ------------
(in thousands)
<S> <C> <C> <C>
Mandatorily redeemable convertible preferred
stock, at redemption value (aggregate
liquidation value of $53,402,025 at June 30,
2000); $0.01 par value, 70,179,098 shares
authorized, 69,994,574 issued and outstanding
(none authorized, issued or outstanding on a
pro forma or pro forma as adjusted basis).... $ 45,381 -- --
Stockholders' Equity (Deficit):
Preferred stock; $0.01 par value, 1,000,000
shares authorized upon effectiveness of
this offering, none issued and outstanding
on an actual, pro forma and pro forma as
adjusted basis............................. -- -- --
Common stock, par value $.0001 per share;
99,000,000 shares authorized; 2,029,301,
16,028,215 and 26,849,406 shares issued and
outstanding on an actual, pro forma and pro
forma as adjusted basis, respectively...... -- 2 3
Additional paid-in capital.................. 16,668 62,047 187,396
Notes receivable for stock options.......... (1,062) (1,062) (1,062)
Deferred compensation....................... (12,752) (12,752) (12,752)
Deficit accumulated during the development
stage...................................... (40,006) (40,006) (40,006)
-------- ------- -------
Total stockholders' equity (deficit)...... (37,152) 8,229 133,579
-------- ------- -------
Total capitalization...................... $ 8,229 8,229 133,579
======== ======= =======
</TABLE>

The table above excludes 1,156,920 shares issuable upon the exercise of
options outstanding as of June 30, 2000 at a weighted average exercise price of
$1.29 per share. From July 1 to September 29, 2000, options to purchase an
additional 649,548 shares have been granted and are outstanding.

17
<PAGE>

DILUTION

Our pro forma net tangible book value as of June 30, 2000 was
approximately $8.2 million, or $0.51 per share. This is based on a pro forma
number of shares outstanding as of June 30, 2000 of 16,028,215, consisting of
2,029,301 shares of our common stock outstanding on June 30, 2000, together
with the 13,998,914 shares of common stock issuable upon conversion of all
outstanding shares of mandatorily redeemable convertible preferred stock at
June 30, 2000

Dilution per share represents the difference between the amount per share
paid by purchasers of shares of our common stock in this offering and the pro
forma net tangible book value per share of our common stock immediately
afterwards, after giving effect to the sale of series H mandatorily redeemable
convertible preferred stock in July 2000, the assumed exercise of preferred
stock warrants and the automatic conversion of these shares into 4,821,191
shares of common stock, and the sale of 6,000,000 shares in this offering. This
represents an immediate increase in pro forma net tangible book value of $2.82
per share to existing stockholders and immediate dilution in net tangible book
value of $11.02 per share to new investors. The following table illustrates
this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $16.00
======
Pro forma net tangible book value per share before the
offering.................................................. $0.51
=====
Increase per share attributable to the series H issuance
and assumed exercise of preferred stock warrants and
conversion of these shares into common stock.............. $1.65
=====
Increase per share attributable to new investors........... $2.82
=====
Pro forma net tangible book value per share of our common
stock after the offering.................................... $ 4.98
======
Dilution per share to new investors.......................... $11.02
======
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 2000,
the total number of shares of common stock purchased from us and the total
consideration paid and the average price per share paid by existing
stockholders and by new investors in this offering:

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders... 20,849,406 77.7% $ 83,415,605 46.5% $ 4.00
========== ----- ============ ----- ======
New Investors........... 6,000,000 22.3% 96,000,000 53.5% $16.00
========== ----- ============ ----- ======
Total................. 26,849,406 100.0% $179,415,605 100.0%
========== ===== ============ =====
</TABLE>

The tables and calculations above assume no exercise of outstanding
options. At June 30, 2000, there were: 1,156,920 shares issuable upon the
exercise of options outstanding with a weighted average exercise price of $1.29
per share. To the extent that these options are exercised, there will be
further dilution to new investors. For a description of our stock option plan,
please see "Management--Employee Benefit Plans."

If the underwriters exercise their over-allotment option in full, the
following will occur:

. the number of shares of our common stock held by existing
stockholders will decrease to approximately 75.1% of the total
number of shares of our common stock outstanding after this
offering;

18
<PAGE>

. the number of shares of our common stock held by new public
investors will increase to 6,900,000, or approximately 24.9% of
the total number of shares of our common stock outstanding after
this offering;

. an increase in pro forma tangible book value of $3.14 per share to
existing stockholders, and an immediate dilution of $10.70 per
share to new investors.

19
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
our financial statements and the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus. The statement of operations data except as otherwise
indicated below for the three years ended December 31, 1999, for the period
from August 9, 1993 (inception) to December 31, 1999 and as of December 31,
1998 and 1999, are derived from our financial statements which have been
audited by KPMG LLP, independent certified public accountants, and are included
elsewhere in this prospectus. The statement of operations data for the years
ended December 31, 1995 and 1996 and the balance sheet data as of December 31,
1995, 1996 and 1997 are derived from audited financial statements not included
in this prospectus. The selected financial data as of June 30, 2000 and for the
six-month periods ended June 30, 1999 and 2000 are derived from our unaudited
financial statements. Such unaudited financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth herein. Operating results for the six
months ended June 30, 2000 are not necessarily indicative of the results to be
expected for the year ending December 31, 2000. Historical results are not
necessarily indicative of the results to be expected in the future and should
be read in conjunction with the financial statements and notes thereto that are
included in this prospectus.

<TABLE>
<CAPTION>
Unaudited
---------------------------------
Six Months Ended Period from
Years Ended December 31, June 30, August 9, 1993
--------------------------------------------- ----------------- (inception) to
1995 1996 1997 1998 1999 1999 2000 June 30, 2000
------- ------- ------- -------- -------- ------- -------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of operations
data:
Grant and license
revenues............... $ -- $ -- $ -- $ 150 $ 11 $ -- $ 17 $ 178
Operating expenses
incurred during the
development stage:
Research and
development........... 2,110 3,695 3,700 7,074 7,398 3,262 5,954 30,032
General and
administrative........ 254 649 1,585 2,277 3,698 1,408 3,394 12,002
------- ------- ------- -------- -------- ------- -------- --------
Total operating
expenses............... 2,364 4,344 5,285 9,351 11,096 4,670 9,348 42,034
------- ------- ------- -------- -------- ------- -------- --------
Net interest income
(expense).............. (28) 272 486 385 404 209 329 1,850
------- ------- ------- -------- -------- ------- -------- --------
Net loss............... (2,392) (4,072) (4,799) (8,816) (10,681) (4,461) (9,002) (40,006)
Undeclared dividends
attributable to
mandatorily redeemable
convertible preferred.. 120 764 1,408 1,704 2,430 1,011 1,578 8,021
Beneficial conversion
feature of mandatorily
redeemable preferred
stock.................. -- -- -- -- -- -- 12,306 12,306
------- ------- ------- -------- -------- ------- -------- --------
Net loss allocable to
common stockholders.... $(2,512) $(4,836) $(6,207) $(10,520) $(13,111) $(5,472) $(22,886) $(60,333)
======= ======= ======= ======== ======== ======= ======== ========
Basic and diluted net
loss per share
allocable to common
stockholders........... $ (3.89) $ (6.31) $ (6.81) $ (10.59) $ (12.55) $ (5.27) $ (15.47)
======= ======= ======= ======== ======== ======= ========
Shares used in computing
basic and diluted net
loss per share
allocable to common
stockholders........... 646 766 912 993 1,045 1,037 1,479
======= ======= ======= ======== ======== ======= ========
Pro forma basic and
diluted net loss per
share allocable to
common stockholders
(unaudited)............ $ (1.07) $ (1.50)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share allocable to
common stockholders
(unaudited)............ 12,260 15,305
======== ========
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
------- ------- -------- -------- -------- -----------
(unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Cash, cash equivalents
and short-term
investments............ $ 335 $ 5,071 $ 10,710 $ 12,046 $ 5,264 $ 11,065
Working capital......... (1,148) 4,378 9,670 10,024 3,069 8,358
Total assets............ 478 5,738 11,508 12,773 6,258 12,153
Total long-term
obligations............ 13 255 174 66 463 919
Mandatorily redeemable
convertible preferred
stock.................. 1,500 11,105 21,375 30,475 33,000 45,381
Deficit accumulated
during the development
stage.................. (2,636) (6,708) (11,507) (20,322) (31,004) (40,006)
Total stockholders'
deficit................ (2,536) (6,568) (11,264) (19,913) (29,590) (37,152)
</TABLE>

21
<PAGE>

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

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

Overview

We have devoted substantially all of our resources since we began our
operations in November 1994 to the discovery and development of proprietary
pharmaceutical products for the treatment of pain and the side effects that are
caused by current pain treatments. We are a development stage pharmaceutical
company and have not generated any revenues from product sales. We have not
been profitable and, since our inception, we have incurred a cumulative net
loss of approximately $40.0 million through June 30, 2000. These losses have
resulted principally from costs incurred in research and development activities
and general and administrative expenses. We have four product candidates in
Phase II/III or Phase II clinical trials and several other compounds in Phase I
clinical trials and preclinical studies.

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

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

We intend to expand our marketing activities in 2000, 2001 and 2002 in
preparation for the establishment of a sales force for our product candidates
in the United States. In international markets, we intend to rely on
collaborations with pharmaceutical companies to market and sell our product
candidates rather than establish our own sales force.

Milestone Payments, Royalties and License Fees

We paid Roberts Laboratories, Inc., which recently merged with Shire
Pharmaceuticals, plc, a total of $600,000 through June 30, 2000 for the
exclusive worldwide license to ADL 8-2698. Our license agreement with Roberts
requires us to make payments to Roberts if and when two milestones are
achieved. Roberts licensed the rights to ADL 8-2698 from Eli Lilly, and Eli
Lilly consented to the assignment by Roberts to us of Roberts' rights and
obligations. Under the agreement with Eli Lilly, we will make a milestone
payment to Eli Lilly if and when we receive FDA approval to sell ADL 8-2698. We
will be required to pay royalties to Eli Lilly and Roberts on any sales of ADL
8-2698.

22
<PAGE>

Results Of Operations

Six Months Ended June 30, 2000 and 1999

Grant and license revenues. Our grant and license revenues were $17,544
for the six months ended June 30, 2000. We recognized no revenues in the six
months ended June 30, 1999. Revenues recognized in the six months ended June
30, 2000 consisted of $13,158 which is a portion of the $500,000 license fee
received from an affiliate of SmithKline Beecham on signing that agreement in
July 1999, and $4,386 which is a portion of the $500,000 license fee received
from Santen Pharmaceutical Co., Ltd. on signing that agreement in April 2000.
These revenues are being recognized over the remaining life of the patents that
were licensed in those collaborations.

Research and development expenses. Our research and development expenses
consist primarily of salaries and other personnel-related expenses, costs of
clinical trials, costs to manufacture drug candidates, stock-based compensation
and other research expenses. Research and development expenses increased to
approximately $6.0 million for the six months ended June 30, 2000 from $3.3
million for the six months ended June 30, 1999. This increase is primarily due
to the costs of developing our product candidates as well as higher personnel
costs resulting from increased staffing. More specifically, clinical
development costs for ADL 2-1294 were lower by approximately $0.6 million for
the first six months of 2000 compared to the same period in 1999 because the
affiliate of SmithKline Beecham and Santen are now responsible for those costs.
In the first six months of 2000, the costs of conducting Phase I and Phase II
clinical trials and the costs of manufacturing the clinical trial materials for
ADL 2-2698 increased by approximately $3.0 million compared to the same period
in 1999. Amortization of deferred stock-based compensation expenses increased
by $0.3 million in the first six months of 2000 compared to the same period in
1999.

General and administrative expenses. Our general and administrative
expenses increased to approximately $3.4 million for the first six months of
2000 from approximately $1.4 million in the first six months of 1999, an
increase of $2.0 million. This increase is primarily due to approximately
$508,000 of higher amortization of deferred stock-based compensation expense,
approximately $334,000 for higher payroll expenses related to additional
personnel, approximately $142,000 of higher patent prosecution expenses and
approximately $909,000 of expenses which were incurred in connection with our
postponed initial public offering in April, 2000.

Net interest income (expense). Our interest income increased from
$219,517 for the six months ended June 30, 1999 to $333,479 for the same period
in 2000 due to investment of returns on the proceeds from the sale of series G
preferred stock in January 2000. Our interest expense represents interest
incurred on an equipment financing facility and the financing of insurance
premiums.

Net loss. Our net loss for the six months ended June 30, 1999 and 2000
was $4.5 million and $9.0 million, respectively. The increase in the net loss
reflects higher costs associated with the expansion of Phase II clinical
development and manufacturing costs for ADL 8-2698, increased staffing levels
and costs for the postponed initial public offering.

Net loss allocable to common stockholders. Our net loss allocable to
common stockholders was approximately $5.5 million for the six months ended
June 30, 1999 compared to approximately $22.9 million in the same period of
2000. The increase reflects the increase in the net loss of approximately $4.6
million, an increase in undeclared dividends of $0.6 million and a beneficial
conversion on mandatorily redeemable Series G convertible preferred stock of
$12.3 million.

Beneficial Conversion Feature. In January 2000, we sold 12,306,000 shares
of mandatorily redeemable Series G preferred stock for net proceeds of $12.3
million. After evaluating the fair value of our common stock in contemplation
of this offering, we determined that the issuance of the Series G preferred
stock resulted in a beneficial conversion feature calculated in accordance with
Emerging Issues

23
<PAGE>

Task Force Consensus No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features." Because the shares of series G mandatorily
redeemable preferred stock were issued below the deemed fair value a beneficial
conversion feature of $12.3 million was reflected in calculating the net loss
allocable to common shareholders for the six months ended June 30, 2000.

Years Ended December 31, 1999 and 1998

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

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

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

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

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

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

Years ended December 31, 1998 and December 31, 1997

Grant and license revenues. Our grant and license revenues were $149,983
for the year ended December 31, 1998 compared to no revenues in the same period
in 1997. Revenues in 1998 included $99,983 from a Phase I SBIR grant and
$50,000 from contract research revenue. We had no future obligations in
connection with these revenues as of December 31, 1998.

24
<PAGE>

Research and development expenses. Our research and development expenses
increased from approximately $3.7 million for the year ended December 31, 1997
to approximately $7.1 million in the same period in 1998, an increase of
approximately $3.4 million. In 1998, research and development costs increased
by $0.5 million for the manufacture of ADL 8-2698 clinical supplies and the
payment of a $0.3 million license fee to Roberts. Research and development
expenses increased by approximately $1.6 million for the preclinical activities
for ADL 10-0101. In 1998, research and development costs increased by
approximately $0.7 million for the initiation of the Phase I and Phase II
clinical program for ADL 2-1294 for the treatment of ophthalmic pain.

General and administrative expenses. Our general and administrative
expenses increased to approximately $2.3 million for the year ended December
31, 1998 compared to approximately $1.6 million in the same period in 1997, an
increase of approximately $0.7 million. This increase is primarily due to
$314,000 of higher patent filing expenses and approximately $267,000 in
increased consulting and professional fees.

Net interest income (expense). Our interest income for the year ended
December 31, 1998 was $412,975 compared to interest income of $531,487 in the
same period in 1997. The decrease in interest income was the result of higher
levels of cash available for investment in 1997 versus 1998. Our interest
expense for the same periods was $28,028 and $45,930, respectively. Interest
expense represents interest incurred on an equipment financing facility.

Net loss. Our net loss for the year ended December 31, 1998 was
approximately $8.8 million compared to a net loss of approximately $4.8 million
in the same period in 1997. This increase was due to the expansion of the Phase
II clinical trials for ADL 2-1294 for the treatment of dermal pain and itch and
the progression of ADL 10-0101 from research into late preclinical development.

Net loss allocable to common stockholders. Our net loss allocable to
common stockholders was approximately $6.2 million for the year ended December
31, 1997 compared to approximately $10.5 million in the same period of 1998.
The increase reflects the increase in the net loss of approximately $4,017,000
and an increase in undeclared dividends attributable to mandatorily redeemable
convertible preferred stock of approximately $296,000.

Liquidity and capital resources

As of June 30, 2000, we had cash, cash equivalents and short term
investments of approximately $11.1 million, and working capital was
approximately $8.4 million. In July 2000, we sold series H mandatorily
redeemable convertible preferred stock, raising gross proceeds of approximately
$36.6 million.

From inception through June 30, 2000, net cash used in operating
activities was approximately $33.1 million. Net cash used in investing
activities since inception was $2.2 million for the acquisition of laboratory
equipment, leasehold improvements and furniture and fixtures and office
equipment, and the purchases of short-term investments.

From inception through June 30, 2000, we have financed our operations
primarily from the net proceeds generated from the issuance of mandatorily
redeemable convertible preferred stock (preferred stock). As of June 30, 2000,
we had received total net proceeds of approximately $43.8 million from the
sales of mandatorily redeemable convertible preferred stock. The issuance of
the shares of series H mandatorily redeemable convertible preferred stock in
July 2000 will result in a beneficial conversion feature of $36.6 million,
which will increase the net loss allocable to common stockholders per share in
the third quarter of 2000.

We anticipate that our capital expenditures will be approximately $1.0
million in 2000.

25
<PAGE>

We lease our corporate and research and development facilities under an
operating lease expiring on November 30, 2001. We may extend this lease for one
additional four-year period at rental rates equal to the then fair rental value
as determined by our landlord. Current total minimum annual payments under
these leases are $224,290 for 2000 and $250,964 for 2001.

Research and development expenditures, including clinical trials, are
expected to increase as we continue to develop new product candidates. We
expect that our operating expenses and capital expenditures will increase in
future periods as a result of the manufacturing scale-up and in anticipation of
commercialization of our product candidates, assuming we receive the necessary
regulatory approvals. The initiation of commercial activities will require the
hiring of additional staff to coordinate contract manufacturing services at
multiple locations. Sales and marketing activities will require hiring and
training of a sales and marketing staff in 2000, 2001 and 2002. As of June 30,
2000, we may be required to pay up to an aggregate of $6.0 million upon the
occurrence of certain future clinical and regulatory events under various
agreements (including our agreement with Lilly). We also intend to hire
additional research and development, clinical and administrative staff. Our
capital expenditure requirements will depend on numerous factors, including the
progress of our research and development programs, the time required to file
and process regulatory approval applications, the development of commercial
manufacturing capability, the ability to obtain additional licensing
arrangements, and the demand for our product candidates, if and when approved
by the FDA or other regulatory authorities.

Future compensation expense relating to all options outstanding at June
30, 2000 is estimated to be approximately $1,928,000, $3,646,000, $3,486,000
and $3,107,000 and $585,000 for the six months ended December 31, 2000 and for
the years ending December 31, 2001, 2002, 2003 and 2004, respectively.
Compensation expense relating to the non-employee portion of options granted is
subject to change each reporting period based upon changes in the fair value at
the Company's common stock, estimated volatility and the risk free interest
rate until the new-employee completes his or her performance under the option
agreement.

From July 1 to September 29, 2000, the Company has granted 649,548 stock
options at exercise prices ranging from $2.75 to $3.50 per share for which a
total compensation charge of approximately $7.1 million based on the fair value
of the common stock on the grant date of $14.40 per share will be recorded over
the four year vesting periods of the options. Future compensation expense
relating to such option grants will be approximately $0.8 million for the year
ending December 31, 2000, $1.8 million for the years ending December 31, 2001
through 2003 and $0.9 million for the year ending December 31, 2004.

We believe that our current cash position, the proceeds from the series H
mandatorily redeemable convertible preferred stock issued in July 2000, capital
leases for equipment and the proceeds of this offering will be sufficient to
fund our operations and capital expenditures at least through the fourth
quarter of 2002.

Income taxes

As of December 31, 1999, we had approximately $10,800,000 of Federal and
$11,200,000 of state net operating loss carryforwards available to offset
future taxable income. The Federal and state net operating loss carryforwards
will begin expiring in 2009 and 2005, respectively, if not utilized. In
addition, the utilization of the state net operating loss carryforwards is
subject to a $2 million annual limitation. At December 31, 1999, we also had
approximately $403,000 of Federal and $130,000 of state research and
development tax credit carryforwards, which begin expiring in 2011, and are
available to reduce Federal and state income taxes.

26
<PAGE>

ownership changes, as defined by the Act, have occurred. Additionally, because
United States tax laws limit the time during which these carryforwards may be
applied against future taxes, we may not be able to take full advantage of
these attributes for Federal income tax purposes.

Disclosure About Market Risk

Our exposure to market risk is principally confined to our cash
equivalents and investments, all of which have maturities of less than one
year. We maintain a non-trading investment portfolio of investment grade,
liquid debt securities that limits the amount of credit exposure to any one
issue, issuer or type of instrument. The fair value of these securities
approximates their cost.

27
<PAGE>

BUSINESS

Our Company

We are a therapeutic-based biopharmaceutical company. We discover,
develop and plan to commercialize proprietary pharmaceutical products for the
treatment of pain and the side effects that are caused by current pain
treatments. We have a portfolio of small molecule product candidates that are
in or have completed development in Phase I to Phase II/III clinical trials.
Our lead product candidate, ADL 8-2698, is designed to selectively block the
effects of narcotics on the gastrointestinal tract. In Phase II and Phase
II/III clinical trials, ADL 8-2648 has been shown to reduce post-surgical bowel
dysfunction, or ileus, thereby speeding the recovery of normal bowel function
following abdominal surgery and other surgical procedures and to prevent or
reverse symptoms of narcotic bowel dysfunction in patients receiving chronic
narcotic analgesics, including constipation, bloating and cramping. Our
analgesic product candidates are designed to treat moderate-to-severe pain and
itch. We are also developing combination narcotic analgesic products that are
intended to reduce the most prevalent and severe side effects of morphine and
other narcotics, such as constipation, nausea and vomiting. Since most of our
product candidates target peripheral opioid receptors (those outside of the
central nervous system), they should not exhibit the dose-limiting central
nervous system side effects of existing narcotics. We believe our product
candidates and drug discovery and development expertise have potential
applicability to a broad range of pain and itch conditions. Combined 1999
prescription sales in the pain management market were $9.1 billion in the
United States, a 24% increase compared to 1998, and are estimated to be $25.8
billion worldwide.

Currently marketed analgesics have well-defined adverse side effects that
limit their ability to meet the needs of physicians and their patients.
Moreover, the increased emphasis on treating pain has highlighted the need for
improved products. We believe our product candidates address significant unmet
needs in the pain management market. In addition, we believe we may create new
pain management markets with some of our product candidates because their
mechanisms of action may provide effective pain relief or relief of narcotic
analgesic side effects that currently have no existing effective therapy.

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

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

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

. narcotic products with significantly reduced side effects.

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

We have additional compounds in clinical development that target
peripheral opioid analgesia receptors. Our compound ADL 10-0101, which is being
developed for the treatment of visceral and post-surgical pain, is in a Phase
II clinical trial for the treatment of visceral pain. In addition, ADL 10-0101
is in a Phase I clinical trial for the treatment of dermal itch. We have
completed Phase II clinical trials for an eye drop formulation of ADL 2-1294
for the treatment of pain from corneal abrasion or ophthalmic

28
<PAGE>

surgery. We have also completed two Phase I clinical trials with topical dermal
formulations of ADL 2-1294 where it demonstrated preliminary efficacy in the
treatment of dermal burn pain. An affiliate of SmithKline Beecham, our
development partner for the commercialization of the dermal product candidate,
is developing topical ADL 2-1294 under an exclusive license from us for the
treatment of dermal pain and itch. Santen Pharmaceutical Co., Ltd. is
developing topical ADL 2-1294 under a worldwide license from us (excluding
South Korea and North Korea) for the treatment of ophthalmic pain.

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

Overview Of Pain Management Industry

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

There has been an increasing focus on pain management in the healthcare
industry. Recently published guidelines of the World Health Organization and
the United States Agency for Health Care Policy and Research encourage the use
of stronger analgesic therapy for treating cancer pain. In 1993, the American
Board of Medicine designated the treatment of pain as a recognized specialty
for physicians, and the number of physicians receiving specialty training in
pain management increased more than tenfold in the subsequent five years. In
addition, as of 1999, all United States hospitals and health care facilities
have been required to assess the adequacy of pain treatment for each patient on
a daily basis to achieve accreditation by the Joint Commission on Accreditation
of Healthcare Organizations.

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

Pain management market. Prescription pain management sales in 1999 were
$9.1 billion in the United States. Growth in the pain management market has
been significant in recent years and is expected to continue. The prescription
pain management market in the United States grew 6% per year from 1994 to 1998,
and grew 24% between 1998 and 1999. This accelerating growth rate appears to be
primarily attributable to recent product introductions in this market. For
example, COX-2 inhibitors, which are non-narcotic prescription analgesics, were
introduced early in 1999, and had 1999 sales of $1.5 billion and sales for the
first six months of 2000 of approximately $1.4 billion. We believe that the
rapid acceptance of COX-2 inhibitors illustrates that there are still many
unmet medical needs in the pain management market and that physicians are
willing to prescribe new and improved products as they become available.

29
<PAGE>

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

<TABLE>
<CAPTION>
U.S. Sales
--------------------
Market Segment 1997 1998 1999
-------------- ------ ------ ------
(In millions)
<S> <C> <C> <C>
Moderate-to-severe pain (Narcotics)................. $2,430 $2,720 $3,203
====== ====== ======
Mild-to-moderate pain (NSAIDs, COX-2 inhibitors,
Acetaminophen)..................................... $2,973 $2,666 $3,755
====== ====== ======
Topical pain, itch and special purpose analgesics
(Corticosteroids, antihistamines).................. $1,599 $1,915 $2,104
====== ====== ======
Total U.S. Pain Management Market................... $7,002 $7,301 $9,062
====== ====== ======
</TABLE>

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

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

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

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

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

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

Non-narcotic analgesics, including acetaminophen and non-steroidal anti-
inflammatory drugs, or NSAIDs, such as ibuprofen, are widely used to treat
mild-to-moderate pain. NSAIDs are thought to produce analgesia by inhibiting
activity of cyclooxygenase enzymes (COX-1 and COX-2), thereby reducing
inflammation at the site of injury or disease. Some NSAIDs require a
prescription and others are available as over-the-counter medications. Recent
advances in NSAID analgesia have focused on reducing adverse GI side effects.

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

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

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Background On Post-surgical Ileus

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

There are no effective or FDA-approved treatments for post-surgical ileus
or for the effects of narcotics on ileus. Of the approximately 30 million
annual surgical procedures in the United States, it is estimated that more than
five million patients are likely to experience post-surgical ileus. The number
of "at risk" patients is even larger since it is not always possible to predict
which specific patients will experience post-surgical ileus. Nearly all of the
patients having abdominal surgery will experience post-surgical ileus, but
other surgical procedures may be less likely to produce post-surgical ileus.
Our market research indicates that most physicians will use a drug
prophylactically to prevent post-surgical ileus when they believe that a
patient has a moderate to high probability of prolonged hospitalization due to
post-surgical ileus. We believe that these patients will comprise the
addressable market for an ADL 8-2698 post-surgical ileus product.

Background On Opioid Analgesia

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

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

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

Our Approach To Pain Management

Peripheral opioid analgesia. Scientists have shown that mu and kappa
opioid receptors are present on nerve endings in the skin, joints and visceral
organs. Activation of these opioid receptors,

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<PAGE>

which are outside of the central nervous system, with mu or kappa opioid
analgesics reduces pain related to injury or inflammation by decreasing pain
transmission from the peripheral nerves into the spinal cord. Proof-of-concept
studies in animals and humans have shown that small doses of morphine, applied
locally to inflamed tissues such as skin, joints and eyes are effective in
reducing pain. These findings demonstrate the effectiveness of stimulating
peripheral mu opioid receptors to produce pain relief. These findings have
created the opportunity for us to develop an entirely new class of analgesics
that selectively stimulate opioid receptors in inflamed tissues but do not
stimulate opioid receptors in the central nervous system thereby avoiding
central nervous system side effects. These pain medications are called
peripheral analgesics. Our peripheral analgesics are effective in preclinical
studies of itch, and our peripheral kappa opioid analgesics are effective in
blocking the visceral pain originating from internal organs such as the bowel
and cervix. In our preclinical studies, our peripheral analgesics have
delivered near complete pain relief without detectable side effects at
therapeutic doses. Because our peripheral analgesics do not cross the blood-
brain barrier and do not enter the brain at therapeutic doses, they do not
cause addiction or other adverse central nervous system side effects. These
peripheral analgesics should not cause sedation, decreased respiratory function
or addiction. As a result, we expect that these analgesics will not be subject
to United States Drug Enforcement Agency regulation under the Controlled
Substances Act.

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

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

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

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

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<PAGE>

Our Strategy

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

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

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

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

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

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

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<PAGE>

Products in Research and Development
Our current product candidates according to clinical indication and
stage of development are:

<TABLE>
<CAPTION>
Product Candidate (Mode of Development
Delivery) Clinical Indication Stage
--------------------------- ----------------------------------- ------------
<S> <C> <C>
Reversal of Narcotic
Analgesic-Induced GI Side
Effects
GI Tract-Restricted mu
Antagonists
ADL 8-2698 (oral) Post-surgical ileus Phase II/III
ADL 8-2698 (oral) Narcotic bowel dysfunction Phase II/III
Treatment of Pain or Itch
Peripherally Restricted kappa Opioid Analgesics
ADL 10-0101 (injectable) Visceral pain Phase II
ADL 10-0101 (injectable) Dermal itch Phase I
ADL 10-0101 (topical) Ophthalmic itch Preclinical
ADL 10-0116 (oral) Inflammatory/visceral pain and itch Preclinical
ADL 1-0398 (oral) Inflammatory/visceral pain and itch Research
Peripherally Restricted mu
Opioid Analgesics
ADL 2-1294 (topical) Ophthalmic pain Phase II
ADL 2-1294 (topical) Dermal pain Phase I
ADL 2-1294 (topical) Dermal itch Phase I
ADL 2-1294 (injectable) Joint pain Preclinical
Centrally-Active Oral
Analgesics
ADL 8-2698 combination with
narcotic opioid analgesic GI side effect-free narcotic Phase I
ADL 1-0386 combination with
centrally-acting kappa
opioid analgesic Non-sedating analgesic Research
ADL 1-0449 non-narcotic
analgesic Inflammatory pain Research
</TABLE>

GI Tract-Restricted mu Antagonists

ADL 8-2698

ADL 8-2698 is a peripherally-acting, GI tract-restricted mu opioid
receptor antagonist. ADL 8-2698 is designed to block the adverse side effects
of narcotics on the GI tract without blocking the beneficial analgesic
effects. We are developing ADL 8-2698 to treat or prevent post-surgical ileus
and narcotic bowel dysfunction.

Post-surgical ileus

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

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<PAGE>

Development stage. We recently finished a 78 patient Phase II clinical
trial which compared two doses of ADL 8-2698 vs. placebo in patients undergoing
partial colectomy or simple or radical hysterectomy surgical procedures. An
initial analysis of these data shows a dose-dependent effect and that patients
receiving the higher dose of ADL 8-2698 experienced shorter time to the first
flatus (P<0.04), time to first bowel movement (P<0.02), time to eating a solid
diet (P=0.0001), and time to discharge from the hospital (P=0.0001). The time
to first flatus was reduced by 15 hours; all other measures were reduced by 24
hours or more. No patients experienced serious adverse side effects in this
trial that were judged by the clinical investigator to be related to the
activity of ADL 8-2698. The 26 patients treated with the higher dose of ADL 8-
2698 actually experienced fewer overall adverse effects than the 26 patients in
the placebo-treated group since ADL 8-2698 blocked the adverse gastrointestinal
effects of morphine or other narcotic analgesics that were used for post-
surgical pain relief. In particular, none of the 26 patients receiving the
higher dose of ADL 8-2698 experienced post-surgical vomiting compared to 23% in
the placebo control group (P<0.03). Twenty seven percent of the patients
receiving the higher dose of ADL 8-2698 experienced clinically relevant post-
surgical nausea compared to 63% of the placebo control group (P=0.003). ADL 8-
2698 did not reduce the beneficial analgesic effects of systemic narcotics used
in this trial. These results suggest that ADL 8-2698 may speed recovery of
normal bowel function after surgery. We are now conducting a Phase II/III
clinical study that will further define the active dose range for ADL 8-2698.
We expect to start pivotal Phase III studies during the first quarter of 2001.

Narcotic bowel dysfunction

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

[DIAGRAM]

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

[DIAGRAM]

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<PAGE>

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

[DIAGRAM]

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

Development stage. More than 290 volunteers and patients have received
ADL 8-2698 in one Phase II/III, five Phase II and six Phase I narcotic bowel
dysfunction, post-surgical ileus and safety clinical trials completed to date.
The Phase II/III trial and three Phase II narcotic bowel dysfunction trials
were designed to identify the active dose range of ADL 8-2698 for reversing
severe narcotic bowel dysfunction in patients receiving chronic narcotic
therapy. In the three narcotic bowel dysfunction trials analyzed to date, ADL
8-2698 was found to effectively reverse narcotic bowel dysfunction on 82% to
100% of the days when patients received ADL 8-2698. All patients who received
ADL 8-2698 responded on at least one day that they received active drug. We
believe we have defined the range of effective doses. At therapeutic doses,
side effects were generally absent or mild and consisted of those expected to
occur during acute reversal of narcotic bowel dysfunction such as abdominal
cramping, gas and nausea. After receiving a dose 12 times higher than the
minimally effective dose, one patient developed severe abdominal cramps,
diarrhea, nausea and vomiting. This case represents the only serious adverse
event in all 12 clinical trials completed to date that was judged by the
clinical investigator to be probably related to the activity of ADL 8-2698. The
fourth double-blind placebo-controlled narcotic bowel dysfunction clinical
trial with 72 total patients has been completed and the results are being
analyzed. One additional Phase II clinical trial successfully demonstrated that
ADL 8-2698 does not reduce the beneficial analgesic effects produced by
morphine after dental surgery (P=0.9). This high P value was a favorable
response because it demonstrated that ADL 8-2698 did not cross the blood-brain
barrier to block pain relief in the central nervous system. We expect to start
Phase III clinical trials in 2001.

In three Phase I clinical trials, ADL 8-2698 reversed the adverse GI side
effects of oral morphine (P(less than)0.01), intravenous morphine (P(less than)
0.01) and oral loperamide (P(less than)0.01). Two Phase I ascending dose safety
and tolerance studies administered doses at least ten times greater than the
expected therapeutic dose without producing serious adverse side effects. The
highest dose in one study, 54 mg per day for four days, was associated with
dose-limiting side effects of abdominal cramps, gas and loose bowel movements in
one patient. All subjects in the other study tolerated the highest dose
administered, 120 mg per day for three days. Side effects which did not limit
dosing included loose bowel movements, gas, cramps, nausea and headaches.

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<PAGE>

Peripherally Restricted kappa Opioid Analgesics

We use advanced chemical design technology to create proprietary topical,
injectable and oral peripheral kappa opioid receptor-specific compounds that do
not cross the blood-brain barrier at therapeutic doses. These compounds are
significantly more effective than acetaminophen or NSAIDs and are equally
effective as narcotic analgesics in relieving inflammatory pain in preclinical
trials. We expect to develop oral formulations to address broader markets in
chronic inflammatory pain, such as the market for prescription arthritis pain
products, that accounted for approximately $3.8 billion in United States
prescription sales in 1999. We believe these peripheral kappa opioid analgesics
will be the first opioid analgesics to address the pain of chronic inflammatory
disease without producing adverse psychological effects associated with central
kappa opioid analgesics, including visual and auditory disturbances, unpleasant
mood changes and hallucinations. Preclinical studies show that our peripheral
kappa opioid analgesics are particularly effective against visceral pain.
Because of these preclinical results, we have begun clinical trials for the
treatment of visceral pain in humans.

ADL 10-0101

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

Visceral pain

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

Development stage. We completed a Phase I clinical trial in the third
quarter of 1999. In this study, the dose was increased until a dose-limiting
adverse side effect was observed. At the highest dose, ADL 10-0101 produced
visual and auditory disturbances, unpleasant mood changes and hallucinations.
We began a Phase II clinical trial in patients, using doses below those which
caused adverse side effects in volunteers, to evaluate efficacy of ADL 10-0101
in the treatment of visceral pain. We expect to complete enrollment by the end
of 2000.

Traumatic injury pain

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

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

37
<PAGE>

Dermal itch

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

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

Ophthalmic itch

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

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

ADL 10-0116

Chronic Inflammatory/Visceral Pain and Itch

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

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

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

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<PAGE>

ADL 1-0398

Chronic inflammatory/visceral pain

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

Development stage. This product candidate is in preclinical research.

Peripherally Restricted mu Opioid Analgesics

ADL 2-1294

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

Ophthalmic pain

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

Development stage. Our Phase II study demonstrated that ADL 2-1294
reduced the severity of pain following corneal abrasions and surgeries to a
greater extent than placebo. ADL 2-1294 resulted in a 56% reduction of pain,
but this effect was not statistically significant (P=0.12). In addition, a
Phase II pilot study suggested that topical administration of ADL 2-1294 was as
effective as topical morphine in reducing corneal pain. Some patients
experienced transient stinging associated with administration of eye drops
containing ADL 2-1294. We believe that the efficacy of ADL 2-1294 can be
improved by optimizing its formulation.

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Dermal pain

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

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

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

Dermal itch

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

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

Joint pain

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

Development stage. This product is in preclinical development.

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Centrally-Active Oral Analgesics

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

ADL 8-2698 Combination With Narcotic Opioid Analgesic

GI side effect-free narcotic

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

Market research shows that there were 34 million units of oral
prescription narcotics sold at the wholesale level in 1999 that were intended
for the treatment of acute or chronic pain, each of which contained sufficient
medication for one to 20 prescriptions at the retail level.

Development stage. A Phase I clinical trial suggested a trend for reduced
severity of morphine-induced nausea, but the difference was not statistically
significant (P=0.07). Data from our Phase II post-surgical ileus trial showed a
trend towards reduction of opioid-induced nausea (P=0.09) and a statistically
significant reduction in post-surgical vomiting (P=0.02), with no vomiting
occurring in patients treated with oral ADL 8-2698 and intravenous narcotic
analgesics. We recently conducted a Phase I clinical trial to evaluate the
ability of ADL 8-2698 to block morphine-induced nausea, but the amount of
nausea experienced by both placebo and drug treated subjects in this trial was
much lower than expected and insufficient to make any conclusions about the
effectiveness of ADL 8-2698. We plan to repeat this study with a revised
protocol designed to produce more narcotic-induced nausea in order to determine
the effectiveness of ADL 8-2698 in reducing narcotic-induced nausea.

ADL 1-0386 Combination With Centrally-Acting kappa Opioid Analgesic

Non-sedating kappa opioid analgesic

Sedation and decreased mental function are dangerous side effects of
current narcotics. Preclinical data indicate that ADL 1-0386 blocks the
sedation produced by centrally active kappa opioid analgesics without blocking
the analgesic effects of these drugs. It also blocks the sedation produced by
some other classes of sedating drugs. Unlike our other analgesic and narcotic
antagonist compounds, ADL 1-0386 does not stimulate or block brain or
peripheral opioid receptors. We believe that a combination product containing
ADL 1-0386 and a centrally-acting kappa opioid analgesic could be used in many
instances where oral narcotic drugs are used to treat acute or chronic pain
conditions, including non-inflammatory neuropathic or nerve damage pain and
cancer pain.

Development stage. This product candidate is in preclinical research.

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ADL 1-0449 Non-Narcotic Analgesic

We recently identified a number of highly selective small molecule
antagonists to the ORL-1 receptor in our preclinical drug discovery screening
program that we believe could form the basis for a new type of non-narcotic
analgesic. Our lead compound in this area is ADL 1-0449. Data from preclinical
studies show that the recently discovered ORL-1 receptor plays a role in the
transmission of pain and that antagonists, or blockers, at the ORL-1 receptor
may be analgesic in conditions associated with inflammatory pain or nerve
damage pain. We are attempting to optimize the properties of ADL 1-0449 and its
analogs in our preclinical chemistry and pharmacology laboratories.

Development stage. This product candidate is in preclinical research.

Commercialization Strategy

We have developed a balanced commercialization strategy that combines
utilizing strategic alliances with major pharmaceutical partners to access
broad distribution networks or markets outside the United States, while
maintaining commercial rights within the United States to certain focused
distribution networks where a relatively small sales force can be effective. We
intend to develop a sales and marketing management team and may use a contract
sales force for marketing certain of our products to surgeons, hospitals,
oncologists and pain management specialists.

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

Our Strategic Relationships

SmithKline Beecham Affiliate

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

In connection with this collaboration, S.R. One, Limited, an affiliate of
SmithKline Beecham purchased $2.5 million in series F mandatorily redeemable
preferred stock, and we granted S.R. One a warrant to purchase shares of
preferred stock convertible into an aggregate of 25,000 shares of common stock
for an aggregate exercise price of $125,000. The warrant is currently
exercisable and expires on the earlier to occur of the closing of an initial
public offering of our shares of common stock or August 24, 2004. S.R. One also
agreed to purchase an additional $500,000 of our capital stock upon the
successful

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completion of the second pivotal clinical trial for the first prescription or
over-the-counter product candidate under our license agreement with SB
Pharmaco.

Santen Pharmaceutical Co., Ltd.

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

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

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

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

Roberts Laboratories Inc.

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

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

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

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

Other Relationships

In November 1997, we entered into a license agreement with Kwang Dong
Pharmaceutical Co., Ltd. relating to the development and commercialization in
South Korea and North Korea of our product candidate ADL 2-1294 for the
indication of topical dermal pain. In addition, in November 1997, we entered
into a stock purchase agreement with Kwang Dong pursuant to which Kwang Dong
purchased, for $1.2 million, 192,000 shares of our series D convertible
preferred stock. The license agreement with

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Kwang Dong provides for, among other things, our transfer to Kwang Dong of
technology and data developed by us relating to the topical formulation of ADL
2-1294. We devoted significant internal efforts and expenditures to the
development of a formulation for this indication. To date, we have not
transferred sufficient technology under the license agreement to allow
commercialization of ADL 2-1294 in South and North Korea. As a result, we do
not anticipate material revenues under the license agreement in the foreseeable
future. In July 1999, we entered into an agreement with SB Pharmaco for the
worldwide (excluding South Korea and North Korea) development and
commercialization of ADL 2-1294 for the topical indications of dermal pain and
itch.

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

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

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

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

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

Competition

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

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

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

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

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

Intellectual Property

We seek United States and international patent protection for major
components of our technology. We also rely on trade secret protection for
certain of our confidential and proprietary

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information, and we use license agreements both to access external technologies
and assets and to convey certain intellectual property rights to others. Our
commercial success will be dependent in part on our ability to obtain
commercially valuable patent claims and to protect our intellectual property
portfolio.

As of August 31, 2000, we owned or had rights, whether by geography, by
field or otherwise, to approximately 40 issued patents, of which 23 are issued
in the United States, and we owned 17 United States patent applications and
numerous foreign patent applications relating to technologies used in our
business.

We have or have licensed patents and patent applications related to (i)
ADL 2-1294, (ii) peripheral kappa analgesics, (iii) ADL 8-2698 and (iv) opioid
receptors and ligands. The patents related to ADL 2-1294 expire between 2015
and 2018. The patents related to kappa receptor analgesics expire between 2016
and 2019. The patents related to ADL 8-2698 expire between 2011 and 2013. The
patents related to opioid receptors and ligands expire in 2016. These
expiration dates are all based on the presumption that the applicable
maintenance fees are paid and the patents are not held to be invalid.

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

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

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

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

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

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

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

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

With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade secret
protection and confidentiality agreements to protect our interests. We believe
that several elements of our drug discovery system involve proprietary know-
how, technology or data that are not covered by patents or patent applications.
We have taken security

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measures to protect our proprietary know-how and technologies and confidential
data and continue to explore further methods of protection. While we require
all employees, consultants and potential business partners to enter into
confidentiality agreements, we cannot be certain that proprietary information
will not be disclosed, that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
our trade secrets, or that we can meaningfully protect our trade secrets. In
the case of arrangements with our potential business partners that require the
sharing of data, our policy is to make available to our potential business
partners only such data as is relevant to our agreements with such customers,
under controlled circumstances, and only during the contractual term of those
agreements, and subject to a duty of confidentiality on the part of our
customer. However, such measures may not adequately protect our data. Any
material leak of confidential data into the public domain or to third parties
may cause our business, financial condition and results of operations to be
harmed.

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

Manufacturing

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

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

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

Government Regulation

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

The drug approval process

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

. preclinical studies,

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

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

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

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

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

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

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

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

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

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

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

Efficacy studies for analgesics

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

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

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

Other regulatory requirements

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

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

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

Employees

As of August 31, 2000, we had 47 full-time employees and 2 part-time
employees, including 14 employees with Ph.D. or M.D. degrees. Thirty-eight of
our employees are engaged in research and development activities at our
laboratory facility. Most of our senior management and professional employees
have had prior experience in pharmaceutical or biotechnology companies. None of
our employees is covered by collective bargaining agreements. We believe that
our relations with our employees are good.

Facilities

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

Legal Proceedings

We are not a party to any legal proceedings.

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MANAGEMENT

Directors and Executive Officers

The following table provides information regarding our directors and
executive officers:

<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
John J. Farrar.......... 56 President, Chief Executive Officer and Director
Randall L. Carpenter.... 46 Vice President, Clinical Research & Development
Deanne D. Garver........ 42 Vice President, Preclinical Development and
Projects Management
Linda Y. Harver......... 48 Vice President, Regulatory Affairs and Quality Assurance
Alan L. Maycock......... 58 Vice President, Exploratory Research and Drug Discovery
Gwen A. Melincoff....... 48 Vice President, Business Development
Andrew D. Reddick....... 48 Senior Vice President of Commercial Operations and Chief
Operating Officer
Peter J. Schied......... 58 Vice President, Chief Financial Officer and Secretary
William K. Schmidt...... 50 Vice President, Technical Affairs
Frank Baldino, Jr.(2)... 47 Director
Ellen M. Feeney(1)...... 40 Director
Paul Goddard............ 51 Director
David M. Madden(1)...... 37 Director
C. Christopher
Moller(1).............. 46 Director
Claude H. Nash(2)....... 57 Director
Robert T. Nelsen(2)..... 37 Director
</TABLE>
--------
(1) Member of the audit committee.
(2) Member of the compensation committee.

John J. Farrar, Ph.D. Dr. Farrar joined us as our President, Chief
Executive Officer and a Director in November 1994. Previously, Dr. Farrar was
Senior Vice President and Director of Biological Research at the Research
Division of Sterling Winthrop Pharmaceuticals, and had responsibility for
approximately 225 scientists conducting drug discovery research. Prior to that,
Dr. Farrar was Group Director of Biological Research at Hoffman-La Roche and
oversaw research programs in the areas of immunology, cancer and virology. Dr.
Farrar received a B.A. in Zoology and an M.S. in Microbiology from Miami
University and a Ph.D. in Microbiology/Immunology from the University of Notre
Dame.

Randall L. Carpenter, M.D. Dr. Carpenter joined us as our Vice President
of Clinical Research & Development in November 1998. From April 1997 to
November 1998, he was Director and Associate Director of Clinical Research,
Astra, U.S.A. and Astra Pain Control, Sweden, and was responsible for the
Anesthesia, Pain Management and Intensive Care divisions where he supervised a
portfolio of 23 drugs and was medically responsible for 19 clinical trials, two
NDAs and seven supplemental NDAs. From November 1994 to April 1997, Dr.
Carpenter was an Associate Professor in the Department of Anesthesia at the
Bowman Gray School of Medicine of Wake Forest University. Dr. Carpenter holds
an adjunct faculty position in the Department of Anesthesiology at Duke
University Medical Center. Dr. Carpenter received an M.D. from the University
of Michigan Medical School. We have entered into an agreement with Dr.
Carpenter under which he will remain with us through March 31, 2000 on a full-
time basis and thereafter will be available to consult with us on a part-time
basis until September 14, 2001.

Deanne D. Garver, Ph.D. Dr. Garver joined us as our Vice President,
Preclinical Development and Projects Management in July 1998. From March 1995
to July 1998, she was Associate Project Director, Cardiopulmonary Project
Management, at SmithKline Beecham Pharmaceuticals, where she led project teams
through clinical trials in Phases I-III and was responsible for development
strategy and operational plans for therapeutic approaches to asthma and chronic
obstructive pulmonary disease and for anticoagulation drugs. Dr. Garver
received a B.A. in Biology and Chemistry from the College of Notre

49
<PAGE>

Dame of Maryland and a Ph.D. in Medicinal Chemistry from the Medical College of
Virginia at Virginia Commonwealth University.

Linda Y. Harver, J.D. Ms. Harver joined us as our Vice President,
Regulatory Affairs and Quality Assurance in June 2000. From November 1999 to
June 2000, she was Vice President of Regulatory Affairs of IBAH, Inc., a
contract research organization. From November 1996 to November 1999, she was
Vice President of Regulatory Affairs of IBEX Technologies, a biopharmaceutical
firm. She held positions of increasing responsibility in Regulatory Affairs for
Sanofi, Inc., a pharmaceutical company, from August 1987 to November 1996. Ms.
Harver has directed regulatory submissions and strategies for multiple
therapeutic areas. Ms. Harver received a B.S. in Pharmacy from the Medical
College of Virginia, an M.B.A. from the University of Richmond and a J.D. from
Widener University.

Alan L. Maycock, Ph.D. Dr. Maycock joined us as our Vice President of
Exploratory Research and Drug Discovery in January 1995. From April 1988 to
January 1995, Dr. Maycock worked at the Research Division of Sterling Winthrop
Pharmaceuticals, where, during the last year of his employment he was Senior
Director of Biochemistry and directed drug discovery programs targeted at
specific enzymes and receptors in several therapeutic areas, including
inflammation, the central nervous system and immunomodulation. From 1974 to
1988, Dr. Maycock held various positions at Merck Sharp & Dohme Research
Laboratories, most recently as Associate Director of Inflammation Research. Dr.
Maycock received a B.A. in Chemistry from Harvard College and an M.S. and Ph.D.
in Organic Chemistry from MIT.

Gwen A. Melincoff. Ms. Melincoff joined us as our Vice President,
Business Development in January 1999. From October 1994 to January 1999, she
was Director of Business Development at NanoSystems, a subsidiary of Eastman
Kodak and, after October 1998, a division of Elan Corporation, plc, where she
was responsible for identifying and implementing the marketing and business
development strategies. Ms. Melincoff received a B.S. in Biology from George
Washington University and a M.S. in Management--Health Care Administration from
Penn State University.

Andrew D. Reddick. Mr. Reddick joined us as our Senior Vice President of
Commercial Operations and Chief Operating Officer in April 2000. From July 1999
to April 2000, Mr. Reddick was President of Faulding Laboratories, Inc., the
branded pharmaceutical division of Faulding, Inc., which is a wholly-owned U.S.
subsidiary of F.H. Faulding and Co. Limited. Starting in August 1996, Mr.
Reddick held executive and senior-level management positions in marketing,
sales and business development with Faulding, Inc. From July 1995 to July 1996,
Mr. Reddick was President and Director of Endeavor Pharmaceuticals Inc., a
privately-held emerging pharmaceutical company. Mr. Reddick received a B.A. in
Biology from the University of California, Santa Barbara, and an M.B.A. from
Duke University.

Peter J. Schied. Mr. Schied joined us as our Vice President, Chief
Financial Officer and Secretary in June 1997. From March 1993 to May 1997, he
was Chief Financial Officer and Vice President of Finance for Transcell
Technologies, Inc., a healthcare services company. Mr. Schied previously held
senior level finance positions for healthcare companies including Greenwich
Pharmaceuticals, Inc., Foster Medical Corporation, Rorer Group, Inc.,
International Division and Bristol-Myers Company, International Division. Mr.
Schied received a B.S. in Engineering and an M.B.A. in Finance and
International Business from Drexel University.

William K. Schmidt, Ph.D. Dr. Schmidt joined us as our Vice President,
Technical Affairs in July 2000 after serving as a Scientific Advisory
Consultant to our company since February 1998. From August 1995 to June 2000,
Dr. Schmidt was President and Chief Executive Officer of NorthStar Research &
Development, Ltd., a startup biopharmaceutical company with an interest in
developing novel pain management pharmaceutical products. From 1978 to August
1995, Dr. Schmidt held several senior research positions with DuPont
Pharmaceuticals and The DuPont Merck Pharmaceutical Company, where he helped to
discover and develop several analgesic and opioid antagonist drugs which are on
the market or in advanced clinical development by other pharmaceutical
companies. Dr. Schmidt received an A.B. in

50
<PAGE>

Biochemistry from the University of California, Berkeley, and a Ph.D. in
Pharmacology from the University of California, San Francisco.

Frank Baldino, Jr., Ph.D. Dr. Baldino joined us as a Director in March
1996. Dr. Baldino is the founder of Cephalon, Inc., a biotechnology company
involved in the development of therapeutics for neurological disorders, sleep
disorders and cancer. He has served as President, Chief Executive Officer and a
Director of Cephalon since that company's inception in 1987. Dr. Baldino holds
adjunct academic appointments, including Adjunct Professor of Pharmacology at
Temple University Medical School, Adjunct Professor of Physiology and
Biophysics and Adjunct Professor of Neurology at Hahnemann University Hospital.
He currently serves as a Director of ViroPharma, Inc., Pharmacopeia, Inc., The
Jackson Laboratory and the Biotechnology Industry Organization. Dr. Baldino
received a Ph.D. in Pharmacology from Temple University and a B.S. in Biology
from Muhlenberg College.

Ellen M. Feeney. Ms. Feeney joined us as a Director in November 1994. Ms.
Feeney is a private investor who focuses on investments in the life sciences
area. From 1989 to 1999, she was a General Partner of Weiss, Peck & Greer
Venture Partners. Prior to that, she was a partner of Hambrecht & Quist Life
Science Ventures. She serves as a Director of several privately-held companies.
Ms. Feeney received a B.S. in Biology from Duke University and an M.S. in Human
Genetics from the University of California.

Paul Goddard, Ph.D. Dr. Goddard joined us as a Director in October 2000.
Dr. Goddard has served as President and Chief Executive Officer of Elan
Pharmaceuticals, a division of Elan PLC, since 1998. Dr. Goddard served as
Chairman, Chief Executive Officer and Director of Neurex Corporation from 1991
through 1998. From 1976 through February 1991, Dr. Goddard was employed by
SmithKline Beecham Corp. and its predecessors in various positions, most
recently as Senior Vice President and Director, Japan-Pacific. He is also a
Director of Onyx Pharmaceutical Inc. and Molecular Devices, Inc. Dr. Goddard
received a Ph.D. in Aetiology and Epidemiology of Colon Cancer from St. Marys
Hospital, University of London.

David M. Madden. Mr. Madden joined us as a Director in January 2000. He
has been a Managing Member of Pharmaceutical Partners, LLC, a private
investment management firm specializing in the acquisition of royalty interests
in pharmaceutical products, since 1997. From 1992 to 1995, Mr. Madden was
President, Chief Executive Officer and a Director of Selectide Corporation, a
development stage pharmaceutical company, that was acquired by Marion Merrill
Dow in 1995. Mr. Madden was a consultant to Marion Merrill Dow during part of
1995. Mr. Madden has a B.S. in Electrical Engineering from Union College and an
M.B.A. from Columbia University.

C. Christopher Moller, Ph.D. Dr. Moller joined us as a Director in
February 1996. Dr. Moller has been a Managing Director of TL Ventures since
1995, and its predecessor funds since 1990, where he works extensively with
early-stage life sciences and bioinformatic companies providing business,
technical and strategic consulting. Dr. Moller currently serves on the boards
of Assurance Medical, eMerge Interactive, Inc., Genomics Collaborative,
OraPharma, Inc., and Who? Vision Systems, Inc. and several privately-held
companies. Dr. Moller has a B.A. in Chemistry from Pomona College and a Ph.D.
in Immunology from the University of Pennsylvania.

Claude H. Nash, Ph.D. Dr. Nash joined us as a Director in January 2000.
He is Chairman of the Board of ViroPharma Incorporated, and he served as Chief
Executive Officer, President and a Director of ViroPharma Incorporated from
that company's inception in 1994 until August 2000. From 1983 to 1994, Dr. Nash
served as Vice President, Infectious Disease and Tumor Biology at Schering-
Plough Research Institute. Dr. Nash has a B.S. in Biology and Chemistry from
Lamar University, an M.S. in Microbiology and a Ph.D. in Microbial Genetics and
Biochemistry from Colorado State University.

Robert T. Nelsen. Mr. Nelsen has been a Director since our inception.
Since July 1994, he has served as a managing director of various venture
capital funds associated with ARCH Venture Partners,

51
<PAGE>

including ARCH Venture Fund II, L.P., ARCH Venture Fund III, L.P. and ARCH
Venture Fund IV, L.P. From April 1987 to July 1994, Mr. Nelsen was a Senior
Manager at ARCH Development Corporation, a company affiliated with the
University of Chicago, where he was responsible for new company formation. Mr.
Nelsen serves on the board of directors of Caliper Technologies Corp., a
publicly held, lab-chip systems developer and manufacturer, and several
privately-held companies. He received a B.S. in Biology and Economics from the
University of Puget Sound and an M.B.A. from the University of Chicago.

Composition of Board of Directors

Currently we have eight members on our Board of Directors. Each of our
directors was elected in accordance with provisions of our Certificate of
Incorporation. Ms. Feeney and Mr. Nelsen were nominated to our Board of
Directors by holders of our series A mandatorily redeemable convertible
preferred stock and Dr. Moller was nominated to our Board of Directors by
holders of our series B mandatorily redeemable convertible preferred stock. Dr.
Goddard was designated for nomination to our Board of Directors by holders of
our series H mandatorily redeemable convertible preferred stock. Upon the
closing of this offering the provisions of our Certificate of Incorporation
pursuant to which Ms. Feeney, Mr. Nelsen and Drs. Goddard and Moller were
elected will terminate.

Scientific Advisors

We have established relationships with leading scholars in the fields of
chemistry, molecular biology, pharmacology and preclinical development. Our
scientific advisors consult on matters relating to the development of the
products described elsewhere in this prospectus. Our scientific advisors are
reimbursed for their reasonable expenses and may also receive options to
purchase shares of our common stock. Our scientific advisors are:

<TABLE>
<CAPTION>
Professional
Advisor University Affiliation Concentration
------- ---------------------- -------------
<S> <C> <C>
Thomas Burks,
Ph.D. University of Texas Opioid Pharmacology
Jerry Collins,
Ph.D. Yale University Pharmacology
Alan Cowan,
Ph.D. Temple University Pharmacology
James Eisenach,
M.D. Wake Forest University Pharmacology
Mary Jeanne
Kreek, M.D. The Rockefeller University Molecular Neurobiology
Mark Wentland,
Ph.D. Rennselaer Polytechnic Institute Chemistry
Tony Yaksh,
Ph.D. University of California, San Diego Pharmacology
Lei Yu, Ph.D. University of Cincinnati Molecular Biology
</TABLE>

Clinical Advisors

We have established relationships with leading scholars who consult on
matters relating to clinical trial design, marketing and regulatory issues. Our
clinical advisors are reimbursed for their reasonable expenses and may also
receive options to purchase shares of our common stock. Our clinical advisors
are:

<TABLE>
<CAPTION>
Advisor University Affiliation Professional Concentration
------- ---------------------- --------------------------
<S> <C> <C>
James Eisenach,
M.D. Wake Forest University Pain Management
Rosemarie
Fisher, M.D. Yale University Gastroenterology
Thomas Garvey, George Washington University Clinical Trial Design/FDA
M.D. Requirements
Jerry Jaffe,
M.D. University of Maryland Opioid Pharmacology/Addiction
Henrik Kehlet,
M.D., Ph.D. Hvidovre University, Denmark Surgical Recovery/Outcome
Mary Jeanne
Kreek, M.D. The Rockefeller University Gastroenterology
</TABLE>

Committees Of The Board

The compensation committee reviews and makes recommendations to the Board
regarding the compensation to be provided to our Chief Executive Officer and
our directors. In addition, the compensation committee reviews compensation
arrangements for our other executive officers and

52
<PAGE>

administers our equity compensation plans. The current members of the
compensation committee are Drs. Baldino and Nash and Mr. Nelsen.

The audit committee reviews and monitors our corporate financial
reporting, external audits, internal control functions and compliance with laws
and regulations that could have a significant effect on our financial condition
or results of operations. In addition, the audit committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, our independent auditors. The current members of the audit
committee are Ms. Feeney, Mr. Madden and Dr. Moller.

Compensation Committee Interlocks And Insider Participation

Mr. Nelsen, a member of the board of directors of ARCH Venture Partners,
is a member of our compensation committee. See "Certain Transactions" for a
description of transactions between ARCH Venture Fund III, L.P., an affiliate
of ARCH Venture Partners, and us.

Director Compensation And Other Arrangements

We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. We also have
granted stock options to each member of our board of directors.

Executive Compensation

The following table sets forth the total compensation earned by our chief
executive officer and each of our most highly compensated executive officers,
other than the chief executive officer, who earned more than $100,000 during
the fiscal year ended December 31, 1999.

<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
---------------- -----------------
Other Shares Underlying
Name and Principal Position Salary Bonus Compensation(1) Options
--------------------------- -------- ------- --------------- -----------------
<S> <C> <C> <C> <C>
John J. Farrar.............. $211,319 $21,305 $ 7,210 110,502
President, Chief Executive
Officer and Director

Randall L. Carpenter........ 183,462 -- 25,723 28,100
Vice President, Clinical
Research & Development
and Regulatory Affairs

Deanne D. Garver............ 132,500 9,730 -- 23,309
Vice President,
Preclinical Development
and Projects Management

Alan L. Maycock............. 153,935 -- -- 57,741
Vice President,
Exploratory Research and
Drug Discovery

Peter J. Schied............. 158,222 6,948 -- 46,809
Vice President, Chief
Financial Officer and
Secretary
</TABLE>
--------
(1) Consists of life insurance premiums paid by us for Dr. Farrar and temporary
living expenses paid by us for Dr. Carpenter.

Employment agreements

In October 1994, we entered into an at will employment agreement, an
employment agreement that permits us to terminate the employee at any time,
with Dr. Farrar in connection with which he

53
<PAGE>

purchased 453,280 shares of our common stock for $1,150. Under the terms of the
employment agreement, either party can terminate the employment relationship at
any time without any continuing obligation. Dr. Farrar is eligible for an
annual performance bonus based on our attaining goals and objectives
established by the Board of Directors. We will use all reasonable good faith
efforts to allow Dr. Farrar the opportunity to maintain at least a 5% interest
in the Company.

Effective September 14, 2000, we entered into an agreement with Dr.
Carpenter under which he will continue to serve as our Vice President, Clinical
Research and Development until March 14, 2001 and thereafter as a part-time
consultant to us until September 14, 2001. While he is our full-time employee,
Dr. Carpenter is eligible to receive bonuses based on the attainment of certain
performance objectives established by our Board of Directors. Dr. Carpenter is
eligible for a $53,000 one-time bonus on the earlier of January 15, 2001 or
five days following the termination of his employment prior to March 14, 2001
other than for cause. Upon execution of the agreement, we granted Dr. Carpenter
options to purchase 20,000 shares of our common stock at an exercise price of
$3.50 per share.

In January 1995, we entered into an at will employment agreement with Dr.
Maycock, in connection with which we granted him options to purchase 70,000
shares of our common stock at an exercise price of $.125 per share. Dr. Maycock
is eligible for an annual performance bonus based on our attaining goals and
objectives established by our Board of Directors. Under the terms of the
employment agreement, either party can terminate the employment relationship at
any time. Dr. Maycock is entitled to a $15,000 one-time severance payment if we
terminate his employment with us, subject to certain qualifications with
respect to the financial condition of Adolor.

In May 1997, we entered into an at will employment agreement with Mr.
Schied, in connection with which we granted him options to purchase 100,000
shares of our common stock at an exercise price of $.35 per share. We provide
Mr. Schied with term life insurance equal to two times his base salary. Under
the terms of the employment agreement, either party can terminate the
employment relationship at any time. If we terminate Mr. Schied pursuant to a
change of control or for any other reason other than just cause, we (or our
successor) are obligated to continue to pay Mr. Schied at his then current base
salary rate for six months following such termination. We may defer these
severance payments in certain circumstances.

In March 2000, we entered into an at will employment agreement with Mr.
Reddick, in connection with which we granted him options to purchase 220,000
shares of our common stock at an exercise price of $2.50 per share. We
anticipate we may record a total compensation charge over the four year vesting
period of the option based on the fair value of our common stock on the date
Mr. Reddick commences employment. Mr. Reddick receives a salary of $20,833 per
month and will be eligible for an annual performance bonus based on our
attaining goals and objectives established by our Board of Directors. Under the
terms of the employment agreement, either party will be able to terminate the
employment relationship at any time. If we terminate Mr. Reddick pursuant to a
change of control or for any other reason other than just cause, we (or our
successor) are obligated to continue to pay Mr. Reddick at his then current
base salary rate for nine months following such termination.

We have granted options to purchase shares of our common stock to
officers and other employees of ours, non-employee members of our Board of
Directors and consultants. Our Board of Directors has determined the exercise
price of each option granted by setting the price at a discounted level from
the price per share of our most recently completed issuance of preferred
securities. The following table contains information concerning grants of
options to purchase shares of our common stock of each of the officers named in
the summary compensation table during the year ended December 31, 1999.

54
<PAGE>

Option Grants During the Year Ended December 31, 1999

<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percentage Annual
Number of of Total Rates of Stock Price
Securities Options Exercise Appreciation for
Underlying Granted to Price Option Term(2)
Options Employees (per Market Expiration ---------------------
Name Granted in 1999 Share) Price(1) Date 5% 10%
------------------------ ---------- ---------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Farrar.......... 96,000 24.50% $0.38 $16.00 1/15/09 $2,465,982 $3,947,988
1,188 0.38 16.00 5/21/09 30,517 48,856
3,161 0.65 16.00 8/31/09 80,328 129,126
713 0.65 16.00 9/28/09 18,114 29,118
9,440 1.50 16.00 11/15/09 231,873 377,607
Randall L. Carpenter.... 15,000 6.24 $0.38 $16.00 1/15/09 $ 385,310 $ 616,873
1,376 0.38 16.00 5/21/09 35,346 56,588
2,414 0.65 16.00 8/31/09 61,340 98,603
1,034 0.65 16.00 9/28/09 26,292 42,263
8,276 1.50 16.00 11/15/09 203,273 331,031
Deanne D. Garver........ 15,000 5.17 $0.38 $16.00 1/15/09 $ 385,310 $ 616,873
688 0.38 16.00 5/21/09 17,673 28,294
5,977 0.65 16.00 7/27/09 151,889 244,160
1,322 0.65 16.00 8/31/09 33,595 54,004
322 0.65 16.00 9/28/09 8,183 13,154
Alan L. Maycock......... 7,467 12.81 $0.38 $16.00 1/1/09 $ 191,797 $ 307,063
45,000 0.38 16.00 1/15/09 1,155,929 1,850,620
1,917 0.38 16.00 5/21/09 49,253 78,853
2,644 0.65 16.00 8/31/09 67,185 107,999
713 0.65 16.00 9/28/09 18,114 29,118
Peter J. Schied......... 35,000 10.39 $0.38 $16.00 1/15/09 $ 899,056 $1,439,371
1,198 0.38 16.00 5/21/09 30,779 49,276
6,852 0.65 16.00 6/2/09 174,135 279,920
3,017 0.65 16.00 8/31/09 76,679 123,260
742 0.65 16.00 9/28/09 18,846 30,294
</TABLE>
--------
(1) There was no public market for our shares of common stock during 1999. For
purposes of this table, $16.00, which is the mid point of the range related
to our initial public offering price per share, has been assumed to be the
market price at the date of grant.
(2) Amounts in these columns represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by U.S. federal securities rules and do not
represent our estimate or projection of our future common stock prices.
Actual gains, if any, on stock option exercises depend on our future
performance and overall stock market conditions. The amounts reflected in
the table may be more or less than the amounts actually achieved.

55
<PAGE>

The following table contains information concerning stock options to
purchase common stock held as of December 31, 1999 by each of the officers
named in the summary compensation table who have stock options.
Year-End December 31, 1999 Option Values

<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Shares Options at Fiscal Year The Money Options at
Acquired on End Fiscal Year-End
Exercise Value ------------------------- -------------------------
Name (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------------------ ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John J. Farrar.......... 0 0 77,879 80,785 $1,219,717 $1,254,261
Randall L. Carpenter.... 0 0 25,328 62,769 $ 392,823 $ 974,846
Deanne D. Garver........ 0 0 25,902 47,402 $ 404,022 $ 740,431
Alan L. Maycock......... 0 0 89,430 37,832 $1,409,204 $ 543,570
Peter J. Schied......... 0 0 88,350 69,809 $1,380,379 $1,090,552
</TABLE>

On January 13, 2000, we granted stock options to purchase an aggregate of
526,600 shares of our common stock to certain of our employees. Drs. Farrar,
Carpenter, Garver and Maycock and Mr. Schied received options to purchase
192,000, 96,000, 30,000, 32,000, and 38,000 shares respectively. These options
have a weighted average exercise price of $2.25 per share, vest in equal
installments over four years, and expire on the tenth anniversary of the date
of grant.

On July 21, 2000, we granted stock options to purchase an aggregate of
531,800 shares of our common stock to certain of our employees. Drs. Farrar,
Carpenter, Garver and Maycock and Mr. Schied received options to purchase
180,000, 42,000, 30,000, 30,000, and 42,000 shares respectively. These options
have a weighted average exercise price of $3.50 per share, vest in equal
installments over four years, and expire on the tenth anniversary of the date
of grant.

In September 2000, we granted options to purchase an aggregate of 10,121
shares of our common stock to certain of our employees. Drs. Farrar, Carpenter,
Garver and Maycock and Mr. Schied received options to purchase 2,891, 1,928,
1,205, 2,651 and 1,446 shares respectively. These options have a weighted
average exercise price of $3.50 per share, vest immediately, and expire on the
tenth anniversary of the date of grant.

Employee Benefit Plans

Amended and Restated 1994 Equity Compensation Plan

We adopted the Amended and Restated 1994 Equity Compensation Plan,
effective as of February 4, 2000. Under the plan, we are authorized to grant
options to eligible individuals for up to a total of 3,550,000 shares of our
common stock. The plan authorizes us to grant either options intended to
constitute incentive stock options under the Internal Revenue Code of 1986, as
amended, or non-qualified stock options. Under the plan, the compensation
committee of the Board of Directors or the Board of Directors will determine
the exercise price of each option granted, provided that the minimum exercise
price is equal to the fair market value of the underlying stock on the date the
option is granted. The maximum term of any option will be ten years from the
date of grant. Options granted will be exercisable at the determination of the
compensation committee of the Board of Directors or the Board of Directors, and
the options will vest according to the vesting schedule which shall be
determined by the Board or the compensation committee. Within any one-year
period, an employee may not receive options to purchase more than 1,000,000
shares of our common stock.

Eligibility. Officers and other employees of ours, non-employee members
of the Board, and consultants are eligible to participate in the plan and
receive non-qualified stock options. Under the plan, only our officers and
other employees are eligible to receive incentive stock options.

Change in Control. The plan includes the following change in control
provisions which may result in the accelerated vesting of outstanding option
grants and stock issuances:

In a merger or consolidation, sale of all or substantially all assets,
sale of all or a majority of the outstanding stock, liquidation or dissolution
or any similar transactions, unless otherwise provided in an

56
<PAGE>

optionee's grant letter, the vesting and exercisability of all options that are
outstanding and unexercised as of such change of control, to the extent
unvested, and any unvested shares held by an optionee will be accelerated such
that all outstanding options are fully vested and exercisable and all shares
held by an optionee are fully vested, and, if Adolor does not survive any such
transaction Adolor shall, if Adolor does not cash-out all outstanding options,
require the successor corporation to assume all outstanding options and to
substitute such options with awards involving the common stock of such
successor corporation on terms and conditions necessary to preserve the rights
of optionees with respect to such options. The compensation committee or the
Board, in its sole discretion, may require the cancellation of all outstanding
vested options in exchange for a cash payment in an amount equal to the excess,
if any, of the fair market value of the common stock underlying the unexercised
portion of the option as of the date of the change of control over the option
price of such portion.

Federal Tax Consequences of Stock Options.

In general, neither the grant nor the exercise of an incentive stock
option will result in taxable income to an option holder or a deduction to us.
To receive special tax treatment as an incentive stock option under the
Internal Revenue Code as to shares acquired upon exercise of an incentive stock
option, an option holder must neither dispose of such shares within two years
after the incentive stock option is granted nor within one year after the
exercise of the option. In addition, the option holder must be an employee at
all times between the date of grant and the date three months, or one year in
the case of disability, before the exercise of the option. Special rules apply
in the case of the death of the option holder. Incentive stock option treatment
under the Internal Revenue Code generally allows the sale of our common stock
received upon the exercise of an incentive stock option to result in any gain
being treated as a capital gain to the option holder, but we will not be
entitled to a tax deduction. However, the exercise of an incentive stock
option, if the holding period rules described above are satisfied, will give
rise to income includable by the option holder in his or her alternative
minimum tax in an amount equal to the excess of the fair market value of the
stock acquired on the date of the exercise of the option over the exercise
price.

If the holding rules described above are not satisfied, gain recognized
on the disposition of the shares acquired upon the exercise of an incentive
stock option will be characterized as ordinary income. Such gain will be equal
to the difference between the exercise price and the fair market value of the
shares at the time of exercise. Special rules may apply to disqualifying
dispositions where the amount realized is less than the value at exercise. We
will generally be entitled to a deduction equal to the amount of such gain
included by an option holder as ordinary income. Any excess of the amount
realized upon such disposition over the fair market value at exercise will
generally be long-term or short-term capital gain depending on the holding
period involved. Notwithstanding the foregoing, in the event that the exercise
of the option is permitted other than by cash payment of the exercise price,
various special tax rules may apply.

No income will be recognized by an option holder at the time a non-
qualified stock option is granted. Generally, ordinary income will, however, be
recognized by an option holder at the time a vested non-qualified stock option
is exercised in an amount equal to the excess of the fair market value of the
underlying common stock on the exercise date over the exercise price. We will
generally be entitled to a deduction for federal income tax purposes in the
same amount as the amount included in ordinary income by the option holder with
respect to his or her non-qualified stock option. Gain or loss on a subsequent
sale or other disposition of the shares acquired upon the exercise of a vested
non-qualified stock option will be measured by the difference between the
amount realized on the disposition and the tax basis of such shares, and will
generally be long-term capital gain depending on the holding period involved.
The tax basis of the shares acquired upon the exercise of any non-qualified
stock option will be equal to the sum of the exercise price of such non-
qualified stock option and the amount included in income with respect to such
option. Notwithstanding the foregoing, in the event that exercise of the option
is permitted other than by cash payment of the exercise price, various special
tax rules apply.

57
<PAGE>

Unless the holder of an unvested non-qualified stock option makes an
83(b) election as described below, there generally will be no tax consequences
as a result of the exercise of an unvested option until the stock received upon
such exercise is no longer subject to a substantial risk of forfeiture or is
transferable. Generally, when the shares have vested, the holder will recognize
ordinary income, and we will be entitled to a deduction, equal to the
difference between the fair market value of the stock at such time and the
exercise price paid by the holder for the stock. Subsequently realized changes
in the value of the stock generally would be treated as long-term or short-term
capital gain or loss, depending on the length of time the shares were held
prior to disposition of such shares. In general terms, if a holder were to make
an 83(b) election under Section 83(b) of the Internal Revenue Code upon the
exercise of the unvested option, the holder would recognize ordinary income on
the date of the exercise of such option, and we would be entitled to a
deduction, equal to:

. the fair market value of the stock received pursuant to such
exercise as though the stock were not subject to a substantial
risk of forfeiture or transferable, minus

. the exercise price paid for the stock.

If an 83(b) election were made, there would generally be no tax
consequences to the holder upon the vesting of the stock, and all subsequent
appreciation in the stock would generally be eligible for capital gains
treatment.

Additional special tax rules may apply to those option holders who are
subject to the rules set forth in Section 16 of the Securities Exchange Act of
1934. The foregoing tax discussion is a general description of certain expected
federal income tax results under current law, and all affected individuals
should consult their own advisors if they wish any further details or have
special questions.

Section 162(m). Section 162(m) of the Internal Revenue Code may preclude
us from claiming a federal income tax deduction if we pay total remuneration in
excess of $1 million to the chief executive officer or to any of the other four
most highly compensated officers in any one year. Total remuneration would
generally include amounts received upon the exercise of stock options granted
under the plan and the value of shares received when restricted shares become
transferable or such other time when income is recognized. An exception does
exist, however, for performance-based compensation which includes amounts
received upon the exercise of stock options pursuant to a plan approved by
stockholders that meets certain requirements. The Amended and Restated 1994
Equity Compensation Plan is intended to make grants of stock options and stock
appreciation rights that meet the requirements of performance-based
compensation. Other awards have been structured with the intent that such
awards may qualify as such performance based compensation if so determined by
the compensation committee.

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<PAGE>

PRINCIPAL STOCKHOLDERS

Execpt as otherwise set forth below, the following table sets forth
certain information regarding beneficial ownership of our common stock as of
August 31, 2000, and as adjusted to reflect the sale of shares offered hereby,
and by:

. each person (or group of affiliated persons) who is known by us to
own more than five percent of the outstanding shares of our common
stock,

. each of our directors and our executive officers named in the
summary compensation table and

. all of our executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Unless otherwise noted, we believe that all
persons named in the table have sole voting and sole investment power with
respect to all shares beneficially owned by them. All figures include shares of
common stock issuable upon the exercise of options or warrants exercisable
within 60 days of August 31, 2000, which are deemed to be outstanding and to be
beneficially owned by the person holding those options or warrants for the
purpose of computing the percentage ownership of that person.

<TABLE>
<CAPTION>
Percent of Shares
Outstanding
--------------------
5% Beneficial Owners, Directors, Number of Shares
Nominees for Director, Named Officers Beneficially Owned Before the After the
Before the Offering After the Offering Offering Offering
-------------------------------------- ------------------ ---------- ---------
<S> <C> <C> <C>
Entities Affiliated with MPM
Capital(1)........................... 2,352,940 11.29% 8.76%
Robert T. Nelsen(2)................... 2,263,633 10.86 8.43
Entities Affiliated with Alta
Partners(3).......................... 2,263,286 10.86 8.43
WPG Venture Partners III, L.P.(4)..... 2,204,761 10.57 8.21
Falcon Technology Partners L.P.(5).... 1,845,238 8.85 6.87
Technology Leaders Management,
Inc.(6).............................. 1,567,833 7.52 5.84
Christopher Moller(7)................. 1,567,833 7.52 5.84
ARCH Venture Fund III, L.P.(8)........ 1,494,584 7.17 5.57
S.R. One, Limited(9).................. 1,392,833 6.68 5.19
John J. Farrar(10).................... 828,168 3.97 3.08
Alan L. Maycock(11)................... 261,689 1.26 *
Andrew D. Reddick(12)................. 25,541 * *
Peter J. Schied(13)................... 161,983 * *
William K. Schmidt(14)................ 17,900 * *
Linda Y. Harver(15)................... 5,041 * *
Randall L. Carpenter(16).............. 143,846 * *
Deanne D. Garver(17).................. 73,750 * *
Gwen A. Melincoff(18)................. 66,442 * *
Frank Baldino, Jr.(19)................ 20,000 * *
Ellen M. Feeney(20)................... 12,625 * *
David Madden.......................... 25,000 * *
Claude Nash(21)....................... 4,166 * *
Paul Goddard(22)...................... 25,000 * *
All directors and executive officers
as a group (16 persons).............. 5,502,616 26.39 20.49
</TABLE>
--------
* Less than 1%

(1) Includes (i) 177,451 shares owned by MPM Bioventures II, L.P.; (ii)
1,609,019 shares owned by MPM Bioventures II-QP, L.P.; and (iii) 566,470
shares owned by MPM Bioventures GMBH & Co. Parallel-Beteiligungs KG. The
address for MPM Bioventures II, L.P. is 601 Gateway Blvd, Suite 360, San
Francisco, CA 94080. The person with investment control of these shares is
Dr. Luke Evnin. Dr. Evnin disclaims beneficial ownership except to the
extent of his pecuniary interests.

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<PAGE>

(2) Includes (i) 769,047 shares including a warrant to purchase 11,905 shares
owned by ARCH Venture Fund II, L.P. and (ii) 1,494,584 shares owned by ARCH
Venture Fund III, L.P. Mr. Nelsen is a managing director of the general
partner of the general partner of the general partner of ARCH Venture Fund
II, L.P. and a managing director of the general partner of ARCH Venture
Fund III, L.P. The address of ARCH Venture Fund II, L.P. is 8725 West
Higgens Rd., Suite 290, Chicago, IL 60631. The people who have investment
control of the ARCH Venture Fund II, L.P. shares are Robert T. Nelsen,
Steven Lazarus and Keith Crandall, each of whom disclaims beneficial
ownership except to the extent of their pecuniary interest therein. Mr.
Nelsen disclaims beneficial ownership of these shares except to the extent
of his pecuniary interest therein.

(3) Includes (i) 2,206,536 shares owned by Alta California Partners, L.P. and
(ii) 56,750 shares owned by Alta Embarcadero Partners, LLC. The Principals
of Alta Partners are General Partners of Alta California Management
Partners, L.P. which is a General Partner of Alta California Partners, L.P.
Certain Principals of Alta Partners are Members of Alta Embarcadero
Partners, LLC. The address of Alta California Management Partners, L.P. is
One Embarcadero Center, Suite 4050, San Francisco, CA 94111. The people who
have investment control of these shares are Jean Deleage, Garrett Gruner,
Guy Nohra and Marino Polestra, each of whom disclaims beneficial ownership
except to the extent of their pecuniary interest therein.
(4) Includes (i) 1,211,480 shares owned by WPG Enterprise Fund II, LP; (ii)
969,472 shares owned by Weiss, Peck & Greer Venture Associates III, L.P.;
and (iii) 23,809 shares owned by WPG LifeScience Entrepreneur Fund. WPG
Venture Partners III, L.P. is the Fund Investment Advisory Member of Weiss,
Peck & Greer Venture Associates III, L.P., WPG Enterprise Fund II, L.P. and
WPG LifeScience Entrepreneur Fund. The address for WPG Venture Partners
III, L.P. is 555 California Street, Suite 3130, San Francisco, CA 94104.
The people who have investment control of these shares are Gill Cogan and
Phillip Greer, each of whom disclaims beneficial ownership except to the
extent of their pecuniary interest therein.

(5) The address of Falcon Technology Partners, L.P. is 600 Dorset Road, Devon,
PA 19833. The person who has investment control of these shares is James
Rathmann. Mr. Rathmann disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein.

(6) Includes (i) 895,888 shares owned by Technology Leaders II, L.P. and (ii)
671,945 shares owned by Technology Leaders II Offshore C.V. Technology
Leaders Management, Inc. controls the general partner of each of these
entities. The address of Technology Leaders Management, Inc. is 435 Devon
Park Drive, Building 700, Wayne, Pennsylvania 19087. The people who have
investment control of these shares are Robert Keith, Gary Anderson, Mark
DeNino, Christopher Moller and Robert Rabbio, each of whom disclaims
beneficial ownership except to the extent of their pecuniary interest
therein.

(7) Includes (i) 895,888 shares owned by Technology Leaders II, L.P. and (ii)
671,945 shares owned by Technology Leaders II Offshore C.V. Dr. Moller is a
managing director of Technology Leaders Management, Inc., which controls
the general partner of both Technology Leaders II, L.P. and Technology
Leaders II Offshore C.V. Dr. Moller disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest therein.

(8) The address of ARCH Venture Fund III, L.P. is 8725 West Higgins Rd., Suite
290, Chicago, IL 60631. The people who have investment control of these
shares are Robert T. Nelsen, Steven Lazarus, Keith Crandall and Clint
Bybee, each of whom disclaims beneficial ownership except to the extent of
their pecuniary interest therein.
(9) Includes a warrant to purchase 25,000 shares. The address of S.R. One
Limited is 4 Tower Bridge, 200 Bar Harbor Drive, Suite 250, West
Conshohocken, PA 19428. The people who have investment control of these
shares are, Dr. Brenda Gavin, Donald Parman, Dr. Raymond Whitaker, Dr.
Barbara Dalton, William Mosher and Arlene Sothern, each of whom disclaims
beneficial ownership except to the extent of their pecuniary interest
therein.

(10) Includes 14,285 shares owned jointly by Dr. Farrar and his wife. Includes
8,888 shares owned by the John J. Farrar and Janet Fuller Farrar Trust for
Christin A. Farrar. Includes 8,888 shares owned by the John J. Farrar and
Janet Fuller Farrar Trust for Lisa K. Farrar. Includes 8,888 shares owned
by the John J. Farrar and Janet Fuller Farrar Trust for Morgan S. Fuller
Bonar. Includes options

60
<PAGE>

which are exercisable within 60 days of August 31, 2000 to purchase 98,335
shares of common stock.

(11) Includes 50,000 shares owned jointly by Dr. Maycock and his wife.
Includes 2,250 shares owned by Alan L. Maycock as custodian under the
Pennsylvania Uniform Gift to Minors Act for Laura B. Maycock. Includes
options which are exercisable within 60 days of August 31, 2000 to
purchase 12,513 shares of common stock.

(12) Consists of options which are exercisable within 60 days of August 31,
2000, to purchase 25,541 shares of common stock.

(13) Includes options which are exercisable within 60 days of August 31, 2000
to purchase 25,810 shares of common stock.

(14) Includes options which are exercisable within 60 days of August 31, 2000
to purchase 7,333 shares of common stock.

(15) Consists of options which are exercisable within 60 days of August 31,
2000 to purchase 5,041 shares of common stock.

(16) Includes 8,800 shares owned by children of Randall L. Carpenter. Includes
options which are exercisable within 60 days of August 31, 2000 to
purchase 21,007 shares of common stock.

(17) Includes options which are exercisable within 60 days of August 31, 2000
to purchase 14,450 shares of common stock.

(18) Includes options which are exercisable within 60 days of August 31, 2000
to purchase 14,620 shares of common stock.

(19) Includes 3,000 shares owned by the James G. Baldino Irrevocable Grantor
Trust 12/29/94. Includes 3,000 shares owned by the Leslie M. Baldino
Irrevocable Grantor Trust 12/29/94. Includes 3,000 shares owned by
Jeffrey P. Baldino Irrevocable Grantor Trust 12/29/94.

(20) Consists of options which are exercisable within 60 days of August 31,
2000 to purchase 12,625 shares of common stock.

(21) Consists of options which are exercisable within 60 days of August 31,
2000 to purchase 4,166 shares of common stock.

(22) Consists of options which are exercisable within 60 days of August 31,
2000 to purchase 25,000 shares of common stock. Paul Goddard joined our
board in October 2000.

61
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In July 1999, we licensed worldwide rights (excluding South Korea and
North Korea) to the development and commercialization of our product candidate
ADL 2-1294 to SB Pharmaco Puerto Rico Inc., an affiliate of SmithKline Beecham
plc, for the topical indications of dermal pain and itch. Under the license
agreement, we received a $500,000 up-front license fee. In the event that ADL
2-1294 meets specified regulatory approval requirements and is successfully
launched commercially in prescription and over-the-counter forms in each of
specified jurisdictions, we would be entitled to up to $38.5 million of
milestone payments, with the potential of additional milestone payments of up
to $6.0 million. In addition, we will receive royalties based on product sales,
if any. SB Pharmaco will be responsible for all development costs.

SB Pharmaco can terminate the agreement on a country by country basis, in
its entirety, or on a product by product basis if it determines that the
product is not marketable in a specified territory. Upon termination in this
circumstance, all of the rights granted to SB Pharmaco under the license
agreement in the relevant country or for the relevant product will terminate
and revert to us. In connection with the licensing of ADL 2-1294, S.R. One,
Limited, an affiliate of SmithKline Beecham purchased $2.5 million in series F
mandatorily redeemable Preferred Stock, was granted a warrant to purchase
shares of preferred stock convertible into an aggregate of 25,000 shares of
common stock for an aggregate exercise price of $125,000 and agreed to purchase
an additional $500,000 of our capital stock upon the achievement of certain
regulatory milestones.

In January 2000, we issued an aggregate of 12,306,000 shares of series G
mandatorily redeemable convertible preferred stock at a purchase price of $1.00
per share, for aggregate consideration of $12,306,000. Of that amount, we
issued 250,000 shares to Technology Leaders II, L.P. Dr. Moller, one of our
directors, is the managing director of the general partner of the general
partner of Technology Leaders II, L.P. We also issued 2,500,000 shares to ARCH
Venture Fund III, L.P. Mr. Nelsen, a director of ours, is the general partner
of the general partner of the general partner of ARCH Venture Fund III, L.P. We
also issued 273,000 shares to WPG Enterprise Fund II, L.L.C. and 227,000 shares
to Weiss, Peck & Greer Venture Associates III, L.L.C. Ms. Feeney, one of our
directors, nominated to our board by Weiss, Peck & Greer Venture Partners III,
the Fund Investment Advisory Member of WPG Enterprise Fund II, L.L.C. and
Weiss, Peck & Greer Venture Associates III, L.L.C., was a general partner of
Weiss, Peck & Greer Venture Partners, from 1989 to 1999. On the closing of this
offering, the series G preferred stock will automatically convert into
2,734,656 shares of common stock.

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

In March 2000, some of our officers exercised options to purchase shares
of our common stock. In connection with the exercises, the officers delivered
promissory notes to us in the aggregate amount of $940,500. The promissory
notes are full recourse and are secured by shares of our common stock. The
promissory notes accrue interest at an annual rate of 6.80% and are payable in
March 2007. As the makers of the promissory notes sell the shares of our common
stock that secure the notes, the makers are required to repay the principal
amounts due under the notes secured by the sold shares. The following table
sets forth the names of the makers of the promissory notes, their relationship
to us and the amounts owed to us by each of these makers.

62
<PAGE>

In January 1999, we purchased an approximately 19.9% equity interest in
Northstar Research & Development Ltd., a startup biopharmaceutical company with
an interest in developing novel pain management pharmaceutical products, for
$100,000. William K. Schmidt, our Vice President, Technical Affairs, was the
President and Chief Executive Officer of Northstar at the time of the purchase.
Northstar does not currently have any operations.
<TABLE>
<CAPTION>
Amount of
Promissory
Name of Maker Relationship to Adolor Corporation Note
------------- ---------------------------------- ----------
<S> <C> <C>
John J. Farrar President, Chief Executive Officer and Director $432,000

Randall L. Carpenter Vice President, Clinical Research & Development 216,000

Deanne D. Garver Vice President, Preclinical Development and Projects Management 67,500

Alan L. Maycock Vice President, Exploratory Research and Drug Discovery 72,000

Gwen A. Melincoff Vice President, Business Development 67,500

Peter J. Schied Vice President, Chief Financial Officer and Secretary 85,500
</TABLE>

63
<PAGE>

DESCRIPTION OF CAPITAL STOCK

General

The following summary assumes the amendment and restatement of our
certificate of incorporation and bylaws to read in their entirety as provided
in the forms of amended and restated certificate of incorporation and bylaws
filed as exhibits to the registration statement of which this prospectus forms
a part. It also reflects changes to our capital structure that will become
effective immediately prior to or upon the closing of this offering. Upon
completion of this offering, our authorized capital stock will consist of
99,000,000 shares of common stock, $0.0001 par value, and 1,000,000 shares of
undesignated preferred stock, $0.01 par value. The following description of our
capital stock does not purport to be complete and is subject to, and qualified
in its entirety by, our certificate of incorporation and bylaws, which we have
included as exhibits to the registration statement of which this prospectus
forms a part.

Common Stock

As of August 31, 2000, there were 2,029,301 shares of our common stock
outstanding. Upon completion of the offering, there will be 26,849,406 shares
of common stock outstanding.

The holders of our common stock are entitled to dividends as our board of
directors may declare from legally available funds, subject to the preferential
rights of the holders of our preferred stock. The holders of our common stock
are entitled to one vote per share on any matter to be voted upon by
stockholders. Our certificate of incorporation does not provide for cumulative
voting. No holder of our common stock will have any preemptive right to
subscribe for any shares of capital stock issued in the future.

Upon any voluntary or involuntary liquidation, dissolution, or winding up
of our affairs, the holders of our common stock are entitled to share ratably
in all assets remaining after payment of creditors and subject to prior
distribution rights of our preferred stock. All of the outstanding shares of
common stock are, and the shares offered by us will be, fully paid and non-
assessable.

Preferred Stock

As of the closing of this offering, no shares of our preferred stock will
be outstanding. Our certificate of incorporation provides that our board of
directors may by resolution establish one or more classes or series of
preferred stock having the number of shares and relative voting rights,
designation, dividend rates, liquidation, and other rights, preferences, and
limitations as may be fixed by them without further stockholder approval. The
holders of our preferred stock may be entitled to preferences over common
stockholders with respect to dividends, liquidation, dissolution, or our
winding up in such amounts as are established by our board of directors
resolutions issuing such shares.

The issuance of our preferred stock may have the effect of delaying,
deferring or preventing a change in control of us without further action by the
holders and may adversely affect voting and other rights of holders of our
common stock. In addition, issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third party to acquire a
majority of the outstanding shares of voting stock. At present, we have no
plans to issue any shares of preferred stock.

Registration Rights

In conjunction with this offering the holders of substantially all of our
common stock and warrants exercisable for our common stock that had demand
rights agreed not to demand registration of their common stock until 180 days
after the effective date of this prospectus without the prior written consent
of Merrill Lynch. After this 180-day period, these holders may, under certain
circumstances,

64
<PAGE>

require us to file a registration statement under the Securities Act. We are
required to use our best efforts to effect the registration, subject to certain
conditions and limitations. In addition, if following 180 days after the date
of this offering, we prepare to register any of our securities under the
Securities Act, for our own account or the account of our other holders, we
will send notice of this registration to holders of the shares eligible for
demand and piggy-back registration rights. Subject to certain conditions and
limitations, they may elect to register their eligible shares. If we are able
to file a registration statement on Form S-3, the holders of shares eligible
for demand rights may register their common stock along with that registration.
The expenses incurred in connection with such registrations will be borne by
us, except that we will pay expenses of only one registration on Form S-3 at a
holder's request per year.

Options

As of August 31, 2000, options to purchase a total of 1,783,617 shares of
common stock were outstanding at a weighted average exercise price of $2.03.
Options to purchase a total of 3,550,000 shares of common stock are reserved
under the Amended and Restated 1994 Equity Compensation Plan. Please see
"Management--Employee benefit plans" and "Shares eligible for future sale."

Warrants

As of September 29, 2000, there were warrants outstanding to purchase
11,905 shares of series B convertible preferred stock and 25,000 shares of
series F convertible preferred stock. These warrants expire on the earlier of
the closing of an initial public offering or October 2000 and August 2004,
respectively.

Section 203 of the Delaware General Corporation Law; Certain Anti Takeover,
Limited Liability and Indemnification Provisions

We are subject to Section 203 of the Delaware General Corporation Law,
which regulates acquisitions of Delaware corporations. In general, Section 203
prohibits a publicly-held Delaware corporation from engaging in a business
combination with an interested stockholder for a period of three years
following the date the person becomes an interested stockholder, unless:

. our board of directors approved the business combination or the
transaction in which the person became an interested stockholder
prior to the date the person attained this status;

. upon consummation of the transaction that resulted in the person
becoming an interested stockholder, the person owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares owned by persons who are
directors and also officers; or

. on or subsequent to the date the person became an interested
stockholder, our board of directors approved the business
combination and the stockholders other than the interested
stockholder authorized the transaction at an annual or special
meeting of stockholders.

Section 203 defines a "business combination" to include:

. any merger or consolidation involving the corporation and the
interested stockholder;

. any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;

. in general, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or

. the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.

65
<PAGE>

In general, Section 203 defines an "interested stockholder" as any person
who, together with the person's affiliates and associates, owns, or within
three years prior to the determination of interested stockholder status did
own, 15% or more of a corporation's voting stock.

Number of Directors; Removal; Filling Vacancies

Our certificate of incorporation and bylaws provide that our Board of
Directors has the authority to determine the number of directors to constitute
the Board, and to fix their terms of office. Further, subject to the rights of
the holders of any series of our preferred stock, if any, our certificate of
incorporation and bylaws authorize our Board of Directors to elect additional
directors under specified circumstances and fill any vacancies that occur in
our Board of Directors by reason of death, resignation, removal, or otherwise.
A director so elected by our Board of Directors to fill a vacancy or a newly
created directorship holds office until the next election of the class for
which such director has been chosen and until his or her successor is elected
and qualified. Subject to the rights of the holders of any series of our
preferred stock, if any, our certificate of incorporation and bylaws also
provide that directors may be removed only for cause and only by the
affirmative vote of holders of a majority of the combined voting power of our
then outstanding stock. The effect of these provisions is to preclude a
stockholder from removing incumbent directors without cause and simultaneously
gaining control of our Board of Directors by filling the vacancies created by
such removal with its own nominees.

Indemnification

We have included in our certificate of incorporation and bylaws
provisions to (i) eliminate the personal liability of our directors for
monetary damages resulting from breaches of their fiduciary duty to the extent
permitted by the Delaware General Corporation Law and (ii) indemnify our
directors and officers to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, including circumstances in which
indemnification is otherwise discretionary. We believe that these provisions
are necessary to attract and retain qualified persons as directors and
officers.

By-laws

Our bylaws are subject to adoption, amendment, alteration, repeal, or
rescission either by our Board of Directors by a vote of a majority of all
directors in office, without the assent or vote of our stockholders, or by the
affirmative vote of the holders of a majority of the outstanding shares of
voting securities.

Transfer Agent and Registrar

The Transfer Agent and Registrar for our common stock is StockTrans, Inc.
The Transfer Agent's address is 44 West Lancaster Avenue, Ardmore, PA 19003,
and its telephone number is (610) 649-7300.

66
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could reduce prevailing market prices. Sales of substantial amounts of
our common stock in the public market after any restrictions on sale lapse
could adversely affect the prevailing market price of the common stock and
impair our ability to raise equity in the future.

Upon completion of this offering, we will have 26,849,406 outstanding
shares of common stock. Of these shares, the 6,000,000 shares sold in this
offering will be freely transferable without restriction or further
registration under the Securities Act, except for any shares purchased by an
affiliate of us. The remaining 20,849,406 shares of common stock held by
existing stockholders are restricted securities. Restricted securities may be
sold in the public market only if registered or if they qualify for exemption
from registration described below under Rules 144, 144(k) or 701 promulgated
under the Securities Act.

As a result of contractual restrictions described below and the
provisions of Rules 144, 144(k) and 701, the restricted shares will be
available for sale in the public market as follows:

. 327,512 shares will be eligible for sale immediately following the
initial public offering;

. 26,185 shares will be eligible for sale beginning 90 days after
the date of the prospectus; and

. 16,065,121 shares will be eligible for sale upon the expiration of
the lock-up agreements, described below, beginning 180 days after
the date of this prospectus.

Lock-Up Agreements

All of our directors, officers, employees and the holders of
substantially all of our securities have entered into lock-up agreements in
connection with this offering. These lock-up agreements generally provide that
these holders will not offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of our common stock or any securities exercisable
for or convertible into our common stock owned by them for a period of 180 days
after the date of this prospectus without the prior written consent of Merrill
Lynch. Notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements
may not be sold until these agreements expire or are waived by Merrill Lynch.
Holders of approximately 97% percent of our stock have entered into lock-up
agreements.

Rule 144

In general, under Rule 144 as currently in effect, after the expiration
of the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:

. one percent of the number of shares of common stock then
outstanding, which will equal approximately 268,495 shares
immediately after this offering; and

. the average weekly trading volume of our common stock during the
four calendar weeks preceding the sale.

Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice and the availability of current public information about
us.

67
<PAGE>

Rule 144(k)

Under Rule 144(k), a person who is not deemed to have been our affiliate
at any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.

Rule 701

Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written
compensatory plan or contract to resell such shares in reliance upon Rule 144,
but without compliance with certain restrictions. Rule 701 provides that
affiliates may sell their Rule 701 shares under Rule 144 90 days after
effectiveness without complying with the holding period requirement and that
non-affiliates may sell such shares in reliance on Rule 144 90 days after
effectiveness without complying with the holding period, public information,
volume limitation or notice requirements of Rule 144.

Registration Rights

Upon completion of this offering, the holders of 18,591,175 shares of
common stock, or their transferees, will be entitled to rights with respect to
the registration of their shares under the Securities Act. Registration of
their shares under the Securities Act would result in these shares becoming
freely tradeable without restriction under the Securities Act, except for
shares purchased by affiliates, immediately upon the effectiveness of such
registration.

Stock Options

We intend to file a registration statement under the Securities Act after
the effective date of this offering to register shares to be issued pursuant to
our employee and director benefit plans. As a result, any options or rights
exercised under the 1994 equity incentive plan will also be freely tradable in
the public market. However, shares held by affiliates will still be subject to
the volume limitation, manner of sale, notice and public information
requirements of Rule 144, unless otherwise resalable under Rule 701. As of
September 30, 2000, we had granted options to purchase 1,805,763 shares of
common stock that had not been exercised. We have reserved 2,144,236 shares for
possible future issuance under our Amended and Restated 1994 Equity
Compensation Plan.

68
<PAGE>

UNDERWRITING

Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc.
and Pacific Growth Equities, Inc., are acting as representatives of the
underwriters named below. Subject to the terms and conditions described in a
purchase agreement among us and the underwriters, we have agreed to sell to the
underwriters, and the underwriters severally have agreed to purchase from us,
the number of shares listed opposite their names below.

<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
Lehman Brothers Inc..............................................
Pacific Growth Equities, Inc.....................................
---------
Total....................................................... 6,000,000
=========
</TABLE>

The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.

We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
the underwriters may be required to make in respect of those liabilities.

The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right
to withdraw, cancel or modify offers to the public and to reject orders in
whole or in part.

Commissions And Discounts

The representatives have advised us that the underwriters propose
initially to offer the shares to the public at the initial public offering
price set forth on the cover page of this prospectus and to dealers at that
price less a concession not in excess of $ per share. The underwriters may
allow, and the dealers may reallow, a discount not in excess of $ per share
to other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.

The following table shows the public offering price, underwriting
discount and proceeds before expenses to us. The information assumes either no
exercise or full exercise by the underwriters of their over-allotment option.

<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price............... $ $ $
Underwriting discount............... $ $ $
Proceeds, before expenses, to
Adolor............................. $ $ $
</TABLE>

The expenses of the offering, not including the underwriting discount,
are estimated at $1.6 million, of which we have already paid approximately $0.9
million.

Over-Allotment Option

We have granted an option to the underwriters to purchase up to 900,000
additional shares at the public offering price, less the underwriting discount.
The underwriters may exercise this option for 30

69
<PAGE>

days from the date of this prospectus solely to cover any over-allotments. If
the underwriters exercise this option, each will be obligated, subject to
conditions contained in the purchase agreement, to purchase a number of
additional shares proportionate to that underwriter's initial amount reflected
in the above table.

Reserved Shares

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares offered by this prospectus for
sale to our officers, directors, employees, clients, friends and related
persons who express an interest in purchasing these shares. If these persons
purchase reserved shares, this will reduce the number of shares available for
sale to the general public. Any reserved shares that are not orally confirmed
for purchase within one day of the pricing of this offering will be offered by
the underwriters to the general public on the same terms as the other shares
offered by this prospectus.

No Sales of Similar Securities

We and our executive officers and directors and most of our existing
shareholders have agreed not to sell or transfer any common stock for 180 days
after the date of this prospectus without first obtaining the written consent
of Merrill Lynch. Specifically, we and these other individuals have agreed not
to directly or indirectly:

. offer, pledge, sell or contract to sell any common stock;

. sell any option or contract to purchase any common stock;

. purchase any option or contract to sell any common stock;

. grant any option, right or warrant for the sale of any common
stock;

. lend or otherwise dispose of or transfer any common stock;

. request or demand that we file a registration statement related to
the common stock; or

. enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of any common stock
whether any such swap or transaction is to be settled by delivery
of shares or other securities, in cash or otherwise.

This lock-up provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition except to the extent acquired after
this offering in an open market transaction. The foregoing restrictions will
not prohibit the following transactions so long as the acquirer agrees to hold
acquired shares of common stock subject to the lock-up provision:

. the transfer of shares as a bona fide gift; and

. a distribution to limited partners or shareholders of the
undersigned.

Quotation on the Nasdaq National Market

We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "ADLR."

Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations among us and the representatives. In addition to prevailing market
conditions, the factors to be considered in determining the initial public
offering price are:

. the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;

. our financial information;

70
<PAGE>

. the history of, and the prospects for, our company and the
industry in which we compete;

. an assessment of our management, its past and present operations,
and the prospects for, the timing of, our future revenues;

. the present state of our development; and

. the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.

An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.

Price Stabilization, Short Positions and Penalty Bids

Until the distribution of the common stock is completed, SEC rules may
limit the underwriters from bidding for or purchasing our common stock.
However, the representatives may engage in transactions that stabilize the
price of the common stock, such as bids or purchases that peg, fix or maintain
that price.

The underwriters may purchase and sell the common stock in the open
market. These transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short sales involve
the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. "Covered" short sales are sales made in
an amount not greater than the underwriters' option to purchase additional
shares in the offering. The underwriters may close out any covered short
position by either exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the over-
allotment option. "Naked" short sales are any sales in excess of such option.
The underwriters must close out any naked short position by purchasing shares
in the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions consist of
various bids or purchases of common stock made by the underwriters in the open
market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.

Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common shares or preventing or retarding a decline in
the market price of the common shares. As a result, the price of the common
stock may be higher than the price that might otherwise exist in the open
market.

Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the representatives make any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.

71
<PAGE>

Internet Offering

Merrill Lynch will be facilitating Internet distribution for this
offering to some of its Internet subscription customers. Merrill Lynch intends
to allocate a limited number of shares for sale to its online brokerage
customers. An electronic prospectus will be made available on the Web site
maintained by Merrill Lynch. Other than the prospectus in electronic format,
the information on the Merrill Lynch Web site relating to this offering is not
a part of this prospectus.

LEGAL MATTERS

The validity of our common stock offered hereby will be passed upon for
us by Dechert, Philadelphia, Pennsylvania. Dechert beneficially owns 40,000
shares of our common stock. Attorneys associated with Dechert who provided
legal advice in connection with this offering beneficially own an aggregate of
15,866 shares of our common stock.

Certain legal matters in connection with the offering will be passed upon
for the underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.

EXPERTS

The financial statements of Adolor Corporation, a development stage
company, as of December 31, 1998 and 1999, and for each of the years in the
three-year period ended December 31, 1999, have been included herein in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Commission, Washington, D.C. 20549, a Registration
Statement on Form S-1 under the Securities Act with respect to our common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules to the
registration statement. For further information with respect to Adolor and our
common stock offered hereby, reference is made to the Registration Statement
and the exhibits and schedules filed as a part of the Registration Statement.
Statements contained in this prospectus concerning the contents of any contract
or any other document are not necessarily complete; reference is made in each
instance to the copy of such contract or any other document filed as an exhibit
to the registration statement. Each such statement is qualified in all respects
by such reference to such exhibit. The registration statement, including
exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office in Washington, D.C., and copies of all or any
part thereof may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th
Floor, New York, New York 10048 after payment of fees prescribed by the
Commission. The Commission also maintains a World Wide Web site which provides
online access to reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address http://www.sec.gov.

72
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Financial Statements:
Balance Sheets at December 31, 1998 and 1999, and June 30, 2000 (unau-
dited)................................................................. F-3
Statements of Operations for the years ended December 31, 1997, 1998 and
1999, the six-month periods ended June 30, 1999 and 2000 (unaudited),
and for the period from August 9, 1993 (inception) to June 30, 2000
(unaudited)............................................................ F-4
Statements of Stockholders' Deficit for the period from August 9, 1993
(inception) to December 31, 1993, for the years ended December 31,
1994, 1995, 1996, 1997, 1998 and 1999, and for the six-month period
ended June 30, 2000 (unaudited)........................................ F-5
Statements of Cash Flows for the years ended December 31, 1997, 1998 and
1999, for the six-month periods ended June 30, 1999 and 2000 (unau-
dited), and for the period from August 9, 1993 (inception) to June 30,
2000 (unaudited)....................................................... F-6
Notes to Financial Statements........................................... F-7
</TABLE>

F-1
<PAGE>

When the transaction referred to in the second paragraph in Note 12 of the
Notes to Financial Statements has been consummated, we will be in a position to
render the following report.

KPMG LLP

Independent Auditors' Report

The Stockholders and Board of Directors
Adolor Corporation:

We have audited the accompanying balance sheets of Adolor Corporation (A
Development Stage Company) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' deficit and cash flows for each of the
years in the three-year period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Adolor Corporation
(A Development Stage Company) as of December 31, 1998 and 1999, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles.

Philadelphia, Pennsylvania
March 31, 2000, except as to the
second paragraph of note 12 which
is as of

F-2
<PAGE>

Adolor Corporation

BALANCE SHEETS

<TABLE>
<CAPTION>
(Unaudited)
------------------------
Pro forma
June 30,
December 31, December 31, June 30, 2000
1998 1999 2000 (note 2)
------------ ------------ ----------- -----------
Assets
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equiva-
lents................. $ 9,972,731 3,472,164 10,460,514 10,460,514
Short-term invest-
ments................. 2,073,322 1,791,531 604,059 604,059
Prepaid expenses and
other current assets.. 122,709 190,893 299,201 299,201
----------- ----------- ----------- -----------
Total current assets.... 12,168,762 5,454,588 11,363,774 11,363,774
Equipment and leasehold
improvements, net..... 571,478 765,504 751,394 751,394
Other assets........... 32,920 38,298 38,298 38,298
----------- ----------- ----------- -----------
Total assets............ $12,773,160 6,258,390 12,153,466 12,153,466
=========== =========== =========== ===========
Liabilities and Stock-
holders' Deficit
Current liabilities:
Notes payable--current
portion............... $ 89,764 65,703 104,175 104,175
Accounts payable....... 924,238 564,742 561,452 561,452
Accrued expenses....... 1,131,242 1,729,119 2,287,480 2,287,480
Deferred licensing
fees.................. -- 26,316 52,632 52,632
----------- ----------- ----------- -----------
Total current liabili-
ties................... 2,145,244 2,385,880 3,005,739 3,005,739
Notes payable, less
current portion....... 65,703 --
Deferred licensing
fees.................. -- 462,719 918,859 918,859
----------- ----------- ----------- -----------
Total liabilities....... 2,210,947 2,848,599 3,924,598 3,924,598
----------- ----------- ----------- -----------
Commitments
Mandatorily redeemable
convertible preferred
stock, at redemption
value (aggregate liqui-
dation value of
$53,402,025 at June 30,
2000) (converts into
13,998,914 common
shares on an unaudited
pro forma basis at June
30, 2000 upon consumma-
tion of the offering
contemplated herein):
Series A, $0.01 par
value; 6,000,000
shares authorized,
issued and
outstanding.......... 1,500,000 1,500,000 1,500,000 --
Series B, $0.01 par
value; 23,107,145
shares authorized,
22,869,049,
22,869,049 and
23,047,621 issued and
outstanding at
December 31, 1998,
1999 and June 30,
2000, respectively... 9,605,000 9,605,000 9,680,000 --
Series C, $0.01 par
value; 13,814,286
shares authorized,
issued and
outstanding.......... 9,670,000 9,670,000 9,670,000 --
Series D, $0.01 par
value; 960,000 shares
authorized, issued
and outstanding ..... 1,200,000 1,200,000 1,200,000 --
Series E, $0.01 par
value; 11,366,667
shares authorized,
11,333,334,
11,366,667 and
11,366,667 shares is-
sued and outstanding
at December 31, 1998
and 1999 and June 30,
2000, respectively... 8,500,000 8,525,000 8,525,000 --
Series F, $0.01 par
value, 2,625,000
shares authorized,
none, 2,500,000 and
2,500,000 shares is-
sued and outstanding
at December 31, 1998
and 1999 and June 30,
2000, respectively... -- 2,500,000 2,500,000 --
Series G, $0.01 par
value, 12,306,000
shares authorized,
none, none, and
12,306,000 shares is-
sued and outstanding
at December 31, 1998
and 1999 and June 30,
2000, respectively... 12,306,000 --
----------- ----------- ----------- -----------
30,475,000 33,000,000 45,381,000 --
----------- ----------- ----------- -----------
Stockholders' deficit:
Preferred stock; $0.01
par value, 1,000,000
shares authorized,
none issued and
outstanding........... -- -- -- --
Common stock, par value
$.0001 per share.
99,000,000 shares
authorized; 1,026,218,
1,055,012 and
2,029,301 shares
issued and outstanding
at December 31, 1998
and 1999 and June 30,
2000, respectively
(16,028,215 shares on
an unaudited pro forma
basis at June 30,
2000, and upon
automatic
conversion)........... 103 106 203 1,603
Additional paid-in cap-
ital.................. 702,494 3,530,018 16,667,607 62,047,207
Notes receivable for
stock options......... -- -- (1,062,151) (1,062,151)
Deferred compensation.. (293,157) (2,116,644) (12,751,978) (12,751,978)
Deficit accumulated
during the development
stage................. (20,322,227) (31,003,689) (40,005,813) (40,005,813)
----------- ----------- ----------- -----------
Total stockholders' eq-
uity (deficit)......... (19,912,787) (29,590,209) (37,152,132) 8,228,868
----------- ----------- ----------- -----------
Total liabilities and
stockholders' deficit.. $12,773,160 6,258,390 12,153,466 12,153,466
=========== =========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE>

Adolor Corporation

STATEMENTS OF OPERATIONS

Years ended December 31, 1997, 1998 and 1999, for the six-month periods ended
June 30, 1999 and 2000 (unaudited) and for the period from August 9, 1993
(inception) to June 30, 2000 (unaudited)

<TABLE>
<CAPTION>
Six months Period from
ended August 9,
June 30, 1993
----------------------- (inception) to
1997 1998 1999 1999 2000 June 30, 2000
----------- ----------- ----------- ---------- ----------- --------------
Unaudited Unaudited
<S> <C> <C> <C> <C> <C> <C>
Grant and license
revenues............... $ -- 149,983 10,965 -- 17,544 178,492
----------- ----------- ----------- ---------- ----------- -----------
Operating expenses
incurred during the
development stage:
Research and
development........... 3,699,720 7,074,011 7,398,468 3,261,794 5,954,372 30,032,314
General and
administrative........ 1,584,872 2,276,450 3,697,484 1,408,595 3,394,348 12,001,831
----------- ----------- ----------- ---------- ----------- -----------
Total operating
expenses............. 5,284,592 9,350,461 11,095,952 4,670,389 9,348,720 42,034,145
----------- ----------- ----------- ---------- ----------- -----------
Other income (expense):
Interest income........ 531,487 412,975 424,667 219,517 333,479 2,042,058
Interest expense....... (45,930) (28,028) (21,142) (10,953) (4,427) (192,218)
----------- ----------- ----------- ---------- ----------- -----------
485,557 384,947 403,525 208,564 329,052 1,849,840
----------- ----------- ----------- ---------- ----------- -----------
Net loss.............. (4,799,035) (8,815,531) (10,681,462) (4,461,825) (9,002,124) (40,005,813)
Undeclared dividends
attributable to
mandatorily redeemable
convertible preferred
stock.................. 1,407,666 1,704,022 2,429,884 1,011,003 1,577,507 8,021,025
Beneficial conversion
feature on mandatorily
redeemable convertible
preferred stock........ -- -- -- -- 12,306,000 12,306,000
----------- ----------- ----------- ---------- ----------- -----------
Net loss allocable to
common stockholders.. $(6,206,701) (10,519,553) (13,111,346) (5,472,828) (22,885,631) (60,332,838)
=========== =========== =========== ========== =========== ===========
Basic and diluted net
loss per share
allocable to common
stockholders (note 2).. $ (6.81) (10.59) (12.55) (5.28) (15.47)
=========== =========== =========== ========== ===========
Shares used in computing
basic and diluted net
loss per share
allocable to common
stockholders
(note 2)............... 911,686 992,907 1,044,571 1,036,664 1,478,584
=========== =========== =========== ========== ===========
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>

Adolor Corporation

STATEMENTS OF STOCKHOLDERS' DEFICIT

For the period from August 9, 1993 (inception) to December 31, 1993, for the
years ended December 31, 1994, 1995, 1996, 1997, 1998 and 1999, and for the six
month period ended June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Deficit
Common stock accumulated
---------------- Additional during the Total
Number of paid-in Notes Deferred development stockholders'
shares Amount capital receivable compensation stage deficit
--------- ------ ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Inception, August 9,
1993................... -- $ -- -- -- -- -- --
Net income (loss)...... -- -- -- -- -- -- --
--------- ---- ---------- ---------- ----------- ----------- -----------
Balance, December 31,
1993................... -- -- -- -- -- -- --
Issuance of common
stock to founder in
November 1994 at $.001
per share............. 100,000 10 12,490 -- (12,400) -- 100
Issuance of restricted
stock to an officer
and consultant in
November 1994 at $.003
per share............. 545,411 55 68,157 -- (66,767) -- 1,445
Amortization of
deferred
compensation.......... -- -- -- -- 15,182 -- 15,182
Net loss............... -- -- -- -- -- (243,423) (243,423)
--------- ---- ---------- ---------- ----------- ----------- -----------
Balance, December 31,
1994................... 645,411 65 80,647 -- (63,985) (243,423) (226,696)
Issuance of common
stock for technology
license agreements in
December 1995 at $.125
per share............. 50,000 5 6,245 -- -- -- 6,250
Value attributed to
issuance of warrants.. -- -- 60,000 -- -- -- 60,000
Amortization of
deferred
compensation.......... -- -- -- -- 16,692 -- 16,692
Exercise of common
stock options......... 4,914 -- 616 -- -- -- 616
Net loss............... -- -- -- -- -- (2,392,480) (2,392,480)
--------- ---- ---------- ---------- ----------- ----------- -----------
Balance, December 31,
1995................... 700,325 70 141,508 -- (47,293) (2,635,903) (2,535,618)
Issuance of restricted
stock to director in
May 1996 at $.21 per
share................. 20,000 2 4,198 -- -- -- 4,200
Deferred compensation
resulting from grant
of options............ -- -- 3,168 -- (3,168) -- --
Amortization of
deferred
compensation.......... -- -- -- -- 17,669 -- 17,669
Exercise of common
stock options......... 104,221 10 18,572 -- -- -- 18,582
Net loss............... -- -- -- -- -- (4,071,758) (4,071,758)
--------- ---- ---------- ---------- ----------- ----------- -----------
Balance, December 31,
1996................... 824,546 82 173,446 -- (32,792) (6,707,661) (6,566,925)
Deferred compensation
resulting from grant
of options............ -- -- 270,720 -- (270,720) -- --
Amortization of
deferred
compensation.......... -- -- -- -- 82,249 -- 82,249
Exercise of common
stock options......... 101,759 10 19,428 -- -- -- 19,438
Net loss............... -- -- -- -- -- (4,799,035) (4,799,035)
--------- ---- ---------- ---------- ----------- ----------- -----------
Balance, December 31,
1997................... 926,305 92 463,594 -- (221,263) (11,506,696) (11,264,273)
Deferred compensation
resulting from grant
of options............ -- -- 217,121 -- (217,121) -- --
Amortization of
deferred
compensation.......... -- -- -- -- 145,227 -- 145,227
Exercise of common
stock options......... 99,913 11 21,779 -- -- -- 21,790
Net loss............... -- -- -- -- -- (8,815,531) (8,815,531)
--------- ---- ---------- ---------- ----------- ----------- -----------
Balance, December 31,
1998................... 1,026,218 103 702,494 -- (293,157) (20,322,227) (19,912,787)
Issuance of common
stock for services in
April 1999 at $3.736
per share............. 3,570 -- 13,339 -- -- -- 13,339
Deferred compensation
resulting from grant
of options............ -- -- 2,806,195 -- (2,806,195) -- --
Amortization of
deferred
compensation.......... -- -- -- -- 982,708 -- 982,708
Exercise of common
stock options......... 25,224 3 7,990 -- -- -- 7,993
Net loss............... -- -- -- -- -- (10,681,462) (10,681,462)
--------- ---- ---------- ---------- ----------- ----------- -----------
Balance, December 31,
1999................... 1,055,012 106 3,530,018 -- (2,116,644) (31,003,689) (29,590,209)
Notes granted to
employees for stock
options (unaudited)... -- -- -- (1,062,151) -- -- (1,062,151)
Deferred compensation
resulting from grant
of options
(unaudited)........... -- -- 11,925,756 -- (11,925,756) -- --
Amortization of
deferred compensation
(unaudited)........... -- -- -- -- 1,290,422 -- 1,290,422
Exercise of common
stock options
(unaudited)........... 974,289 97 1,211,833 -- -- -- 1,211,930
Net loss (unaudited)... -- -- -- -- -- (9,002,124) (9,002,124)
--------- ---- ---------- ---------- ----------- ----------- -----------
Balance, June 30, 2000
(unaudited)............ 2,029,301 $203 16,667,607 (1,062,151) (12,751,978) (40,005,813) (37,152,132)
========= ==== ========== ========== =========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>

Adolor Corporation

STATEMENTS OF CASH FLOWS

Years ended December 31, 1997, 1998 and 1999, for the six-month periods ended
June 30, 1999 and 2000 (unaudited), and for the period from August 9, 1993
(inception) to June 30, 2000 (unaudited)

<TABLE>
<CAPTION>
Year ended December 31, Unaudited
------------------------------------ --------------------------------------
Six months Period from
ended Six months August 9 1993
June 30, ended June (inception) to
1997 1998 1999 1999 30, 2000 June 30, 2000
----------- ---------- ----------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net cash flows from
operating activities:
Net loss................ $(4,799,035) (8,815,531) (10,681,462) (4,461,825) (9,002,124) (40,005,813)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Non-cash compensation
expense............... 82,249 145,227 996,047 464,895 1,290,423 2,563,489
Non-cash warrant
value................. -- -- -- -- -- 60,000
Depreciation and
amortization expense.. 143,898 202,346 254,283 112,106 142,903 844,678
Issuance of common
stock for technology
license agreements.... -- -- -- -- -- 6,250
Changes in assets and
liabilities:
Prepaid expenses and
other current assets.. 40,934 60,590 (68,184) (18,902) (109,387) (300,280)
Other assets.......... (4,562) -- (5,378) -- -- (38,298)
Accounts payable...... 225,541 378,608 (359,496) -- (10,899) 553,843
Accrued expenses...... 120,494 579,302 597,877 (48,169) 549,058 2,278,177
Deferred licensing
fees................. -- -- 489,035 -- 482,455 971,490
----------- ---------- ----------- ---------- ---------- -----------
Net cash used in
operating activities.. (4,190,481) (7,449,458) (8,777,278) (3,951,895) (6,657,571) (33,066,464)
----------- ---------- ----------- ---------- ---------- -----------
Net cash flows from
investing activities:
Purchases of equipment
and leasehold
improvements.......... (312,417) (191,357) (448,309) (329,005) (129,279) (1,596,558)
Purchases of short-term
investments........... (10,338,476) (3,045,281) (2,221,062) (1,698,420) (304,119) (22,839,406)
Maturities of short-
term investments...... 8,887,795 5,892,160 2,502,853 2,073,322 1,491,590 22,235,346
----------- ---------- ----------- ---------- ---------- -----------
Net cash provided by
(used in) investing
activities........... (1,763,098) 2,655,522 (166,518) 45,897 1,058,192 (2,200,618)
----------- ---------- ----------- ---------- ---------- -----------
Net cash flows from
financing activities:
Proceeds from issuance
of mandatorily
redeemable convertible
preferred stock and
Series B warrants..... 9,670,000 9,100,000 2,525,000 25,000 12,381,000 43,781,000
Proceeds from Series D
mandatorily redeemable
convertible preferred
stock subscription.... 600,000 -- -- -- -- 600,000
Net Proceeds from
issuance of restricted
common stock and
exercise of common
stock options......... 19,438 21,790 7,993 3,123 168,256 242,420
Proceeds from notes
payable--related
parties............... -- -- -- -- -- 1,000,000
Proceeds from notes
payable............... -- -- -- 60,250 97,851 542,836
Payment of notes
payable............... (135,062) (144,464) (89,764) (65,106) (59,378) (438,660)
Obligation under
capital lease......... (13,017) -- -- -- --
----------- ---------- ----------- ---------- ---------- -----------
Net cash provided by
financing
activities........... 10,141,359 8,977,326 2,443,229 23,267 12,587,729 45,727,596
----------- ---------- ----------- ---------- ---------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 4,187,780 4,183,390 (6,500,567) (3,882,731) 6,988,350 10,460,514
Cash and cash
equivalents at
beginning of period.... 1,601,561 5,789,341 9,972,731 9,972,731 3,472,164 --
----------- ---------- ----------- ---------- ---------- -----------
Cash and cash
equivalents at end of
period................. $ 5,789,341 9,972,731 3,472,164 6,090,000 10,460,514 10,460,514
=========== ========== =========== ========== ========== ===========
Supplemental disclosure
of cash flow
information:
Cash paid for
interest.............. $ 45,930 28,028 21,142 10,953 4,427 102,343
=========== ========== =========== ========== ========== ===========
Supplemental disclosure
of noncash financing
activities:
Deferred compensation
from issuance of
common stock,
restricted common
stock and common stock
options............... $ 270,720 217,121 2,806,195 1,931,968 11,925,576 15,301,947
Issuance of common
stock for technology
license agreements or
for services.......... -- -- 13,339 -- -- 19,589
Conversion of stock
subscription to Series
D mandatorily
redeemable preferred
stock................. -- 600,000 -- -- -- 600,000
Conversion of bridge
financing, including
accrued interest, to
Series B mandatorily
redeemable preferred
stock................. -- -- -- -- -- 1,019,787
=========== ========== =========== ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.

F-6
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS

December 31, 1997, 1998 and 1999 and June 30, 2000 (Information subsequent to
December 31, 1999, as of June 30, 2000, for the period from inception to June
30, 2000, and with respect to the six-month periods ended June 30, 1999 and
2000, is unaudited)

1. ORGANIZATION AND BUSINESS ACTIVITIES

Adolor Corporation (the Company) was incorporated in the State of
Delaware on August 9, 1993 (inception). The Company is a development stage
pharmaceutical company engaged in the development of peripheral and central
analgesics based on opiate receptors and opiate-like receptors. The Company
commenced operations on November 7, 1994. The Company is currently devoting
substantially all of its efforts toward conducting pharmaceutical discovery and
development, licensing technology, obtaining regulatory approval for products
under development, negotiating strategic corporate relationships, recruiting
personnel and raising capital.

The accompanying financial statements include the results of operations
of the Company for the period from August 9, 1993 (inception) to June 30, 2000.

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

The Company has not generated any product sales revenues and has not yet
achieved profitable operations. There is no assurance that profitable
operations, if ever achieved, could be sustained on a continuing basis. In
addition, development activities and clinical and pre-clinical testing and
commercialization of the Company's proprietary technology will require
significant additional financing. The Company's deficit accumulated during the
development stage through June 30, 2000, aggregated approximately $40 million,
and the Company's management expects to incur substantial and increasing losses
in future periods. Further, the Company's future operations are dependent on
the success of the Company's research, development and licensing efforts and,
ultimately, upon regulatory approval and market acceptance of the Company's
proposed future products.

The Company plans to finance its future operations with a combination of
license payments and payments from strategic research and development and
marketing arrangements, private placements of equity, the initial public
offering contemplated herein (Offering), follow-on public offerings and
revenues from future product sales, if any. The Company has not generated
positive cash flows from operations, and there are no assurances that the
Company will be successful in obtaining an adequate level of financing for the
long-term development and commercialization of its planned products. As
described in note 6, in July 2000, the Company received approximately
$36,600,000 in net proceeds from the sale of its Series H mandatorily
redeemable convertible preferred stock (Series H). The Company believes that
its current financial resources and sources of liquidity are adequate to fund
operations for the next year based on a level of research and development and
administrative activities necessary to achieve its short-term objectives.

2. BASIS OF ACCOUNTING AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
cash and cash equivalents are held in United States

F-7
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

financial institutions or obligations of the United States Treasury. The
carrying amount of cash and cash equivalents approximates its fair value due to
its short-term nature.

Short-Term Investments

Short-term investments consist primarily of debt securities backed by the
U.S. government with original maturities greater than three months but less
than one year. The Company's entire short-term investment portfolio is
currently classified as available for sale and is recorded at the fair value as
determined by quoted market values, which approximates cost.

Concentration of Credit Risk

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

Equipment and Leasehold Improvements

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

Revenue Recognition

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

Research and Development

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

Accounting for Income Taxes

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

F-8
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

Use of Estimates

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

Stock-Based Compensation

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

Segment Information

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

Net Loss per Share

Net loss per share is computed in accordance with SFAS No. 128, "Earnings
Per Share", by dividing the net loss allocable to common stockholders by the
weighted average number of shares of common stock outstanding. Net loss
allocable to common stockholders is calculated as the net loss plus preferred
dividends accrued for the respective period, whether or not declared and plus
the beneficial conversion feature on mandatorily redeemable convertible
preferred stock. As of June 30, 2000, the Company has certain options, warrants
and mandatorily redeemable convertible preferred stock (see notes 6 and 7),
which have not been used in the calculation of diluted net loss per share
because to do so would be anti-dilutive. As such, the numerator and the
denominator used in computing both basic and diluted net loss per share
allocable to common stockholders are equal.

Pro Forma Net Loss per Share (Unaudited)

The following pro forma basic and diluted net loss per share allocable to
common stockholders and shares used in computing pro forma basic and diluted
net loss per share allocable to common stockholders have been presented
reflecting the assumed exercise of warrants for Series B and F

F-9
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

mandatorily redeemable convertible preferred stock (Series B and F) which will
expire upon the closing of the Offering and the automatic conversion into
shares of common stock of the mandatorily redeemable convertible preferred
stock upon completion of the Offering (see notes 6 and 12), using the if
converted method from their respective dates of issuance (in thousands, except
per share data):

<TABLE>
<CAPTION>
Six months
Year Ended ended
December 31, June 30,
------------ -----------
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Net loss allocable to common stockholders............ $(13,111) $(22,886)
======== ========
Weighted-average shares used in computing basic and
diluted net loss per share.......................... 1,045 1,479
======== ========
Basic and diluted net loss per common share.......... $ (12.55) $ (15.47)
======== ========
Pro forma (unaudited):
Shares used above (unaudited)........................ 1,045 1,479
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock
(unaudited)......................................... 11,215 13,826
-------- --------
Shares used in computing pro forma basic and diluted
net loss per share (unaudited)...................... 12,260 15,305
======== ========
Pro forma basic and diluted net loss per common share
(unaudited)......................................... $ (1.07) $ (1.50)
======== ========
</TABLE>

Pro Forma Balance Sheet (Unaudited)

Upon the closing of the Offering, all of the outstanding shares of
mandatorily redeemable convertible preferred stock outstanding as of June 30,
2000 automatically convert into 13,998,914 shares of common stock (see notes 6
and 12). The June 30, 2000 unaudited pro forma balance sheet has been prepared
assuming the automatic conversion of the mandatorily redeemable convertible
preferred stock outstanding as of June 30, 2000 into common stock as of June
30, 2000.

Interim Financial Statements (Unaudited)

The consolidated balance sheet at June 30, 2000, the consolidated
statements of operations and statements of cash flows for the six months ended
June 30, 1999 and 2000, and for the period from August 9, 1993 (inception) to
June 30, 2000 and the consolidated statement of stockholders' equity (deficit)
for the periods from January 1, 2000 to June 30, 2000 are unaudited. In the
opinion of management of the Company, such unaudited consolidated financial
statements include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of financial results for these periods. The
results of operations for the six months ended June 30, 2000 are not
necessarily indicative of results to be expected for the entire fiscal year.

F-10
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following:

<TABLE>
<CAPTION>
June 30,
December 31, 2000
1998 1999 (unaudited)
---------- --------- -----------
<S> <C> <C> <C>
Laboratory, computer and office equipment.... $ 821,175 1,244,665 1,285,821
Furniture, fixtures and leasehold improve-
ments....................................... 197,795 222,614 310,252
---------- --------- ---------
1,018,970 1,467,279 1,596,073
Less accumulated depreciation and amortiza-
tion........................................ 447,492 701,775 844,679
---------- --------- ---------
$ 571,478 765,504 751,394
========== ========= =========
</TABLE>

4. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
June 30,
December 31, 2000
1998 1999 (unaudited)
---------- --------- -----------
<S> <C> <C> <C>
Consulting and contracted research............. $ 875,814 1,403,566 2,105,751
Professional fees.............................. 35,615 270,727 113,999
Payroll and related costs...................... 56,020 31,475 52,473
Other.......................................... 163,793 23,351 15,257
---------- --------- ---------
$1,131,242 1,729,119 2,287,480
========== ========= =========
</TABLE>

5. NOTES PAYABLE

In 1995, the Company entered into an "emerging company" funding agreement
with the Ben Franklin Technology Center of Southeastern Pennsylvania (the
Center) to provide the Company with up to $50,000 in funding for research and
development through November 30, 1996. At December 31, 1997 outstanding
borrowings under the facility aggregated $45,000; this balance was repaid in
1998.

In October 1996, the Company executed a secured equipment loan agreement
to finance the purchase of computers, software, laboratory and office
equipment, and furniture. At December 31, 1998, 1999 and June 30, 2000, the
Company had loan draws totaling $155,467, $65,703 and $30,856 outstanding under
this agreement, respectively. The loans are secured by the equipment financed
at interest rates ranging from 13.55% to 19.13%. The remaining balance of
$30,856 at June 30, 2000 is due in December 2000.

In March 2000, the Company entered into loan agreements to finance the
companies insurance policies. The balance on these loans as of June 30, 2000,
is $73,319 and are due in December 2000 and January 2001.

F-11
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company issued 6,000,000 shares of its Series A mandatorily
redeemable convertible preferred stock (Series A) in November 1994 at a price
of $.25 per share. Total proceeds to the Company were $1,500,000.

In October 1995, the Company issued convertible promissory notes in the
principal amount of $1,000,000 to the Series A stockholders (Bridge Note).
These notes accrued interest at 5.75% per annum. Principal plus accrued
interest on the Bridge Note totaling $1,019,787 were converted into 2,428,063
shares of Series B at a price of $.42 per share in March 1996.

In conjunction with the Bridge Note, the Company issued warrants to
purchase 238,096 shares of Series B at the fair value of the Series B at the
date of issuance ($.42 per share). These warrants are exercisable until the
earlier of the closing of an initial public offering or October 2000. The fair
value of such warrants at their issuance date aggregated $60,000, which amount
was charged to interest expense in 1995. During the six month period ended June
30, 2000, 178,572 of these warrants were exercised for proceeds of $75,000.

In March 1996, the Company issued 20,440,986 shares of its Series B at a
price of $.42 per share. Series B purchasers included the holders of the Series
A, certain officers of the Company and other investors.

In May 1997, the Company sold 13,814,286 shares of its Series C
mandatorily redeemable preferred stock (Series C) at a price of $.70 per share.
The total proceeds received by the Company was $9,670,000.

In November 1997, the Company entered into a certain license agreement
(see note 8) and a stock purchase agreement with Kwang Dong Pharmaceutical Co.
(Kwang Dong). Pursuant to the stock purchase agreement, the Company agreed to
issue to Kwang Dong 960,000 shares of the Company's Series D mandatorily
redeemable convertible preferred stock (Series D) for $1,200,000. As of
December 31, 1997, the Company had received $600,000. In February 1998, the
Company received the additional $600,000 from Kwang Dong and issued the 960,000
shares of Series D.

In December 1998, the Company sold 11,333,334 shares of its Series E
mandatorily redeemable convertible preferred stock (Series E) at a price of
$.75 per share. The total proceeds received by the Company was $8,500,000. An
additional 33,333 shares of Series E was sold in January 1999 for $25,000.

In July 1999, the Company entered into a license agreement (see note 8)
and a stock purchase agreement with an affiliate of SmithKline Beecham (SB).
Pursuant to the stock purchase agreement, the Company sold 2,500,000 shares of
its Series F at a price of $1.00 per share to SB. The total proceeds received
by the Company was $2,500,000. In connection with Series F, the Company granted
a warrant to purchase 125,000 shares of Series F at $1.00 per share at any time
prior to the earlier of the closing of an initial public offering or August
2004. SB will purchase an additional $500,000 of either common stock subsequent
to an initial public offering of the Company's common stock or preferred stock
prior to an initial public offering of the Company's common stock, upon the
successful completion of the second pivotal clinical trial for the first
prescription or over-the-counter product candidate under the license agreement
that the Company has entered into with SB. If the purchase occurs prior to an
initial public

F-12
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

offering of the Company's common stock, the purchase price of the preferred
stock will be the fair market value of the Company's preferred stock at the
date of purchase as determined by the Company's Board of Directors. If the
purchase occurs subsequent to an initial public offering of the Company's
common stock, the purchase price of the common stock will be the fair value of
the Company's common stock as listed on the principal national securities
exchange on which the common stock is then listed.

In January 2000, the Company authorized and sold 12,306,000 shares of its
Series G mandatorily redeemable convertible preferred stock at a price of $1.00
per share. The total net proceeds received by the Company was approximately
$12,306,000. The issuance of these securities resulted in a $12,306,000
beneficial conversion feature which increased net loss per share allocable to
common stockholders in the first quarter of 2000. The beneficial conversion
feature cannot exceed the proceeds from the sale of the securities.

In July 2000, the Company authorized 23,921,569 shares and sold
23,921,425 shares of Series H mandatorily redeemable convertible preferred
stock at a price of $1.53 per share. The total net proceeds received by the
Company was approximately $36.6 million. The issuance of these securities will
result in a $36.6 million beneficial conversion feature which will increase net
loss per share allocable to common stockholders in the third quarter of 2000.
The beneficial conversion feature cannot exceed the proceeds from the sale of
the securities. The Series G has the same rights and privileges as the Series E
but with the redemption date being on or after March 1, 2003, and is
convertible into 4,784,286 shares of common stock.

The holders of Series A, B, C, D, E, F, G and H vote together with all
other classes and series of stock of the Company as a single class on all
actions to be taken by the stockholders of the Company. Each share of preferred
stock entitles the holder to an equal number of votes as the number of common
shares into which each share of preferred stock is convertible.

The holders of Series A, B, C, D, E, F, G and H are entitled to a
liquidation preference over all other types of capital stock, of $.25 per
share, $.42 per share, $.70 per share, $1.25 per share, $.75 per share, $1.00
per share, $1.00 per share and $1.53 per share respectively, plus for the
Series A, B, C, E, F, G, and H an amount equal to all cumulative accrued and
unpaid dividends thereon, whether or not declared, and in the case of the
Series A, B, C, D, E, F, G and H, plus an amount equal to all dividends
declared but unpaid. Such cumulative dividends totaled approximately $8.0
million for the Series A, B, C, E, F and G as of June 30, 2000. Each share of
Series A, B, C, D, E, F, G and H is convertible into common stock at a
conversion ratio of 5-for-1 (subsequent to the reverse split--see note 12),
subject to certain anti-dilutive adjustments, as defined. Further, such
conversion becomes mandatorily effective upon the closing of an initial public
offering for the sale of the Company's common stock with aggregate gross
proceeds of at least $7,000,000 for the Series D, with aggregate gross proceeds
of at least $25,000,000 and a public offering price per share of at least $1.50
for the Series A, B, C, E, F, G and H with aggregate gross proceeds of at least
$25,000,000 for Series H and a public offering price per share of $2.85.

Commencing March 1, 2003, the holders of 60% of the Series A, B, C, F, G
and H then outstanding, taken as a whole, commencing March 1, 2005, the holders
of 60% of the Series D then outstanding and, may require the Company to redeem
all or any part of the then outstanding Series A, B, C, D, E, F, G and H of
these respective holders at a redemption price equal to $.25 per share, $.42
per

F-13
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

share, $.70 per share, $1.25 per share, $.75 per share, $1.00 per share, $1.00
per share and $1.53 per share, respectively, plus an amount equal to all
declared but unpaid dividends.

The holders of Series A, B, C, E, F, G and H are entitled to cumulative
dividends at an annual rate of 8% of the original purchase price per share on
the date of issuance, if and when declared. The Series D are entitled to
cumulative dividends at the same rate and at the same time as dividends are
declared and paid on the common stock. No dividends or other distributions can
be declared or paid on other types of capital stock until all dividends on the
Series A, B, C, E and F have been paid. As of June 30, 2000 no such dividends
have been declared.

7. COMMON STOCK AND COMMON STOCK OPTIONS

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

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

The Company granted 606,060 common stock options in January 2000 at
exercise prices of $2.25 per share for which a compensation charge amounting to
approximately $7,446,000 will be recorded over the respective vesting periods
of the options based on a fair value of $14.40 per share on the grant date. In
addition, between March and June 2000 the Company granted 376,428 common stock
options at an exercise price of $2.50 per share for which a compensation charge
amounting to approximately $4,479,000 will be recorded over the respective
vesting periods of the options.

During March, 2000, certain officers and employees exercised options to
purchase 472,067 shares of common stock. The exercised options are scheduled to
vest monthly over four years, during which time the Company has the right to
repurchase any unvested shares. In connection with such exercises, the
employees delivered promissory notes to the Company in the aggregate amount of
approximately $1,062,200 as consideration for the exercise price. The
promissory notes are full recourse and are secured by shares of the Company's
common stock. The promissory notes accrue interest at an annual rate of 6.80%
and are payable in March 2007. As the makers of the promissory notes sell the
shares of the Company's common stock that secure the notes, the makers are
required to repay the principal amounts due under the notes secured by the sold
shares. As of June 30, 2000, 422,893 were subject to buyback at the purchase
price paid by the employee.

F-14
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

recorded over the four year vesting periods of the options. Future
compensation expense relating to such option grants will be approximately $0.8
million for the year ending December 31, 2000, $1.8 million for the years
ending December 31, 2001 through 2003 and $0.9 million for the year ending
December 31, 2004.

The Company's 1994 Equity Compensation Plan, as amended, (the 1994 Plan)
allows the granting of incentive and nonqualified stock options to employees,
directors, consultants and contractors to purchase an aggregate of 1,550,000
shares of the Company's common stock. The options are exercisable generally
for a period of 6-7 years from the date of grant and vest over terms ranging
from immediately to 4 years.

On February 4, 2000, the Board of Directors approved an Amended and
Restated 1994 Equity Compensation Plan with terms similar to those described
above. A provision of this Amended and Restated 1994 Equity Compensation Plan
is that officers and certain employees have the ability to deliver full
recourse promissory notes as consideration for the exercise of options.

A summary of activity under the 1994 Plan from January 1, 1997 to June
30, 2000 is as follows:
<TABLE>
<CAPTION>
Exercise
Number price
of options per share
---------- ---------
<S> <C> <C>
Balance, January 1, 1997................................. 547,049 $.126-.21
Granted................................................. 242,078 .21-.50
Exercised............................................... (101,759) .126-.35
Cancelled............................................... (3,623) .126-.21
---------
Balance, December 31, 1997............................... 683,745 .126-.50
Granted................................................. 209,636 .35-.35
Exercised............................................... (99,913) .126-.35
Cancelled............................................... (65,014) .126-.35
---------
Balance, December 31, 1998............................... 728,454 .126-.50
Granted................................................. 499,744 .376-1.50
Exercised............................................... (25,224) .126-.376
Cancelled............................................... (50,262) .21-.376
---------
Balance, December 31, 1999............................... 1,152,712 .126-1.50
Granted (unaudited)..................................... 982,488 .50-0.56
Exercised (unaudited)................................... (974,289) .30-2.26
Cancelled (unaudited)................................... (3,991) .08-.50
---------
Balance, June 30, 2000 (unaudited)....................... 1,156,920
=========
</TABLE>

At December 31, 1999, the Plan had the following options outstanding and
exercisable by price range, as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted Weighted Weighted
average average average
Range of Number of remaining exercise price Number exercise price
exrciseeprices shares contractual life (per share) of shares per share
--------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.125-0.21 373,461 2.6 years $0.16 364,101 $0.16
$0.35-0.375 710,396 5.7 years 0.36 267,477 0.36
$ 0.5-0.65 40,339 6.5 years 0.64 31,436 0.64
$ 0.75-1.50 28,516 6.5 years 1.34 4,849 1.48
--------- -------
1,152,712 $0.33 667,863 $0.27
========= =======
</TABLE>

F-15
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

The Company applies APB No. 25 in accounting for its stock option plan.
During the years ended December 31, 1997, 1998 and 1999, and for the six-month
period ended June 30, 2000, certain employees of the Company were granted
options to acquire 236,678, 201,236, 450,576 and 919,888 shares of the
Company's common stock, respectively. The weighted average fair values of
common stock for the years ended December 31, 1997, 1998 and 1999, and for the
six-month period ended June 30, 2000 were $1.43 per share, $1.70 per share,
$7.22 per share, and $14.40 per share respectively. The differences between
the fair value, as determined by the Board of Directors, and the respective
exercise prices at the grant dates has been recorded as deferred compensation
($263,694, $205,651, $1,831,402 and $11,082,534 for 1997, 1998, 1999, and
2000, respectively) which is being amortized on a straight-line basis to
expense over the vesting period of the options.

Had the Company determined compensation cost for options granted during
the years ended December 31, 1997, 1998 and 1999 based on the minimum value
method at the grant date under SFAS No. 123, the Company's net loss and net
loss per share would have been increased to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
Years Ended December 30,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss allocable to common
stockholders:
As reported.......................... $(6,206,701) (10,519,553) (13,111,346)
Pro forma under SFAS No. 123......... $(6,213,780) (10,527,468) (13,350,599)
Basic and diluted net loss per share
allocable to common stockholders:
As reported.......................... $ (6.81) (10.59) (12.55)
Pro forma under SFAS No. 123......... $ (6.82) (10.60) (12.78)
</TABLE>

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

In April 1995 and December 1995, the Company issued 17,500 shares and
32,500 shares of common stock to a research institution and a researcher,
respectively, as compensation for certain technology license agreements.
Research and development expense of $6,250 was recognized in 1995 related to
the issuance of these shares. In 1997, 1998 and 1999 and for the six month
period ended June 30, 2000 the Company issued 5,400, 8,400, 46,168 and 62,600
stock options, respectively, to non-employees. Such options vest over future
service periods. The Company recorded deferred compensation of $7,026,
$11,470, $974,793 and $843,222 in 1997, 1998, 1999, and 2000 respectively,
based on the fair value as determined using a Black-Scholes pricing model.
Such deferred compensation is being amortized to expense using the methodology
prescribed in FASB Interpretation No. 28 over the vesting period. The amount
of amortization for the 1998 and 1999 grants is subject to change each
reporting period based upon changes in the fair value of the Company's common
stock, estimated volatility and the risk free interest rate until the non-
employee completes his or her performance under the option agreement.

All options were granted with exercise prices less than the fair value
of the Company's common stock. The per share weighted-average minimum value of
the stock options granted to employees during 1997, 1998, and 1999 was $1.16,
$1.44, and $4.34 per share, respectively, on the date of grant. The per

F-16
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

share weighted-average fair value of stock options granted to non-employees
during 1997, 1998, and 1999 was $1.26, $1.37, and $12.90 per share,
respectively, on the date of grant. Such values were determined using the
minimum value method for employees and a Black Scholes option-pricing model for
non-employees with the following weighted average assumptions: expected
dividend yield 0%; risk free interest rate of 6.10% for 1997, 4.465% for 1998,
and 5.49% for 1999; volatility of 0% for employees and 60% for non-employees;
an expected option life of 4 years for employees and 10 years for non-
employees.

8. LICENSE AND RESEARCH AGREEMENTS

On June 22, 1995, the Company and the University of California at San
Diego (UCSD) entered into an exclusive, worldwide license for certain
technology rights covered under UCSD patents. The Company paid a $10,000
license fee, and committed to a $10,000 annual license maintenance fee. The
Company also agreed to bear UCSD's prosecution costs for patents covering the
licensed technology. Payments of $50,000 and $150,000 are payable upon
commencement of Phase III clinical trials and NDA filing, respectively, and the
agreement provides for royalties at various rates on sales proceeds of products
resulting from the licensed technology, if any.

In November 1997, the Company entered into a license agreement with Kwang
Dong which granted them the rights in South Korea and North Korea to develop
and market one of the Company's compounds for certain indications. Under the
terms of the agreement, the Company will receive payments upon the achievement
of defined clinical and regulatory milestones of up to an aggregate of
$800,000, and royalties on any future sales proceeds in South Korea and North
Korea, if any, resulting from the licensed technology. The Company will supply
formulated bulk drug, including certain free amounts during the first year of
sales, and Kwang Dong will be responsible for clinical development and
regulatory approvals in South Korea and North Korea. The Company devoted
significant internal efforts and expenditures to the development of a
formulation for this indication. To date, the Company has not transferred
sufficient technology under the license agreement to allow commercialization of
ADL 2-1294 in South Korea and North Korea. As a result the Company does not
anticipate material revenues under the license agreement in the forseeable
future. Kwang Dong also made an equity investment in the Company (see note 6).

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

On July 26, 1999, the Company entered into a license agreement with SB
granting SB an exclusive license to certain of the Company's compounds for
certain indications in most of the world. SB may develop, at their own cost,
manufacture, market and sell any resulting products. Under the terms of the
agreement, the Company will receive milestone payments upon the achievement of
defined clinical and regulatory milestones, and royalties on any future sales
proceeds, if any, resulting from the licensed technology. The Company must
maintain the underlying patents and provide certain other information to

F-17
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

SB. Upon signing the agreement, the Company received a licensing fee of
$500,000. This licensing fee has been deferred and is being recognized over the
remaining life of the patents which is nineteen years. SB also made an equity
investment in the Company (see note 6). The proceeds received from the
licensing fee and the equity instrument have been allocated to their related
financial statement components based upon the amounts specified in the separate
agreements which represent management's estimate of the fair value of such
components.

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

The Company has entered into various licensing, research and other
agreements. Under these agreements, the Company is working in collaboration
with various other parties. Should any discoveries be made under such
arrangements, the Company would be required to negotiate the licensing of the
technology for the development of respective discoveries, and possible
royalties on future product sales, if any. Under these agreements, the Company
would be obligated to make payments aggregating up to approximately $3,900,000
upon the achievement of certain milestones and to make future royalty payments
on sales proceeds of products, if any, a portion of which could be offset by
previously made milestone payments.

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

9. INCOME TAXES

No federal and state taxes are payable as of December 31, 1998, 1999 and
June 30, 2000. As of December 31, 1999, the Company had approximately
$10,800,000 of Federal and $11,200,000 of state net operating loss
carryforwards available of offset future taxable income. The Federal and state
net operating loss carryforwards will expire as follows:

<TABLE>
<CAPTION>
State Federal Total
<S> <C> <C> <C>
2005 $ 450,000 $ -- $ 450,000
2006 1,232,000 -- 1,232,000
2007 2,063,000 -- 2,063,000
2008 3,519,000 -- 3,519,000
2009 3,937,000 33,000 3,970,000
2010 -- 482,000 482,000
Thereafter -- 10,263,000 10,263,000
------------ ----------- -----------
$ 11,201,000 $10,778,000 $21,979,000
</TABLE>

In addition, the utilization of the state net operating loss
carryforwards is subject to a $2 million annual limitation. At December 31,
1999, the Company also has approximately $403,000 of Federal and $130,000 of
state research and development tax credit carryforwards, which begin expiring
in 2011, and are available to reduce Federal and state income taxes.

F-18
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

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

Significant components of the Company's deferred tax assets and
liabilities are shown below. At December 31, 1999, a valuation allowance of
$12,755,000 has been recognized to fully offset the deferred tax assets as
realization of such assets is not "more likely than not". SFAS 109 requires a
valuation allowance to reduce the deferred tax assets reported if based on
weight of the evidence it is more likely than not that some, or all, of the
deferred tax assets will not be realized. Realization of the Company's deferred
tax assets is dependent upon generating future taxable income. After
considering all of the evidence, including the Company's net losses since
inception and the uncertainty of future profitability, management has
determined that a valuation allowance is necessary to reduce the net deferred
tax assets to zero. The change in the valuation allowance in 1998 and 1999 were
increases of $4,337,065 and $3,394,401, respectively, related primarily to
additional net operating losses and capitalized research and development costs
incurred by the Company.

<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 3,570,672 4,368,000
Capitalized research and development costs........... 5,320,051 7,329,000
Tax credit carryforwards............................. 391,900 533,000
Accrued expenses and other........................... 139,171 586,000
----------- -----------
Total deferred tax assets........................... 9,421,794 12,816,000
Less valuation allowance............................. (9,360,599) (12,755,000)
----------- -----------
Net deferred tax assets............................. 61,195 61,000
Deferred tax liability................................ (61,195) (61,000)
----------- -----------
Net deferred tax.................................... $ -- --
=========== ===========
</TABLE>

10. COMMITMENTS

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

<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000.................................................................. $224,290
2001.................................................................. 250,964
--------
$475,254
========
</TABLE>

Rent expense was $160,232, $237,351, $258,805 and $164,810 for the years
ended December 31, 1997, 1998 and 1999, and the six-month period ended June 30,
2000, respectively.

F-19
<PAGE>

Adolor Corporation

NOTES TO FINANCIAL STATEMENTS (Continued)

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

11. 401(k) PROFIT SHARING PLAN

In 1995, the Company adopted a 401(k) Profit Sharing Plan (the 401(k)
Plan) available to all employees meeting certain eligibility criteria. The
401(k) Plan permits participants to contribute up to 15% of their salary, not
to exceed the limits established by the Internal Revenue Code. All
contributions made by participants vest immediately into the participant's
account. The Company is not required to make and did not make any contributions
to the 401(k) Plan in 1997, 1998, 1999 or for the six months ended June 30,
2000.

12. AUTHORIZED SHARES AND REVERSE STOCK SPLIT

On March 28, 2000, the Company filed a Restated Certificate of
Incorporation which, increased the number of authorized shares of common stock
to 96,024,821 and authorized 1,000,000 shares of undesignated preferred stock,
and effected a reverse stock split of its common stock on a 1-for-4.5 basis. In
July 2000, the reverse stock split and the authorization of the undesignated
preferred stock was reversed. On July 6, 2000, the Company increased the number
of authorized common shares to 121,987,903.

On September 13, 2000 the Board of Directors approved a reverse stock
split of its common stock on a 1-for-5 basis, decreased the number of
authorized shares of common stock to 99,000,000 and authorized 1,000,000 shares
of undesignated preferred stock effective immediately prior to the
effectiveness of the Company's registration statement in connection with this
initial public offering. All common share, options, and per share amounts in
the accompanying financial statements have been retroactively adjusted to
reflect the reverse stock split for all periods presented.

13. SUBSEQUENT EVENTS

Initial Public Offering

On September 13, 2000, the Board of Directors authorized the filing of a
registration statement for the Offering with the SEC for the sale of shares of
common stock. If the Offering is consummated under the terms presently
anticipated, all shares of Series A, B, C, D, E, F, G and H outstanding as of
the closing date of the Offering will convert into shares of common stock on a
five-for-one basis, and no dividends will be payable on any of the mandatorily
redeemable convertible preferred stock.

F-20
<PAGE>

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

Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.

6,000,000 Shares

[LOGO OF ADOLOR CORPORATION]
Common Stock

----------------
P R O S P E C T U S
----------------

Merrill Lynch & Co.

Lehman Brothers

Pacific Growth Equities, Inc.

, 2000

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

PART II

Information not required in prospectus

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The expenses to be paid by Adolor Corporation in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:

<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Securities and Exchange Commission Registration Fee........... $ 30,968
NASD Filing Fee............................................... 12,230
Nasdaq National Market Listing Fee............................ 95,000
Accounting Fees and Expenses.................................. 400,000
Blue Sky Fees and Expenses.................................... 15,000
Legal Fees and Expenses....................................... 400,000
Transfer Agent and Registrar Fees and Expenses................ 25,000
Printing and Engraving Expenses............................... 350,000
Miscellaneous Fees and Expenses............................... 260,802
----------
Total....................................................... $1,589,000*
==========
</TABLE>
--------
All amounts are estimated except for the SEC fee, the Nasdaq National
Market fee and the NASD fee. *Of this amount, $909,000 has been expensed by the
Company and $680,000 will be net in the proceeds of this offering.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Section 145 of the General Corporate Law of the State of Delaware,
Adolor Corporation has broad powers to indemnify its directors and officers
against liabilities they may incur in such capacities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). Adolor
Corporation's bylaws also provide for mandatory indemnification of its
directors and executive officers, and permissive indemnification of its
employees and agents, to the fullest extent permissible under Delaware law.

Adolor Corporation's certificate of incorporation provides that the
liability of its directors for monetary damages shall be eliminated to the
fullest extent permissible under Delaware law. Pursuant to Delaware law, this
includes elimination of liability for monetary damages for breach of the
directors' fiduciary duty of care to Adolor Corporation and its stockholders.
These provisions do not eliminate the directors' duty of care and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to Adolor Corporation, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for any transaction from which the director derived an improper personal
benefit, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.

Adolor Corporation has obtained a policy of directors' and officers'
liability insurance that insures its directors and officers against the cost of
defense, settlement or payment of a judgment under certain circumstances.

The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of Adolor
Corporation and its officers and directors for certain liabilities arising
under the Securities Act or otherwise.

II-1
<PAGE>

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In the preceding three years, the Registrant has issued the following
securities that were not registered under the Act:

In May 1997, the Registrant sold an aggregate of 13,814,286 shares of its
series C mandatorily redeemable convertible preferred stock to investors at a
purchase price per share of $.70 for a total of $9,670,000. The shares of
series C mandatorily redeemable convertible preferred stock are convertible
into 2,762,857 shares of common stock.

On November 5, 1997, the Registrant sold 960,000 shares of its series D
mandatorily redeemable convertible preferred stock to Kwang Dong
Pharmaceuticals Company at a price per share of $1.25 for a total of
$1,200,000. The shares of series D mandatorily redeemable convertible preferred
stock are convertible into 192,000 shares of common stock.

In December 1998 and January 1999, the Registrant sold 11,366,667 shares
of its series E mandatorily redeemable convertible preferred stock to investors
at a purchase price per share of $.75 for a total of $8,525,000. The shares of
series E mandatorily redeemable convertible preferred stock are convertible
into 2,273,333 shares of common stock.

On July 26, 1999 the Registrant sold 2,500,000 shares of its series F
mandatorily redeemable convertible preferred stock and issued a warrant to
purchase 125,000 shares of series F mandatorily redeemable convertible
preferred stock to S.R. One, Limited at a purchase price per share of $1.00 for
a total of $2,500,000. The shares of series F mandatorily redeemable
convertible preferred stock and the shares underlying the warrant are
convertible into 500,000 shares of common stock.

In January 2000, the Registrant sold 12,306,000 shares of its series G
mandatorily redeemable convertible preferred stock to investors at a purchase
price per share of $1.00 for a total of $12,306,000. The shares of series G
mandatorily redeemable convertible preferred stock are convertible into
2,461,200 shares of common stock.

In June 2000, the Registrant sold 23,921,425 shares of its series H
mandatorily redeemable convertible preferred stock to investors at a purchase
price per share of $1.53 per share for a total of $36,600,000. The shares of
series H mandatorily redeemable convertible preferred stock are convertible
into 4,784,286 shares of Common Stock.

The sale and issuance of securities in the transactions described above
were made under the exemption from registration provided under Section 4(2) of
the Securities Act.

Appropriate restrictive legends were affixed to the stock certificates
issued in the above transactions. Similar legends were imposed in connection
with any subsequent sales of any such securities. No underwriters were employed
in any of the above transactions.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits:

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Purchase Agreement.**
Form of Amended and Restated Certificate of Incorporation of
3.1 Adolor.***
3.2 Form of Amended and Restated Bylaws of Adolor.***
4.1 Series A Convertible Preferred Stock Purchase Agreement among Opian
Pharmaceuticals, Inc. and the parties set forth therein, dated
November 7, 1994.***
</TABLE>

II-2
<PAGE>

<TABLE>
<C> <S>
4.2 Series B Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated March 1, 1996.***
4.3 Series C Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated May 1, 1997.***
4.4 Stock Purchase Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997.***
4.5 Series E Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated December 8, 1998.***
4.6 Series F Convertible Preferred Stock Purchase Agreement between Adolor
and S.R. One, Limited dated July 26, 1999.***
4.7 Series G Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated January 10, 2000.***
4.8 Registration Rights Agreement among Opian Pharmaceuticals, Inc. and
the parties set forth therein, dated November 7, 1994.88***
4.9 Amendment No. 1 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated February 27, 1996.***
4.10 Amendment No. 2 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated May 1, 1997.***
4.11 Amendment No. 3 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated December 8, 1998.***
4.12 Amendment No. 4 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated July 26, 1999.***
4.13 Amendment No. 5 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated January 10, 2000.***
4.14 Form of Common Stock Certificate.***
4.15 Series H Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated July 6, 2000.**
4.16 Amendment No. 6 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated June 29, 2000.**
5.1 Opinion of Dechert.***
10.1 Form of Amended and Restated 1994 Equity Compensation Plan.**
10.2 Option and License Agreement between Adolor and Roberts Laboratories,
Inc., dated June 10, 1998.***@
10.3 License Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997.***@
10.4 License Agreement between Adolor and SB Pharmaco Puerto Rico Inc.,
dated July 26, 1999.***@
10.5 Development and License Agreement between Adolor and Santen
Pharmaceutical Co., Ltd. dated April 25, 2000.***@
10.6 Sublease Agreement between Adolor and Environ Products, Inc. dated
September , 2000.**
10.7 Letter Agreement between Opian Pharmaceuticals, Inc. and John J.
Farrar dated October 9, 1994.**
10.8 Letter Agreement between Adolor and Alan L. Maycock dated January 6,
1995.**
10.9 Letter Agreement between Adolor and Peter J. Schied dated April 23,
1997.**
10.10 Letter Agreement between Adolor and Andrew Reddick dated March 27,
2000.**
10.11 Agreement between Adolor and Randall L. Carpenter dated September 14,
2000.**
23.1 Consent of KPMG LLP.**
</TABLE>

II-3
<PAGE>

<TABLE>
<C> <S>
23.2 Consent of Dechert (included in Exhibit 5.1).***
24.1 Powers of Attorney.****
27.1 Financial Data Schedule.***
</TABLE>
--------

*To be filed by amendment

** Filed herewith.

***Previously filed.

**** Included on signature page to Registrant's Registration Statement on Form
S-1 previously filed with the Securities and Exchange Commission on
February 7, 2000.
@ Confidential Treatment Requested.

(b) Financial Statement Schedules

None.

Schedules other than those listed above have been omitted since they are
not required or are not applicable or the required information is shown in the
financial statements or related notes. Columns omitted from schedules filed
have been omitted since the information is not applicable.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-4
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 8 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Philadelphia, Commonwealth of Pennsylvania on the 23rd day of
October, 2000.

Adolor Corporation

/s/ John J. Farrar
By:________________________________
John J. Farrar
President, Chief Executive
Officer and Director

Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 8 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ John J. Farrar President, Chief Executive October 23, 2000
________________________________ Officer and Director
John J. Farrar (Principal Executive
Officer)

/s/ Peter J. Schied Vice President, Chief October 23, 2000
________________________________ Financial
Peter J. Schied Officer and Secretary
(Principal Financial and
Accounting Officer)

*
________________________________
Frank Baldino, Jr. Director October 23, 2000

*
________________________________
Ellen M. Feeney Director October 23, 2000

________________________________
Paul Goddard Director October 23, 2000

*
________________________________
David M. Madden Director October 23, 2000

*
________________________________
C. Christopher Moller Director October 23, 2000

*
________________________________
Robert T. Nelsen Director October 23, 2000

*
________________________________
Claude H. Nash Director October 23, 2000
</TABLE>

II-5
<PAGE>

--------

* John J. Farrar, pursuant to a Power of Attorney executed by each of the
directors and officers noted above and included in the signature page of the
initial filing of this Registration Statement, by signing his name hereto,
does hereby sign and execute this Amendment No. 8 to the Registration
Statement on behalf of each of the persons noted above, in the capacities
indicated, and does hereby sign and execute this Amendment No. 8 to the
Registration Statement on his own behalf, in the capacities indicated.

II-6
<PAGE>

Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Purchase Agreement.**

3.1 Form of Amended and Restated Certificate of Incorporation of
Adolor.***

3.2 Form of Amended and Restated Bylaws of Adolor.***

4.1 Series A Convertible Preferred Stock Purchase Agreement among Opian
Pharmaceuticals, Inc. and the parties set forth therein, dated
November 7, 1994.***

4.2 Series B Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated March 1, 1996.***

4.3 Series C Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated May 1, 1997.***

4.4 Stock Purchase Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997.***

4.5 Series E Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated December 8, 1998.***

4.6 Series F Convertible Preferred Stock Purchase Agreement between Adolor
and S.R. One, Limited dated July 26, 1999.***

4.7 Series G Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated January 10, 2000.***

4.8 Registration Rights Agreement among Opian Pharmaceuticals, Inc. and
the parties set forth therein, dated November 7, 1994.***

4.9 Amendment No. 1 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated February 27, 1996.***

4.10 Amendment No. 2 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated May 1, 1997.***

4.11 Amendment No. 3 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated December 8, 1998.***

4.12 Amendment No. 4 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated July 26, 1999.***

4.13 Amendment No. 5 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated January 10, 2000.***

4.14 Form of Common Stock Certificate.***

4.15 Series H Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated July 6, 2000.**

4.16 Amendment No. 6 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated June 29, 2000.**

5.1 Opinion of Dechert.***

10.1 Form of Amended and Restated 1994 Equity Compensation Plan.**

10.2 Option and License Agreement between Adolor and Roberts Laboratories,
Inc., dated June 10, 1998.***@
</TABLE>

II-7
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.3 License Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997.***@

10.4 License Agreement between Adolor and SB Pharmaco Puerto Rico Inc.,
dated July 26, 1999.***@

10.5 Development and License Agreement between Adolor and Santen
Pharmaceutical Co., Ltd., dated April 25, 2000***@

10.6 Sublease Agreement between Adolor and Environ Products, Inc. dated
September , 2000.**

10.7 Letter Agreement between Opian Pharmaceuticals, Inc. and John J.
Farrar dated October 9, 1994.**

10.8 Letter Agreement between Adolor and Alan L. Maycock dated January 6,
1995.**

10.9 Letter Agreement between Adolor and Peter J. Schied dated April 23,
1997.**

10.10 Letter Agreement between Adolor and Andrew Reddick dated March 27,
2000.**

10.11 Agreement between Adolor and Randall L. Carpenter dated September 14,
2000.**

23.1 Consent of KPMG LLP.**

23.2 Consent of Dechert (included in Exhibit 5.1).***

24.1 Power of Attorney.****

27.1 Financial Data Schedule.***
</TABLE>
--------
* To be filed by amendment.

** Filed herewith.

*** Previously filed.
**** Included on signature page to Registrant's Registration Statement on Form
S-1 previously filed with the Securities and Exchange Commission on
February 7, 2000.
@ Confidential Treatment Requested.

II-8