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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 September 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 October 15, 2009
|Common Stock, par value $0.0001 per share |  | 46,333,735 Shares                 









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ADOLOR CORPORATION

FORM 10-Q

September 30, 2009

INDEX



|         |  |                                                                                          |  |         
|-------- |  | ---------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                          |  | Page No.
|         |  | CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS                                     |  | ii      
|         |  |                                                                                         
|PART I.  |  | FINANCIAL INFORMATION                                                                    |  |         
|         |  |                                                                                         
|ITEM 1.  |  | Financial Statements (unaudited):                                                        |  |         
|         |  |                                                                                         
|         |  | Balance Sheets at September 30, 2009 and December 31, 2008                               |  | 1       
|         |  |                                                                                         
|         |  | Statements of Operations for the three and nine months ended September 30, 2009 and 2008 |  | 2       
|         |  |                                                                                         
|         |  | Statement of Stockholders Equity for the nine months ended September 30, 2009           |  | 3       
|         |  |                                                                                         
|         |  | Statements of Cash Flows for the nine months ended September 30, 2009 and 2008           |  | 4       
|         |  |                                                                                         
|         |  | Notes to Financial Statements                                                            |  | 5       
|         |  |                                                                                         
|ITEM 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations    |  | 12      
|         |  |                                                                                         
|ITEM 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                               |  | 18      
|         |  |                                                                                         
|ITEM 4.  |  | Controls and Procedures                                                                  |  | 18      
|         |  |                                                                                         
|PART II. |  | OTHER INFORMATION                                                                        |  |         
|         |  |                                                                                         
|ITEM 1.  |  | Legal Proceedings                                                                        |  | 19      
|         |  |                                                                                         
|ITEM 1A. |  | Risk Factors                                                                             |  | 19      
|         |  |                                                                                         
|ITEM 6.  |  | Exhibits                                                                                 |  | 29      
|         |  |                                                                                         
|         |  | 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)



|                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------------ | - | ---------------- | - | ------------ | -
|                                                                                                                                                    |  | September 30,2009 |              |   | December 31,2008 |  
|Assets                                                                                                                                              |  |                   |              |   |                  |   |              |  
|Current assets:                                                                                                                                     |  |                   |              |   |                  |   |              |  
|Cash and cash equivalents                                                                                                                           |  | $                 | 3,788,338    |   |                  | $ | 7,535,146    |  
|Short-term investments                                                                                                                              |  |                   | 90,649,857   |   |                  |   | 124,375,060  |  
|Accounts receivable                                                                                                                                 |  |                   | 1,846,635    |   |                  |   | 3,588,935    |  
|Inventory                                                                                                                                           |  |                   | 1,031,153    |   |                  |   |             |  
|Prepaid expenses and other current assets                                                                                                           |  |                   | 4,022,743    |   |                  |   | 4,348,209    |  
|                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total current assets                                                                                                                                |  |                   | 101,338,726  |   |                  |   | 139,847,350  |  
|Equipment and leasehold improvements, net                                                                                                           |  |                   | 1,854,626    |   |                  |   | 4,466,803    |  
|Other assets                                                                                                                                        |  |                   | 114,002      |   |                  |   | 112,414      |  
|                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total assets                                                                                                                                        |  | $                 | 103,307,354  |   |                  | $ | 144,426,567  |  
|                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|                                                                                                                                                    |  |                  
|Liabilities and Stockholders Equity                                                                                                                |  |                   |              |   |                  |   |              |  
|Current liabilities:                                                                                                                                |  |                   |              |   |                  |   |              |  
|Accounts payable                                                                                                                                    |  | $                 | 967,250      |   |                  | $ | 2,310,330    |  
|Accrued expenses                                                                                                                                    |  |                   | 10,326,050   |   |                  |   | 10,941,059   |  
|Customer deposits                                                                                                                                   |  |                   | 1,189,582    |   |                  |   | 274,425      |  
|Deferred revenue and rent  current                                                                                                                 |  |                   | 13,338,404   |   |                  |   | 14,071,511   |  
|                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total current liabilities                                                                                                                           |  |                   | 25,821,286   |   |                  |   | 27,597,325   |  
|Deferred revenue and rent  non-current                                                                                                             |  |                   | 27,237,828   |   |                  |   | 28,207,240   |  
|Other liabilities                                                                                                                                   |  |                   | 200          |   |                  |   | 3,440        |  
|                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total liabilities                                                                                                                                   |  |                   | 53,059,314   |   |                  |   | 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 September 30,
2009 and December 31, 2008 |  |                   | 4,633        |   |                  |   | 4,633        |  
|Additional paid-in capital                                                                                                                          |  |                   | 546,082,865  |   |                  |   | 543,009,215  |  
|Unrealized gains on available for sale securities                                                                                                   |  |                   | 85,544       |   |                  |   | 671,457      |  
|Accumulated deficit                                                                                                                                 |  |                   | (495,925,002 | ) |                  |   | (455,066,743 | )
|                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total stockholders equity                                                                                                                          |  |                   | 50,248,040   |   |                  |   | 88,618,562   |  
|                                                                                                                                                    |  |                   |              |   |                  |   |              |  
|Total liabilities and stockholders equity                                                                                                          |  | $                 | 103,307,354  |   |                  | $ | 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 September 30, |             |   | Nine Months Ended September 30, |  
|                                                              |  | 2009                             |             |   | 2008                            |   |             | 2009 |  |   | 2008        |  
|Revenues:                                                     |  |                                  |             |   |                                 |   |             |      |  |   |             |   |  |   |             |  
|Product sales, net                                            |  | $                                | 3,343,947   |   |                                 | $ | 167,880     |      |  | $ | 7,158,679   |   |  | $ | 167,880     |  
|Contract revenues                                             |  |                                  | 5,318,994   |   |                                 |   | 7,702,251   |      |  |   | 17,247,860  |   |  |   | 40,877,593  |  
|                                                              |  |                                  |             |   |                                 |   |             |      |  |   |             |   |  |   |             |  
|Total revenues, net                                           |  |                                  | 8,662,941   |   |                                 |   | 7,870,131   |      |  |   | 24,406,539  |   |  |   | 41,045,473  |  
|                                                              |  |                                  |             |   |                                 |   |             |      |  |   |             |   |  |   |             |  
|                                                              |  |                                  |             |  
|Operating expenses incurred:                                  |  |                                  |             |   |                                 |   |             |      |  |   |             |   |  |   |             |  
|Cost of product sales                                         |  |                                  | 320,711     |   |                                 |   | 13,431      |      |  |   | 704,273     |   |  |   | 13,431      |  
|Research and development                                      |  |                                  | 11,105,662  |   |                                 |   | 14,133,503  |      |  |   | 35,400,476  |   |  |   | 38,816,751  |  
|Selling, general and administrative                           |  |                                  | 8,673,482   |   |                                 |   | 7,889,233   |      |  |   | 26,056,422  |   |  |   | 20,662,427  |  
|Restructuring charge (reversal)                               |  |                                  | (148,000    | ) |                                 |   |            |      |  |   | 4,058,521   |   |  |   |            |  
|                                                              |  |                                  |             |   |                                 |   |             |      |  |   |             |   |  |   |             |  
|Total operating expenses                                      |  |                                  | 19,951,855  |   |                                 |   | 22,036,167  |      |  |   | 66,219,692  |   |  |   | 59,492,609  |  
|                                                              |  |                                  |             |   |                                 |   |             |      |  |   |             |   |  |   |             |  
|                                                              |  |                                  |             |  
|Loss from operations                                          |  |                                  | (11,288,914 | ) |                                 |   | (14,166,036 | )    |  |   | (41,813,153 | ) |  |   | (18,447,136 | )
|Interest income, net                                          |  |                                  | 159,842     |   |                                 |   | 910,757     |      |  |   | 954,894     |   |  |   | 3,621,790   |  
|                                                              |  |                                  |             |   |                                 |   |             |      |  |   |             |   |  |   |             |  
|Net loss                                                      |  | $                                | (11,129,072 | ) |                                 | $ | (13,255,279 | )    |  | $ | (40,858,259 | ) |  | $ | (14,825,346 | )
|                                                              |  |                                  |             |   |                                 |   |             |      |  |   |             |   |  |   |             |  
|Basic and diluted net loss per share                          |  | $                                | (0.24       | ) |                                 | $ | (0.29       | )    |  | $ | (0.88       | ) |  | $ | (0.32       | )
|                                                              |  |                                  |             |   |                                 |   |             |      |  |   |             |   |  |   |             |  
|Shares used in computing basic and diluted net loss per share |  |                                  | 46,296,235  |   |                                 |   | 46,293,701  |      |  |   | 46,296,235  |   |  |   | 46,112,197  |  
|                                                              |  |                                  |             |   |                                 |   |             |      |  |   |             |   |  |   |             |  

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



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ADOLOR CORPORATION

Statement of Stockholders Equity

(Unaudited)



|                                                        |  |                 |  |            |       |                              |   |                    |  |   |                    |       |  |                     |              |   |  |   |             |  
|------------------------------------------------------- |  | --------------- |  | ---------- | ----- | ---------------------------- | - | ------------------ |  | - | ------------------ | ----- |  | ------------------- | ------------ | - |  | - | ----------- | -
|                                                        |  | Common stock    |  | Additional |       | Unrealized gainson available |   |                    |  |   |                    | Total | 
|                                                        |  | Numberof shares |  | Amount     |       | paid-incapital               |   | for salesecurities |  |   | Accumulateddeficit |       |  | stockholdersequity |             
|Balance, January 1, 2009                                |  | 46,333,735      |  | $          | 4,633 |                              | $ | 543,009,215        |  | $ | 671,457            |       |  | $                   | (455,066,743 | ) |  | $ | 88,618,562  |  
|Stock-based compensation expense                        |  |                |  |            |      |                              |   | 3,073,650          |  |   |                   |       |  |                     |             |   |  |   | 3,073,650   |  
|Unrealized losses on available for sale securities, net |  |                |  |            |      |                              |   |                   |  |   | (585,913           | )     |  |                     |             |   |  |   | (585,913    | )
|Net loss                                                |  |                |  |            |      |                              |   |                   |  |   |                   |       |  |                     | (40,858,259  | ) |  |   | (40,858,259 | )
|                                                        |  |                 |  |            |       |                              |   |                    |  |   |                    |       |  |                     |              |   |  |   |             |  
|Balance, September 30, 2009                             |  | 46,333,735      |  | $          | 4,633 |                              | $ | 546,082,865        |  | $ | 85,544             |       |  | $                   | (495,925,002 | ) |  | $ | 50,248,040  |  
|                                                        |  |                 |  |            |       |                              |   |                    |  |   |                    |       |  |                     |              |   |  |   |             |  

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



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ADOLOR CORPORATION

Statements of Cash Flows

(Unaudited)



|                                                                            |  |                                 |             |   |      |   |              |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ----------- | - | ---- | - | ------------ | -
|                                                                            |  | Nine Months Ended September 30, |            
|                                                                            |  | 2009                            |             |   | 2008 |  
|Net cash flows from operating activities:                                   |  |                                 |             |   |      |   |              |  
|Net loss                                                                    |  | $                               | (40,858,259 | ) |      | $ | (14,825,346  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |             |   |      |   |              |  
|Stock-based compensation expense                                            |  |                                 | 3,070,410   |   |      |   | 5,260,820    |  
|Amortization of premiums and discounts on short-term investments            |  |                                 | 796,156     |   |      |   | 1,173,334    |  
|Amortization of deferred revenue and rent                                   |  |                                 | (10,127,519 | ) |      |   | (12,914,621  | )
|Depreciation, asset disposal and amortization                               |  |                                 | 1,039,135   |   |      |   | 1,503,988    |  
|Non-cash restructuring charge                                               |  |                                 | 1,876,479   |   |      |   |             |  
|Acquired in-process research and development                                |  |                                 | 2,000,000   |   |      |   |             |  
|Changes in assets and liabilities:                                          |  |                                 |             |   |      |   |              |  
|Accounts receivable                                                         |  |                                 | 1,742,300   |   |      |   | (2,042,742   | )
|Inventory                                                                   |  |                                 | (1,031,153  | ) |      |   |             |  
|Prepaid expenses and other current assets                                   |  |                                 | 307,878     |   |      |   | 873,234      |  
|Other assets                                                                |  |                                 | (1,588      | ) |      |   | 44,175       |  
|Accounts payable                                                            |  |                                 | (1,343,080  | ) |      |   | 773,347      |  
|Accrued expenses                                                            |  |                                 | (859,225    | ) |      |   | 1,925,854    |  
|Customer deposits                                                           |  |                                 | 915,157     |   |      |   | 159,269      |  
|Deferred revenue                                                            |  |                                 | 8,425,000   |   |      |   |             |  
|                                                                            |  |                                 |             |   |      |   |              |  
|Net cash used in operating activities                                       |  |                                 | (34,048,309 | ) |      |   | (18,068,688  | )
|                                                                            |  |                                 |             |   |      |   |              |  
|                                                                            |  |                                
|Net cash flows from investing activities:                                   |  |                                 |             |   |      |   |              |  
|Purchases of equipment and leasehold improvements                           |  |                                 | (500,333    | ) |      |   | (771,740     | )
|Proceeds from disposal of equipment                                         |  |                                 | 458,700     |   |      |   |             |  
|Purchase of in-process research and development                             |  |                                 | (2,000,000  | ) |      |   |             |  
|Purchases of short-term investments                                         |  |                                 | (79,656,866 | ) |      |   | (126,826,749 | )
|Maturities of short-term investments                                        |  |                                 | 112,000,000 |   |      |   | 136,987,000  |  
|                                                                            |  |                                 |             |   |      |   |              |  
|Net cash provided by investing activities                                   |  |                                 | 30,301,501  |   |      |   | 9,388,511    |  
|                                                                            |  |                                 |             |   |      |   |              |  
|                                                                            |  |                                
|Net cash flows from financing activities:                                   |  |                                 |             |   |      |   |              |  
|Net proceeds from exercise of stock options                                 |  |                                 |            |   |      |   | 147,569      |  
|Payment of withholding taxes related to deferred stock                      |  |                                 |            |   |      |   | (425,238     | )
|                                                                            |  |                                 |             |   |      |   |              |  
|Net cash used in financing activities                                       |  |                                 |            |   |      |   | (277,669     | )
|                                                                            |  |                                 |             |   |      |   |              |  
|Net decrease in cash and cash equivalents                                   |  |                                 | (3,746,808  | ) |      |   | (8,957,846   | )
|Cash and cash equivalents at beginning of period                            |  |                                 | 7,535,146   |   |      |   | 15,575,804   |  
|                                                                            |  |                                 |             |   |      |   |              |  
|Cash and cash equivalents at end of period                                  |  | $                               | 3,788,338   |   |      | $ | 6,617,958    |  
|                                                                            |  |                                 |             |   |      |   |              |  
|                                                                            |  |                                
|Supplemental disclosure of cash flow information:                           |  |                                 |             |   |      |   |              |  
|Unrealized losses on available for sale securities, net                     |  | $                               | (585,913    | ) |      | $ | (106,873     | )
|Change in accrued expenses related to purchases of equipment                |  |                                 | (179,663    | ) |      |   | (367,469     | )
|Deposit received for sale of equipment                                      |  |                                 | 423,879     |   |      |   |             |  

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



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Adolor Corporation

Notes to Financial Statements

September 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).
ENTEREG is indicated to accelerate upper and lower gastrointestinal (GI) recovery following partial large or small bowel resection surgery with primary anastomosis. Delayed GI recovery causes significant discomfort for patients and results in
increased expense to healthcare providers. 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 deltaopioid 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 and ADL5945 to treat opioid bowel
dysfunction (OBD), a condition that often results from chronic use of opioid analgesics to treat persistent pain conditions. 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 (GAAP)
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 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 as of 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 GAAP 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 Accounting Standards Codification (ASC) 605, Revenue Recognition,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 for an amount equal to the
lesser of (a) the previous shipment or (b) the new order. Cost of product sales also is recorded on this reorder basis, with inventory being relieved based on the shipment being recognized as revenue. 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 and cost of product sales upon the transfer of ownership and risk of loss for the product to the customer.



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Adolor Corporation

Notes to Financial Statements

September 30, 2009

(Unaudited)(Continued)



The Company records product sales net of prompt payment discounts, a return allowance
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.
The Company has a customer deposit balance of $1.2 million as of September 30, 2009.

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 nine months ended September 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 $1.2 million decrease in net cash used in operating activities and in net cash provided by investing activities for the nine months ended September 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 nine months ended September 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 have an impact on the Companys financial statements.

In May 2009, the FASB issued Statement of
Financial Accounting Standards (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 was 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 September 30, 2009 up through October 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 had no effect on
the Companys financial statements upon adoption other than references to previous GAAP, which were replaced with references to the applicable ASC paragraphs.

In September 2009, the FASB issued Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements(ASU 2009-13), which requires companies to allocate revenue in arrangements
involving multiple deliverables based on the estimated selling price of each deliverable, even though such deliverables are not sold separately either by the company or other vendors. ASU 2009-13 eliminates the requirement that all undelivered
elements must have objective and reliable evidence of fair value before a company can recognize the portion of the overall arrangement fee that is attributable to items that already have been delivered. As a result, the new guidance may allow some
companies to recognize revenue on transactions that involve multiple deliverables earlier than under current requirements. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010. Early adoption is permitted at the beginning of a companys fiscal year. The Company expects to adopt ASU 2009-13 on January 1, 2011 and does not expect ASU 2009-13 to have a material impact on its financial statements.



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Adolor Corporation

Notes to Financial Statements

September 30, 2009

(Unaudited)(Continued)



3. COMPREHENSIVE LOSS

The following is the reconciliation of net loss to comprehensive loss for the three and nine months ended September 30, 2009 and 2008:



|                                                                |  |                                 |             |   |                                |   |             |      |  |   |             |   |  |   |             |  
|--------------------------------------------------------------- |  | ------------------------------- | ----------- | - | ------------------------------ | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                |  | Three Months EndedSeptember 30, |             |   | Nine Months EndedSeptember 30, |  
|                                                                |  | 2009                            |             |   | 2008                           |   |             | 2009 |  |   | 2008        |  
|Net loss                                                        |  | $                               | (11,129,072 | ) |                                | $ | (13,255,279 | )    |  | $ | (40,858,259 | ) |  | $ | (14,825,346 | )
|Unrealized gains (losses) on available for sale securities, net |  |                                 | (3,815      | ) |                                |   | 275,450     |      |  |   | (585,913    | ) |  |   | (106,873    | )
|                                                                |  |                                 |             |   |                                |   |             |      |  |   |             |   |  |   |             |  
|Comprehensive loss                                              |  | $                               | (11,132,887 | ) |                                | $ | (12,979,829 | )    |  | $ | (41,444,172 | ) |  | $ | (14,932,219 | )
|                                                                |  |                                 |             |   |                                |   |             |      |  |   |             |   |  |   |             |  

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.

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



|                                                      |  |                |             |                      |   |                       |  |   |            |   |  |   |            
|----------------------------------------------------- |  | -------------- | ----------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -----------
|                                                      |  | Amortized Cost |             | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|U.S. Government obligations                           |  | $              | 90,070,313  |                      | $ | 86,706                |  | $ | (1,158     | ) |  | $ | 90,155,861 
|Certificates of deposit                               |  |                | 494,000     |                      |   |                      |  |   | (4         | ) |  |   | 493,996    
|                                                      |  |                |             |                      |   |                       |  |   |            |   |  |   |            
|Total short-term investments as of September 30, 2009 |  | $              | 90,564,313  |                      | $ | 86,706                |  | $ | (1,162     | ) |  | $ | 90,649,857 
|                                                      |  |                |             |                      |   |                       |  |   |            |   |  |   |            
|                                                      |  |                |             |                     
|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
|                                                      |  |                |             |                      |   |                       |  |   |            |   |  |   |            

ASC 820, Fair Value Measurements and Disclosures, 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 September 30, 2009:



|                             |  |                                            |            |                                                     |   |                                           |  |                                        |         |  |   |  
|---------------------------- |  | ------------------------------------------ | ---------- | --------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | ------- |  | - | -
|                             |  |                                            |            | Fair Value Measurements at September 30, 2009 Using
|                             |  | Total CarryingValue as ofSeptember 30,2009 |            | Quoted PricesinActive Markets(Level 1)              |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|U.S. Government obligations  |  | $                                          | 90,155,861 |                                                     | $ | 90,155,861                                |  | $                                      |        |  | $ | 
|Certificates of deposit      |  |                                            | 493,996    |                                                     |   |                                          |  |                                        | 493,996 |  |   | 
|                             |  |                                            |            |                                                     |   |                                           |  |                                        |         |  |   |  
|Total short-term investments |  | $                                          | 90,649,857 |                                                     | $ | 90,155,861                                |  | $                                      | 493,996 |  | $ | 
|                             |  |                                            |            |                                                     |   |                                           |  |                                        |         |  |   |  



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Adolor Corporation

Notes to Financial Statements

September 30, 2009

(Unaudited)(Continued)



5. INVENTORY

At September 30, 2009, inventory consists of $0.6 million of work-in-progress and $0.4 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. 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. Prior to the FDA approval of ENTEREG, costs associated with the manufacture of alvimopan were expensed to research and development when incurred.

6. CONTRACT REVENUES

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



|                                                  |  |                                 |           |                                |   |           |  |      |            |  |   |           
|------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------ | - | --------- |  | ---- | ---------- |  | - | ----------
|                                                  |  | Three Months EndedSeptember 30, |           | Nine Months EndedSeptember 30,
|                                                  |  | 2009                            |           | 2008                           |   | 2009      |  | 2008
|Milestone revenue                                 |  | $                               |          |                                | $ |          |  | $    |           |  | $ | 20,000,000
|Amortization of deferred revenue                  |  |                                 | 3,291,669 |                                |   | 4,067,500 |  |      | 9,998,725  |  |   | 12,792,726
|Cost reimbursement under collaboration agreements |  |                                 | 2,027,325 |                                |   | 3,634,751 |  |      | 6,301,215  |  |   | 8,084,867 
|Other                                             |  |                                 |          |                                |   |          |  |      | 947,920    |  |   |          
|                                                  |  |                                 |           |                                |   |           |  |      |            |  |   |           
|Total contract revenues                           |  | $                               | 5,318,994 |                                | $ | 7,702,251 |  | $    | 17,247,860 |  | $ | 40,877,593
|                                                  |  |                                 |           |                                |   |           |  |      |            |  |   |           

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 to the Glaxo collaboration agreement of
$0.8 million was recognized in each of the three-month periods ended September 30, 2009 and 2008 and $2.5 million was recognized in each of the nine-month periods ended September 30, 2009 and 2008. During the nine months ended
September 30, 2008, the Company recorded $20.0 million in milestone revenue under the Glaxo collaboration agreement following FDA approval of ENTEREG in May 2008.

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 ASC 605, Revenue Recognition,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 ASC 605 to be
accounted for as a unit of accounting separate from the original collaboration agreement 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 $0.7 million was recognized in the three and nine months ended September 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.

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 $0.8 million and $1.0 million for the three months ended September 30, 2009 and 2008, respectively, and $3.5 million
and $3.0 million for the nine months ended September 30, 2009 and 2008, respectively, under this arrangement. As of September 30, 2009, $0.6 million was receivable from Glaxo for reimbursement of expenses incurred by the Company pursuant
to the collaboration agreement.



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Adolor Corporation

Notes to Financial Statements

September 30, 2009

(Unaudited)(Continued)



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 status of the development programs. The effect of the first quarter change in estimate was a reduction in contract revenues that otherwise would have been recorded of $0.5 million and $1.1
million for the three and nine months ended September 30, 2009, respectively. The Company recorded revenue related to the deferred license fees under the collaboration agreement with Pfizer of $2.2 million and $3.3 million for the three months
ended September 30, 2009 and 2008, respectively, and $6.8 million and $10.3 million in the nine months ended September 30, 2009 and 2008, respectively.

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 $1.2 million and $2.6 million for the three months ended September 30, 2009
and 2008, respectively, and $2.9 million and $5.1 million for the nine months ended September 30, 2009 and 2008, respectively. As of September 30, 2009, $1.2 million was receivable from Pfizer for reimbursement of expenses incurred by the
Company pursuant to the collaboration agreement.

7. STOCKHOLDERS EQUITY

During the nine months ended September 30, 2009, the Company granted options to purchase 1,345,211 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 nine months ended September 30,
2009 was $1.7 million and such amount will be recognized over the applicable vesting period.

During the nine months ended
September 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. The Company will begin recognizing compensation expense 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 nine months ended September 30, 2009 was $0.6 million.

For the three and nine months ended September 30, 2009, compensation expense recognized related to outstanding stock options as well as deferred and restricted stock awards was $0.9 million and $3.1 million, respectively.

On May 12, 2009, the Companys stockholders approved a stock option exchange program under which eligible employees (which
excluded executive officers and directors) were given the opportunity to exchange some or all of their outstanding options with exercise prices of $7.00 per share or higher for a lesser number of new options with an exercise price per share equal to
the fair market value on the exchange date. The program commenced on July 22, 2009 and expired on August 19, 2009. Under the program, the Company accepted for cancellation eligible options to purchase 367,413 shares of the Companys
common stock and the Company issued new options to purchase up to 37,575 shares of the Companys common stock under the Companys Amended and Restated 1994 Equity Compensation Plan and/or Amended and Restated 2003 Stock-Based Incentive
Compensation Plan in exchange for the options surrendered. The new options have an exercise price of $1.57 per share, the closing price of the Companys common stock on August 20, 2009, and vest on a semi-annual basis over a period of one
or two years. The exchange was treated as a modification under ASC 718, Stock Compensation, and the incremental expense associated with the exchange was immaterial for the three and nine months ended September 30, 2009.



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Adolor Corporation

Notes to Financial Statements

September 30, 2009

(Unaudited)(Continued)



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 alleged 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 was 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 added 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 were 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.

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 ENTEREG and the advancement of its clinical programs. The Company
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 were provided with severance payments,
continued benefits for a specified period of time and outplacement assistance.

The Company recorded a restructuring charge of
$4.1 million for the nine months ended September 30, 2009. The reduction in expense of $0.1 million for the three months ended September 30, 2009 resulted from an increase in the estimated salvage value of certain impaired assets affected
by the restructuring. For the nine months ended September 30, 2009, the charge consisted of $2.2 million of employee severance and benefit related costs and $1.9 million of a 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 certain 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
September 30, 2009. The following table summarizes activity related to the Companys restructuring:



|                              |  |                           |            |   |                   |   |            |       |  |   |            |  
|----------------------------- |  | ------------------------- | ---------- | - | ----------------- | - | ---------- | ----- |  | - | ---------- | -
|                              |  | EmployeeTermination Costs |            |   | Asset Write-downs |   |            | Total | 
|Balance at January 1, 2009    |  | $                         |           |   |                   | $ |           |       |  | $ |           |  
|Restructuring charge          |  |                           | 2,182,042  |   |                   |   | 1,876,479  |       |  |   | 4,058,521  |  
|Cash payments                 |  |                           | (2,069,349 | ) |                   |   |           |       |  |   | (2,069,349 | )
|Non-cash impairment           |  |                           |           |   |                   |   | (1,876,479 | )     |  |   | (1,876,479 | )
|                              |  |                           |            |   |                   |   |            |       |  |   |            |  
|Balance at September 30, 2009 |  | $                         | 112,693    |   |                   | $ |           |       |  | $ | 112,693    |  
|                              |  |                           |            |   |                   |   |            |       |  |   |            |  



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##### Table of Contents

Adolor Corporation

Notes to Financial Statements

September 30, 2009

(Unaudited)(Continued)



10. LICENSE AGREEMENT WITH ELI LILLY AND COMPANY

In September 2009, the Company acquired from Eli Lilly and Company (Lilly) the exclusive worldwide rights to OpRA III (Adolor compound
ADL5945). ADL5945 is a clinical-stage opioid receptor antagonist. The Company intends initially to develop ADL5945 to treat OBD and plans to initiate additional Phase 1 clinical trials of this compound in early 2010. Under the terms of the
agreement, the Company paid Lilly $2.0 million in September 2009. As a result of requiring additional research and development efforts and regulatory approval in order to commercialize this product candidate, the $2.0 million was recognized as
acquired in-process research and development and recorded as research and development expense for the three and nine months ended September 30, 2009. In addition to the $2.0 million payment, the Company will be required to pay royalties on net
sales of the product and up to approximately $70 million in milestones, which are contingent upon achievement of pre-defined, late-stage clinical and regulatory events and achievement of certain sales targets.



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##### Table of Contents

|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). 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. Delayed GI recovery causes significant discomfort for patients and results in increased expense to healthcare providers. We also have a number of product candidates in various stages of clinical and
preclinical development.

For the nine months ended September 30, 2009, our total net revenues and net loss were
$24.4 million and $40.9 million, respectively. Net shipments of ENTEREG for the three and nine months ended September 30, 2009 were $4.0 million and $8.9 million, respectively, of which we recognized $3.3 million and $7.2 million,
respectively, as net product sales under our revenue recognition policy. We will need net 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 September 2009, we acquired from Eli Lilly and Company (Lilly) the exclusive worldwide rights to OpRA III (Adolor compound ADL5945), a
Phase 1 clinical-stage product candidate. ADL5945 is a potent opioid receptor antagonist, with potential use in multiple therapeutic indications. We intend initially to develop ADL5945 to treat opioid bowel dysfunction (OBD) and plan to initiate
clinical trials of this compound for this indication in early 2010. ADL5945 will be developed in parallel with ADL7445 as part of our OBD Program. Under the terms of the agreement, we paid Lilly $2.0 million in September 2009. In addition to the
$2.0 million payment, we will be required to pay royalties on net sales of the product and up to approximately $70 million in milestones, which are contingent upon achievement of pre-defined, late-stage clinical and regulatory events and achievement
of certain sales targets.

ENTEREG

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
co-promote ENTEREG in certain hospitals with a field force that numbers approximately 25 persons.ENTEREG was approved 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 September 30, 2009, approximately 1,550 hospitals have registered in the E.A.S.E. Program. Additionally, as of September 30,
2009, we estimate that approximately 725 hospitals had accepted ENTEREG for inclusion on their formularies, including 435 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 and losses 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 thedeltaopioid 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 today all marketed opioid
drugs interact primarily with only one such receptor, themu receptor. We have identified a series of novel, orally-activedelta agonists that selectively stimulate thedeltaopioid receptor. Our goal is to develop medications
that produce pain relief similar to traditionalmuopioids, while reducing or eliminating some typical narcotic side effects seen with muopioids, including dependence, sedation and respiratory depression.

In October 2009, Pfizer and we initiated a Phase 2a proof-of-concept study of ADL5859 and ADL5747 in osteoarthritis patients. Pfizer and we
also intend to initiate a Phase 2b proof-of-concept study of ADL5747 in post-herpetic neuralgia in early 2010.

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 muopioid 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 OBD.

We are developing ADL7445 and ADL5945 to treat OBD. These compounds are small molecule, muopioid receptor antagonists intended to
block the adverse effects of opioid analgesics on the GI tract without affecting analgesia. We submitted an Investigational New Drug Application (IND) for ADL7445 in September 2009 and intend to initiate clinical evaluation of this compound during
the fourth quarter of 2009. We licensed ADL5945 from Lilly in September 2009 and intend to initiate clinical testing of this compound in early 2010.

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 $94.4 million at September 30, 2009 and $131.9 million at December 31, 2008, representing 91% of our total assets. We invest excess cash predominantly in U.S. Treasury obligations. Our working capital, which is calculated
as current assets less current liabilities, was $75.5 million at September 30, 2009 compared to $112.3 million at December 31, 2008. The decrease in cash, cash equivalents, 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 nine months ended September 30, 2009 and 2008:



|                                          |  |                                 |             |   |      |   |             |  
|----------------------------------------- |  | ------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                          |  | Nine Months Ended September 30, |            
|                                          |  | 2009                            |             |   | 2008 |  
|Net loss                                  |  | $                               | (40,858,259 | ) |      | $ | (14,825,346 | )
|Adjustments for non-cash operating items  |  |                                 | (1,345,339  | ) |      |   | (4,976,479  | )
|                                          |  |                                 |             |   |      |   |             |  
|Net cash operating loss                   |  |                                 | (42,203,598 | ) |      |   | (19,801,825 | )
|Net change in assets and liabilities      |  |                                 | 8,155,289   |   |      |   | 1,733,137   |  
|                                          |  |                                 |             |   |      |   |             |  
|Net cash used in operating activities     |  | $                               | (34,048,309 | ) |      | $ | (18,068,688 | )
|                                          |  |                                 |             |   |      |   |             |  
|Net cash provided by investing activities |  | $                               | 30,301,501  |   |      | $ | 9,388,511   |  
|                                          |  |                                 |             |   |      |   |             |  
|Net cash used in financing activities     |  | $                               |            |   |      | $ | (277,669    | )
|                                          |  |                                 |             |   |      |   |             |  



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Net Cash Used in Operating Activities

Net cash used in operating activities of $34.0 million and $18.1 million for the nine months ended September 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 nine months ended September 30, 2009 and 2008, we received net payments of $13.4 million and $26.4 million, respectively, under such collaboration agreements. Of the $13.4 million received during the nine months ended September 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 $26.4 million received during the nine months ended September 30, 2008
included a $20.0 million milestone payment related to the FDAs approval of ENTEREG. In addition, we received $8.1 million of cash related to net shipments of ENTEREG during the nine months ended September 30, 2009.

Net Cash Provided By Investing Activities

Net cash provided by investing activities relates to purchases and maturities of investment securities, capital expenditures for property and equipment and proceeds from the sale of 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 $30.3 million for the nine months ended September 30, 2009 as compared to $9.4
million for the nine months ended September 30, 2008. The increase in cash provided by investing activities for the nine months ended September 30, 2009 is primarily attributable to 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 September 30, 2009 was $495.9 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, at current
expenditure levels, we will need ENTEREG sales to increase significantly beyond current levels before we will be able to achieve profitability and positive cash flows from operations.

Prior to the FDA approval of ENTEREG, costs associated with the manufacture of alvimopan were expensed to research and development. As a
result, at September 30, 2009, we have inventory related to alvimopan that carries a zero-cost and is not reflected on the September 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 all 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.

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 in pain and Phase 1 clinical trials
for ADL7445 and ADL5945 in OBD. 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.



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We believe that our existing cash, cash equivalents and short-term investments are adequate
to fund our recently 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.

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 Accounting Standards Codification (ASC) 605,
Revenue Recognition,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 in 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, a returns allowance 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 were $4.0 million and $0.6 million for the three months ended September 30, 2009 and 2008, respectively, and
were $8.9 million and $0.6 million for the nine months ended September 30, 2009 and 2008, respectively. We recognized net product sales of $3.3 million and $0.2 million under our revenue recognition policy during the three months ended
September 30, 2009 and 2008, respectively, and $7.2 million and $0.2 million for the nine months ended September 30, 2009 and 2008, respectively. The increase in 2009 compared to 2008 was due to an increase in the number of ordering and
reordering hospitals period-over-period. Since launch, approximately 625 hospitals have reordered ENTEREG. We have a customer deposit balance of $1.2 million at September 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.

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 $5.3 million and $7.7 million for the three months ended September 30, 2009 and 2008, respectively, and were $17.2 million and $40.9
million for the nine months ended September 30, 2009 and 2008, respectively. Contract revenues for the nine months ended September 30, 2008 included a $20.0 million milestone payment received from Glaxo in conjunction with the FDA approval
of ENTEREG. Contract revenues from Pfizer for the three and nine months ended September 30, 2009 decreased in 2009 due to a decrease in delta program costs, which resulted in lower cost reimbursement, as well as reduced amortization of
deferred licensing fees due to extensions of the estimated performance period in the third quarter of 2008 and the first quarter of 2009. These decreases were partially offset by increased revenue that was recognized related to $9.3 million of
payments received from Glaxo during the nine months ended September 30, 2009 under the terms of Amendment No. 4 to the collaboration agreement. Of the $9.3 million received, $8.4 million was received in the first quarter of 2009 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. The remaining $0.9 million was received and recognized as revenue in the second
quarter of 2009.

Cost of Product Sales

Cost of product sales was $0.3 million and $0.7 million for the three and nine months ended September 30, 2009, respectively, consisting primarily of royalty payments under certain alvimopan license
agreements, FDA fees and manufacturing costs. Cost of product sales was immaterial for the three and nine months ended September 30, 2008. Consistent with our revenue recognition policy, cost of product sales is recorded on a reorder basis,
with inventory being relieved based on the shipment being recognized for revenue purposes.



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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 $11.1 million and $14.1 million for the three months ended September 30, 2009 and 2008,
respectively, and were $35.4 million and $38.8 million for the nine months ended September 30, 2009 and 2008, respectively, and consist of the following:



|                                                 |  |                                 |            |                                |   |            |  |      |            |  |   |           
|------------------------------------------------ |  | ------------------------------- | ---------- | ------------------------------ | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                 |  | Three Months EndedSeptember 30, |            | Nine Months EndedSeptember 30,
|                                                 |  | 2009                            |            | 2008                           |   | 2009       |  | 2008
|External research and development expenses:      |  |                                 |            |                                |   |            |  |      |            |  |   |           
|ENTEREG program                                  |  | $                               | 982,420    |                                | $ | 260,725    |  | $    | 3,410,573  |  | $ | 3,927,952 
|Delta agonist program                            |  |                                 | 2,085,950  |                                |   | 4,328,655  |  |      | 4,763,755  |  |   | 8,457,076 
|OBD program                                      |  |                                 | 3,117,978  |                                |   | 580,944    |  |      | 6,075,127  |  |   | 631,540   
|Other programs                                   |  |                                 | 1,109,211  |                                |   | 3,092,046  |  |      | 4,175,217  |  |   | 6,579,435 
|                                                 |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Total external research and development expenses |  |                                 | 7,295,559  |                                |   | 8,262,370  |  |      | 18,424,672 |  |   | 19,596,003
|Total internal research and development expenses |  |                                 | 3,810,103  |                                |   | 5,871,133  |  |      | 16,975,804 |  |   | 19,220,748
|                                                 |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Total research and development expenses          |  | $                               | 11,105,662 |                                | $ | 14,133,503 |  | $    | 35,400,476 |  | $ | 38,816,751
|                                                 |  |                                 |            |                                |   |            |  |      |            |  |   |           

We report all expenses gross within our statements of operations in accordance with
ASC 605, Revenue Recognition,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 nine months ended September 30, 2009 as compared to the three and nine months ended September 30, 2008 primarily due to lower
costs of clinical studies incurred during 2009 in our delta agonist program, lower expenses in other programs and a reduction in headcount and depreciation expenses resulting from our June 2009 restructuring. These decreases were partially
offset by higher expenses in our OBD program, including a $2.0 million payment to Lilly for the rights to ADL5945 in September 2009 which was expensed immediately as in-process research and development.

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 $8.7 million and $7.9 million for the three months ended September 30, 2009 and 2008, respectively, and were $26.1 million and $20.7 million for
the nine months ended September 30, 2009 and 2008, respectively. The increase in 2009 compared to 2008 was primarily driven by higher sales and marketing expenses associated with ENTEREG.

Restructuring Charge

As a result of our June 2009 restructuring, we recorded a charge of $4.1 million for the nine months ended September 30, 2009. The reduction in expense of $0.1 million for the three months ended
September 30, 2009 resulted from an increase in the estimated salvage value of certain impaired assets affected by the restructuring. The charge for the nine months ended September 30, 2009 consisted of $2.2 million of employee severance-
and benefit-related costs and a $1.9 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 nine months ended September 30, 2008.



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Interest Income, Net

Our interest income, net, was $0.2 million and $0.9 million for the three months ended September 30, 2009 and 2008, respectively, and
was $1.0 million and $3.6 million for the nine months ended September 30, 2009 and 2008, respectively. This decrease was due to lower investment balances resulting primarily from the use of cash in operating activities and lower prevailing
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 fair value
of our investment portfolio at September 30, 2009 totaled $90.6 million, and the weighted-average yield-to-maturity was approximately 0.6% with maturities ranging up to 12 months.



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

(a) Evaluation of Disclosure Controls and Procedures

For the quarterly period ended September 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 September 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 September 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, 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 accelerating GI recovery following partial large or small bowel resection surgery with primary anastomosis. 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 cost;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 that accelerate GI recovery following bowel resection surgery.
| | - |  | -----------------------------------------------------------------------------------------------------------------

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 in its labeled indication by the FDA subject to a REMS. The FDA has determined that a
REMS is necessary to ensure that the benefits of ENTEREG 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 in 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.



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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 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.

Even if we are successful in registering hospitals in the E.A.S.E. Program and having
those registered hospitals include ENTEREG on their formulary, there can be no assurance that such hospitals will order ENTEREG in meaningful amounts, if at all.

Our product sales revenues from ENTEREG and related financial results may fail to meet market expectations and will likely fluctuate, 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, ENTEREG product sales may not meet market expectations and will likely fluctuate, which may adversely affect our stock price. In addition, there are other factors that may cause our financial
results to fluctuate, including 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 our expectations, 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 deltaopioid 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 initiated an additional Phase 2a study of ADL5859 and ADL5747
during October 2009 in osteoarthritis and intend to commence a Phase 2a study of ADL5747 in post-herpetic neuralgia in early 2010. 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
September 30, 2009 was $495.9 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 restructuring in June 2009, we expect to continue to generate substantial losses for at least the next several years due to expenditures related to 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 profitability, 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, issuances of equity and/or debt, sale and/or
partnering of one or more of our development programs or other strategic initiatives. Any public or



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private financings involving issuances of common stock or other classes of our equity 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.

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 September 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 and 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 and third-party contractors. 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.



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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
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 financial and other resources. Despite our efforts, we may be unable to secure 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 product and product candidates 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 the 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 cause us substantial harm by delaying or preventing regulatory approval and marketing of our products.



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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 and 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 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.



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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;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | 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 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 and the price of our common stock.

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 or license, receive
regulatory approval for and commercialize our product candidates.

Our product candidates 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 will likely limit our ability to discover new products and increase the risk that our long-term business objectives will not be met.



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We intend to explore opportunities to expand our product portfolio by acquiring or
in-licensing product candidates. In September 2009, we acquired rights to OpRA III (ADL5945), a clinical-stage product candidate, from Lilly. 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.

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



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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 or condition. 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 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 harm the commercial prospects for the product or otherwise
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 benefits. 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 various stages of clinical development for the treatment of post-operative ileus, opioid induced constipation and other manifestations of OBD. For example, we are aware of molecules in development by Progenics
Pharmaceuticals, Inc., Tranzyme Pharma, Nektar Therapeutics and Alkermes, Inc. that could compete with our existing product or our product candidates. 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 are additional competitive products being developed that could have a material adverse effect on our ability to successfully market and sell our product and product
candidates.

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



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| |  |  | license proprietary technology; and
| | - |  | -----------------------------------



| |  |  | attract qualified personnel.
| | - |  | ----------------------------

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

If the use of drugs or techniques that reduce the requirement for muopioid analgesics becomes more widespread, the market for
ENTEREG and our OBD product candidates 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 muopioid 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 and our OBD product
candidates.

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 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;
| | - |  | ----------------------------------------------------------------



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| |  |  | 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 6. | EXHIBITS
|------- | --------



|            |  |                                                                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                     
|            | 
|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.
|            | 
|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.
|- | ---------------

|# | 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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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: October 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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