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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2009

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

Commission File Number: 000-30039





ADOLOR CORPORATION

(Exact Name of Registrant as Specified in Its Charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 31-1429198                             
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification Number)

700 Pennsylvania Drive

Exton, Pennsylvania 19341

(Address of Principal Executive Offices and Zip
Code)

484-595-1500

(Registrants Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)





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

Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).     ̈  Yes    x  No

Indicate the number of shares outstanding of each class of the registrants common stock, as of the latest practicable date



|                                          |  |                                
|----------------------------------------- |  | -------------------------------
|Class                                     |  | Outstanding as of July 15, 2009
|Common Stock, par value $0.0001 per share |  | 46,333,735 Shares              









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ADOLOR CORPORATION

FORM 10-Q

June 30, 2009

INDEX



|         |  |                                                                                       |  |   
|-------- |  | ------------------------------------------------------------------------------------- |  | --
|         |  | Page No.                                                                             
|         |  | CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS                                  |  | ii
|         |  |                                                                                      
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |   
|         |  |                                                                                      
|ITEM 1.  |  | Financial Statements (unaudited):                                                     |  |   
|         |  |                                                                                      
|         |  | Balance Sheets at June 30, 2009 and December 31, 2008                                 |  | 1 
|         |  |                                                                                      
|         |  | Statements of Operations for the three and six months ended June 30, 2009 and 2008    |  | 2 
|         |  |                                                                                      
|         |  | Statement of Stockholders Equity for the six months ended June 30, 2009              |  | 3 
|         |  |                                                                                      
|         |  | Statements of Cash Flows for the six months ended June 30, 2009 and 2008              |  | 4 
|         |  |                                                                                      
|         |  | Notes to Financial Statements                                                         |  | 5 
|         |  |                                                                                      
|ITEM 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11
|         |  |                                                                                      
|ITEM 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 17
|         |  |                                                                                      
|ITEM 4.  |  | Controls and Procedures                                                               |  | 17
|         |  |                                                                                      
|PART II. |  | OTHER INFORMATION                                                                     |  |   
|         |  |                                                                                      
|ITEM 1.  |  | Legal Proceedings                                                                     |  | 18
|         |  |                                                                                      
|ITEM 1A. |  | Risk Factors                                                                          |  | 18
|         |  |                                                                                      
|ITEM 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 28
|         |  |                                                                                      
|ITEM 6.  |  | Exhibits                                                                              |  | 28
|         |  |                                                                                      
|         |  | Signatures                                                                            |  | 30



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical facts or statements of current condition, this report and the documents into which this report is and will be incorporated
contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements contained in this report or
incorporated herein by reference constitute our expectations or forecasts of future events as of the date this report was filed with the Securities and Exchange Commission and are not statements of historical fact. You can identify these statements
by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as anticipate, will, estimate, expect, project, intend,
should, plan, believe, hope and other words and terms of similar meaning in connection with any discussion of, among other things, sales, future operating or financial performance, strategic
initiatives and business strategies, regulatory or competitive environments, our intellectual property and product development. In particular, these forward-looking statements include, among others, statements about:



| |  |  | our dependence on sales of ENTEREG® (alvimopan) in the United States and the commercial prospects and future marketing efforts for this product;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our anticipated progress in our research and development of potential pharmaceutical products, including our ongoing or planned clinical trials, the status, timing,
costs and results of such trials, the ability to secure regulatory approval for our product candidates and the likelihood or timing of revenues from these products, if any;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the scope and duration of our intellectual property protection for our products and product candidates, our ability to adequately protect our technologies and
enforce our intellectual property rights and the future expiration of patent and/or regulatory exclusivity on alvimopan;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our anticipated operating losses and cash requirements, projections regarding the levels of our cash, cash equivalents and investments and our ability to raise
additional funds in light of our current and projected level of operations; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other statements regarding matters that are not historical facts or statements of current condition.
| | - |  | ----------------------------------------------------------------------------------------------------

Any or all of our forward-looking statements in this report and in the documents to which we have referred you may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Therefore, you should not place undue reliance on any such forward-looking statements. The factors that could cause actual results to differ from those
expressed or implied by our forward-looking statements include, among others:



| |  |  | the acceptance of ENTEREG by hospitals, physicians and patients in the marketplace;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | setbacks with respect to research programs, clinical trials, manufacturing activities or commercial activities;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | the timing and unpredictability of regulatory actions;
| | - |  | ------------------------------------------------------



| |  |  | our ability to develop and launch new products effectively;
| | - |  | -----------------------------------------------------------



| |  |  | unanticipated cash requirements to support current operations, to expand our business or for capital expenditures;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the inability to adequately protect our key intellectual property rights;
| | - |  | -------------------------------------------------------------------------



| |  |  | the loss of key management or scientific personnel;
| | - |  | ---------------------------------------------------



| |  |  | the activities of our competitors;
| | - |  | ----------------------------------



| |  |  | regulatory, legal or other setbacks with respect to our operations or business;
| | - |  | -------------------------------------------------------------------------------



| |  |  | market conditions in the capital markets and the biopharmaceutical industry that make raising capital or consummating acquisitions difficult, expensive or both; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enactment of new government laws, regulations, court decisions, regulatory interpretations or other initiatives that are adverse to us or our interests.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



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We do not intend to update publicly any forward-looking statement, whether as a result of new
information, future events or otherwise, except as required by law. We discuss in more detail the risks that we anticipate in Part II, Item 1A of this report. This discussion is permitted by the Private Securities Litigation Reform Act of 1995.



iii



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ADOLOR CORPORATION

Balance Sheets

(Unaudited)



|                                                                                                                                               |  |              |              |   |                  |   |              |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------------ | - | ---------------- | - | ------------ | -
|                                                                                                                                               |  | June 30,2009 |              |   | December 31,2008 |  
|Assets                                                                                                                                         |  |              |              |   |                  |   |              |  
|Current assets:                                                                                                                                |  |              |              |   |                  |   |              |  
|Cash and cash equivalents                                                                                                                      |  | $            | 6,734,466    |   |                  | $ | 7,535,146    |  
|Short-term investments                                                                                                                         |  |              | 101,857,930  |   |                  |   | 124,375,060  |  
|Accounts receivable                                                                                                                            |  |              | 2,391,889    |   |                  |   | 3,588,935    |  
|Inventory                                                                                                                                      |  |              | 247,605      |   |                  |   |             |  
|Prepaid expenses and other current assets                                                                                                      |  |              | 3,658,323    |   |                  |   | 4,348,209    |  
|                                                                                                                                               |  |              |              |   |                  |   |              |  
|Total current assets                                                                                                                           |  |              | 114,890,213  |   |                  |   | 139,847,350  |  
|Equipment and leasehold improvements, net                                                                                                      |  |              | 1,842,902    |   |                  |   | 4,466,803    |  
|Other assets                                                                                                                                   |  |              | 119,414      |   |                  |   | 112,414      |  
|                                                                                                                                               |  |              |              |   |                  |   |              |  
|Total assets                                                                                                                                   |  | $            | 116,852,529  |   |                  | $ | 144,426,567  |  
|                                                                                                                                               |  |              |              |   |                  |   |              |  
|Liabilities and Stockholders Equity                                                                                                           |  |              |              |   |                  |   |              |  
|Current liabilities:                                                                                                                           |  |              |              |   |                  |   |              |  
|Accounts payable                                                                                                                               |  | $            | 799,437      |   |                  | $ | 2,310,330    |  
|Accrued expenses                                                                                                                               |  |              | 10,718,367   |   |                  |   | 10,941,059   |  
|Customer deposits                                                                                                                              |  |              | 967,476      |   |                  |   | 274,425      |  
|Deferred revenue and rent  current                                                                                                            |  |              | 13,338,404   |   |                  |   | 14,071,511   |  
|                                                                                                                                               |  |              |              |   |                  |   |              |  
|Total current liabilities                                                                                                                      |  |              | 25,823,684   |   |                  |   | 27,597,325   |  
|Deferred revenue and rent  non-current                                                                                                        |  |              | 30,572,429   |   |                  |   | 28,207,240   |  
|Other liabilities                                                                                                                              |  |              | 400          |   |                  |   | 3,440        |  
|                                                                                                                                               |  |              |              |   |                  |   |              |  
|Total liabilities                                                                                                                              |  |              | 56,396,513   |   |                  |   | 55,808,005   |  
|                                                                                                                                               |  |              |              |   |                  |   |              |  
|Contingencies (Note 8)                                                                                                                         |  |              |              |   |                  |   |              |  
|                                                                                                                                               |  |             
|Stockholders equity:                                                                                                                          |  |              |              |   |                  |   |              |  
|Series A Junior Participating preferred stock, $0.01 par value; 35,000 shares authorized; none issued and outstanding                          |  |              |             |   |                  |   |             |  
|Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding                                                     |  |              |             |   |                  |   |             |  
|Common stock, $0.0001 par value; 99,000,000 shares authorized; 46,333,735 shares issued and outstanding at June 30, 2009 and
December 31, 2008 |  |              | 4,633        |   |                  |   | 4,633        |  
|Additional paid-in capital                                                                                                                     |  |              | 545,157,954  |   |                  |   | 543,009,215  |  
|Unrealized gains on available for sale securities                                                                                              |  |              | 89,359       |   |                  |   | 671,457      |  
|Accumulated deficit                                                                                                                            |  |              | (484,795,930 | ) |                  |   | (455,066,743 | )
|                                                                                                                                               |  |              |              |   |                  |   |              |  
|Total stockholders equity                                                                                                                     |  |              | 60,456,016   |   |                  |   | 88,618,562   |  
|                                                                                                                                               |  |              |              |   |                  |   |              |  
|Total liabilities and stockholders equity                                                                                                     |  | $            | 116,852,529  |   |                  | $ | 144,426,567  |  
|                                                                                                                                               |  |              |              |   |                  |   |              |  

The accompanying notes are an integral part of these financial statements.



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ADOLOR CORPORATION

Statements of Operations

(Unaudited)



|                                                             |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  
|------------------------------------------------------------ |  | --------------------------- | ----------- | ------------------------- | ---- | - | ---------- |  | - | ----------- | - |  | - | ---------- | -
|                                                             |  | Three Months Ended June 30, |             | Six Months Ended June 30, |     
|                                                             |  | 2009                        |             |                           | 2008 |   | 2009       |  |   | 2008        |  
|Revenues:                                                    |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  
|Product sales, net                                           |  | $                           | 2,382,549   |                           |      | $ |           |  | $ | 3,814,732   |   |  | $ |           |  
|Contract revenues                                            |  |                             | 6,681,389   |                           |      |   | 26,964,318 |  |   | 11,928,866  |   |  |   | 33,175,342 |  
|                                                             |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  
|Total revenues, net                                          |  |                             | 9,063,938   |                           |      |   | 26,964,318 |  |   | 15,743,598  |   |  |   | 33,175,342 |  
|                                                             |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  
|                                                             |  |                             |             |                          
|Operating expenses incurred:                                 |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  
|Cost of product sales                                        |  |                             | 230,258     |                           |      |   |           |  |   | 383,562     |   |  |   |           |  
|Research and development                                     |  |                             | 11,972,191  |                           |      |   | 13,262,176 |  |   | 24,294,814  |   |  |   | 24,683,248 |  
|Selling, general and administrative                          |  |                             | 9,505,266   |                           |      |   | 7,224,664  |  |   | 17,382,940  |   |  |   | 12,773,194 |  
|Restructuring charge                                         |  |                             | 4,206,521   |                           |      |   |           |  |   | 4,206,521   |   |  |   |           |  
|                                                             |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  
|Total operating expenses                                     |  |                             | 25,914,236  |                           |      |   | 20,486,840 |  |   | 46,267,837  |   |  |   | 37,456,442 |  
|                                                             |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  
|                                                             |  |                             |             |                          
|Income (loss) from operations                                |  |                             | (16,850,298 | )                         |      |   | 6,477,478  |  |   | (30,524,239 | ) |  |   | (4,281,100 | )
|Interest income, net                                         |  |                             | 308,451     |                           |      |   | 1,008,015  |  |   | 795,052     |   |  |   | 2,711,034  |  
|                                                             |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  
|Net income (loss)                                            |  | $                           | (16,541,847 | )                         |      | $ | 7,485,493  |  | $ | (29,729,187 | ) |  | $ | (1,570,066 | )
|                                                             |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  
|Basic net income (loss) per share                            |  | $                           | (0.36       | )                         |      | $ | 0.16       |  | $ | (0.64       | ) |  | $ | (0.03      | )
|                                                             |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  
|Diluted net income (loss) per share                          |  | $                           | (0.36       | )                         |      | $ | 0.16       |  | $ | (0.64       | ) |  | $ | (0.03      | )
|                                                             |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  
|Shares used in computing basic net income (loss) per share   |  |                             | 46,296,235  |                           |      |   | 46,092,828 |  |   | 46,296,235  |   |  |   | 46,020,447 |  
|                                                             |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  
|Shares used in computing diluted net income (loss) per share |  |                             | 46,296,235  |                           |      |   | 46,354,384 |  |   | 46,296,235  |   |  |   | 46,020,447 |  
|                                                             |  |                             |             |                           |      |   |            |  |   |             |   |  |   |            |  

The accompanying notes are an integral part of these financial statements.



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ADOLOR CORPORATION

Statement of Stockholders Equity

(Unaudited)



|                                                        |  |                 |  |                          |       |                                               |   |             |                    |   |          |                          |  |   |              |   |  |   |             |  
|------------------------------------------------------- |  | --------------- |  | ------------------------ | ----- | --------------------------------------------- | - | ----------- | ------------------ | - | -------- | ------------------------ |  | - | ------------ | - |  | - | ----------- | -
|                                                        |  | Common
stock    |  | Additionalpaid-incapital |       | Unrealizedgainson availablefor salesecurities |   |             | Accumulateddeficit |   |          | Totalstockholdersequity | 
|                                                        |  | Numberof shares |  | Amount                   |       |                                               |   |            
|Balance, January 1, 2009                                |  | 46,333,735      |  | $                        | 4,633 |                                               | $ | 543,009,215 |                    | $ | 671,457  |                          |  | $ | (455,066,743 | ) |  | $ | 88,618,562  |  
|Compensation expense under SFAS 123R                    |  |                |  |                          |      |                                               |   | 2,148,739   |                    |   |         |                          |  |   |             |   |  |   | 2,148,739   |  
|Unrealized losses on available for sale securities, net |  |                |  |                          |      |                                               |   |            |                    |   | (582,098 | )                        |  |   |             |   |  |   | (582,098    | )
|Net loss                                                |  |                |  |                          |      |                                               |   |            |                    |   |         |                          |  |   | (29,729,187  | ) |  |   | (29,729,187 | )
|                                                        |  |                 |  |                          |       |                                               |   |             |                    |   |          |                          |  |   |              |   |  |   |             |  
|Balance, June 30, 2009                                  |  | 46,333,735      |  | $                        | 4,633 |                                               | $ | 545,157,954 |                    | $ | 89,359   |                          |  | $ | (484,795,930 | ) |  | $ | 60,456,016  |  
|                                                        |  |                 |  |                          |       |                                               |   |             |                    |   |          |                          |  |   |              |   |  |   |             |  

The accompanying notes are an integral part of these financial statements.



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ADOLOR CORPORATION

Statements of Cash Flows

(Unaudited)



|                                                                            |  |                           |             |   |      |   |              |  
|--------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ------------ | -
|                                                                            |  | Six Months Ended June 30, |            
|                                                                            |  | 2009                      |             |   | 2008 |  
|Net cash flows from operating activities:                                   |  |                           |             |   |      |   |              |  
|Net loss                                                                    |  | $                         | (29,729,187 | ) |      | $ | (1,570,066   | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |             |   |      |   |              |  
|Stock-based compensation expense                                            |  |                           | 2,145,699   |   |      |   | 4,101,864    |  
|Amortization of premiums and discounts on short-term investments            |  |                           | 649,779     |   |      |   | 587,218      |  
|Amortization of deferred revenue and rent                                   |  |                           | (6,792,918  | ) |      |   | (8,806,496   | )
|Depreciation and amortization expense                                       |  |                           | 934,344     |   |      |   | 1,081,112    |  
|Non-cash restructuring charge                                               |  |                           | 2,024,479   |   |      |   |             |  
|Changes in assets and liabilities:                                          |  |                           |             |   |      |   |              |  
|Accounts receivable                                                         |  |                           | 1,197,046   |   |      |   | (1,039,553   | )
|Inventory                                                                   |  |                           | (247,605    | ) |      |   |             |  
|Prepaid expenses and other current assets                                   |  |                           | 672,298     |   |      |   | 618,579      |  
|Other assets                                                                |  |                           | (7,000      | ) |      |   | 13,775       |  
|Accounts payable                                                            |  |                           | (1,510,893  | ) |      |   | 598,963      |  
|Accrued expenses                                                            |  |                           | (43,029     | ) |      |   | 389,150      |  
|Customer deposits                                                           |  |                           | 693,051     |   |      |   |             |  
|Deferred revenue                                                            |  |                           | 8,425,000   |   |      |   | 29,860       |  
|                                                                            |  |                           |             |   |      |   |              |  
|Net cash used in operating activities                                       |  |                           | (21,588,936 | ) |      |   | (3,995,594   | )
|                                                                            |  |                           |             |   |      |   |              |  
|Net cash flows from investing activities:                                   |  |                           |             |   |      |   |              |  
|Purchases of equipment and leasehold improvements, net of disposals         |  |                           | (496,997    | ) |      |   | (524,482     | )
|Purchases of short-term investments                                         |  |                           | (60,714,747 | ) |      |   | (100,760,519 | )
|Maturities of short-term investments                                        |  |                           | 82,000,000  |   |      |   | 101,987,000  |  
|                                                                            |  |                           |             |   |      |   |              |  
|Net cash provided by investing activities                                   |  |                           | 20,788,256  |   |      |   | 701,999      |  
|                                                                            |  |                           |             |   |      |   |              |  
|Net cash flows from financing activities:                                   |  |                           |             |   |      |   |              |  
|Net proceeds from exercise of stock options                                 |  |                           |            |   |      |   | 38,021       |  
|Payment of withholding taxes related to deferred stock                      |  |                           |            |   |      |   | (425,238     | )
|                                                                            |  |                           |             |   |      |   |              |  
|Net cash used in financing activities                                       |  |                           |            |   |      |   | (387,217     | )
|                                                                            |  |                           |             |   |      |   |              |  
|Net decrease in cash and cash equivalents                                   |  |                           | (800,680    | ) |      |   | (3,680,812   | )
|Cash and cash equivalents at beginning of period                            |  |                           | 7,535,146   |   |      |   | 15,575,804   |  
|                                                                            |  |                           |             |   |      |   |              |  
|Cash and cash equivalents at end of period                                  |  | $                         | 6,734,466   |   |      | $ | 11,894,992   |  
|                                                                            |  |                           |             |   |      |   |              |  
|Supplemental disclosure of cash flow information:                           |  |                           |             |   |      |   |              |  
|Unrealized losses on available for sale securities, net                     |  | $                         | (582,098    | ) |      | $ | (382,323     | )
|Change in accrued expenses related to purchases of equipment                |  |                           | (179,663    | ) |      |   | (297,428     | )

The accompanying notes are an integral part of these financial statements.



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Adolor Corporation

Notes to Financial Statements

June 30, 2009

(Unaudited)



|1. | ORGANIZATION AND BUSINESS ACTIVITIES
|-- | ------------------------------------

Adolor Corporation (the Company) is a biopharmaceutical company focused on the discovery, development and commercialization of novel prescription pain management products. On May 20, 2008, the U.S. Food and Drug Administration (FDA)
approved the Companys first product, ENTEREG® (alvimopan), for the management of postoperative ileus following
bowel resection surgery (POI). POI causes significant discomfort for patients and results in increased expense to healthcare providers. ENTEREG is specifically indicated to accelerate the time to upper and lower gastrointestinal recovery following
partial large or small bowel resection surgery with primary anastomosis. In collaboration with Glaxo Group Limited (Glaxo), the Company launched ENTEREG in the United States in 2008.

The Company also has a number of product candidates in various stages of clinical and preclinical development. The Company is collaborating with
Pfizer Inc. (Pfizer) in the clinical development of two delta opioid receptor agonist compounds, ADL5859 and ADL5747 (Pfizer compounds PF-04856880 and PF-04856881, respectively), for the treatment of pain. The Company also is
developing ADL7445 to treat opioid bowel dysfunction, a condition that often results from chronic use of opioid analgesics to treat persistent pain conditions. The Company intends to submit an Investigational New Drug Application for ADL7445 in the
third quarter of 2009 and to initiate clinical evaluation thereafter. The Companys other product candidates are in preclinical development for treating moderate-to-severe pain and other central nervous system conditions.

Interim Financial Information

The accompanying
unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnote disclosures required by U.S. generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Companys Annual Report on Form 10-K,
filed with the Securities and Exchange Commission (SEC), which includes audited financial statements at December 31, 2008 and 2007 and for each of the years in the three-year period ended December 31, 2008. The results of the
Companys operations for any interim period are not necessarily indicative of the results of operations for any other interim period or full year.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of assets and liabilities. The estimates made are principally in the areas of
revenue recognition, research and development accruals, stock-based compensation expense and asset impairment. Management bases its estimates on historical experience and various assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from those estimates.

Product Sales Recognition

In accordance with SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104,
Revenue Recognition, and Statement of Financial Accounting Standards (SFAS) No. 48, Revenue Recognition When Right of Return Exists, the Company defers recognition of revenue associated with the first shipment of ENTEREG to each
hospital customer as it is not yet able to reasonably estimate future returns. When an existing customer places a new order, the Company recognizes revenue on the previous shipment for an amount equal to the lesser of (a) the previous shipment
or (b) the new order. Hospital orders are processed through wholesalers; however, ENTEREG is drop-shipped from Glaxos warehouse directly to an ordering hospital registered under the ENTEREG Access Support and Education (E.A.S.E.)
Program. Once the Company has developed sufficient historical experience to estimate product returns, it intends to recognize net product sales upon the transfer of ownership and risk of loss for the product to the customer.



5



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##### Table of Contents

The Company records product sales net of prompt payment discounts, returns and other discounts as
reported to it by Glaxo. When payment from Glaxo is received but the conditions for revenue recognition have not yet been met, the Company will record a liability, which is classified on the balance sheet as customer deposits.

Adjustment to Statement of Cash Flows

Management has
determined that the amortization of premiums and discounts on short-term investments previously included within net cash provided by investing activities in the six months ended June 30, 2008 should have been included as a non-cash adjustment
within net cash used in operating activities in the Companys statement of cash flows. This adjustment resulted in a $0.6 million decrease in net cash used in operating activities and in net cash provided by investing activities for the six
months ended June 30, 2008 and had no impact on any amounts on the balance sheet, statement of operations or on the net decrease in cash and cash equivalents reflected in the statement of cash flows. Management believes that the impact of this
adjustment is not material to the Companys financial position, results of operations or liquidity as of and for the six months ended June 30, 2008.



|2. | RECENT ACCOUNTING PRONOUNCEMENTS
|-- | --------------------------------

In December 2007,
the Financial Accounting Standards Board (FASB) issued Emerging Issues Task Force (EITF) Issue No. 07-1, Accounting for Collaborative Arrangements, which applies to collaborative arrangements that are conducted by the participants
without the creation of a separate legal entity for the arrangement and clarifies, among other things, how to determine whether a collaborative arrangement is within the scope of this issue. EITF Issue No. 07-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The adoption of EITF Issue No. 07-1 did not impact the Companys financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for the quarter ended June 30, 2009. The adoption of SFAS 165 did not have a
material impact on the Companys financial statements. The Company evaluated all events and transactions that occurred after June 30, 2009 up through July 30, 2009, the date the Company issued these financial statements. During this
period, the Company did not have any material recognizable or non-recognizable subsequent events.

In June 2009, the FASB issued SFAS
No. 168, FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (SFAS 168). SFAS 168 identifies the FASB Accounting Standards Codification as the
authoritative source of GAAP. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements issued for interim and annual periods
ending after September 15, 2009. SFAS 168 will have no effect on the Companys financial statements upon adoption other than current references to GAAP, which will be replaced with references to the applicable codification paragraphs.



|3. | COMPREHENSIVE INCOME (LOSS)
|-- | ---------------------------

The following is the
reconciliation of net income (loss) to comprehensive income (loss) for the three and six months ended June 30, 2009 and 2008:



|                                                        |  |                             |             |   |                           |   |           |      |  |   |             |   |  |   |            |  
|------------------------------------------------------- |  | --------------------------- | ----------- | - | ------------------------- | - | --------- | ---- |  | - | ----------- | - |  | - | ---------- | -
|                                                        |  | Three Months Ended June 30, |             |   | Six Months Ended June 30, |  
|                                                        |  | 2009                        |             |   | 2008                      |   |           | 2009 |  |   | 2008        |  
|Net income (loss)                                       |  | $                           | (16,541,847 | ) |                           | $ | 7,485,493 |      |  | $ | (29,729,187 | ) |  | $ | (1,570,066 | )
|Unrealized losses on available for sale securities, net |  |                             | (168,714    | ) |                           |   | (819,404  | )    |  |   | (582,098    | ) |  |   | (382,323   | )
|                                                        |  |                             |             |   |                           |   |           |      |  |   |             |   |  |   |            |  
|Comprehensive income (loss)                             |  | $                           | (16,710,561 | ) |                           | $ | 6,666,089 |      |  | $ | (30,311,285 | ) |  | $ | (1,952,389 | )
|                                                        |  |                             |             |   |                           |   |           |      |  |   |             |   |  |   |            |  



|4. | SHORT-TERM INVESTMENTS
|-- | ----------------------

Short-term investments
consist of investment grade, fixed income securities with original maturities of greater than three months. All investments are classified as available for sale and are considered current assets as the contractual maturities of the Companys
short-term investments are all less than one year.



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The following summarizes the short-term investments at June 30, 2009 and December 31, 2008:



|                                                     |  |      |             |                      |   |                       |  |   |            |   |  |   |            
|---------------------------------------------------- |  | ---- | ----------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -----------
|                                                     |  | Cost |             | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|U.S. Government obligations                          |  | $    | 101,274,571 |                      | $ | 92,637                |  | $ | (4,508     | ) |  | $ | 101,362,700
|Certificates of deposit                              |  |      | 494,000     |                      |   | 1,230                 |  |   |           |   |  |   | 495,230    
|                                                     |  |      |             |                      |   |                       |  |   |            |   |  |   |            
|Total short-term investments as of June 30, 2009     |  | $    | 101,768,571 |                      | $ | 93,867                |  | $ | (4,508     | ) |  | $ | 101,857,930
|                                                     |  |      |             |                      |   |                       |  |   |            |   |  |   |            
|                                                     |  |      |             |                     
|U.S. Government obligations                          |  | $    | 123,703,603 |                      | $ | 671,457               |  | $ |           |   |  | $ | 124,375,060
|                                                     |  |      |             |                      |   |                       |  |   |            |   |  |   |            
|Total short-term investments as of December 31, 2008 |  | $    | 123,703,603 |                      | $ | 671,457               |  | $ |           |   |  | $ | 124,375,060
|                                                     |  |      |             |                      |   |                       |  |   |            |   |  |   |            

SFAS No. 157, Fair Value Measurements, establishes a valuation hierarchy for
disclosure of the inputs to valuation techniques used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2
inputs include quoted prices for identical or similar assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly
or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on managements own assumptions used to measure assets and liabilities at fair value. The
classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the Companys assets and liabilities carried at fair value as of June 30, 2009:



|                             |  |                                        |             |                                                |   |                                        |  |   |         |  |   |  
|---------------------------- |  | -------------------------------------- | ----------- | ---------------------------------------------- | - | -------------------------------------- |  | - | ------- |  | - | -
|                             |  | Total CarryingValue as ofJune 30,2009  |             | Fair Value Measurements at June 30, 2009 Using
|                             |  | Quoted PricesinActive Markets(Level 1) |             | SignificantOtherObservableInputs(Level 2)      |   | SignificantUnobservableInputs(Level 3)
|U.S. Government obligations  |  | $                                      | 101,362,700 |                                                | $ | 101,362,700                            |  | $ |        |  | $ | 
|Certificates of deposit      |  |                                        | 495,230     |                                                |   |                                       |  |   | 495,230 |  |   | 
|                             |  |                                        |             |                                                |   |                                        |  |   |         |  |   |  
|Total short-term investments |  | $                                      | 101,857,930 |                                                | $ | 101,362,700                            |  | $ | 495,230 |  | $ | 
|                             |  |                                        |             |                                                |   |                                        |  |   |         |  |   |  



|5. | INVENTORY
|-- | ---------

At June 30, 2009, inventory
consists of $0.2 million of finished goods manufactured subsequent to the approval of ENTEREG by the FDA. Inventories are stated at the lower of cost or market, as determined on a first-in, first-out, or FIFO, basis. Prior to the FDA approval of
ENTEREG, costs associated with the manufacture of alvimopan were expensed to research and development when incurred. The Company periodically reviews its inventory for excess or obsolete inventory, and will write-down the excess or obsolete
inventory value to its net realizable value, if applicable.



|6. | CONTRACT REVENUES
|-- | -----------------

Contract revenues for the three
and six months ended June 30, 2009 and 2008 consist of the following:



|                                                  |  |                             |           |                           |   |            |  |      |            |  |   |           
|------------------------------------------------- |  | --------------------------- | --------- | ------------------------- | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                  |  | Three Months Ended June 30, |           | Six Months Ended June 30,
|                                                  |  | 2009                        |           | 2008                      |   | 2009       |  | 2008
|Milestone revenue                                 |  | $                           |          |                           | $ | 20,000,000 |  | $    |           |  | $ | 20,000,000
|Amortization of deferred revenue                  |  |                             | 3,291,670 |                           |   | 4,362,616  |  |      | 6,707,056  |  |   | 8,725,233 
|Cost reimbursement under collaboration agreements |  |                             | 2,441,799 |                           |   | 2,601,702  |  |      | 4,273,890  |  |   | 4,450,109 
|Other                                             |  |                             | 947,920   |                           |   |           |  |      | 947,920    |  |   |          
|                                                  |  |                             |           |                           |   |            |  |      |            |  |   |           
|Total contract revenues                           |  | $                           | 6,681,389 |                           | $ | 26,964,318 |  | $    | 11,928,866 |  | $ | 33,175,342
|                                                  |  |                             |           |                           |   |            |  |      |            |  |   |           



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In April 2002, the Company entered into a collaboration agreement with Glaxo for the exclusive worldwide
development and commercialization of ENTEREG for certain indications. Under the terms of the agreement, Glaxo paid the Company a non-refundable and non-creditable signing fee of $50.0 million. The $50.0 million signing fee was recorded as deferred
revenue and is being recognized as revenue on a straight-line basis over the estimated performance period under the collaboration agreement, which extends to March 2016. Revenue related thereto of $0.8 million was recognized in each of the
three-month periods ended June 30, 2009 and 2008 and $1.6 million was recognized in each of the six-month periods ended June 30, 2009 and 2008. During the three months ended June 30, 2008, the Company recorded $20.0 million in
milestone revenue under the Glaxo collaboration agreement following FDA approval of ENTEREG in May 2008.

External expenses for research
and development and marketing activities incurred in the United States by each party are reimbursed pursuant to contractually agreed percentages. Reimbursement amounts owed to the Company by Glaxo are recorded gross in the statements of operations
as contract revenues. The Company recorded collaboration agreement cost reimbursements from Glaxo of $1.3 million and $0.9 million for the three months ended June 30, 2009 and 2008, respectively, and $2.6 million and $1.9 million for the six
months ended June 30, 2009 and 2008, respectively, under this arrangement. As of June 30, 2009, $1.1 million was receivable from Glaxo for reimbursement of expenses incurred by the Company pursuant to the collaboration agreement.

On January 30, 2009, the Company and Glaxo entered into Amendment No. 4 to the collaboration agreement. Under Amendment
No. 4, the Company and Glaxo, effective as of January 1, 2009, modified certain provisions of the collaboration agreement to (i) reflect the current plan jointly developed by the parties relating to the sale and promotion of ENTEREG
and (ii) modify certain payment provisions of the collaboration agreement, principally the acceleration of payments owed by Glaxo to the Company. Under the terms of Amendment No. 4, Glaxo paid the Company $8.4 million during the first
quarter of 2009. In accordance with EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, the Company determined that the payment should be evaluated as part of a single arrangement with multiple deliverables under the
collaboration agreement. Further, the Company determined that the payment did not meet the criteria in EITF Issue No. 00-21 to be accounted for as a separate unit of accounting under the arrangement and, as a result, the $8.4 million was recorded as
deferred revenue and is being recognized as revenue on a straight-line basis over the estimated remaining performance period under the collaboration agreement. Revenue related thereto of $0.3 million and $0.4 million was recognized in the three and
six months ended June 30, 2009, respectively. Under the terms of Amendment No. 4, the Company also received a $0.9 million payment from Glaxo in the second quarter of 2009 that it recognized as revenue.

In December 2007, the Company entered into a collaboration agreement with Pfizer for the exclusive worldwide development and commercialization of ADL5859
and ADL5747. Under the terms of the agreement, Pfizer paid the Company an up-front payment of $30.0 million and reimbursed $1.9 million of Phase 2a development costs incurred by the Company prior to entering into the collaboration agreement. The
$31.9 million up-front fee was recorded as deferred licensing fees and is being recognized as revenue on a straight-line basis over the estimated performance period under the collaboration agreement. During the third quarter of 2008, the performance
period was extended by six months to August 2010 based on the status of the development programs. During the first quarter of 2009, the performance period was further extended by four months to December 2010 based on the current status of the
development programs. The effect of this change in estimate was a reduction in contract revenues that otherwise would have been recorded of $0.5 million and $0.6 million for the three and six months ended June 30, 2009, respectively. The
Company recorded revenue related to the deferred license fees under the collaboration agreement with Pfizer of $2.2 million and $3.5 million in the three months ended June 30, 2009 and 2008, respectively, and $4.7 million and $7.1 million in
the six months ended June 30, 2009 and 2008, respectively.



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##### Table of Contents

External expenses for research and development and marketing activities incurred in the United States by
each party are reimbursed pursuant to contractually agreed percentages. Reimbursement amounts owed to the Company by Pfizer are recorded gross on the statements of operations as contract revenues. The Company recorded collaboration cost
reimbursement from Pfizer of $1.1 million and $1.7 million for the three months ended June 30, 2009 and 2008, respectively, and $1.7 million and $2.5 million for the six months ended June 30, 2009 and 2008, respectively. As of
June 30, 2009, $1.1 million was receivable from Pfizer for reimbursement of expenses incurred by the Company pursuant to the collaboration agreement.



|7. | STOCKHOLDERS EQUITY
|-- | --------------------

During the six months
ended June 30, 2009, the Company granted options to purchase 1,315,211 shares of common stock to employees and non-employee directors. The employee stock options vest monthly over a four-year period beginning from the date of grant, and the
non-employee director stock options vest annually over either a one or two-year period beginning from the date of grant. All stock options were granted with an exercise price equal to the fair market value of the Companys common stock on the
date of grant. The grant-date fair value of the options granted during the six months ended June 30, 2009 was $1.6 million and such amounts will be recognized over the applicable vesting period.

During the six months ended June 30, 2009, the Company granted 330,333 deferred stock awards to employees and non-employee directors. Of these
awards, 130,000 shares were granted to certain of the Companys executive officers and vest upon the achievement of certain sales targets within a specified period of time. In accordance with SFAS No. 123R, Share-Based Payment, the
Company will begin recognizing compensation cost for these performance shares if and when it is probable the performance condition will be achieved. The remaining 173,043 employee deferred stock awards and 27,290 non-employee director
deferred stock awards vest annually over a four-year period and a one-year period, respectively, beginning from the date of grant, and will be expensed over the applicable vesting period. The fair value of all deferred stock awards granted during
the six months ended June 30, 2009 was $0.6 million.

For the three and six months ended June 30, 2009, compensation expense
recognized related to outstanding stock options as well as deferred and restricted stock awards was $1.0 million and $2.1 million, respectively.



|8. | LEGAL PROCEEDINGS
|-- | -----------------

On April 21, 2004, a
lawsuit was filed in the U.S. District Court for the Eastern District of Pennsylvania against the Company, one of its directors and certain of its officers seeking unspecified damages on behalf of a putative class of persons who purchased Adolor
common stock between September 23, 2003 and January 14, 2004. The complaint alleges violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, in connection with the announcement of the results of
certain studies in the Companys Phase 3 clinical trials for alvimopan, which allegedly had the effect of artificially inflating the price of the Companys common stock. This suit has been consolidated with three subsequent actions
asserting similar claims under the caption In re Adolor Corporation Securities Litigation,No. 2:04-cv-01728. On December 29, 2004, the District Court issued an order appointing the Greater Pennsylvania Carpenters Pension Fund
as Lead Plaintiff. The appointed Lead Plaintiff filed a consolidated amended complaint on February 28, 2005. That complaint purported to extend the class period, so as to bring claims on behalf of a putative class of Adolor shareholders who
purchased stock between September 23, 2003 and December 22, 2004. The complaint also adds as defendants the Companys Board of Directors asserting claims against them and the other defendants for violation of Section 11 and
Section 15 of the Securities Act of 1933 in connection with the Companys public offering of stock in November 2003. Together with the management and director defendants, the Company moved to dismiss the complaint on April 29, 2005.
The plaintiffs responded to the motion to dismiss on June 28, 2005, and the Companys reply was filed on August 12, 2005. In May 2009, the District Court granted the Companys motion to dismiss the case in its entirety.

On August 2, 2004, two shareholder derivative lawsuits were filed in the U.S. District Court for the Eastern District of
Pennsylvania, purportedly on behalf of the Company, against its directors and certain of its officers seeking unspecified damages for various alleged breaches of fiduciary duty and waste. The allegations are similar to those set forth in the class
action complaints, involving the announcement of the results of certain studies in the Companys Phase 3 clinical trials for alvimopan. On November 12, 2004, the derivative plaintiff filed an amended complaint. On December 13, 2004,
the Company filed a motion challenging the standing of the derivative plaintiff to file the derivative litigation on its behalf. On December 13, 2004, the Companys directors and officers moved to dismiss the complaint for the failure to
state a claim. Plaintiffs responded to these motions on January 27, 2005 and the Company filed reply briefs on February 18, 2005. In May 2009, the District Court granted the Companys motion to dismiss the case in its entirety.



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|9. | RESTRUCTURING
|-- | -------------

In June 2009, the Company announced
a restructuring that resulted in the reduction of approximately 45 positions, or 28% of the Companys workforce, as well as other cost saving initiatives. The Companys primary focus going forward will continue to be on its first
commercial product, ENTEREG, and the advancement of its clinical programs. The Company has reduced and restructured its discovery group to focus on late-stage, preclinical compounds, with fewer resources dedicated to early-stage
programs. Employees directly affected by the restructuring received notification and are being provided with severance payments, continued benefits for a specified period of time and outplacement assistance.

The Company recorded a restructuring charge of $4.2 million for the three months ended June 30, 2009, consisting of $2.2 million of employee
severance and benefit related costs and a $2.0 million non-cash impairment charge primarily related to leasehold improvements and laboratory equipment used for activities which were eliminated pursuant to the Companys restructuring.
Although the Companys management has used its best estimate to determine the impairment charge, the estimated salvage value of the impaired assets may change upon final disposal of the assets, which would require an adjustment to the
Companys statement of operations.

Excluding the disposal of the impaired assets discussed above, the Company has completed
substantially all restructuring activities and recognized all anticipated restructuring charges as of June 30, 2009. The following table summarizes activity related to the Companys restructuring:



|                           |  |                          |            |   |                   |   |            |       |  |   |            |  
|-------------------------- |  | ------------------------ | ---------- | - | ----------------- | - | ---------- | ----- |  | - | ---------- | -
|                           |  | EmployeeTerminationCosts |            |   | Asset Write-downs |   |            | Total | 
|Balance at January 1, 2009 |  | $                        |           |   |                   | $ |           |       |  | $ |           |  
|Restructuring charge       |  |                          | 2,182,042  |   |                   |   | 2,024,479  |       |  |   | 4,206,521  |  
|Cash payments              |  |                          | (1,305,942 | ) |                   |   |           |       |  |   | (1,305,942 | )
|Non-cash settlement        |  |                          |           |   |                   |   | (2,024,479 | )     |  |   | (2,024,479 | )
|                           |  |                          |            |   |                   |   |            |       |  |   |            |  
|Balance at June 30, 2009   |  | $                        | 876,100    |   |                   | $ |           |       |  | $ | 876,100    |  
|                           |  |                          |            |   |                   |   |            |       |  |   |            |  



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide information to assist you
in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and
our Annual Report on Form 10-K for the year ended December 31, 2008.

EXECUTIVE SUMMARY

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel prescription pain management
products. On May 20, 2008, the U.S. Food and Drug Administration (FDA) approved our first product, ENTEREG®
(alvimopan), for the management of postoperative ileus following bowel resection surgery (POI). POI causes significant discomfort for patients and results in increased expense to healthcare providers. ENTEREG is specifically indicated to accelerate
the time to upper and lower gastrointestinal (GI) recovery following partial large or small bowel resection surgery with primary anastomosis. We also have a number of product candidates in various stages of clinical and preclinical development.

For the six months ended June 30, 2009, our total revenues and net loss were $15.7 million and $29.7 million, respectively.
Net shipments of ENTEREG for the three and six months ended June 30, 2009 were $2.9 million and $4.9 million, respectively, of which we recognized $2.4 million and $3.8 million, respectively, as net product sales under our revenue recognition
policy. We will need sales of ENTEREG to increase significantly beyond current levels before we will be able to achieve profitability and positive cash flow from operations. Ultimately, we may never generate sufficient revenues from ENTEREG for us
to reach profitability, generate positive cash flow or sustain, on an ongoing basis, our current or projected levels of operations.

In
June 2009, we announced a restructuring that resulted in the reduction of approximately 45 positions, or 28% of our workforce, as well as other cost saving initiatives. Our primary focus going forward will continue to be on ENTEREG and the
advancement of our clinical programs. We have reduced and restructured our discovery group to focus on late-stage, preclinical compounds, with fewer resources dedicated to early-stage programs. Once this reduction in force and other cost
savings initiatives are fully in place, we expect that annualized net cash used in operating activities will be reduced by approximately $12 million. During the three months ended June 30, 2009, the Company recorded a restructuring charge of
$4.2 million, consisting of $2.2 million related to employee severance and benefits related costs and a $2.0 million non-cash asset impairment charge.

ENTEREG for POI

Together with our partner, Glaxo Group Limited (Glaxo), we launched ENTEREG in the United States in
mid-2008. ENTEREG is detailed primarily by Glaxos national hospital-based sales organization. We are co-promoting ENTEREG in certain hospitals with a field force that numbers approximately 25 persons.ENTEREG was approved in POI subject
to a Risk Evaluation and Mitigation Strategy (REMS) under which the product is available only to hospitals that perform bowel resections and are enrolled in the ENTEREG Access Support and Education (E.A.S.E.) Program. As of June 30, 2009,
approximately 1,425 hospitals have registered under the E.A.S.E. program. Additionally, as of June 30, 2009, we estimate that approximately 600 hospitals had accepted ENTEREG for inclusion on their formularies, including 365 of the 1,400
hospitals that perform approximately 80% of the bowel resection surgeries in the United States.

Under our agreement with Glaxo, we have a
profit-sharing arrangement under which we are allocated 45% of profits and losses, as defined, and Glaxo is allocated 55% of profits and losses. Profits are calculated as net sales of ENTEREG less certain agreed-upon costs and are subject to certain
adjustments. Beginning in mid-2011, the parties will share such profits and losses equally.

As required by our FDA approval letter for
ENTEREG, we began a Phase 4 clinical trial in the first quarter of 2009 intended to evaluate the safety and efficacy of ENTEREG in patients undergoing radical cystectomy for bladder cancer.



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DeltaOpioid Receptor Agonists

We are collaborating with Pfizer Inc. (Pfizer) for the development and commercialization of thedelta opioid receptor agonist compounds ADL5859 and
ADL5747 (Pfizer compounds PF-04856880 and PF-04856881, respectively), for the treatment of pain. Thedelta receptor is one of three opioid receptors that are believed to modulate pain, although all marketed opioid drugs interact primarily
with one such receptor, themu receptor. We have identified a series of novel, orally-activedelta agonists that selectively stimulate thedelta opioid receptor. Our goal is to develop medications that produce pain relief
similar to traditionalmuopioids, while reducing or eliminating some typical narcotic side effects.

In early 2009, we initiated
several pharmacokinetic (PK) studies of ADL5859 and ADL5747 following the results of several Phase 2a studies with ADL5859 in 2008 that showed no statistically significant difference in efficacy versus placebo, along with an excessive degree of
pharmacokinetic variability. The results of these recent PK studies appear to explain the variability seen in the previous Phase 2a studies and Pfizer and we intend to initiate Phase 2a proof-of-concept studies in two chronic pain indications in the
fourth quarter of 2009.

Opioid Bowel Dysfunction Program

Opioid receptors in the GI tract, or peripheral opioid receptors, regulate functions such as motility, water secretion and absorption. Stimulation of these GI mu-opioid receptors by morphine, or other opioid
analgesics, can slow gut motility and disrupt normal GI function that allows for the passage, absorption and excretion of ingested solid materials resulting in a number of symptoms, including severe constipation. In patients who take opioid
analgesics to treat chronic and persistent pain, this condition is known as opioid bowel dysfunction (OBD).

We are developing ADL7445 to
treat OBD. ADL7445 is a proprietary, small molecule, peripherally-acting mu-opioid receptor antagonist intended to block the adverse effects of opioid analgesics on the GI tract without affecting analgesia. We intend to submit an
Investigational New Drug Application (IND) for ADL7445 in the third quarter of 2009 and to initiate clinical evaluation of ADL7445 thereafter.

Discovery Research and In-licensing Efforts

Following our restructuring in June 2009, we reorganized our discovery group to
focus on late-stage, preclinical compounds, with fewer resources dedicated to early-stage programs. Further, we believe there may be opportunities to expand our product portfolio through the acquisition or in-licensing of products and/or product
development candidates and we intend to continue to explore and evaluate such opportunities.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments were $108.6 million at June 30, 2009 and $131.9 million at December 31, 2008, representing 93%
and 91% of our total assets, respectively. We invest excess cash predominantly in U.S. Treasury obligations. Our working capital, which is calculated as current assets less current liabilities, was $89.1 million at June 30, 2009 compared to
$112.3 million at December 31, 2008. The decrease in cash, cash equivalents and short-term investments and working capital was primarily from the use of cash to fund our operations, offset partially by $9.3 million received from Glaxo as a
result of the modification of certain payment provisions under our collaboration agreement.

The following is a summary of selected cash
flow information for the six months ended June 30, 2009 and 2008:



|                                          |  |                           |             |   |      |   |            |  
|----------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ---------- | -
|                                          |  | Six Months Ended June 30, |            
|                                          |  | 2009                      |             |   | 2008 |  
|Net loss                                  |  | $                         | (29,729,187 | ) |      | $ | (1,570,066 | )
|Adjustments for non-cash operating items  |  |                           | (1,038,617  | ) |      |   | (3,036,302 | )
|                                          |  |                           |             |   |      |   |            |  
|Net cash operating loss                   |  |                           | (30,767,804 | ) |      |   | (4,606,368 | )
|Net change in assets and liabilities      |  |                           | 9,178,868   |   |      |   | 610,774    |  
|                                          |  |                           |             |   |      |   |            |  
|Net cash used in operating activities     |  | $                         | (21,588,936 | ) |      | $ | (3,995,594 | )
|                                          |  |                           |             |   |      |   |            |  
|Net cash provided by investing activities |  | $                         | 20,788,256  |   |      | $ | 701,999    |  
|                                          |  |                           |             |   |      |   |            |  
|Net cash used in financing activities     |  | $                         |            |   |      | $ | (387,217   | )
|                                          |  |                           |             |   |      |   |            |  



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Net Cash Used in Operating Activities

Net cash used in operating activities of $21.6 million and $4.0 million for the six months ended June 30, 2009 and 2008, respectively, resulted
primarily from research and development expenditures associated with our product candidates and selling, general and administrative expenses, offset by payments received under the Glaxo and Pfizer collaboration agreements. For the six months ended
June 30, 2009 and 2008, we received net payments of $12.1 million and $23.4 million, respectively, under such collaboration agreements. Of the $12.1 million received during the six months ended June 30, 2009, $9.3 million was related to
the acceleration of payments owed by Glaxo to the Company under the terms of Amendment No. 4 of the Glaxo collaboration agreement. The $23.4 million received during the six months ended June 30, 2008 included a $20.0 million milestone
payment related to the FDAs approval of ENTEREG. In addition, we received $4.5 million of cash related to net shipments of ENTEREG during the six months ended June 30, 2009.

Net Cash Provided By Investing Activities

Net cash provided by investing activities relates to
purchases and maturities of investment securities, as well as capital expenditures for property and equipment. We expect to fund a significant portion of our future operations through the sale or maturities of investments in our portfolio, which
consist primarily of U.S. Treasury obligations.

Net cash provided by investing activities was $20.8 million for the six months ended
June 30, 2009 as compared to $0.7 million for the six months ended June 30, 2008. The increase in cash provided by investing activities for the six months ended June 30, 2009 is primarily attributable to an increase in cash provided
from the net maturities of available-for-sale securities.

Outlook

We expect to use our cash, cash equivalents and short-term investments to fund our operations. Since inception, we have experienced significant operating losses and negative operating cash flow and have funded our
operations primarily from the proceeds received from the sale of our equity securities, as well as from amounts received under collaboration agreements. Our accumulated deficit at June 30, 2009 was $484.8 million and we expect to continue to
incur substantial losses for at least the next several years.

We may never generate significant product sales, achieve profitable
operations or generate positive cash flows from operations and, even if profitable operations are achieved, they may not be sustained on a continuing basis or sufficient to support our current or projected levels of investment in our research and
development programs and our other operations. At this time, we cannot accurately assess a number of factors that will influence the levels of future product sales, such as the degree of market acceptance, patent protection and exclusivity of
ENTEREG, the impact of competition, the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop, receive approval for and successfully launch other product candidates. However, we will need sales of ENTEREG
to increase significantly beyond current levels before we will be able to achieve profitability and positive cash flows from operations. In June 2009, we announced a restructuring that we expect will reduce annualized net cash used in operating
activities by approximately $12 million. We believe that our existing cash, cash equivalents and short-term investments are adequate to fund our restructured operations into 2012 based upon the level of research and development and marketing and
administrative activities we believe will be necessary to achieve our strategic objectives. We may need to obtain funding for our future operational needs, and we cannot be certain that funding will be available on terms acceptable to us, or at all.

ENTEREG

Our ability
to generate positive cash flow from operations depends, in large part, on our ability to successfully commercialize ENTEREG in the United States. To that end, we expect that sales and marketing expenses associated with the product will continue to
increase for the remainder of 2009. Prior to the FDA approval of ENTEREG, costs associated with the manufacture of alvimopan were expensed to research and development. As a result, at June 30, 2009, we have inventory related to alvimopan that
carries a zero-cost and is not reflected on the June 30, 2009 balance sheet. Certain of this inventory is expected to be used in further research and development activities, with the remaining inventory available for commercial sale. To the
extent that this inventory is sold, our cost of product sales will not reflect costs associated with such product manufacture, and our gross margins will be favorably impacted. We currently are unable to estimate the timing of the impact to future
profitability resulting from the sell-through of any inventory manufactured after FDA approval of ENTEREG for POI.



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Research and Development

Over the past few years, we have incurred significant expenditures related to conducting clinical studies to develop new pharmaceutical products. We
expect to continue to incur significant levels of research and development expenditures related to our clinical product candidates. We expect to begin or continue a number of clinical programs including, among others, a Phase 4 study of ENTEREG in
patients undergoing radical cystectomy, additional Phase 2a clinical trials of ADL5747 and ADL5859 and Phase 1 clinical trials for ADL7445. We also expect to continue to conduct research, preclinical studies and process development activities on our
other preclinical product candidates, although as a result of our recent restructuring, the level of such expenditures will be significantly reduced compared to previous years. Should these programs advance to later stages of development, it is
likely that expenses related to these efforts will increase over time.

RESULTS OF OPERATIONS

This section should be read in conjunction with the discussion above under Liquidity and Capital Resources.

Product Sales

Net product sales are derived solely
from ENTEREG. ENTEREG was approved by the FDA in May 2008 and product shipments to hospitals began in June 2008. In accordance with SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by
SAB No. 104, Revenue Recognition, and Statement of Financial Accounting Standards No. 48, Revenue Recognition When Right of Return Exists, we defer recognition of revenue associated with the first shipment of ENTEREG to each
hospital customer as we are not yet able to reasonably estimate future returns. When an existing customer places a new order, we recognize product sales on the previous shipment for an amount equal to the lesser of (a) the previous shipment or
(b) the new order. Hospital orders are processed through wholesalers; however, ENTEREG is drop-shipped from Glaxos warehouse directly to a registered hospital. Wholesalers remit payment to Glaxo and, on a monthly basis, Glaxo remits the
net proceeds to us. We record product sales net of prompt payment discounts, returns and other discounts as reported to us by Glaxo. While we undertake certain procedures to review the reasonableness of this information, we cannot obtain absolute
assurance over the accounting methods and controls over such information utilized by Glaxo.

Net shipments of ENTEREG for the three and six
months ended June 30, 2009 were $2.9 million and $4.9 million, respectively, and we recognized net product sales of $2.4 million and $3.8 million under our revenue recognition policy during the three and six months ended June 30, 2009,
respectively. Since our commercial launch in June 2008, approximately 450 hospitals have reordered ENTEREG. We have a customer deposit balance of $1.0 million at June 30, 2009. Customer deposits represent net shipments made for which payment
has been received from Glaxo, but which have not yet been recognized as product sales revenue.

No product sales were recognized prior to
the third quarter of 2008.

Contract Revenues

Contract revenues are derived from our collaboration agreements with Glaxo and Pfizer and include milestone payments, cost reimbursement, amortization of up-front license fees and other revenue. Contract revenues were $6.7 million and $27.0
million for the three months ended June 30, 2009 and 2008, respectively, and were $11.9 million and $33.2 million for the six months ended June 30, 2009 and 2008, respectively. Contract revenues for the three and six months ended
June 30, 2008 were favorably impacted by a $20.0 million milestone payment received from Glaxo in conjunction with the FDA approval of ENTEREG. In addition, Pfizer contract revenues decreased due primarily to reduced amortization of deferred
licensing fees resulting from increases to the estimated performance period during the third quarter of 2008 and the first quarter of 2009. These decreases were partially offset by increased reimbursement under the ENTEREG profit-sharing arrangement
and revenue that was recognized related to $9.3 million of payments received from Glaxo during the six months ended June 30, 2009 under the terms of Amendment No. 4 to the collaboration agreement. Of the $9.3 million received, $0.9 million
was recognized as revenue and $8.4 million was deferred and is being recognized as revenue on a straight-line basis over the estimated remaining performance period under the collaboration agreement, which extends to March 2016. See Note 6 to the
financial statements in Part 1, Item 1 of this report.

Cost of Product Sales

Cost of product sales was $0.2 million and $0.4 million for the three and six months ended June 30, 2009, respectively, and consisted primarily of
royalty payments under certain alvimopan license agreements and FDA



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fees. Prior to the FDA approval of ENTEREG, costs associated with the manufacture of alvimopan were expensed to research and development. Since product
shipped during the six months ended June 30, 2009 was manufactured prior to FDA approval, no manufacturing costs were incurred or recorded in cost of product sales during the six months ended June 30, 2009.

Research and Development Expenses

Our research and
development expenses can be identified as internal or external expenses. External expenses include expenses incurred with clinical research organizations, contract manufacturers and other third-party vendors. Internal expenses include expenses such
as personnel, laboratory and overhead expenses.

Research and development expenses were $12.0 million and $13.3 million for the three
months ended June 30, 2009 and 2008, respectively, and were $24.3 million and $24.7 million for the six months ended June 30, 2009 and 2008, respectively, and consist of the following:



|                                                 |  |                             |            |                           |   |            |  |      |            |  |   |           
|------------------------------------------------ |  | --------------------------- | ---------- | ------------------------- | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                 |  | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                                 |  | 2009                        |            | 2008                      |   | 2009       |  | 2008
|External research and development expenses:      |  |                             |            |                           |   |            |  |      |            |  |   |           
|ENTEREG POI program                              |  | $                           | 1,307,814  |                           | $ | 1,958,483  |  | $    | 2,428,153  |  | $ | 3,667,227 
|Delta agonist program                            |  |                             | 1,811,873  |                           |   | 2,754,976  |  |      | 2,677,805  |  |   | 4,128,421 
|OBD program                                      |  |                             | 1,454,980  |                           |   | 50,596     |  |      | 2,957,149  |  |   | 50,596    
|Other programs                                   |  |                             | 1,542,932  |                           |   | 1,145,414  |  |      | 3,066,006  |  |   | 3,487,389 
|                                                 |  |                             |            |                           |   |            |  |      |            |  |   |           
|Total external research and development expenses |  |                             | 6,117,599  |                           |   | 5,909,469  |  |      | 11,129,113 |  |   | 11,333,633
|Total internal research and development expenses |  |                             | 5,854,592  |                           |   | 7,352,707  |  |      | 13,165,701 |  |   | 13,349,615
|                                                 |  |                             |            |                           |   |            |  |      |            |  |   |           
|Total research and development expenses          |  | $                           | 11,972,191 |                           | $ | 13,262,176 |  | $    | 24,294,814 |  | $ | 24,683,248
|                                                 |  |                             |            |                           |   |            |  |      |            |  |   |           

We report all expenses gross within our statements of operations in accordance with Emerging
Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, and, as such, the above table does not reflect any cost reimbursements from our collaboration partners.

Total research and development expenses decreased for the three and six months ended June 30, 2009 as compared to the three and six months ended
June 30, 2008 primarily due to lower costs of clinical studies incurred during 2009 in our delta agonist program and lower expenses in our ENTEREG POI program. These decreases were partially offset by higher expenses related to the
development of our OBD program.

There are significant risks and uncertainties inherent in the preclinical and clinical studies associated
with each of our research and development programs. These studies may yield varying results that could delay, limit or prevent the advancement of a program through the various stages of product development and significantly impact the costs to be
incurred, and time involved, in bringing a program to completion. As a result, the cost to complete such programs, as well as the period in which net cash inflows from significant programs are expected to commence, are not reasonably estimable.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses were $9.5 million and $7.2 million for the three months ended June 30, 2009 and 2008, respectively, and were $17.4 million and $12.8 million for the six months ended June 30, 2009
and 2008, respectively. The increase in 2009 compared to 2008 was primarily driven by higher sales and marketing expenses associated with the commercialization of ENTEREG.

Restructuring Charge

As a result of our June 2009 restructuring, we recorded a charge of $4.2
million for the three and six months ended June 30, 2009, consisting of $2.2 million of employee severance and benefit related costs and a $2.0 million non-cash impairment charge primarily related to leasehold improvements and laboratory
equipment used for activities which were eliminated pursuant to our restructuring. There was no restructuring charge for the three or six months ended June 30, 2008.



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Interest Income, Net

Our interest income, net was $0.3 million and $1.0 million for the three months ended June 30, 2009 and 2008, respectively, and was $0.8 million and $2.7 million for the six months ended June 30, 2009 and
2008, respectively. This decrease was due to lower investment balances resulting primarily from the use of cash in operating activities and an overall decline in interest rates.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Managements Discussion and Analysis of Financial
Condition and Results of Operations discusses our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. In preparing these financial statements, we must make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We develop and
periodically change these estimates and assumptions based on historical experience and various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or
conditions. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the year ended December 31, 2008 in the Critical Accounting
Policies and Estimates section and the Recently Issued Accounting Pronouncements section of Part II, Item 7 and in Note 2 to the financial statements within Part II, Item 8.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Our investment assets consist primarily of U.S. Treasury obligations. The market value of such investments fluctuates with current market interest rates. In general, as rates increase, the market value of a debt instrument would be expected
to decrease. The opposite also is true. To minimize such market risk, we have in the past held, and to the extent possible will continue in the future to hold, such debt instruments to maturity at which time the debt instrument will be redeemed at
its stated, or face, value. Due to the short duration and nature of these instruments, we do not believe that we have a material exposure to interest rate risk related to our investment portfolio. The investment portfolio at June 30, 2009
totaled $101.9 million, and the weighted-average yield-to-maturity was approximately 0.8% with maturities ranging up to 12 months.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



|(a) | Evaluation of Disclosure Controls and Procedures
|--- | ------------------------------------------------

For the quarterly period ended June 30, 2009, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President, Finance
and Chief Financial Officer (the principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended, as of the end of the period covered by this report.

Our management, including our President and Chief Executive Officer
and our Senior Vice President, Finance and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors or fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met and our disclosure controls and procedures are designed to provide this reasonable assurance. Based upon the evaluation discussed above, our President and Chief
Executive Officer and our Senior Vice President, Finance and Chief Financial Officer concluded that, as of June 30, 2009, our disclosure controls and procedures were effective at providing such reasonable assurance.



|(b) | Changes in Internal Control over Financial Reporting
|--- | ----------------------------------------------------

There were no changes in our internal control over financial reporting during the three-month period ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.



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PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

The information required by this
Item is incorporated by reference to Note 8 of the financial statements included in Part I, Item 1 of this Report.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

You should carefully consider the risks described
below, in addition to the other information contained in this report, before making an investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below
are not the only ones we face. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations.

We are and will continue to be highly dependent on the commercial success of ENTEREG for POI, and we may be unable to attain profitability and/or positive cash flow
from operations based solely on product sales of ENTEREG.

In May 2008, the FDA approved ENTEREG for use in the treatment of POI.
ENTEREG is for hospital use only and is available only to hospitals that have been registered under our E.A.S.E. Program. The commercial success of ENTEREG will depend on several factors, including the following:



| |  |  | the acceptance of ENTEREG in the medical community and the marketplace, particularly with respect to whether physicians, patients and hospitals view ENTEREG as safe
and effective for its labeled indication, whether the product carries with it an acceptable benefit-to-risk profile and whether the product offers sufficient pharmacoeconomic benefit to hospitals in light of its costs;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the number of hospitals that register for the E.A.S.E. Program;
| | - |  | ---------------------------------------------------------------



| |  |  | the ability to obtain formulary acceptance for ENTEREG at registered hospitals;
| | - |  | -------------------------------------------------------------------------------



| |  |  | the effectiveness of Glaxos and our sales and marketing efforts;
| | - |  | -----------------------------------------------------------------



| |  |  | the occurrence of any side effects, adverse reactions or misuse (or any unfavorable publicity relating thereto) stemming from the use of ENTEREG; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the development of competing products or therapies for the treatment of POI.
| | - |  | ----------------------------------------------------------------------------

Ultimately, we may never generate sufficient revenues from ENTEREG for us to reach profitability, generate positive cash flow or sustain, on an ongoing basis, our current or projected levels of operations, even in
light of our recent restructuring.

Restrictions on ENTEREG may have the effect of limiting the commercial prospects for the product.

In April 2007, Glaxo and we announced the results of Study 014, a Phase 3 long-term safety study of alvimopan in patients taking opioids for chronic
non-cancer pain and experiencing OBD. Results from Study 014 showed numerically more myocardial infarctions and other cardiovascular serious adverse events reported by patients treated long-term with alvimopan in this study compared to placebo. As a
result, ENTEREG was approved by the FDA subject to a REMS. The FDA has determined that a REMS is necessary to ensure that the benefits of ENTEREG in POI outweigh the risks. Our ENTEREG product labeling carries a boxed warning that ENTEREG is
available only for short-term (15 doses) use in hospitalized patients. The REMS and the boxed warning may make it more difficult to market and sell ENTEREG. We will not be able to market and sell ENTEREG to hospitals that do not register for the
E.A.S.E. Program. Hospitals may be unwilling or unable to comply with the requirements for registration in the E.A.S.E. Program. For example, hospitals may not have systems, order sets, protocols or other measures in place to limit the use of
ENTEREG to no more than 15 doses per patient and to ensure in-hospital use only. Hospitals also may not have controls in place to ensure that ENTEREG will neither be dispensed for outpatient use nor be transferred to unregistered hospitals. In such
cases, we will be unable to register these hospitals in the E.A.S.E. Program. Further, even if we are successful in registering hospitals, there can be no assurance that such hospitals will order ENTEREG in meaningful amounts, if at all.

Selling a pharmaceutical product in the hospital setting presents certain challenges. Each hospital environment is different, and each hospitals
or hospital groups prescribing is influenced by a list of accepted drugs



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called a formulary. Most hospitals have a committee, often called a pharmacy and therapeutics (P&T) committee, which meets periodically to determine
which pharmaceutical products to add to the formulary. Many factors are assessed by such committees, including the cost of the drug and its pharmacoeconomic profile. Once a pharmaceutical is on formulary, it is easier for a physician within a
hospital or hospital group to prescribe the drug. Hospital formulary approval is critical to the commercial success of ENTEREG and we cannot assure you that a sufficient number of hospitals will include ENTEREG on their formulary.

Our product sales revenues from ENTEREG and related financial results will likely fluctuate and may fail to meet market expectations, which may adversely affect our
stock price.

Forecasting revenue is difficult, especially when there is little commercial history, the product is the first product
approved for a particular indication and when the level of market acceptance of the product is uncertain. For ENTEREG, the registration process required under the E.A.S.E. Program, as well as the P&T committee and formulary approval process, is
likely to slow uptake of the product. As a result of these factors, it is likely that we will experience significant fluctuations in ENTEREG product sales from period to period and/or that product sales may not meet market expectations, which may
adversely affect our stock price. Other factors that may cause our financial results to fluctuate include the achievement and timing of research and development milestones and other collaboration revenues, the cost and timing of clinical trials,
marketing and other expenses and manufacturing or supply disruption.

In June 2009, we announced a reduction in force that, together with
other cost savings, is expected to reduce annualized net cash used in operating activities by approximately $12 million. Notwithstanding these expected savings, we may be unable to achieve such cost reductions or realize as significant a benefit as
anticipated.

Ourdeltaopioid receptor agonist program may not lead to successful drug candidates or commercially successful
products.

To date, no selective delta opioid receptor agonist compounds have been successfully developed and approved by the
FDA or any other regulatory authority. We are developing our delta agonists, ADL5859 and ADL5747, in collaboration with Pfizer. These product candidates are in early stage clinical development. To date, we have studied ADL5859 in three Phase
2a clinical studies and in each case the compound has not achieved a statistically significant difference in efficacy versus placebo. Notwithstanding these results, we intend to initiate additional Phase 2a studies later in 2009 in two chronic pain
indications. Ultimately, drug development is a highly uncertain process; our delta agonist product candidates may not be safe or effective and we may not be successful in our delta agonist development program. Development of
delta agonists may not lead to commercially successful products.

If we continue to incur significant operating losses, we may be unable to
continue our operations.

We have generated operating losses in each year since we began operations in November 1994, and our
accumulated deficit as of June 30, 2009 was $484.8 million. Our losses have resulted principally from costs incurred in research and development, including clinical trials, and from selling, general and administrative expenses associated with
our operations. Notwithstanding our recent restructuring, we expect to continue to generate substantial losses for at least the next several years due to our sales and marketing and research and development activities. We cannot be sure that we will
ever achieve significant product revenue from ENTEREG or any of our other product candidates sufficient for us to generate positive cash flows from operations. Sales of ENTEREG will need to increase significantly beyond current levels before we will
be able to achieve profitability and/or positive cash flows from operations. Even if we are able to achieve this, we may be unable to maintain profitability on a continuing basis or at a level sufficient to support our current or projected levels of
continuing investment. We may need to obtain funding for our future operational needs, and we cannot be certain that such funding will be available on terms acceptable to us, if at all, particularly in light of current economic and capital market
conditions. Any capital raising necessary to continue our operations may be through one or a combination of approaches, which could include public and/or private financing, sale and/or partnering of one or more of our development programs or other
strategic initiatives. Any public or private financings may involve issuances of debt or common stock or other classes of our equity, which could further dilute existing stockholders percentage ownership. If we are unable to obtain funding to
support operations, we will be forced to curtail our operations and we will be unable to develop products successfully.



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Our stock price has been highly volatile, and your investment in our stock could decline significantly in value.

The market price for our common stock has been, and may continue to be in the future, highly volatile. For example, during the period
January 1, 2006 through June 30, 2009, the price of our common stock reached a low of $1.27 per share on December 19, 2008 and a high of $27.80 per share on March 1, 2006.

The market price for our common stock is highly dependent on the performance of ENTEREG in the market and the success of our product development efforts.
Negative announcements, including, among others:



| |  |  | disappointing sales of ENTEREG;
| | - |  | -------------------------------



| |  |  | disappointing developments concerning our collaborations;
| | - |  | ---------------------------------------------------------



| |  |  | negative clinical trial results or adverse regulatory decisions for our product candidates;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | adverse period-to-period fluctuations in our sales or operating results or financial results that fall below the markets expectations; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | legal challenges, disputes and/or other adverse developments impacting our patents or other proprietary products,
| | - |  | -----------------------------------------------------------------------------------------------------------------

could trigger a significant decline in the price of our common stock. In addition, external events, such as news concerning economic or market conditions in the general
economy or within our industry, the activities of our competitors or our customers, changes in U.S. or foreign government regulations impacting our industry or the movement of capital into or out of our industry, also are likely to affect the price
of our common stock, regardless of our operating performance.

Our success is highly dependent on the efforts of our collaborators, the efforts of our
third-party contractors and on our ability to secure future partnerships.

Because we have limited resources, we have entered into a
number of agreements with other pharmaceutical companies. These agreements may call for our partner to control or play a significant role in, among other things:



| |  |  | the development of a product candidate, including, among other things, toxicology, formulation and clinical research efforts;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | the design and execution of clinical studies;
| | - |  | ---------------------------------------------



| |  |  | the process of obtaining regulatory approval to market the product; and
| | - |  | -----------------------------------------------------------------------



| |  |  | the manufacturing, marketing and selling of any approved product.
| | - |  | -----------------------------------------------------------------

In each of these areas, our partners may not support fully our research and commercial interests since our program may compete for time, attention and resources with the internal programs of our corporate
collaborators. As such, we cannot be sure that our corporate collaborators will share our perspectives on the relative importance of our program, that they will commit sufficient resources to our program to move it forward effectively or that the
program will advance as rapidly as it might if we had retained complete control of all research, development, regulatory and commercialization decisions. For example, we are highly dependent on the efforts and expertise of Glaxo in the distribution,
marketing and selling of ENTEREG. Presently, ENTEREG is detailed primarily by Glaxos national hospital-based sales organization. We are co-promoting ENTEREG in certain hospitals with a field force that numbers approximately 25 persons. The
ultimate commercial success of ENTEREG will depend, to a large degree, on the success of the efforts of Glaxos and our field forces.

We also have a development and commercialization agreement with Pfizer for ADL5859 and ADL5747, our proprietary deltaopioid receptor agonist compounds, for the treatment of pain. Under the Pfizer agreement, we are responsible for
IND filings and Phase 1 and Phase 2a clinical studies and Pfizer is responsible for subsequent worldwide development, securing regulatory approvals and commercialization of the products.

Any failure by our collaborators to perform their obligations or any decision by our collaborators to terminate these agreements under the terms provided
for in their respective agreements could negatively impact our ability to successfully develop, obtain regulatory approvals for and commercialize our product and product



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candidates, which would likely materially impact our financial condition, results of operations and our outlook. In addition, any termination of our
collaboration agreements will terminate the funding we may receive under the relevant collaboration agreement and may materially and adversely impact our ability to fund further development efforts and our progress in our development programs.

In the future, we may enter into other collaborative arrangements for the development, marketing, sale and/or distribution of certain of
our product candidates, which may require us to share profits or revenues. For example, we currently have limited marketing, sales and distribution capabilities, and also have limited resources. Despite our efforts, we may be unable to enter into
additional collaborative licensing or other arrangements that we need to develop and commercialize our product candidates. Moreover, we may not realize the contemplated benefits from such collaborative licensing or other arrangements. These
arrangements may place responsibility on our collaborative partners for preclinical testing, human clinical trials, the preparation and submission of applications for regulatory approval, or for marketing, sales and distribution support for product
commercialization. These arrangements also may require us to transfer certain material rights or issue our equity securities to corporate partners, licensees or others. Any license or sublicense of our commercial rights may reduce our product
revenue. Moreover, we may not derive any revenues or profits from these arrangements.

We have no commercial manufacturing capability and
infrastructure, and we rely on third parties to manufacture our products in sufficient quantities, at an acceptable cost and in compliance with regulatory requirements.

We depend on Piramal Healthcare (Canada) Limited (formerly Torcan Chemical Ltd.) and, effective July 2009, Central Glass Germany GmbH as approved
suppliers under our New Drug Application (NDA) of the active pharmaceutical ingredient in ENTEREG. We also depend on Pharmaceutics International, Inc. to manufacture ENTEREG finished capsules. FDA approval is required to change or add new suppliers
and manufacturers and obtaining such approval could result in delays that disrupt the supply of the product. While we seek to maintain inventory to protect against supply disruptions, if they were to occur they could materially and adversely affect
the commercial success of ENTEREG.

Completion of our clinical trials and commercialization of our product candidates require access to, or
development of, facilities to manufacture a sufficient supply of our product candidates. We have depended, and expect to continue to depend, on third parties for the manufacture of our product candidates for preclinical, clinical and commercial
purposes. While we have established relationships with a number of different third party manufacturing service providers, we may not be able to contract for the manufacture of sufficient quantities of the products we develop, or even to meet our
needs for preclinical or clinical development. Our products may be in competition with other products for manufacturing capacity of third parties and suitable alternatives may be unavailable. Consequently, our products may be subject to
manufacturing delays if outside contractors give their own or other products greater priority than ours. It is difficult and expensive to change contract manufacturers for pharmaceutical products. Our dependence upon others for the manufacture of
our products may adversely affect our future profit margin and our ability to commercialize products, if additional products are approved, on a timely and competitive basis.

To receive regulatory approval for a product, our contract manufacturers will be required to obtain approval for their manufacturing facilities to
manufacture that product, and there is a risk that such approval may not be obtained. In an NDA, we are required to submit information and data regarding chemistry, manufacturing and controls which satisfy the FDA that our contract manufacturers are
able to make that product in accordance with current Good Manufacturing Practices (cGMPs). Under cGMPs, our manufacturers and we will be required to manufacture our products and maintain records in a prescribed manner with respect to manufacturing,
testing and quality control activities. We are dependent on our third-party manufacturers to comply with these regulations in the manufacture of our products and these parties may have difficulties complying with cGMPs. The failure of any
third-party manufacturer to comply with applicable government regulations could substantially harm and delay or prevent regulatory approval and marketing of our products.

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

Our commercial success will depend, in part, on obtaining patent protection for new technologies, products and processes and successfully defending these
patents against third-party challenges. To that end, we file applications for patents covering the compositions, uses and proprietary processes for the manufacture of our product candidates. The patent positions of pharmaceutical and biotechnology
companies can be highly uncertain and involve complex legal, scientific and factual questions. Accordingly, we cannot predict the breadth of claims allowed in our patents or those of our collaborators. The patents and patent applications relating to
our products, product candidates and technologies may be challenged, invalidated or circumvented by third parties and might not



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protect us against competitors with similar products or technology. Patent disputes in our industry are frequent and can preclude commercialization of
products. If we ultimately engage in and lose any such disputes, we could be subject to competition and/or significant liabilities, we could be required to enter into third-party licenses or we could be required to cease using the technology or
product in dispute. In addition, even if such licenses are available, the terms of any license requested by a third party could be unacceptable to us.

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, or important to our business. We cannot be certain
that any patent application owned by a third party will not have priority over patent applications filed or in-licensed by us, or that we or our licensors will not be involved in interference proceedings before U.S. or foreign patent offices.

Although no third party has asserted a claim of infringement against us, others may hold proprietary rights that could prevent our product
candidates from being marketed unless we can obtain a license to those proprietary rights. Any patent-related legal action against our collaborators or us claiming damages and seeking to enjoin commercial activities relating to our products and
processes could subject us to potential liability for damages and require our collaborators or us to obtain a license to continue to manufacture or market the affected products and processes. We cannot predict whether our collaborators or we would
prevail in any such 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. The results of patent litigation among third parties has
caused, and may continue to cause, changes to the ways patents are interpreted, enforced and/or challenged. These changes may adversely affect our ability to protect our products. If we become involved in litigation, it could consume substantial
managerial and financial resources.

We also 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, consultants and other contractors to enter into confidentiality agreements, we may not be able to adequately protect our
trade secrets or other proprietary information. Our research collaborators and scientific advisors have rights to publish data and information in which we have rights. If we cannot maintain the confidentiality of our technology and other
confidential information in connection with our collaborators and advisors, our ability to receive patent protection or protect our proprietary information may be imperiled.

We are a party to various license agreements that give us rights to use specified technologies in our research and development processes. If we are not
able to continue to license such technology on commercially reasonable terms, our product development and research may be delayed. In addition, we generally do not fully control the prosecution of patents relating to in-licensed technology (or
technology subject to a collaboration) and, accordingly, are unable to exercise the same degree of control over this intellectual property as we exercise over our internally developed technology.

The results and timing of future clinical trials cannot be predicted and future setbacks may materially and adversely affect our business.

We must demonstrate through preclinical testing and clinical trials that a product candidate is safe and efficacious. The results from preclinical
testing and early clinical trials may not be predictive of results obtained in subsequent clinical trials, and we cannot be sure that these clinical trials will demonstrate the safety and efficacy necessary to obtain regulatory approval for any
product candidates.

Many companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced
clinical trials. Product candidates that appear to be promising at earlier stages of development may not reach the market or be marketed successfully for a number of reasons, including, but not limited to, the following:



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



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



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



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



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



| |  |  | competitors may market equivalent or superior products.
| | - |  | -------------------------------------------------------

The completion of clinical trials of our product candidates may be delayed by many factors, one of which is the rate of enrollment of patients. Neither we nor our collaborators can control the rate at which patients
present themselves for enrollment, and we cannot be sure that the rate of patient enrollment will be consistent with our expectations or be sufficient to enable clinical trials of our product candidates to be completed in a timely manner. In
addition, we often contract with third parties to conduct our clinical trials, and are subject to the risk that these third parties fail to perform their obligations properly and in compliance with applicable FDA and other governmental regulations.
Any significant delays in, or termination of, clinical trials of our product candidates may have a material adverse effect on our business.

We cannot be sure that we will be permitted by regulatory authorities to undertake additional clinical trials for any of our product candidates, or that if such trials are conducted, any of our product candidates will prove to be safe and
efficacious or will receive regulatory approvals. In addition, we, or a regulatory authority, may suspend ongoing clinical trials at any time if the subjects participating in the trial are exposed to unacceptable health risks or if the regulatory
agency finds deficiencies in the conduct of the trials. Any delays in or termination of these clinical trial efforts could have a material and adverse effect on our business.

Our long-term success depends upon our ability to develop, receive regulatory approval for and commercialize our product candidates and, if we are not successful, our ability to generate revenue from the
commercialization of any products resulting from our development efforts will be limited.

Our product candidates will require
governmental approvals prior to commercialization. Because these product candidates are in development, we face the substantial risks of failure inherent in developing drugs based on new technologies. Our product candidates must satisfy rigorous
standards of safety and efficacy before the FDA and foreign regulatory authorities will approve them for commercial use. There can be no assurance that these standards will remain consistent over time, further complicating our ability to obtain
marketing approvals for our product candidates. To satisfy these standards, we will need to conduct significant additional research, preclinical testing and clinical trials.

Preclinical testing and clinical development are long, expensive and highly uncertain processes. Failure can occur at any stage of testing. Success in
preclinical testing and early clinical trials does not ensure that later clinical trials will be successful. Based on results at any stage of clinical trials, we may decide to discontinue development of our product candidates. Even if we obtain
approval and begin marketing a product, ongoing clinical trials, including for other indications, may result in additional information that could affect our ability or decision to continue marketing the product. Even if we receive regulatory
approval for our product candidates, we must comply with applicable FDA post-marketing regulations governing manufacturing, promotion, labeling, risk management and reporting of adverse events and other information, as well as other regulatory
requirements. Failure to comply with applicable regulatory requirements could subject us to criminal penalties, civil penalties, recall or seizure of products, withdrawal of marketing approval, total or partial suspension of production or
injunction, as well as other regulatory actions against our product or us.

In June 2009, we announced a restructuring that resulted in a
reduction in force of approximately 45 positions, or 28% of our workforce. As part of this, we reduced and restructured our discovery group to focus on late-stage, preclinical compounds, with fewer resources dedicated to early-stage discovery
programs. The restructuring of our discovery group and the related reduction in resources may limit our ability to discover new products and increase the risk that our long-term business objectives will not be met.

We intend to explore opportunities to expand our product portfolio by acquiring or in-licensing product candidates. Although we conduct extensive
evaluations of product candidate opportunities as part of our due diligence efforts, there can be no assurance that our product candidate development efforts related thereto will be successful or that we will not become aware of issues or
complications that will cause us to alter, delay or terminate our product candidate development efforts.



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If we market products in a manner that violates healthcare fraud and abuse laws, or if we violate government price
reporting laws, we may be subject to civil or criminal penalties.

In addition to FDA restrictions on marketing of pharmaceutical
products, several other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include anti-kickback statutes and false claims
statutes. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws.

The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving
remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This
statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are several statutory exemptions and regulatory safe harbors
protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not
qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement to
get a false claim paid.

Over the past few years, several pharmaceutical and other healthcare companies have been prosecuted under these
laws for a variety of alleged promotional and marketing activities, such as: allegedly providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting to pricing services inflated average
wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion that caused claims to be submitted to Medicaid for non-covered, off-label uses; and submitting inflated best price information to
the Medicaid Rebate Program to reduce liability for Medicaid rebates. Most states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other
state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturers products from reimbursement under government programs,
criminal fines and imprisonment.

We are required to submit pricing data to the federal government as a condition of selling ENTEREG to
healthcare facilities of the Department of Veterans Affairs (VA), the Department of Defense (DoD) and other federal agencies and having ENTEREG covered under Medicaid. These price reports are used to determine the amount of discounts that must be
provided to the VA and DoD healthcare networks. Pharmaceutical manufacturers have been prosecuted under false claims laws for knowingly submitting inaccurate pricing information to the government to reduce their liability for providing discounts.
The rules governing the calculation of these reported prices are complex. We depend upon Glaxo to calculate these prices for ENTEREG, and it is possible that Glaxos methodologies for calculating these prices could be challenged under false
claims laws or other laws. If this were to occur, we could face substantial liability.

We face product liability risks, which may have a negative
effect on our financial performance.

The administration of drugs to humans, whether in clinical trials or commercially, can result in
product liability claims regardless of whether or not the drugs are actually at fault for causing an injury. The product labeling for ENTEREG includes a boxed warning that ENTEREG is available only for short-term (15 doses) use in hospitalized
patients. The product label informs physicians that there were more reports of myocardial infarctions in patients treated with alvimopan 0.5 milligrams twice daily compared with placebo-treated patients in a 12-month study of patients treated with
opioids for chronic pain. ENTEREG also is marketed and sold under a REMS.

If ENTEREG is used more widely or if physicians prescribe the
product for conditions other than its labeled indication, the likelihood of an adverse drug reaction, unintended side effect or incident of misuse may increase. Product liability claims can be expensive to defend and may result in large judgments or
settlements against us, which could have a negative effect on our financial performance. The cost of product liability insurance has increased in recent years, and the availability of coverage has decreased. We maintain product liability insurance
and self-insurance retentions in amounts we believe to be commercially reasonable, but which may not



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cover the potential liability associated with significant product liability claims. Even if a product liability claim is not successful, the adverse
publicity and time and expense of defending such a claim may interfere with our business.

Additionally, we enter into various agreements
where we indemnify third parties such as manufacturers and investigators for certain product liability claims related to our products. These indemnification obligations may require us to pay significant sums of money for claims that are covered by
these indemnifications.

Our ability to generate product sales could diminish if we fail to obtain acceptable prices or an adequate level of
reimbursement for our products from third-party payors.

Our ability to successfully commercialize pharmaceutical products, alone or
with collaborators, may depend in part on the extent to which reimbursement is available from government and health administration authorities or private health insurers and third-party payors.

The continuing efforts of government and third-party payors to contain or reduce the costs of healthcare through various means may limit our commercial
opportunity. In the United States, we expect that there will continue to be a number of federal and state proposals to implement pharmaceutical pricing and cost control measures under government healthcare programs such as Medicare and Medicaid.
Increasing emphasis on managed care in the United States will continue to put pressure on the pricing of in-patient hospital procedures and pharmaceutical products. Significant uncertainty exists as to the reimbursement status of newly approved
healthcare products. Cost control initiatives could adversely affect the commercialization of our products, decrease the price received for any products in the future and may impede patients ability to obtain reimbursement under their
insurance programs for our products.

In the case of partial large or small bowel resection surgery, a hospital typically will be
reimbursed a fixed fee for the procedure by a private health insurer or Medicare. Pharmaceutical products such as ENTEREG that may be used in connection with the surgery are not separately reimbursed and therefore a hospital must assess the cost of
ENTEREG relative to its pharmacoeconomic benefit. Current and future efforts to limit the level of reimbursement for in-patient hospital procedures could cause a hospital to decide to not use ENTEREG or to discontinue use of the product.

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

Other companies have product candidates in development to treat the
conditions we are seeking to treat and they may develop effective and commercially successful products. Our competitors may succeed in developing products that are more effective than those that we may develop, that have fewer side effects, that are
less expensive or that they market before we market any products we may develop.

We are aware of other products in clinical development
for the treatment of POI, including methylnaltrexone, which was developed by Progenics in collaboration with Wyeth. In April 2008, methylnaltrexone as a subcutaneous injection was approved by the FDA for sale in the United States for the treatment
of opioid-induced constipation in patients with advanced illness who are receiving palliative care, when response to laxative therapy has not been sufficient. In addition, Tranzyme Pharma is currently developing TZP-101, an intravenous ghrelin
agonist that is currently in Phase 2b clinical testing, for the treatment of POI and Nektar Therapeutics is currently developing oral NKTR-118, a peripheral opioid antagonist that recently completed Phase 2 clinical testing, for the treatment of
opioid induced constipation and other manifestations of OBD. If Wyeth and Progenics are able to successfully develop methylnaltrexone for the treatment of POI, Tranzyme Pharma is able to successfully develop TZP-101 and/or Nektar is able to
successfully develop NKTR-118, our business could be adversely affected. In addition, there are products already on the market for use in treating other GI conditions that also are being developed for use in opioid induced bowel dysfunction. There
may be additional competitive products being developed that could have a material adverse effect on our ability to successfully market and sell our products.



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



| |  |  | attract qualified personnel;
| | - |  | ----------------------------



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



| |  |  | license proprietary technology.
| | - |  | -------------------------------

Reduction in the
use of opioid analgesics would reduce the potential market for ENTEREG for POI and any products developed to treat OBD.

If the use of
drugs or techniques that reduce the requirement for mu-opioid analgesics becomes more widespread, the market for ENTEREG for POI and our OBD product candidate would decrease. Various techniques to reduce the use of opioids are being utilized
in an attempt to reduce the impact of opioid side effects. The use of local anesthetics in epidural catheters during and after surgery with the continuation of the epidural into the postoperative period can reduce or eliminate the use of opioids.
Non-steroidal anti-inflammatory agents also may reduce total opioid requirements. Continuous infusion of local anesthetic into a wound or near major nerves can reduce the use of opioids in limited types of procedures and pain states. Novel
analgesics that act at receptors other than mu-opioid receptors also are under development. Many companies have developed and are developing analgesic products that compete with opioids or which, if approved, would compete with opioids. If
these analgesics reduce the use of opioids, it would have a negative impact on the potential market for ENTEREG for POI and our OBD product candidate.

We are or may become involved in legal proceedings that, if adversely adjudicated or settled, could materially impact our financial condition.

As a public biopharmaceutical company, we are or may become a party to litigation in the ordinary course of our business, including, among others, matters alleging product liability, patent or other intellectual
property rights infringement, patent invalidity, violations of securities laws, employment discrimination or breach of commercial contract. In general, litigation claims can be expensive and time consuming to bring or defend against and could result
in settlements or damages that could significantly impact our results of operations and financial condition.

Our business could suffer if we are unable
to attract, retain and motivate skilled personnel and cultivate key academic collaborations.

We are a small company, and our success
depends on our continued ability to attract, retain and motivate highly-qualified management and scientific personnel. We may not be successful in attracting or retaining qualified individuals. Our success also depends on our ability to develop and
maintain important relationships with leading academic institutions and scientists. Competition for personnel and academic collaborations is intense. In particular, our product development programs depend on our ability to attract and retain
highly-skilled chemists, biologists and clinical development personnel. If we lose the services of any of these personnel, it could impede significantly the achievement of our research and development objectives. 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. We do not
maintain key man life insurance on any of our employees.

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 use radioactivity in conducting biological assays and we use solvents that could be flammable in conducting our research and development activities. We cannot
completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. We do not maintain a separate insurance policy for these types of risks. 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.



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

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



| |  |  | issue equity securities that would dilute our current stockholders percentage ownership;
| | - |  | -----------------------------------------------------------------------------------------



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



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



| |  |  | assume substantial actual or contingent liabilities; or
| | - |  | -------------------------------------------------------



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

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

Certain provisions of both our charter documents and Delaware law, our adoption of a shareholder rights plan and certain limitations within our collaboration agreements may make an acquisition of us, which may be
beneficial to our stockholders, more difficult.

Provisions of our amended and restated certificate of incorporation and restated
bylaws, 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.

Authorized shares of our common stock and preferred stock are available for future issuance without stockholder approval. The existence of unissued common stock and preferred stock may enable our Board of Directors to
issue shares to persons friendly to current management or to issue preferred stock with terms that could render more difficult or discourage a third-party attempt to obtain control of us by means of a merger, tender offer, proxy contest or
otherwise, which would protect the continuity of our management. In addition, we adopted a shareholder rights plan, the effect of which may be to make an acquisition of us more difficult.

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

Under our collaboration agreements with Glaxo and Pfizer, there are certain limitations on the ability of Glaxo and Pfizer to acquire our securities.
These limitations make it more difficult for Glaxo or Pfizer to acquire us, even if such an acquisition would benefit our stockholders. The limitations do not prevent Glaxo or Pfizer, among other things, from acquiring our securities in certain
circumstances following initiation by a third party of an unsolicited tender offer to purchase more than a certain percentage of any class of our publicly traded securities.



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

The following matters were considered at our annual meeting of stockholders held in Malvern, Pennsylvania, on May 12, 2009:



| | I. | To elect three Class II directors to hold office until the annual meeting of stockholders in 2012:
| | -- | --------------------------------------------------------------------------------------------------

NUMBER OF VOTES



|                         |  |            |  |           |  |                 
|------------------------ |  | ---------- |  | --------- |  | ----------------
|NOMINEE                  |  | FOR        |  | WITHHELD  |  | BROKER NON-VOTES
|Georges Gemayel, Ph.D.   |  | 39,244,596 |  | 1,077,611 |  | 0               
|David M. Madden          |  | 39,272,361 |  | 1,049,846 |  | 0               
|Guido Magni, M.D., Ph.D. |  | 38,063,834 |  | 2,258,373 |  | 0               

Our directors who continued after the meeting include: three Class I directors whose terms expire
in 2011, Armando Anido, Michael R. Dougherty and George V. Hager, Jr.; and three Class III directors whose terms expire in 2010, Paul Goddard, Ph.D., Claude H. Nash, Ph.D. and Donald Nickelson.



| | II. | To approve amendments to Adolors 1994 Equity Compensation Plan and 2003 Stock-Based Incentive Compensation Plan to allow for a one-time stock exchange program for employees
other than executive officers and directors:
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NUMBER OF VOTES



|           |  |           |  |         |  |                 
|---------- |  | --------- |  | ------- |  | ----------------
|FOR        |  | AGAINST   |  | ABSTAIN |  | BROKER NON-VOTES
|27,348,528 |  | 6,731,267 |  | 16,309  |  | 6,226,103       



| | III. | To ratify the appointment of KPMG LLP as independent registered public accounting firm for the fiscal year ending December 31, 2009:
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------

NUMBER OF VOTES



|           |  |         |  |         |  |                 
|---------- |  | ------- |  | ------- |  | ----------------
|FOR        |  | AGAINST |  | ABSTAIN |  | BROKER NON-VOTES
|40,179,714 |  | 124,029 |  | 18,464  |  | 0               



|ITEM 6. | EXHIBITS
|------- | --------



|            |  |                                                                                                                                                                                                                             
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                 
|10.1       |  | Summary of Oral Agreement for Payment of Services between Adolor Corporation and its Board of Directors (effective as of May 2009), filed as Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on May 14, 2009.
|            | 
|10.2       |  | Adolor Corporation Amended and Restated 1994 Equity Compensation Plan, effective as of May 12, 2009, filed as Exhibit 10.2 to the Companys Current Report on Form 8-K/A filed on July 20,
2009.                            
|            | 
|10.3       |  | Adolor Corporation Amended and Restated 2003 Stock-based Incentive Compensation Plan, effective as of May 12, 2009, filed as Exhibit 10.3 to the Companys Current Report on Form 8-K
filed on May 14, 2009.                
|            | 
|10.4*      |  | Form of Non-Employee Director Stock Option Agreement.                                                                                                                                                                       
|            | 
|10.5*      |  | Form of Non-Employee Director Deferred Stock Agreement.                                                                                                                                                                     
|            | 
|31.1*       |  | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                            



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|            |  |                                                                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                     
|31.2*       |  | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.1#       |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                         
|            | 
|32.2#       |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                         



|* | Filed herewith.
|- | ---------------

| | Compensation plans and arrangements for executive officers and others.
|- | ----------------------------------------------------------------------

|# | This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that
section. Further, this exhibit shall not be deemed to be incorporated by reference in any document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                    |  |                    |  |                                                                                                        
|------------------- |  | ------------------ |  | -------------------------------------------------------------------------------------------------------
|                    |  | ADOLOR CORPORATION
|                    |  |                   
|Date: July 30, 2009 |  | By:                |  | /s/ Michael R. Dougherty                                                                               
|                    |  |                    |  | Michael R. Dougherty                                                                                   
|                    |  |                    |  | President and Chief Executive Officer                                                                  
|                    |  |                    |  | (Principal executive officer)                                                                          
|                    |  |                   
|                    |  | By:                |  | /s/ Stephen W. Webster                                                                                 
|                    |  |                    |  | Stephen W. Webster                                                                                     
|                    |  |                    |  | Senior Vice President, Finance and Chief Financial Officer (Principal financial and accounting officer)



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