10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2004

OR

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

For the transition period from                     to                    

Commission File Number   000-19119

CEPHALON, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	23-2484489
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
145 Brandywine Parkway, West Chester, PA	19380-4245
(Address of Principal Executive Offices)	(Zip Code)
(610) 344-0200
(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.   Yes    ý         No    o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ý    No  o

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of November 3, 2004
Common Stock, par value $.01	57,688,672 Shares

CEPHALON, INC. AND SUBSIDIARIES

INDEX

i

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 constitute our expectations or forecasts of future events as of the date this report was filed with the SEC 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, 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 PROVIGIL® (modafinil) tablets [C-IV], ACTIQ® (oral transmucosal fentanyl citrate) [C-II] and GABITRIL® (tiagabine hydrochloride) in the United States and the market prospects and future marketing efforts for these products, including with respect to any new indications for such products;

•any potential expansion of the authorized uses of our existing products;

•our anticipated scientific progress in our research programs and our development of potential pharmaceutical products including our ongoing or planned clinical trials, the timing and costs of such trials and the likelihood or timing of revenues from these products, if any;

•the timing and predictability of regulatory approvals;

•our ability to adequately protect our technology and enforce our intellectual property rights and the future expiration of patent and/or regulatory exclusivity on certain of our products;

•our ability to realize the anticipated benefits of our acquisition of CIMA LABS INC.;

•our future cash flow, our ability to service or repay our existing debt and our ability to raise additional funds, if needed, 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 we have referred you to 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 our products by physicians and patients in our current markets and new markets;

•our ability to obtain regulatory approvals of our product candidates or of expanded indications for certain of our existing products;

•scientific or regulatory setbacks in our research programs, clinical trials, or manufacturing activities for our product candidates or our existing products;

•unanticipated cash requirements to support current operations, expand our business or incur capital expenditures;

•the inability to adequately protect our key intellectual property rights, including as a result of an adverse adjudication with respect to the PROVIGIL litigation;

•the loss of key management or scientific personnel;

•the activities of our competitors in the industry, including the filing of Abbreviated New Drug Applications (ANDAs) with a Paragraph IV certification for any product containing modafinil or the entry of a generic competitor to ACTIQ;

•the loss of one or more key customers of CIMA or the inability to obtain regulatory approval of OraVescent® fentanyl;

•market conditions in the biotechnology industry that make raising capital or consummating acquisitions difficult, expensive or both; and

ii

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

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 the section included in Part I, Item 2 hereof and entitled “Certain Risks Related to our Business.” This discussion is permitted by the Private Securities Litigation Reform Act of 1995.

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PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

CEPHALON, INC.  AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)	September 30, 2004			December 31, 2003
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	605,992		$	1,115,699
Investments	204,534			39,464
Receivables, net	136,503			86,348
Inventory, net	71,466			61,249
Deferred tax asset	69,481			57,972
Other current assets	27,664			9,198
Total current assets	1,115,640			1,369,930
PROPERTY AND EQUIPMENT, net	224,523			126,442
GOODWILL	363,912			298,769
INTANGIBLE ASSETS, net	412,216			326,445
DEBT ISSUANCE COSTS, net	27,429			35,250
DEFERRED TAX ASSET, net	129,216			168,506
OTHER ASSETS	25,877			56,314
	$	2,298,813		$	2,381,656
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	9,403		$	9,637
Accounts payable	40,330			28,591
Accrued expenses	131,254			99,038
Current portion of deferred revenues	1,042			422
Total current liabilities	182,029			137,688
LONG-TERM DEBT	1,287,320			1,409,417
DEFERRED REVENUES	1,592			1,736
DEFERRED TAX LIABILITIES	86,251			45,665
OTHER LIABILITIES	17,862			16,780
Total liabilities	1,575,054			1,611,286
COMMITMENTS AND CONTINGENCIES	—			—
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized, 2,500,000 shares issued, and none outstanding	—			—
Common stock, $.01 par value, 200,000,000 shares authorized, 57,690,229 and 55,842,510 shares issued, and 57,380,965 and 55,533,682 shares outstanding	577			558
Additional paid-in capital	1,161,570			1,052,059
Treasury stock, 309,064 and 308,828 shares outstanding, at cost	(13,706		)	(13,692		)
Accumulated deficit	(473,223		)	(321,305		)
Accumulated other comprehensive income	48,541			52,750
Total stockholders’ equity	723,759			770,370
	$	2,298,813		$	2,381,656

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

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CEPHALON, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per share data)	2004			2003			2004			2003
REVENUES:
Sales	$	253,594		$	184,877		$	698,975		$	482,745
Other revenues	8,373			5,166			17,451			20,822
	261,967			190,043			716,426			503,567
COSTS AND EXPENSES:
Cost of sales	33,782			22,584			89,599			65,283
Research and development	67,683			44,541			198,208			117,336
Selling, general and administrative	76,204			63,533			243,908			183,685
Depreciation and amortization	13,784			10,991			36,927			32,558
Impairment charge	—			—			30,071			—
Acquired in-process research and development	185,700			—			185,700			—
	377,153			141,649			784,413			398,862
INCOME (LOSS) FROM OPERATIONS	(115,186		)	48,394			(67,987		)	104,705
OTHER INCOME AND EXPENSE
Interest income	4,804			2,962			11,639			8,137
Interest expense	(5,176		)	(6,218		)	(16,888		)	(22,574		)
Debt exchange expense	(28,230		)	—			(28,230		)	—
Charge on early extinguishment of debt	(1,352		)	(9,816		)	(2,313		)	(9,816		)
Other income (expense), net	(642		)	(522		)	(2,444		)	1,789
	(30,596		)	(13,594		)	(38,236		)	(22,464		)
INCOME (LOSS) BEFORE INCOME TAXES	(145,782		)	34,800			(106,223		)	82,241
INCOME TAX EXPENSE	(19,464		)	(12,528		)	(45,695		)	(29,608		)
NET INCOME (LOSS)	$	(165,246	)	$	22,272		$	(151,918	)	$	52,633
* BASIC INCOME (LOSS) PER COMMON SHARE (Note 11)	$	(2.94	)	$	0.40		$	(2.71	)	$	0.94
* DILUTED INCOME (LOSS) PER COMMON SHARE (Note 11)	$	(2.94	)	$	0.37		$	(2.71	)	$	0.90
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING	56,178			55,573			56,065			55,510
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION	56,178			64,552			56,065			64,497

* Prior period income per common share is restated for adoption of guidance from EITF 03-6.

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

2

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

																							Accumulated
													Additional										Other
	Comprehensive						Preferred Stock			Common Stock			Paid-in			Treasury Stock				Accumulated			Comprehensive
(In thousands, except share data)	Income			Total			Shares	Amount		Shares	Amount		Capital			Shares	Amount			Deficit			Income
BALANCE, JANUARY 1, 2003				$	642,585		—	$	—	55,425,841	$	554	$	1,034,137		272,857	$	(11,989	)	$	(405,163	)	$	25,046
Net Income	$	83,858		83,858				—		—	—		—				—			83,858			—
Foreign currency translation gain	28,995
Unrealized investment losses	(1,291		)
Other comprehensive income	27,704			27,704				—		—	—		—				—			—			27,704
Comprehensive income	$	111,562
Sale of warrants associated with convertible subordinated notes				178,315				—		—	—		178,315				—			—			—
Purchase of Convertible Hedge associated with convertible subordinated notes				(258,584		)							(258,584		)
Tax benefit from the purchase of Convertible Hedge				90,500									90,500
Stock options exercised				4,528				—		299,056	3		4,525				—			—			—
Tax benefit from the exercise of stock options				944							—		944				—			—			—
Restricted stock award plan				1,394				—		99,025	1		1,393				—			—			—
Employer contributions to employee benefit plan				829				—		18,588	—		829				—			—			—
* Treasury stock acquired				(1,703		)		—			—		—			35,971	(1,703		)	—			—
BALANCE, DECEMBER 31, 2003				770,370			—	—		55,842,510	558		1,052,059			308,828	(13,692		)	(321,305		)	52,750
Net Loss	$	(151,918	)	(151,918		)					—									(151,918		)	—
Foreign currency translation loss	(3,022		)
Unrealized investment losses	(1,187		)
Other comprehensive loss	(4,209		)	(4,209		)					—												(4,209		)
Comprehensive income	$	(156,127	)
Issuance of common stock upon conversion of convertible notes				105,122						1,518,169	15		105,107
Tax effect upon conversion of convertible notes				(11,288		)							(11,288		)
Stock options exercised				8,794						328,875	4		8,790										—
Tax benefit from the exercise of stock options				3,109							—		3,109										—
Restricted stock award plan				3,793						675	—		3,793										—
* Treasury stock acquired				(14		)					—					236	(14		)				—
BALANCE, SEPTEMBER 30, 2004 (Unaudited)				$	723,759		—	$	—	57,690,229	$	577	$	1,161,570		309,064	$	(13,706	)	$	(473,223	)	$	48,541

*Acquisition of treasury stock represents the dollar value of shares withheld from vesting of restricted stock grants as consideration for the employee’s required tax withholding.

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

3

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
(In thousands)	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(151,918	)	$	52,633
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Deferred income taxes	11,853			15,227
Tax benefit from exercise of stock options	3,109			3,100
Debt exchange expense	28,230			—
Tax effect on conversion of convertible notes	(11,288		)	—
Depreciation and amortization	39,327			32,558
Amortization of debt issuance costs	6,420			6,837
Stock-based compensation expense	3,793			1,765
Non-cash charge on early extinguishment of debt	2,313			3,615
Pension curtailment	(4,214		)	—
Loss on disposals of property and equipment	430			—
Impairment charge	30,071			—
Acquired in-process research and development	185,700			—
Increase (decrease) in cash due to changes in assets and liabilities, net of effect of acquistion:
Receivables	(40,085		)	(12,394		)
Inventory	(4,504		)	(2,328		)
Other assets	18,122			1,193
Accounts payable, accrued expenses and deferred revenues	12,018			6,339
Other liabilities	2,225			(2,784		)
Net cash provided by operating activities	131,602			105,761
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(27,283		)	(28,983		)
Investments in non-marketable securities	—			(32,975		)
Acquisition of CIMA, net of cash acquired	(482,521		)	—
Acquisition of intangible assets	(308		)	—
Purchases of investments	(169,741		)	(87,643		)
Sales of investments	76,653			136,481
Net cash used for investing activities	(603,200		)	(13,120		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock options	8,794			3,391
Acquisition of treasury stock	(14		)	(125		)
Principal payments on and retirements of long-term debt	(45,924		)	(200,757		)
Net proceeds from issuance of convertible subordinated notes	—			727,085
Proceeds from sale of warrants	—			178,315
Purchase of Convertible Hedge	—			(258,584		)
Net cash provided by (used for) financing activities	(37,144		)	449,325
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(965		)	4,078
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(509,707		)	546,044
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	1,115,699			486,097
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	605,992		$	1,032,141
Supplemental disclosures of cash flow information:
Non-cash investing and financing activities:
Capital lease additions	$	2,222		$	733
Tax benefit from the purchase of Convertible Hedge	—			90,500
Conversion of convertible notes into common stock	78,250			—

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

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CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Amounts in thousands, except per share data

1.     BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, which includes audited financial statements as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003.  The results of our operations for any interim period are not necessarily indicative of the results of our operations for any other interim period or for a full year.

Reclassifications

Certain reclassifications of prior year amounts have been made to conform with the current year presentation.

2.     ACQUISITION OF CIMA LABS INC.

On August 12, 2004, we completed our acquisition of the outstanding shares of capital stock of CIMA LABS INC (CIMA). With this acquisition, we control the rights to OraVescent fentanyl, a pain relief product candidate currently in Phase 3 clinical trials. OraVescent fentanyl is a tablet that utilizes an enhanced absorption transmucosal drug delivery technology developed by CIMA that we anticipate will provide for rapid onset of pain relief.  We believe that this delivery technology will be more appealing and will enable greater market penetration than has been the case with ACTIQ.  Further, we plan to pursue a broader label for OraVescent fentanyl than currently exists for ACTIQ, including treatment of breakthrough pain in opioid-tolerant patients with conditions other than cancer.  Success in this program may enable the product to reach several million more patients. OraVescent fentanyl is protected by a pharmaceutical composition patent that extends until 2019.

The purchase price of $514.1 million, $482.5 million net of cash acquired (or $409.4 million net of cash, cash equivalents and investments), consists of $500.1 million for all outstanding shares of CIMA at $34.00 per share and $14.0 million in direct transaction costs. The acquisition was funded from Cephalon’s existing cash and short-term investments. In connection with the acquisition, CIMA used $18.8 million of their own funds to purchase all outstanding employee stock options, whether or not vested or exercisable, for an amount equal to $34.00 less the exercise price for such option.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition. The final purchase price allocation will differ from that presented below due to adjustments

5

primarily for items such as additional transaction costs and the final assessment of deferred taxes and valuation allowances.

	At August 12, 2004
Cash and cash equivalents	$	31,604
Available-for-sale investments	73,169
Receivables	10,673
Inventory	6,224
Deferred tax asset, net	22,221
Other current assets	560
Property, plant and equipment	82,474
Intangible assets	113,100
Acquired in-process research and development	185,700
Goodwill	63,909
Total assets acquired	589,634
Current liabilities	(33,097		)
Deferred tax liability	(42,412		)
Total liabilities assumed	(75,509		)
Net assets acquired	$	514,125

Of the $113.1 million of acquired intangible assets, $70 million was assigned to the DuraSolv technology with an estimated useful life of 14 years, $32.7 million was assigned to the OraSolv technology with a weighted average estimated useful life of approximately 6 years, and $10.4 million was assigned to the developed OraVescent technology with an estimated useful life of 15 years. The $63.9 million of goodwill was assigned to the U.S. pharmaceutical segment. In accordance with SFAS 142, goodwill is not amortized, but will be subject to a periodic assessment for impairment by applying a fair-value-based test. None of this goodwill is expected to be deductible for income tax purposes.

We allocated $185.7 million of the purchase price to in-process research and development projects. In-process research and development (IPR&D) represents the valuation of acquired, to-be-completed research projects. At the acquisition date, CIMA’s ongoing research and development initiatives were primarily involved with the development and commencement of Phase 3 clinical trials of OraVescent fentanyl, and several other minor ongoing research and development projects.  At the acquisition date, CIMA had spent approximately $5.6 million on the OraVescent in-process research and development project, and expected to spend an additional $18.2 million to complete all phases of the research and development. We expect to complete our OraVescent fentanyl Phase 3 clinical trials and submit an NDA for approval of this product in 2006.  The estimated revenues for the in-process projects are expected to be recognized from 2006 through 2019.

The value assigned to purchased in-process technology was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projections used to value the in-process research and development were, in some cases, reduced based on the probability of developing a new drug, and considered the relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from such projects are based on management’s estimates of cost of sales, operating expenses, and income taxes from such projects. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental projects, discount rates of 28 percent were considered appropriate for the in-process research and development. These discount rates were commensurate with the projects’ stage of development and the uncertainties in the economic estimates described above.

If these projects are not successfully developed, the sales and profitability of the combined company may be adversely affected in future periods. Additionally, the value of other acquired intangible assets may become impaired. We believed that the foregoing assumptions used in the in-process research and development analysis were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. At the date of acquisition, the development of these projects had not yet reached technological feasibility,

6

and the research and development in progress had no alternative future uses. Accordingly, these costs were charged to expense in the third quarter of 2004.

The results of operations for CIMA have been included in our consolidated statements since the acquisition date of August 12, 2004.

The following unaudited pro forma information shows the results of the our operations for the nine months ended September 30, 2004 and 2003 as though the acquisition had occurred as of the beginning of the periods presented:

	For the nine months ended September 30,
	2004			2003
Total revenues	$	753,004		$	558,849
Net income (loss)	$	(170,649	)	$	52,617
Basic and diluted net loss per common share:
Before cumulative effect of accounting change	$	(3.04	)	$	0.94
Net income (loss)	$	(3.04	)	$	0.90

The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition taken place as of the beginning of the periods presented, or the results that may occur in the future. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the acquisition.

3.     STOCK-BASED COMPENSATION

We account for stock option plans and restricted stock award plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”  Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock.  Restricted stock awards are recorded as compensation cost over the requisite vesting periods based on the market value on the date of grant.  We have opted to disclose only the provisions of Statement of Financial Accounting Standards (SFAS) 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure — An Amendment to FASB Statement No. 123,” as they pertain to financial statement recognition of compensation expense attributable to option grants.  As such, no compensation cost has been recognized for our stock option plans.  If we had elected to recognize compensation cost based on the fair value of granted stock options as prescribed by SFAS 123 and SFAS 148, the pro forma income (loss) and income (loss) per share amounts would have been as follows:

(Our previously reported earnings per share have been restated as required by EITF Issue No. 03-6. See Note 11.)

	For the three months ended September 30,						For the nine months ended September 30,
	2004			2003			2004			2003
				Restated						Restated
Net income (loss), as reported	$	(165,246	)	$	22,272		$	(151,918	)	$	52,633
Add: Stock-based compensation expense included in net income, net of related tax effects	792			200			2,314			568
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(8,517		)	(8,008		)	(23,312		)	(23,641		)
Pro forma net income (loss)	$	(172,971	)	$	14,464		$	(172,916	)	$	29,560
Earnings (loss) per share:
Basic income (loss) per share, as reported	$	(2.94	)	$	0.40		$	(2.71	)	$	0.94
Basic income (loss) per share, pro forma	$	(3.08	)	$	0.26		$	(3.08	)	$	0.52
Diluted income (loss) per share, as reported	$	(2.94	)	$	0.37		$	(2.71	)	$	0.90
Diluted income (loss) per share, pro forma	$	(3.08	)	$	0.25		$	(3.08	)	$	0.52

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4.      RECENT ACCOUNTING PRONOUNCEMENTS

In addition to the recent accounting pronouncements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2003, the following should be considered.

On March 31, 2004, the Financial Accounting Standards Board (FASB) issued an Exposure Draft, “Share-Based Payment,” that addressed the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally would require instead that such transactions be accounted for using a fair-value-based method. The proposed standard’s original effective date would have applied to awards that are granted, modified, or settled in cash in fiscal years beginning after December 15, 2004. On October 13, 2004, the FASB decided to delay the effective date of its proposed standard to interim or annuals periods beginning after June 15, 2005. The FASB is expected to issue a final standard by December 31, 2004.

In March 2004, the FASB’s Emerging Issues Task Force (EITF) reached consensus on Issue 03-6. This Issue is intended to clarify what is a participating security for purposes of applying SFAS 128, “Earnings Per Share.”  The Issue also provides further guidance on how to apply the two-class method of computing earnings per share (EPS) once it is determined that a security is participating, including how to allocate undistributed earnings to such a security.  We adopted this Issue in the second quarter of 2004 and determined that our 3.875% convertible subordinated notes were participating securities as defined by this Issue. Although as of September 30, 2004 there are no longer any of the 3.875% convertible notes outstanding,  net income (loss) used for basic and diluted income (loss) per share is allocated to the common shares using a ratio of weighted average common shares outstanding and weighted average participating securities, using the if-converted method. Our previously reported earnings per share have been restated as required by EITF Issue 03-6.  There was no effect on our basic EPS for 2003 for the three months ended September 30 and a decrease of $0.01 per share for nine months ended September 30. The effect on our diluted EPS for 2003 was a decrease of $0.01 per share for the three and nine months ended September 30.

In September 2004, the EITF issued reached consensus on Issue 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effects on Diluted Earnings per Share.”  This Issue requires the inclusion of convertible shares for contingently convertible debt in the calculation of diluted EPS using the if-converted method, regardless of whether the contingency has been met. The Issue is effective for periods ending after December 15, 2004 and requires the restatement of previously reported EPS. We are examining possible transactions involving our Zero Coupon Convertible Notes that could cause these notes to not be considered contingently convertible debt for purposes of EITF 04-8. If we do not restructure, retire, redeem or exchange these notes prior to December 31, 2004, this Issue will require us to include an additional 12.9 million shares in the calculation of diluted EPS for 2004 and the portion of 2003 for which the convertible debt was outstanding.

5.     INVENTORY, NET

Inventory consisted of the following:

	September 30, 2004		December 31, 2003
Raw materials	$	24,256	$	23,647
Work-in-process	9,443		10,295
Finished goods	37,767		27,307
	$	71,466	$	61,249

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In addition to the inventory listed above, we are incurring costs associated with producing supplies of NUVIGIL, a follow-on compound to PROVIGIL currently in Phase 3 clinical trials. As this is a second generation version of a currently FDA-approved product, we have capitalized these costs with the expectation of receiving future regulatory approval to market the product. At September 30, 2004, we had $16.3 million of costs reflected in other current assets. If we do not receive approval to market the product or if we should use these supplies for research purposes or if it becomes probable that the product will expire before it can be sold, we will expense these costs at that point in time.

6.     INTANGIBLE ASSETS, NET

Other intangible assets consisted of the following:

		September 30, 2004						December 31, 2003
	Estimated Useful Lives	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Developed technology acquired from Lafon	10-15 years	$	132,000	$	27,133	$	104,867	$	132,000	$	19,733	$	112,267
Trademarks/tradenames acquired from Lafon	15 years	16,000		2,933		13,067		16,000		2,133		13,867
GABITRIL product rights	9-15 years	115,990		27,088		88,902		116,585		21,055		95,530
Novartis CNS product rights	10 years	41,641		15,615		26,026		41,641		12,492		29,149
ACTIQ marketing rights	10 years	75,465		21,794		53,671		75,465		16,056		59,409
Modafinil marketing rights	10 years	9,296		1,862		7,434		9,469		1,142		8,327
DuraSolv technology acquired from CIMA	14 years	70,000		609		69,391		—		—		—
OraSolv technology acquired from CIMA	6 years	32,700		655		32,045		—		—		—
OraVescent technology acquired from CIMA	15 years	10,400		85		10,315		—		—		—
Other product rights	5-14 years	14,406		7,908		6,498		14,341		6,445		7,896
		$	517,898	$	105,682	$	412,216	$	405,501	$	79,056	$	326,445

Intangible assets are amortized over their estimated useful economic life using the straight-line method.  Amortization expense was $9.7 million and $8.3 million for the three months ended September 30, 2004 and 2003, respectively, and $26.5 million and $24.8 million for the nine months ended September 30, 2004 and 2003, respectively.  Estimated amortization expense of intangible assets for each of the next five fiscal years, is approximately $44.0 million.

7.     LONG-TERM DEBT

Long-term debt consisted of the following:

	September 30, 2004			December 31, 2003
2.5% convertible subordinated notes due December 2006	$	522,030		$	600,920
3.875% convertible subordinated notes due March 2007	—			43,000
Zero Coupon convertible subordinated notes first putable June 2008	375,000			375,000
Zero Coupon convertible subordinated notes first putable June 2010	375,000			375,000
Due to Abbott Laboratories	5,411			6,725
Mortgage and building improvement loans	9,884			10,354
Capital lease obligations	3,395			2,289
Other	6,003			5,766
Total debt	1,296,723			1,419,054
Less current portion	(9,403		)	(9,637		)
Total long-term debt	$	1,287,320		$	1,409,417

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2.5% Convertible Subordinated Notes

In July 2004, a holder of our 2.5% convertible subordinated notes approached us, and we agreed, to exchange $78.3 million of these outstanding notes for 1,518,169 shares of our common stock.  We recognized debt exchange expense of $28.2 million in the third quarter of 2004 relating to these early exchanges in accordance with SFAS No. 84, “Induced Conversion of Convertible Debt.”  We also recognized the tax effect of this exchange of $11.3 million as a reduction of additional paid-in capital and as a tax benefit in our statement of operations for the nine months ended September 30, 2004.

3.875% Convertible Subordinated Notes

In March 2004 and August 2004, we repurchased for cash $10.0 million (at a price of 109.5% of the face amount) and $33.0 million (at a price of 104% of the face amount), respectively, of the 3.875% convertible subordinated notes in private transactions.  As a result, during the nine months ended September 30, 2004, we recognized $2.3 million in our financial statements as a charge on early extinguishment of debt, as follows:

	Principal Amount		Premium		Write-off of unamortized debt issuance costs		Total charge on early extinguishment of debt
3.875% convertible subordinated notes repurchased in March 2004	$	10,000	$	950	$	11	$	961
3.875% convertible subordinated notes repurchased in July 2004	33,000		1,320		32		1,352
	$	43,000	$	2,270	$	43	$	2,313

8.     LEGAL PROCEEDINGS

On March 28, 2003, we filed a patent infringement lawsuit in U.S. District Court in New Jersey against Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc., Ranbaxy Pharmaceuticals Inc., and Barr Laboratories, Inc. based upon the abbreviated new drug applications (ANDAs) filed by each of these companies seeking FDA approval to market a generic version of modafinil.  The lawsuit claims infringement of our U.S. Patent No. RE37516, which covers the pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL.  Defendants Barr, Mylan and Ranbaxy have asserted counterclaims for non-infringement and/or patent invalidity.  This lawsuit is currently in the discovery phase and we expect that the trial will begin sometime in 2005.  On May 26, 2004, we also filed a patent infringement lawsuit in U.S. District Court in New Jersey against Sandoz Inc. based upon their ANDA for a generic equivalent of modafinil.  Discovery on this action has not yet commenced.  We intend to vigorously defend the validity, and prevent infringement, of this patent.

On September 7, 2004, we announced that we had received subpoenas from the U.S. Attorney’s Office in Philadelphia requesting generally relating to our sales and promotional practices for PROVIGIL, ACTIQ and GABITRIL.  We are cooperating with the investigation and are providing documents to the Government.  In addition, we have engaged in ongoing discussions with the Attorney General in Pennsylvania regarding recent media reports of

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instances of abuse and diversion of ACTIQ.  We have had similar discussions with the Office of the Attorney General in Connecticut; in September 2004, we received a voluntary request for information from the Office of the Connecticut Attorney General asking us to provide information generally relating to our sales and promotional practices for our U.S. products.  We have agreed to comply with this voluntary request.  These matters may involve the bringing of criminal charges and fines, and/or civil penalties.  We cannot predict or determine the outcome of these matters or reasonably estimate the amount or range of amounts of any fines or penalties that might result from an adverse outcome.  However, an adverse outcome could have a material adverse effect on our financial position, liquidity and results of operations.

We are a party to certain other litigation in the ordinary course of our business, including, among others, U.S. patent interference proceedings, European patent oppositions, and matters alleging employment discrimination, product liability and breach of commercial contract. We are vigorously defending ourselves in all of the actions against us and do not believe these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition, results of operations or cash flows.

9.     INVESTMENT IN MDS PROTEOMICS INC.

In January 2003, we purchased from MDS Proteomics Inc. (MDSP), a privately-held Canadian company and a subsidiary of MDS Inc., a $30.0 million convertible note due 2010 and entered into a five-year research agreement focused on accelerating the clinical development of our pipeline of small chemical compounds.  Recently, MDSP determined to change its business model to focus upon the provision of services to the pharmaceutical and biotechnology industries, which it believes can lead to nearer term revenue and profitability.

On July 29, 2004, MDSP completed its reorganization under Canada’s Companies Creditors’ Arrangement Act and changed its name to Protana Inc.  As part of the reorganization, we agreed to terminate our research agreement with Protana and cancel the $30.0 million convertible note we held in return for shares of Class A Preferred Stock and Common Stock of Protana.  In light of the restructuring of Protana and the uncertain business prospects for the company, we determined that the carrying value of our investment was fully impaired and we recorded an impairment charge of $30.1 million, which included transaction costs, in our second quarter of 2004 results of operations. We did not record a tax benefit for this impairment charge since the realization of this deduction for tax purposes is not considered probable.

10.          COMPREHENSIVE INCOME (LOSS)

Our total comprehensive income (loss) is as follows:

	Three months ended September 30,						Nine months ended September 30,
	2004			2003			2004			2003
Net income (loss)	$	(165,246	)	$	22,272		$	(151,918	)	$	52,633
Foreign currency translation adjustment	3,588			2,597			(3,022		)	14,907
Unrealized investment (losses) gains	227			(572		)	(1,187		)	(1,003		)
Other comprehensive (loss) income	3,815			2,025			(4,209		)	13,904
Comprehensive income (loss)	$	(161,431	)	$	24,297		$	(156,127	)	$	66,537

11.          EARNINGS PER SHARE (EPS)

We compute income per common share in accordance with SFAS No. 128, “Earnings Per Share.” Basic income per common share is computed based on the weighted average number of common shares outstanding during

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the period. Diluted income per common share is computed based on the weighted average shares outstanding and the dilutive impact of common stock equivalents outstanding during the period. The dilutive effect of employee stock options and restricted stock awards is measured using the treasury stock method. The dilutive effect of convertible notes is measured using the “if-converted” method.  Common stock equivalents are not included in periods where there is a loss, as they are anti-dilutive. Because of the inclusion of the restricted convertibility terms of the Zero Coupon Convertible Subordinated Notes, our diluted income per common share calculation does not give effect to the dilution from the conversion of the notes until our share price exceeds the 120% conversion price premium.

In addition, we adopted the guidance from the EITF’s Issue 03-6 in the second quarter of 2004. Under the guidance, we must apply the two-class method of computing EPS and allocate undistributed earnings to participating securities. We determined that our 3.875% convertible subordinated notes were participating securities as these notes contained a provision that stated that if we distributed cash to all or substantially all of our common stock holders, whether by dividend or otherwise, the holders were entitled to such distribution as if they had converted their notes into shares. Although as of September 30, 2004 there are no longer any of the 3.875% convertible notes outstanding,  net income (loss) used for basic and diluted income (loss) per share is allocated to the common shares using a ratio of weighted average common shares and weighted average participating securities for the period outstanding, using the if-converted method. Our previously reported earnings per share have been restated as required by EITF Issue 03-6.

The following is a reconciliation of net income (loss) and weighted average common shares outstanding for purposes of calculating basic and diluted income (loss) per common share:

	Three months ended September 30,					Nine months ended September 30,
	2004			2003		2004			2003
				Restated					Restated
Basic income (loss) per share computation:
Numerator:
Net income (loss) used for basic income per common share	$	(165,246	)	$	22,272	$	(151,918	)	$	52,633
Net income used for basic income per participating security	—			242		—			678
	$	(165,246	)	$	22,514	$	(151,918	)	$	53,311
Denominator:
Weighted average shares used for basic income (loss) per common share	56,178			55,573		56,065			55,510
Weighted average shares of participating securities	214			611		422			724
Basic income (loss) per common share:	$	(2.94	)	$	0.40	$	(2.71	)	$	0.94
Diluted income (loss) per share computation:
Numerator:
Net income (loss) used for basic income per common share	$	(165,246	)	$	22,272	$	(151,918	)	$	52,633
Interest on convertible subordinated notes (net of tax)	—			2,049		—			6,359
Net income (loss) used for diluted income per common share	$	(165,246	)	$	24,321	$	(151,918	)	$	58,992
Denominator:
Weighted average shares used for basic income (loss) per common share	56,178			55,573		56,065			55,510
Effect of dilutive securities:
Employee stock options and restricted stock awards	—			1,571		—			1,579
Convertible subordinated notes	—			7,408		—			7,408
Weighted average shares used for diluted income (loss) per common share	56,178			64,552		56,065			64,497
Diluted income (loss) per common share:	$	(2.94	)	$	0.37	$	(2.71	)	$	0.90

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The following reconciliation shows the shares excluded from the calculation of diluted income (loss) per common share as the inclusion of such shares would be anti-dilutive:

	Three months ended September 30,		Nine months ended September 30,
	2004	2003	2004	2003
Weighted average shares excluded:
Employee stock options	7,728	5,674	2,305	5,698
Convertible subordinated notes	19,753	13,730	20,497	7,702
	27,481	19,404	22,802	13,400

The potential impact of the Zero Coupon Convertible Notes on the calculation of diluted shares is described in the table below:

	Principal amount		Conversion price per share		Resulting conversion shares	120% conversion price
Zero Coupon notes first putable June 2008	$	375,000	$	59.50	6,303	$	71.40
Zero Coupon notes first putable June 2010	375,000		$	56.50	6,637	$	67.80
	$	750,000			12,940

At the end of each period, SFAS 128 requires that we use the if-converted method to determine the dilutive impact of the 2008 Notes and the 2010 Notes.  Since the terms of these notes include restrictions which prevent the holder from converting the notes until our share price exceeds the 120% Conversion Price, there will be no impact of these notes on the total diluted shares figure for a particular reporting period unless our stock price exceeds the 120% Conversion Price on the last day of that reporting period.  If that occurs, the 2008 Notes and the 2010 Notes will increase the total diluted shares figure by 6.3 million shares and 6.6 million shares, respectively, for both that current reporting period and the corresponding year-to-date reporting period.  Under the if-converted method, we must recalculate this analysis each quarter to determine if the diluted shares from the 2008 Notes and 2010 Notes should be included in our diluted shares figures.  However, in September 2004, the FASB’s Emerging Issues Task Force reached consensus on Issue 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effects on Diluted Earnings per Share” effective for periods ending after December 15, 2004.  Assuming we do not restructure, retire, redeem or exchange our Zero Coupon Convertible Notes, this issue requires us to include the additional 12.9 million shares related to our Zero Coupon Convertible Notes in the calculation of diluted EPS, regardless of whether the contingency has been met.

We purchased Convertible Note Hedges and sold Warrants which, in combination, have the effect of reducing the dilutive impact of the Zero Coupon Convertible Notes by increasing the effective conversion price for these Notes, from our perspective, to $72.08. SFAS 128, however, requires us to analyze the impact of the Convertible Note Hedges and Warrants on diluted EPS separately.  As a result, the purchase of the Convertible Note Hedge is excluded because its impact will always be anti-dilutive.  SFAS 128 further requires that the impact of the sale of the Warrants be computed using the treasury stock method.  For example, using the treasury stock method, if the average price of our stock during the period ended September 30, 2004 had been $72.08, $80.00 or $90.00, the shares from the Warrants to be included in diluted EPS would have been zero, 1.0 million and 2.1 million shares, respectively.  The total number of shares that could potentially be included under the Warrants is 12.9 million.  Since the average share

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price of our stock during the three months ended September 30, 2004 did not exceed the Conversion Price of $72.08, there was no impact of these Warrants on diluted shares or diluted EPS during that period.

12.          SEGMENT AND SUBSIDIARY INFORMATION

Although we have significant sales, manufacturing, and research operations conducted by several subsidiaries located throughout the United States and Europe, including our latest acquisition of CIMA, Cephalon management makes operating decisions and assesses performance based on a single pharmaceutical segment. CIMA’s operations consist of contract manufacturing and research and development of pharmaceutical products which we have aggregated into our single operational segment for reporting purposes.

As required by SFAS 131, “Disclosure about Segments of an Enterprise and Related Information,” revenue and long-lived asset information summarized by geographic region is provided below:

Revenues:

	Three months ended September 30,				Nine months ended September 30,
	2004		2003		2004		2003
United States	$	228,239	$	155,507	$	614,009	$	402,574
Europe	33,728		34,536		102,417		100,993
Total	$	261,967	$	190,043	$	716,426	$	503,567

Long-lived assets:

	September 30,2004		December 31, 2003
United States	$	652,062	$	474,112
Europe	531,111		537,614
Total	$	1,183,173	$	1,011,726

13.          PENSIONS AND OTHER POSTRETIREMENT BENEFITS

We have a defined benefit pension plan for current employees and a postretirement benefit plan for employees who retired prior to 2003 at our French subsidiaries.  These plans are noncontributory and are not funded; benefit payments are funded from operations.

A summary of the components of net periodic benefit costs is as follows:

	Pension Benefits For the three months ended September 30,					Pension Benefits For the nine months ended September 30,
	2004			2003		2004			2003
Service cost	$	113		$	94	$	346		$	270
Interest cost	82			73		250			209
Recognized actuarial gain	(62		)	—		(189		)	—
Change in benefit obligation	$	133		$	167	$	407		$	479

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	Other Benefits For the three months ended September 30,						Other Benefits For the nine months ended September 30,
	2004			2003			2004			2003
Service cost	$	8		$	94		$	23		$	270
Interest cost	21			64			63			185
Amortization of prior improvements	—			(59		)	—			(171		)
Recognized actuarial gain	(9		)	(1		)	(28		)	(3		)
Recognized gain due to plan curtailment	—			—			(4,240		)	—
Change in benefit obligation	$	20		$	98		$	(4,182	)	$	281

In the first quarter of 2004, we cancelled postretirement health care benefits at Cephalon France for employees not yet retired.  This resulted in a gain of $4.2 million, which has been recognized as an offset to net periodic benefits costs for the three months ended March 31, 2004 and the nine months ended September 30, 2004.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations.  We recommend that you read this MD&A in conjunction with our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2003.

EXECUTIVE SUMMARY

Cephalon is an international biopharmaceutical company dedicated to the discovery, development and marketing of innovative products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting an active research and development program, we market three products in the United States and numerous products in various countries throughout Europe.  Our three biggest products in terms of product sales, PROVIGIL, ACTIQ and GABITRIL, comprised approximately 90% of our worldwide net sales for the nine months ended September 30, 2004.  We market PROVIGIL, ACTIQ and GABITRIL in the United States through our approximately 500-person sales force.

Our corporate and research and development headquarters are in West Chester, Pennsylvania, and we have offices in Utah, Minnesota, France, the United Kingdom, Germany and Switzerland. We operate manufacturing facilities in France for the production of modafinil, which is the active drug substance in PROVIGIL, Salt Lake City, Utah, for the production of ACTIQ for worldwide distribution and sale, and Eden Prairie and Brooklyn Park, Minnesota, for the production of orally disintegrating versions of drugs for pharmaceutical company partners.

Our future success is highly dependent on obtaining and maintaining patent protection for our products and technology.  With respect to PROVIGIL, we have filed patent infringement suits against five generic companies.  Depending on the results of the litigation, we could face generic competition as early as December 2005.  For ACTIQ, the patents covering the previous and current formulations are set to expire as early as May 2005 and September 2006, respectively.  As a result of the License and Supply Agreement we entered into with Barr Laboratories, Inc. in July 2004, we could face generic competition from Barr prior to September 2006 if we receive FDA approval of CIMA’s OraVescent fentanyl before this date.  See “Acquisition of CIMA LABS INC.” below.  The loss of patent protection on any of our existing products, whether by third-party challenge, invalidation or circumvention or by patent expiration, would materially impact our results of operations.

As part of our business strategy, in the future we expect to consider and, as appropriate, consummate acquisitions of other technologies, products and businesses.  Over the past few years, we also have pursued a strategy of both broadening the range of clinical uses that are approved by regulatory authorities and seeking new and improved formulations of our currently marketed products.  Our efforts resulted in approvals in 2003 of an expanded indication for PROVIGIL in Germany, and in 2004 of expanded indications for PROVIGIL in the United States, the United Kingdom, France, Austria and Switzerland.  For the remainder of 2004 and into 2005, we have a number of ongoing and planned clinical trials, including Phase 3 clinical trials of NUVIGIL™, a single isomer of PROVIGIL, in narcolepsy, obstructive sleep apnea/hypopnea syndrome (OSA/HS) and shift work sleep disorder (SWSD), clinical trials of PROVIGIL and ACTIQ in pediatric patients, and a Phase 3 clinical program evaluating GABITRIL for the treatment of generalized anxiety disorder (GAD).  In November 2004, we plan to file an sNDA with the FDA for a sugar-free formulation of ACTIQ.  We also anticipate filing an sNDA for PROVIGIL in attention deficit/hyperactivity disorder (ADHD) in late 2004, an NDA for NUVIGIL in early 2005 and an NDA for OraVescent fentanyl in the second half of 2005.  With respect to our Phase 2 clinical trials evaluating the use of GABITRIL in treating insomnia, we have determined that the data from these trials was less robust than the GABITRIL GAD data and, for that reason, do not plan to initiate a Phase 3 program for GABITRIL in treating insomnia at this time.

We also have devoted significant resources to the development of therapeutics to treat neurological and oncological disorders.  In the neurology area, we have a program with H. Lundbeck A/S to evaluate a molecule, CEP-1347, that has entered into an 800-patient Phase 2/3 clinical trial for the treatment of patients with early stage Parkinson’s disease.  In the cancer area, we have a program with a molecule, CEP-701, and are currently conducting

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Phase 2 clinical trials in patients suffering from prostate cancer and acute myeloid leukemia (AML).  We also are conducting a Phase 1/2 program with another molecule, CEP-7055, to evaluate safety and tolerability and to gather preliminary evidence of efficacy in patients with treatment refractory tumors.  In the pharmaceutical industry, the regulatory approval for the sale of new pharmaceutical products remains highly uncertain because the majority of therapeutic candidates fail to show the human safety and efficacy necessary for regulatory approval and successful commercialization.  In addition, these efforts require substantial time, effort and financial resources.  Our success in developing and commercializing these product candidates, or new or improved formulations of existing products, will be a significant factor in our future success.

We have significant levels of indebtedness outstanding, the majority of which consists of convertible notes with stated conversion prices or restricted conversion prices higher than our stock price as of the date of this filing. Of our outstanding convertible notes, as of the filing date of this report, $521.7 million in aggregate principal amount outstanding matures in 2006.

The rate of our future growth and our ability to generate sufficient cash flows from operations to service and repay our indebtedness ultimately will depend, in large part, on our ability to maintain patent protection on our existing products and successfully acquire or develop new products and new indications for our existing products.

Acquisition of CIMA LABS INC.

On August 12, 2004, we completed our acquisition of CIMA LABS INC.  Under the Agreement and Plan of Merger dated November 3, 2003, we acquired each outstanding share of CIMA common stock for $34.00 per share in cash.  The total cash paid to CIMA shareholders in the transaction was approximately $482.5 million, net of CIMA’s existing cash on hand, or $409.4 million, net of CIMA’s cash, cash equivalents and investments.  As a result of the acquisition, we obtained the rights to CIMA’s OraVescent fentanyl product candidate, which is currently in Phase 3 clinical trials for the treatment of breakthrough cancer pain in opioid-tolerant patients.  OraVescent fentanyl utilizes an enhanced absorption transmucosal drug delivery technology that we believe may facilitate the rapid onset of pain relief in such patients.  We are targeting approval of this product by the FDA for late 2006.

CIMA also develops and manufactures orally disintegrating tablets using its proprietary technologies, OraSolv® and DuraSolv®, which allow an active drug ingredient to be formulated into a new, orally disintegrating dosage form that quickly disintegrates in the mouth without chewing or the need for water.  CIMA enters into collaborative agreements with pharmaceutical companies to develop products based on its oral drug delivery technologies.  It currently manufactures for its partners, including AstraZeneca, Organon and Wyeth, three prescriptions and four over-the-counter pharmaceutical brands incorporating either the OraSolv or DuraSolv technologies.  Revenues from these arrangements consist of net sales of manufactured product to partners, product development and licensing fees and royalties.

CIMA has facilities in Eden Prairie and Brooklyn Park, Minnesota, which house its executive offices, manufacturing facility, research and product development center and warehouse space.  As of December 31, 2003, CIMA had 273 full-time employees.

To secure FTC clearance of the CIMA acquisition, we entered into a license and supply agreement with Barr Laboratories, Inc. whereby we agreed to license to Barr our U.S. rights to any intellectual property related to ACTIQ. The license to ACTIQ will become effective upon the earliest to occur of (i) final FDA approval of OraVescent fentanyl, (ii) September 5, 2006, if we have not received either (A) an approvable letter from FDA for the sugar free formulation of ACTIQ by July 1, 2005 (or final FDA approval within 180 days of such approvable letter) or (B) a pediatric extension for ACTIQ or (iii) February 3, 2007, if we have received a pediatric extension for ACTIQ.  As we currently expect to receive both a pediatric extension for ACTIQ prior to September 2006 and FDA approval for the sugar-free formulation of ACTIQ within the timeframe agreed upon with the FTC, we anticipate that the Barr license will be effective upon OraVescent fentanyl approval.  Under the agreement, Barr also may receive a license to the sugar-free formulation of ACTIQ under development; this license would become effective upon OraVescent fentanyl approval by the FDA or if the sugar-free approval timelines described above are not achieved.  In November 2004, we plan to file an sNDA with the FDA requesting approval for the sugar-free formulation of ACTIQ, and we anticipate final FDA approval of this formulation in mid-2005.

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Under the license and supply agreement, we also agreed to transfer to Barr our technological know-how and intellectual property related to ACTIQ and to sell to Barr, for period of up to three years, a generic form of ACTIQ for resale in the United States if Barr is unable to manufacture an FDA-approved generic version of ACTIQ by the date the license takes effect.  In addition, we have agreed to forbear from asserting any remaining patent rights in ACTIQ against other parties beginning on the earlier of August 3, 2007 or six months following the effective date of Barr’s license.

RECENT ACCOUNTING PRONOUNCEMENTS

On March 31, 2004, the FASB issued an Exposure Draft, Share-Based Payment, that addressed the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require instead that such transactions be accounted for using a fair-value-based method. The proposed standard’s original effective date would have applied to awards that are granted, modified, or settled in cash in interim or annual periods beginning January 1, 2005. On October 13, 2004, the FASB decided to delay the effective date of its proposed standard for interim or annuals periods beginning June 15, 2005. The FASB is expected to issue its final standard before December 31, 2004.

In March 2004, the FASB’s Emerging Issues Task Force (EITF) reached consensus on Issue 03-6. This Issue is intended to clarify what is a participating security for purposes of applying SFAS 128, “Earnings Per Share.”  The Issue also provides further guidance on how to apply the two-class method of computing earnings per share (EPS) once it is determined that a security is participating, including how to allocate undistributed earnings to such a security.  We adopted this Issue in the second quarter of 2004 and determined that our 3.875% convertible subordinated notes were participating securities as defined by this Issue. Although as of September 30, 2004 there are no longer any of the 3.875% convertible notes outstanding,  net income (loss) used for basic and diluted income (loss) per share is allocated to the common shares using a ratio of weighted average common shares outstanding and weighted average participating securities, using the if-converted method. Our previously reported earnings per share have been restated as required by EITF Issue 03-6.  There was no effect on our basic EPS for 2003 for the three months ended September 30 and a decrease of $0.01 per share for nine months ended September 30. The effect on our diluted EPS for 2003 was a decrease of $0.01 per share for the three and nine months ended September 30.

In September 2004, the EITF issued reached consensus on Issue 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effects on Diluted Earnings per Share.”  This Issue requires the inclusion of convertible shares for contingently convertible debt in the calculation of diluted EPS using the if-converted method, regardless of whether the contingency has been met. The Issue is effective for periods ending after December 15, 2004 and requires the restatement of previously reported EPS. We are examining possible transactions involving our Zero Coupon Convertible Notes that could cause these notes to not be considered contingently convertible debt for purposes of EITF 04-8. If we do not restructure, retire, redeem or exchange these notes prior to December 31, 2004, this Issue will require us to include an additional 12.9 million shares in the calculation of diluted EPS for 2004 and the portion of 2003 for which the convertible debt was outstanding.

RESULTS OF OPERATIONS

(Dollar amounts in thousands)

CIMA LABS INC. —On August 12, 2004, we completed our acquisition of CIMA. The following table shows the effect of CIMA on our results of operations for the period August 13 to September 30, 2004 for which we have no comparable amounts in our 2003 results of operations:

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For the period August 13 through September 30, 2004:
Sales	$	5,224
Other revenues	5,389
	10,613
Costs and expenses:
Cost of sales	4,577
Research and development	3,338
Selling, general and administrative	1,673
Depreciation and amortization	1,802
Acquired in-process research and development costs	185,700
	197,090
Other income and expense:
Interest income	255
Other income (expense), net	(13		)
	242
Loss before income taxes	$	(186,235	)

Sales— In the United States, we sell our products to pharmaceutical wholesalers.  Decisions made by these wholesalers and their customers regarding the levels of inventory they hold (and thus the amount of product they purchase) can materially affect the level of our sales in any particular period and thus may not necessarily correlate to the number of prescriptions written for our products as reported by IMS Health Incorporated.  We attempt to minimize these fluctuations, both by providing, from time to time, discounts to our customers to stock normal amounts of inventory and by canceling orders if we believe a particular customer is speculatively buying inventory in anticipation of possible price increases.  However, we do not have any agreements, understandings or business practices under which we extend incentives based on levels of inventory held by wholesalers.  We estimate that wholesaler inventories as of September 30, 2004 for all three of our products were within a normal range.  However, we do not have access to the actual inventory levels of our products held by our wholesalers or their customers.

At the beginning of 2004, we consolidated our two former U.S. sales forces into a single unit that now details all three products to a broader group of physicians, including primary care physicians (e.g. internists, general practitioners and family practitioners). In addition, we recently expanded this combined force to approximately 500 persons. We believe this substantially larger sales force, coupled with focused marketing efforts designed to educate physicians and communicate the benefits of our products, contributed to the increases in total sales for the three and nine months ended September 30, 2004.

Three months ended September 30, 2004 compared to three months ended September 30, 2003:

	For the three months ended September 30,
	2004		2003		Change		% Change
Sales:
PROVIGIL	$	101,978	$	79,746	$	22,232	28	%
ACTIQ	102,694		65,451		37,243		57	%
GABITRIL	24,624		17,243		7,381		43	%
Other	24,298		22,437		1,861		8	%
Total sales	253,594		184,877		68,717		37	%
Total other revenues	8,373		5,166		3,207		62	%
Total revenues	$	261,967	$	190,043	$	71,924	38	%

Sales— In addition to our larger sales force presence, other factors which contributed to the increase in sales are summarized as follows:

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•Sales of PROVIGIL increased 28% in the third quarter of 2004 as compared to 2003. U.S. prescriptions for PROVIGIL increased by 37%, according to IMS Health. In January, the FDA granted an expanded U.S. label for PROVIGIL, which is now indicated to improve wakefulness in patients with excessive sleepiness associated with obstructive sleep apnea and shift work sleep disorder, as well as narcolepsy.  Additionally, domestic prices increased approximately 8% from period to period.

•Sales of ACTIQ increased 57% as compared to the same period last year. U.S. prescriptions for ACTIQ increased by 22%, according to IMS Health. In addition, domestic prices increased approximately 5% from period to period.

•Sales of GABITRIL increased 43% as compared to the same period last year. U.S. prescriptions for GABITRIL increased by 43%, according to IMS Health. An increase in domestic prices of approximately 6% period over period also contributed to higher sales recorded in 2004.

•Other sales consist of (1) sales of other products and certain third party products in various international markets, principally in France and (2) sales of products manufactured by CIMA and sold to its pharmaceutical partners.  The most significant sales in this other sales category are SPASFON® (phloroglucinol) and FONZYLANE® (buflomedil).

Other Revenues—The increase in other revenues of 62% from period to period is primarily due to the inclusion of product development and licensing fees and royalties earned by CIMA.  This additional revenue was partially offset by a decrease in partner reimbursements on both our CEP-7055 program and our CEP-1347 program and a reduction in earnings recognized under our collaboration agreement with Novartis Pharma AG. The level of other revenue recognized from period to period may continue to fluctuate based on the status and activity of each related project and terms of each collaboration agreement.  Therefore, past levels of other revenues may not be indicative of future levels.

	For the three months ended September 30,
	2004		2003		Change		% Change
Costs and expenses:
Cost of sales	$	33,782	$	22,584	$	11,198	50	%
Research and development	67,683		44,541		23,142		52	%
Selling, general and administrative	76,204		63,533		12,671		20	%
Depreciation and amortization	13,784		10,991		2,793		25	%
Acquired in-process research and development costs	185,700		—		185,700		—	%
	$	377,153	$	141,649	$	235,504	166	%

Cost of Sales— The cost of sales was approximately 13% of net sales for the third quarter of 2004 and 12% of net sales for the third quarter of 2003.  The increase is primarily due to higher costs related to other products sold in France and to CIMA’s cost of sales for which there is no comparable data and for which the cost percentage to sales is higher than existing Cephalon products.

Research and Development Expenses—Research and development expenses increased $23.1 million, or 52%, in the third quarter of 2004 as compared to the third quarter of 2003. Approximately $12.8 million of this increase is due to clinical research costs associated with increased headcount necessary to support increased clinical activities and with costs incurred with our Phase 3 studies of NUVIGIL started in the fourth quarter of 2003. Expenses of $4.0 million were incurred in 2004 to develop new or improve current production processes for our currently marketed products and products in development as well as producing material for our clinical trials. CIMA costs of $3.3 million also contributed to the increase.

Selling, General and Administrative Expenses—Selling, general and administrative expenses increased $12.7 million, or 20%, in the third quarter of 2004 as compared to the third quarter of 2003.  Of this increase, $8.3 million is a result of the expansion of our U.K. and U.S. field sales forces and an additional $1.7 million is due to CIMA. Of the

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remaining increase, a portion is due (1) to higher administrative expenses associated with an increase in headcount, (2) costs associated with complying with the requirements of the Sarbanes-Oxley Act, and (3) higher accruals for bonus expenses resulting from a shift from a stock option-based plan to a cash-based performance incentive plan for most employees.

Depreciation and Amortization Expenses—Depreciation and amortization expenses increased by $2.8 million, or 25%, in the third quarter of 2004 as compared to the third quarter of 2003. Depreciation expense increased period over period primarily as a result of increased capital investments in software, building and laboratory improvements at our West Chester location, increased spending on manufacturing equipment at our Salt Lake City location and the acquisition of property, plant and equipment from CIMA. Amortization expense increased due to the amortization of technology, trademark and marketing rights acquired from CIMA.

Acquired in-process research and development— In connection with our acquisition of CIMA, we allocated approximately $185.7 million of the purchase price to in-process research and development projects. At the acquisition date, CIMA’s ongoing research and development initiatives was primarily involved with the development and commencement of Phase 3 clinical trials of OraVescent fentanyl, and several other minor ongoing research and development projects.  These costs were charged to expense in the third quarter of 2004 since, at the date of acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses.

	For the three months ended September 30,
	2004			2003			Change			% Change
Other income and expense:
Interest income	$	4,804		$	2,962		$	1,842		62	%
Interest expense	(5,176		)	(6,218		)	1,042			(17	)%
Debt exchange expense	(28,230		)	—			(28,230		)	—	%
Charge on early extinguishment of debt	(1,352		)	(9,816		)	8,464			(86	)%
Other income (expense), net	(642		)	(522		)	(120		)	23	%
	$	(30,596	)	$	(13,594	)	$	(17,002	)	125	%

Other Income and Expense— Total other income and expense, net, decreased $17 million, or 125%, in the third quarter of 2004 from the third quarter of 2003.  The decrease was attributable to the following factors:

•Interest income increased by $1.8 million in the third quarter of 2004 due to higher investment returns partially offset by lower average investment balances.

•Interest expense decreased by $1.0 million due primarily to a decrease in interest and amortization expense as a result of the July 2004 exchange of $78.3 million of our 2.5% convertible subordinated notes into 1,518,169 shares of our common stock.

•In July 2004, a holder of our 2.5% convertible subordinated notes approached us, and we agreed, to exchange $78.3 million of these outstanding notes into 1,518,169 shares of our common stock.  We recognized debt exchange expense of $28.2 million in the third quarter of 2004 relating to this exchange in accordance with SFAS No. 84, “Induced Conversion of Convertible Debt.”

•In August 2004, we repurchased for cash $33.0 million (at a price of 104% of the face amount) of our 3.875% convertible subordinated notes in a private transaction.  As a result, during the three months ended September 30, 2004, we recognized $1.4 million in our financial statements as a charge on early extinguishment of debt. In July 2003, we redeemed for cash all of the $174.0 million outstanding 5.25% notes at a redemption price of 103.15% per $1,000 aggregate principal amount of notes, and we purchased $12.0 million of the 3.875% notes from one of the holders in a private transaction at a price of 106% of the face amount of the notes. As a result, during the third quarter of 2003, $9.8 million was recognized in our financial statements as a charge on early extinguishment of debt.

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	For the three months ended September 30,
	2004			2003			Change			% Change
Income tax expense	$	(19,464	)	$	(12,528	)	$	(6,936	)	55	%

Income Taxes— We recognized $19.5 million of income tax expense in the third quarter of 2004 and $12.5 million of income tax expense in the third quarter of 2003 based on an overall estimated annual effective tax rate of approximately 39.5% in 2004 and 36% in 2003.  No tax benefit was recorded for the $185.7 million charge for in-process research and development expense recognized in the third quarter of 2004. We recorded a tax benefit and a reduction of additional paid in capital of $11.3 million for the $28.3 debt exchange expense recognized upon conversion of $78.3 million of our 2.5% convertible subordinated notes in the third quarter of 2004.

Nine months ended September 30, 2004 compared to nine months ended September 30, 2003:

	For the nine months ended September 30,
	2004		2003		Change			% Change
Sales:
PROVIGIL	$	299,292	$	205,058	$	94,234		46	%
ACTIQ	258,480		164,316		94,164			57	%
GABITRIL	72,031		44,473		27,558			62	%
Other	69,172		68,898		274			—	%
Total sales	698,975		482,745		216,230			45	%
Total other revenues	17,451		20,822		(3,371		)	(16	)%
Total revenues	$	716,426	$	503,567	$	212,859		42	%

Sales—In addition to our larger sales force presence, other factors which contributed to the increase in sales are summarized as follows:

•Sales of PROVIGIL increased 46% as compared to the same period last year. U.S. prescriptions for PROVIGIL increased by 35%, according to IMS Health. In January, the FDA granted an expanded U.S. label for PROVIGIL, which is now indicated to improve wakefulness in patients with excessive sleepiness associated with obstructive sleep apnea and shift work sleep disorder, as well as narcolepsy.  The period-to-period change was also impacted by lower sales recorded in the first quarter of 2003 as a result of the depletion of inventory levels at certain wholesalers. Additionally, domestic price increases of approximately 8% period over period contributed to higher 2004 sales.

•Sales of ACTIQ increased 57% as compared to the same period last year.  U.S. prescriptions for ACTIQ increased by 40%, according to IMS Health. In addition, domestic prices increased approximately 7% from period to period.

•Sales of GABITRIL increased 62% as compared to the same period last year.  U.S. prescriptions for GABITRIL increased by 44%, according to IMS Health. An increase in domestic prices of approximately 9% period over period also contributed to higher sales recorded in 2004.

•Other sales consist of (1) sales of other products and certain third party products in various international markets, principally in France and (2) sales of products manufactured by CIMA and sold to its pharmaceutical partners.  The most significant sales in this other sales category are SPASFON® (phloroglucinol) and FONZYLANE® (buflomedil).

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Other Revenues— The decrease in other revenues of 16% from period to period is primarily due to a decrease in partner reimbursements on both our CEP-7055 program and our CEP-1347 program and a reduction in earnings recognized under our collaboration agreement with Novartis Pharma AG. This decrease was partially offset by the inclusion of product development and licensing fees and royalties reflected by CIMA. The level of other revenue recognized from period to period may continue to fluctuate based on the status and activity of each related project and terms of each collaboration agreement.  Therefore, past levels of other revenues may not be indicative of future levels.

	For the nine months ended September 30,
	2004		2003		Change		% Change
Costs and expenses:
Cost of sales	$	89,599	$	65,283	$	24,316	37	%
Research and development	198,208		117,336		80,872		69	%
Selling, general and administrative	243,908		183,685		60,223		33	%
Depreciation and amortization	36,927		32,558		4,369		13	%
Impairment charge	30,071		—		30,071		—	%
Acquired in-progress research and development costs	185,700		—		185,700		—	%
	$	784,413	$	398,862	$	385,551	97	%

Cost of Sales— The cost of sales was approximately 13% of net sales for the nine months ended September 30, 2004 and 14% of net sales for the nine months ended September 30, 2003.  The decrease is due to cost savings realized from our transfer of U.S. ACTIQ manufacturing from Abbott Laboratories to our Salt Lake City facility beginning in June 2003, partially offset by higher costs related to other products sold in France and to CIMA’s cost of sales for which there is no comparable data and for which the cost percentage to sales is higher than existing Cephalon products.

Research and Development Expenses—Research and development expenses increased $80.9 million, or 69%, in the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003.  Approximately $57.1 million of this increase is due to clinical research costs associated with increased headcount necessary to support increased clinical activities and with (1) additional clinical studies initiated in 2004 to explore the utility of GABITRIL beyond its current indication,  (2) costs incurred with Phase 3 clinical programs of PROVIGIL in Pediatric ADHD which began in late 2003, and (3) costs incurred with our Phase 3 studies of NUVIGIL which began in the fourth quarter of 2003.  We also incurred during the nine months ended September 30, 2004 (1) $5.7 million for the production of MYOTROPHIN in support of a Phase 3 study being performed by certain physicians, (2) $6.3 million to develop new or improve current production processes for our currently marketed products and products in development as well as producing material for our clinical trials, (3) $3.3 million of costs incurred by CIMA, and (4) $1.2 million is for a milestone payment due to a third-party under a GABITRIL license agreement. Of the remaining increase, a portion is due to higher accruals for bonus expenses resulting from a shift from a stock option-based plan to a cash-based performance incentive plan.

Selling, General and Administrative Expenses—Selling, general and administrative expenses increased $60.2 million, or 33%, in the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003.  Of this increase, $43.6 million is a result of the expansion of our U.K. and U.S. field sales forces, additional product promotional expenses and an increased number of educational programs and $1.7 million is due to CIMA.  Of the remaining increase, a portion is due (1) to higher administrative expenses associated with an increase in headcount, (2) costs associated with complying with the requirements of the Sarbanes-Oxley Act, and (3) higher accruals for bonus expenses resulting from a shift from a stock option-based plan to a cash-based performance incentive plan for most employees.  These increases were partially offset by the recognition of a gain of $4.2 million in the nine months ended September 30, 2004 as a result of retiree medical benefit changes for current employees at Cephalon France.

Depreciation and Amortization Expenses—Depreciation and amortization expenses increased by $4.4 million, or 13%, in the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003. Depreciation expense increased period over period primarily as a result of increased capital investments in

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software, building and laboratory improvements at our West Chester location, increased spending on manufacturing equipment at our Salt Lake City location and the acquisition of property, plant and equipment from CIMA. Amortization expense increased due to the amortization of technology, trademark and marketing rights acquired from CIMA.

Impairment charge—During 2004, we recorded an impairment charge of $30.1 million for the write-off of our investment in MDS Proteomics Inc.

Acquired in-process research and development— In connection with our acquisition of CIMA, we allocated approximately $185.7 million of the purchase price to in-process research and development projects. At the acquisition date, CIMA’s ongoing research and development initiatives was primarily involved with the development and commencement of Phase 3 clinical trials of OraVescent fentanyl, and several other minor ongoing research and development projects.  These costs were charged to expense in the third quarter of 2004 since, at the date of acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses.

	For the nine months ended September 30,
	2004			2003			Change			% Change
Other income and expense:
Interest income	$	11,639		$	8,137		$	3,502		43	%
Interest expense	(16,888		)	(22,574		)	5,686			(25	)%
Debt exchange expense	(28,230		)	—			(28,230		)	—	%
Charge on early extinguishment of debt	(2,313		)	(9,816		)	7,503			(76	)%
Other income (expense), net	(2,444		)	1,789			(4,233		)	(237	)%
	$	(38,236	)	$	(22,464	)	$	(15,772	)	70	%

Other Income and Expense— Total other income and expense, net, decreased $15.8 million, or 70%, in the nine months ended September 30, 2004 from the nine months ended September 30, 2003. The decrease was attributable to the following factors:

•Interest income increased by $3.5 million in the nine months ended September 30, 2004 due to higher average investment balances as average investment returns remained relatively constant period to period.

•Interest expense decreased by $5.7 million due primarily to:

•a decrease in interest and amortization expense of $5.5 million as a result of the July 2003 redemption of our 5.25% convertible subordinated notes,

•a decrease in interest expense of $0.8 million on our 2.5% convertible subordinated notes due to the July 2004 exchange of $78.3 million of the outstanding notes into 1,518,169 shares of our common stock

•an increase in amortization expense of $2.0 million associated with debt issuance costs from the June 2003 sale of our Zero Coupon Convertible Subordinated Notes.

•In July 2004, a holder of our 2.5% convertible subordinated notes approached us, and we agreed, to exchange $78.3 million of these outstanding notes into 1,518,169 shares of our common stock.  We recognized debt exchange expense of $28.2 million in the third quarter of 2004 relating to this exchange in accordance with SFAS No. 84, “Induced Conversion of Convertible Debt.”

•In March 2004 and August 2004, we repurchased for cash $10.0 million (at a price of 109.5% of the face amount) and $33.0 million (at a price of 104% of the face amount), respectively, of the 3.875% convertible subordinated notes in private transactions.  As a result, during the nine months ended September 30, 2004, we recognized $2.3 million in our financial statements as a charge on early

24

extinguishment of debt. In July 2003, we redeemed for cash all of the $174.0 million outstanding 5.25% notes at a redemption price of 103.15% per $1,000 aggregate principal amount of notes and we purchased $12.0 million of the 3.875% notes from one of the holders in a private transaction at a price of 106% of the face amount of the notes. As a result, during the third quarter of 2003, $9.8 million was recognized in our financial statements as a charge on early extinguishment of debt.

•Other income decreased by $4.2 million in the nine months ended September 30, 2004 compared to the same period last year primarily due to the recording of a $4.1 million gain on the increase in the fair value of a foreign currency derivative instrument in the nine months ended September 30, 2003.

	For the nine months ended September 30,
	2004			2003			Change			% Change
Income tax expense	$	(45,695	)	$	(29,608	)	$	(16,087	)	54	%

Income Taxes— We recognized $45.7 million of income tax expense in the nine months ended September 30, 2004 and $29.6 million of income tax expense in the nine months ended September 30, 2003 based on an overall estimated annual effective tax rate of approximately 39.5% in 2004 and 36% in 2003. We did not record a tax benefit on the impairment charge of $30.1 million recognized in the second quarter of 2004 since the realization of this deduction for tax purposes is not considered probable. No tax benefit was recorded for the $185.7 million charge for in-process research and development expense recognized in the third quarter of 2004. We recorded a tax benefit and a reduction of additional paid-in capital of $11.3 million for the $28.3 debt exchange expense recognized upon conversion of $78.3 million of our 2.5% convertible subordinated notes in the third quarter of 2004.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and investments at September 30, 2004 were $810.5 million, representing 35% of total assets.  Working capital, which is calculated as current assets less current liabilities, was $933.6 million at September 30, 2004.

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $131.6 million for the nine months ended September 30, 2004 as compared to $105.8 million for 2003. The increase is primarily a result of our sales growth, in addition to net changes in cash flow resulting from decreases in accounts payable, accrued expenses partially offset by an increase in trade receivables.

Net Cash Used for Investing Activities

Net cash used for investing activities was $603.2 million for the nine months ended September 30, 2004 as compared to $13.1 million for 2003. The change is primarily due to the acquisition of CIMA in August 2004 for $482.5 million, net of cash acquired (or $409.4 million, net of cash, cash equivalents and investments acquired) and the increase of purchases of available-for-sale investments in order to benefit from rising interest rates on longer term investments.  These increases of net cash used for investing activities were partially offset by the purchase of non-marketable securities totaling $33.0 million in 2003, which included securities of MDS Proteomics Inc. (MDSP), a privately-held Canadian company. The carrying value of the investment in MDSP was written off as an impairment charge in the second quarter of 2004.

Net Cash Provided by (Used for) Financing Activities

Net cash used for financing activities was $37.1 million for the nine months ended September 30, 2004, as compared to net cash provided by financing activities of $449.3 million in 2003. The change is primarily the result of net proceeds of $727.1 million received in 2003 from the sale of zero coupon convertible subordinated notes. Concurrent with the private placement of the notes, we purchased a convertible note hedge for $258.6 million and sold warrants for $178.3 million.

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During both comparable periods, convertible subordinated notes were repurchased or redeemed (amounts in thousands):

3.875% convertible subordinated notes	March 2004	Repurchase	$	10,000
3.875% convertible subordinated notes	August 2004	Repurchase	33,000
			$	43,000
5.25% convertible subordinated notes	March 2003	Repurchase	$	2,000
5.25% convertible subordinated notes	April 2003	Repurchase	7,000
5.25% convertible subordinated notes	July 2003	Redemption	174,000
3.875% convertible subordinated notes	July 2003	Repurchase	12,000
			$	195,000

The volume of exercises of common stock options increased in the first half of 2004 as compared to the same period in 2003. The extent and timing of option exercises are primarily dependent upon the market price of our common stock and general financial market conditions, as well as the exercise prices and expiration dates of the options.

Outlook

Overview

Cash, cash equivalents and investments at September 30, 2004 were $810.5 million.  In August 2004, we completed our acquisition of CIMA and paid $482.5 million in cash, net of CIMA’s existing cash on hand, (or $409.4 million, net of CIMA’s cash, cash equivalents and investments) to CIMA shareholders to complete the transaction.  We expect to use our remaining cash, cash equivalents and investments for working capital and general corporate purposes, including the acquisition of businesses, products, product rights, or technologies, the payment of contractual obligations, including scheduled interest payments on our convertible notes, and/or the purchase, redemption or retirement of our convertible notes.  At this time, we cannot accurately predict the effect of certain developments on the rate of sales growth in 2005 and beyond, such as the degree of market acceptance and exclusivity of our products, the impact of competition, the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop new products and formulations of our existing products and to demonstrate the utility of our products in indications beyond those already included in the FDA approved labels.  However, we expect that sales of our three most significant marketed products, PROVIGIL, ACTIQ and GABITRIL, in combination with other revenues, should allow us to continue to generate profits and positive cash flows from operations in the near term.

Based on our current level of operations and projected sales of our products combined with other revenues and interest income, we also believe that we will be able to service our existing debt and meet our capital expenditure and working capital requirements in the near term. However, we cannot be sure that our anticipated revenue growth will be realized or that we will continue to generate significant positive cash flow from operations. We may need to obtain additional funding for future significant strategic transactions, to repay our outstanding indebtedness or for our future operational needs, and we cannot be certain that funding will be available on terms acceptable to us, or at all.

Products

Analysis of prescription data for our products in the United States indicates that physicians elected to prescribe PROVIGIL, GABITRIL and ACTIQ to treat a number of indications outside of their labeled indications.  Our strategy for PROVIGIL and GABITRIL has been to broaden the ranges of clinical uses that are approved by the FDA and European regulatory agencies to include many of the currently prescribed uses.  In January 2004, we received approval from the FDA to expand the label for PROVIGIL to include improving wakefulness in patients with excessive sleepiness associated with SWSD and OSA/HS. In the first quarter of 2004, we launched PROVIGIL for these new indications with an expanded sales force of approximately 500 persons.  In April 2004, we announced that we had received marketing approval in the United Kingdom to expand the label of PROVIGIL to include the

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treatment of excessive sleepiness in patients with chronic pathological conditions, including narcolepsy, OSA/HS and moderate to severe SWSD.  We believe that the addition of these new indications, coupled with a larger sales force, is having a meaningful and positive impact on PROVIGIL sales in 2004.

Continued sales growth of PROVIGIL beyond the December 2005 expiration of orphan drug exclusivity depends, in part, on our maintaining protection on the modafinil particle-size patent through its expiration beginning in 2014.  See “—Legal Proceedings” below.   If we complete clinical studies of PROVIGIL in pediatric patients that are agreeable to the FDA, the FDA could grant us a six-month extension of our current exclusivity and of the particle-size patent.

Our sales of ACTIQ also depend on our existing patent protection for the approved compressed powder formulation, which expires in the U.S. in September 2006, and for the previous formulation of ACTIQ, which expires in May 2005.  See “—Legal Proceedings” below.  If we complete clinical studies in pediatric patients that are agreeable to the FDA, the FDA could grant us six months of exclusivity beyond the September 2006 compressed powder patent expiration.  However, even with this additional exclusivity, Barr’s license to the ACTIQ patents could become effective as early as the launch of OraVescent fentanyl (expected in late 2006), and in no event later than February 3, 2007.  The entry of Barr with a generic form of ACTIQ beginning in late 2006 or early 2007 could significantly and negatively impact future ACTIQ sales.

Clinical Studies

We anticipate continuing to incur significant expenditures related to conducting clinical studies to develop new pharmaceutical products and to explore the utility of our existing products in treating disorders beyond those currently approved in their respective labels.  We have commenced a Phase 3 program for NUVIGIL in OSA/HS, SWSD and narcolepsy and expect to file an NDA with the FDA in early 2005.  In August 2004, we announced positive results of a Phase 3 program that showed that proprietary, once-daily dosage forms of modafinil improved symptoms of ADHD in children and adolescents; we anticipate filing a sNDA with the FDA in late 2004.  With respect to GABITRIL, we have initiated a Phase 3 clinical program evaluating GABITRIL for the treatment of GAD.  During the third quarter of 2004, we completed a Phase 2 program with GABITRIL for the treatment of insomnia and have determined not to pursue a Phase 3 program for GABITRIL in treating insomnia at this time.  With respect to new product candidates, we are enrolling patients in Phase 3 clinical trials of OraVescent fentanyl for the treatment of breakthrough cancer pain, and we expect to continue in 2004 and 2005 our Phase 2/3 studies of CEP-1347 for the treatment of Parkinson’s Disease.  We also are continuing clinical development of CEP-701 and CEP-7055 for treatment of certain malignancies.  In the future, we expect to continue to incur significant expenditures to fund research and development activities, including clinical trials, for our other product candidates, and for improved formulations for our existing products.  We may seek to mitigate the risk in our research and development programs by seeking sources of funding for a portion of these expenses through collaborative arrangements with third parties. However, we intend to retain a portion of the commercial rights to these programs and, as a result, we still expect to spend significant funds on our share of the cost of these programs, including the costs of research, preclinical development, clinical research and manufacturing.

Manufacturing, Selling and Marketing Efforts

We also expect to continue to incur significant expenditures associated with manufacturing, selling and marketing our products.  In 2004, we purchased 19 acres of land adjacent to our current facilities in Salt Lake City for approximately $2 million and began a nearly $70 million capital expansion that will be substantially completed by late 2006 and that will increase our ACTIQ capacity and provide us with flexibility to manufacture other products.

Indebtedness

We have significant indebtedness outstanding, consisting principally of indebtedness on convertible subordinated notes.  The following table summarizes the principal terms of our convertible subordinated notes outstanding as of September 30, 2004:

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Security	Aggregate Principal Balance Outstanding (in millions)		Conversion Price			Other
2.5% Convertible Subordinated Notes due December 2006	$	521.8	$	81.00		•      Redeemable on or after December 20, 2004 at our option at a redemption price of 100% of the principal amount redeemed.
Zero Coupon Convertible Notes due June 2033, first putable June 15, 2008	$	375.0	$	59.50	*	•      Redeemable on June 15, 2008 at either option of holder or us at a redemption price of 100.25% of the principal amount redeemed.
Zero Coupon Convertible Notes due June 2033, first putable June 15, 2010	$	375.0	$	56.50	*	•      Redeemable on June 15, 2010 at either option of holder or us at a redemption price of 100.25% of the principal amount redeemed.

*Stated conversion prices as per the terms of the notes.  However, each convertible note contains certain terms restricting a holder’s ability to convert the notes, including that a holder may only convert if the closing price of our stock on the day prior to conversion is higher than $71.40 or $67.80 with respect to the 2008 notes or the 2010 notes, respectively.  For a more complete description of these notes, including the convertible note hedge strategy we entered into when we sold the notes and the related potential impact of the notes and hedge strategy on the calculation of earnings per share, see Notes 1 and 10 to our consolidated financial statements included in Item 8 of our Form 10-K for the fiscal year ended December 31, 2003.

The annual interest payments on the $1,271.8 million of convertible notes outstanding as of September 30, 2004 are $13.0 million, payable at various dates throughout the year.  In the future, we may agree to exchanges of the notes for shares of our common stock or debt, or may determine to use a portion of our existing cash on hand to purchase, redeem or retire all or a portion of the outstanding convertible notes.  In January 2003, we entered into an interest rate swap agreement with a financial institution relating to our 2.5% convertible notes in the aggregate notional amount of $200.0 million.  Although we exchanged $78.3 million of these notes in July 2004 for 1,518,169 shares of our common stock, the interest rate swap remains at $200.0 million. Under the swap, we agreed to pay a variable interest rate on this $200.0 million notional amount equal to LIBOR-BBA + .29% in exchange for the financial institution’s agreement to pay a fixed rate of 2.5%.  The variable interest rate is re-calculated at the beginning of each quarter.  Effective October 1, 2004, the interest rate is 2.265%.  We also agreed to provide the financial institution with cash collateral to support our obligations under the agreement.  The current collateral amount is $3.0 million and is recorded in Other Assets in our consolidated balance sheet.

Acquisition Strategy

As part of our business strategy, we plan to consider and, as appropriate, make acquisitions of other businesses, products, product rights or technologies. Our cash reserves and other liquid assets may be inadequate to consummate these acquisitions and it may be necessary for us to raise substantial additional funds in the future to complete these transactions. In addition, as a result of our acquisition efforts, we are likely to experience significant charges to earnings for merger and related expenses (whether or not our efforts are successful) that may include transaction costs, closure costs or acquired in-process research and development charges.

In February 2004, we filed with the SEC a $1.0 billion universal shelf registration statement covering the issuance and sale from time to time, of common and preferred stock, debt securities and warrants.  While we have no current plans to access the capital markets, the shelf registration statement would allow us to expediently access capital markets periodically in the future.

Legal Proceedings

On March 28, 2003, we filed a patent infringement lawsuit in U.S. District Court in New Jersey against Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc., Ranbaxy Pharmaceuticals Inc., and Barr Laboratories, Inc. based upon the ANDAs filed by each of these companies seeking FDA approval to market a generic equivalent of

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modafinil.  The lawsuit claims infringement of our U.S. Patent No. RE37516, which covers the pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL.  Defendants Barr, Mylan and Ranbaxy have asserted counterclaims for non-infringement and/or patent invalidity.  This litigation is currently in the discovery phase and we expect that the trial will begin sometime in 2005.  On May 26, 2004, we also filed a patent infringement lawsuit in U.S. District Court in New Jersey against Sandoz Inc. based upon their ANDA for a generic equivalent of modafinil.  Discovery on this action has not yet commenced.  We intend to vigorously defend the validity, and prevent infringement, of this patent.  However, these efforts will be both expensive and time consuming and, ultimately, may not be successful.

On September 7, 2004, we announced that we had received subpoenas from the U.S. Attorney’s Office in Philadelphia requesting generally relating to our sales and promotional practices for PROVIGIL, ACTIQ and GABITRIL.  We are cooperating with the investigation and are providing documents to the Government.  In addition, we have engaged in ongoing discussions with the Attorney General in Pennsylvania regarding recent media reports of instances of abuse and diversion of ACTIQ.  We have had similar discussions with the Office of the Attorney General in Connecticut; in September 2004, we received a voluntary request for information from the Office of the Connecticut Attorney General asking us to provide information generally relating to our sales and promotional practices for our U.S. products.  We have agreed to comply with this voluntary request.  These matters may involve the bringing of criminal charges and fines, and/or civil penalties.  We cannot predict or determine the outcome of these matters or reasonably estimate the amount or range of amounts of any fines or penalties that might result from an adverse outcome.  However, an adverse outcome could have a material adverse effect on our financial position, liquidity and results of operations.

We are a party to certain other litigation in the ordinary course of our business, including, among others, U.S. patent interference proceedings, European patent oppositions, and matters alleging employment discrimination, product liability and breach of commercial contract. We are vigorously defending ourselves in all of the actions against us and do not believe these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition, results of operations or cash flows.

Other

We may experience significant fluctuations in quarterly results based primarily on the level and timing of:

•product sales and cost of product sales;

•inventory stocking or destocking practices of our large customers;

•achievement and timing of research and development milestones;

•collaboration revenues;

•cost and timing of clinical trials;

•marketing and other expenses; and

•manufacturing or supply disruptions.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. In addition to the item listed below, a summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2003 in the “Critical Accounting Policies and Estimates” section and the “Recent Accounting Pronouncements” section.

We capitalize inventory costs associated with marketed products and certain products prior to regulatory approval and product launch, based on management’s judgment of probable future commercial use and net realizable value. We could be required to expense previously capitalized costs related to pre-approval or pre-launch inventory upon a change in such judgment, due to a denial or delay of approval by regulatory bodies, a delay in commercialization, or other potential factors. Conversely, our gross margins may be favorably impacted if some or all of the related production costs were expensed prior to the product being available for commercial sale.  We are

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incurring costs associated with producing supplies of NUVIGIL, a follow-on compound to PROVIGIL currently in Phase 3 clinical trials. As this is a second generation version of a currently FDA-approved product, we have capitalized these costs with the expectation of receiving future regulatory approval to market the product. At September 30, 2004, we had $16.3 million of costs reflected in other current assets.

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CERTAIN RISKS RELATED TO OUR BUSINESS

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.

A significant portion of our revenues is derived from U.S. sales of our three largest products, and our future success will depend on the continued acceptance and growth of these products.

For the nine months ended September 30, 2004, approximately 90% of our worldwide net sales were derived from sales of PROVIGIL, ACTIQ and GABITRIL. We cannot be certain that these products will continue to be accepted in their markets. Specifically, the following factors, among others, could affect the level of market acceptance of PROVIGIL, ACTIQ and GABITRIL:

•a change in the perception of the healthcare community of their safety and efficacy, both in an absolute sense and relative to that of competing products;

•the effectiveness of our sales and marketing efforts, particularly with respect to our efforts in 2004 directed to general practitioners for the indications approved for PROVIGIL in January 2004;

•any unfavorable publicity regarding these products or similar products;

•the price of the product relative to other competing drugs or treatments;

•any changes in government and other third-party payer reimbursement policies and practices; and

•regulatory developments affecting the manufacture, marketing or use of these products.

Any material adverse developments with respect to the sale or use of PROVIGIL, ACTIQ and GABITRIL could significantly reduce our product revenues and have a material adverse effect on our ability to generate net income and positive net cash flow from operations.

We may be unsuccessful in our efforts to expand the number and scope of authorized uses of PROVIGIL or GABITRIL, which would significantly hamper sales and earnings growth.

Even with the approval in January 2004 of a broader label for PROVIGIL, the markets for the approved indications of PROVIGIL and GABITRIL remain relatively small. Analysis of prescription data indicates that a significant portion of product sales of these products, as well as for ACTIQ, is derived from the use of these products outside of their labeled indications. We believe that the growth of PROVIGIL and GABITRIL will be greater if we are able to further expand the approved indications for these products.

To this end, we have completed the Phase 3 clinical trials of proprietary formulations of modafinil for the treatment of ADHD in children and expect to file an sNDA with the FDA in late 2004. We also have initiated a Phase 3 clinical program evaluating GABITRIL for the treatment of GAD.  We do not know whether these current or future studies will demonstrate safety and efficacy, or if they do, whether we will succeed in receiving regulatory approval to market these products for these or other disorders. If the results of some of these additional studies are negative or adverse, this could undermine physician and patient comfort with the product, limit its commercial success, and diminish its acceptance. Even if the results of these studies are positive, the impact on sales of these products may be minimal unless we are able to obtain FDA and foreign medical authority approval to expand the authorized uses of this product. FDA regulations limit our ability to communicate the results of additional clinical studies to patients and physicians without first obtaining regulatory approval for any expanded uses.

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We may not be able to maintain adequate protection for our intellectual property or market exclusivity for certain of our products and, therefore, competitors may develop competing products, which could result in a decrease in sales and market share, cause us to reduce prices to compete successfully and limit our commercial success.

We place considerable importance on obtaining patent protection for new technologies, products and processes. To that end, we file applications for patents covering the compositions or uses of our drug candidates or our proprietary processes. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions. To date, no consistent policy has emerged regarding breadth of claims in such companies’ patents. Accordingly, 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 or significant liabilities, we could be required to enter into third party licenses or we could be required to cease using 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.

PROVIGIL

The U.S. composition of matter patent for modafinil expired in 2001. We own U.S. and foreign patent rights that expire between 2014 and 2015 covering pharmaceutical compositions and uses of modafinil and, more specifically, covering certain particle sizes of modafinil contained in the pharmaceutical composition. Ultimately, these patents might be found invalid as the result of a challenge by a third party, or a potential competitor could develop a competing product or product formulation that avoids infringement of these patents. To date, the FDA has accepted five ANDAs, for pharmaceutical products containing modafinil. Each of these ANDAs contained a Paragraph IV certification in which the ANDA applicant certified that the U.S. particle-size modafinil patent covering PROVIGIL either is invalid or will not be infringed by the ANDA product. On March 28, 2003, we filed a patent infringement lawsuit in U.S. District Court in New Jersey against Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc., Ranbaxy Pharmaceuticals Inc., and Barr Laboratories, Inc. based upon the ANDAs filed by each of these companies with the FDA. The lawsuit claims infringement of our U.S. Patent No. RE37516.  Defendants Barr, Mylan and Ranbaxy have asserted counterclaims for non-infringement and/or patent invalidity.  This litigation is currently in the discovery phase, and we expect that the trial will begin sometime in 2005.  On May 26, 2004, we also filed a patent infringement lawsuit in U.S. District Court in New Jersey against Sandoz Inc. based upon their ANDA for a generic equivalent of modafinil.  Discovery on this action has not yet commenced.  While we intend to vigorously defend the validity of this patent and prevent infringement, these efforts will be both expensive and time consuming and, ultimately, may not be successful.

In early 2004, Barr and Ranbaxy each announced the receipt of tentative FDA approval for their respective generic versions of PROVIGIL. If the court finds the particle-size patent is invalid or not infringed, Barr and Ranbaxy could begin selling their modafinil-based products upon the expiration of our FDA orphan drug exclusivity, currently in December 2005, which would significantly and negatively impact revenues from PROVIGIL. We do not know whether the ANDAs filed by Teva, Mylan and Sandoz have been, or will be, tentatively approved by the FDA.

If we complete clinical studies of PROVIGIL in pediatric patients that are acceptable to the FDA, the FDA could grant us a six-month extension of our orphan drug exclusivity (to June 2006) and six months of exclusivity beyond the 2014 expiration of the particle-size patent term.

ACTIQ

With respect to ACTIQ, we hold an exclusive license to a U.S. patent covering the currently approved compressed powder pharmaceutical composition and methods for administering fentanyl via this composition that is set to expire in September 2006. Corresponding patents in foreign countries are set to expire between 2009 and 2010. Our patent protection with respect to the ACTIQ formulation we sold prior to June 2003 will expire in May 2005. If we complete an additional clinical study in pediatric patients that is agreeable to the FDA, the FDA could grant us six months of exclusivity beyond the September 2006 compressed powder patent expiration.  However, even with this additional exclusivity, Barr’s license to the ACTIQ patents under the license and supply agreement could become effective as early as the launch of OraVescent fentanyl (expected in late 2006), and in no event later than February 3, 2007.  The entry of Barr with a generic form of ACTIQ could significantly and negatively impact future ACTIQ sales.

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GABITRIL

With respect to GABITRIL, there are three U.S. composition-of-matter patents covering the currently approved product: a patent claiming tiagabine, the active drug substance in GABITRIL; a patent claiming crystalline tiagabine hydrochloride monohydrate and its use as an anti-epileptic agent; and a patent claiming anhydrous crystalline tiagabine hydrochloride and processes for its preparation.  These patents currently are set to expire in 2011, 2012 and 2017, respectively.  There also is a pharmaceutical composition patent covering the currently approved product and processes for its preparation, which is set to expire in 2016.  Supplemental Protection Certificates based upon corresponding foreign patents covering this product are set to expire in 2011.  Ultimately, these patents might be found invalid as the result of a challenge by a third party, or a potential competitor could develop a competing product or product formulation that avoids infringement of these patents.

We also rely on trade secrets, know-how and continuing technological advancements to support our competitive position. Although we have entered into confidentiality and invention rights agreements with our employees, consultants, advisors and collaborators, these parties could fail to honor such agreements or we could be unable to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, others could independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how. In addition, many of our scientific and management personnel have been recruited from other biotechnology and pharmaceutical companies where they were conducting research in areas similar to those that we now pursue. As a result, we could be subject to allegations of trade secret violations and other claims.

Manufacturing, supply and distribution problems may create supply disruptions that could result in a reduction of product sales revenue and an increase in costs of sales, and damage commercial prospects for our products.

The manufacture, supply and distribution of pharmaceutical products, both inside and outside the United States, is highly regulated and complex. We, and the third parties we rely upon for the manufacturing and distribution of our products, must comply with all applicable regulatory requirements of the FDA and foreign authorities, including current Good Manufacturing Practice regulations. In addition, we must comply with all applicable regulatory requirements of the Drug Enforcement Administration and analogous foreign authorities for certain of our products that contain controlled substances. The facilities used to manufacture, store and distribute our products also are subject to inspection by regulatory authorities at any time to determine compliance with regulations.  These regulations are complex, and any failure to comply with them could lead to remedial action, civil and criminal penalties and delays in production or distribution of material.

We predominately depend upon single sources for the manufacture of both the active drug substances contained in our products and for finished commercial supplies. For example:

•PROVIGIL: Our manufacturing facility in France is the sole source of the active drug substance modafinil. With respect to finished commercial supplies of PROVIGIL, we currently have two qualified manufacturers, DSM Pharmaceuticals, in Greenville, North Carolina, and Patheon, Inc., in Ontario, Canada.

•ACTIQ: Our U.S. facility in Salt Lake City, Utah, is the sole source for the worldwide manufacture of ACTIQ.

•GABITRIL: Abbott Laboratories manufactures finished commercial supplies of GABITRIL for the U.S. market (through at least October 2005) and Sanofi-Synthelabo manufactures GABITRIL for non-U.S. markets (through January 2005).  We have identified a third party manufacturer for the future worldwide production of the active drug substance tiagabine and finished commercial supplies of GABITRIL.  We are in the process of qualifying this manufacturer with appropriate U.S. and European regulatory authorities.

•Other Products: Certain of our products are manufactured at our facilities in France, with the remaining products manufactured by single source third parties. CIMA also manufactures products at its Minnesota facilities for certain of its pharmaceutical company partners.

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The process of changing or adding a manufacturer or changing a formulation requires prior FDA and/or European medical authority approval and is very time-consuming. If we are unable to manage this process effectively or if an unforeseen event occurs at any facility, we could face supply disruptions that would result in significant costs and delays, undermine goodwill established with physicians and patients, damage commercial prospects for our products and adversely affect operating results. We also rely on third parties to distribute our products, perform customer service activities and accept and process product returns.

As our products are used commercially, unintended side effects, adverse reactions or incidents of misuse may occur that could result in additional regulatory controls, adverse publicity and reduced sales of our products.

During research and development, the use of pharmaceutical products, such as ours, is limited principally to clinical trial patients under controlled conditions and under the care of expert physicians. The widespread commercial use of our products could identify undesirable or unintended side effects that have not been evident in our clinical trials or the relatively limited commercial use to date. In addition, in patients who take multiple medications, drug interactions could occur that can be difficult to predict. Additionally, incidents of product misuse, product diversion or theft may occur, particularly with respect to products such as ACTIQ and PROVIGIL, which contain controlled substances. These events, among others, could result in adverse publicity that harms the commercial prospects of our products or lead to additional regulatory controls that could limit the circumstances under which the product is prescribed or even lead to the withdrawal of the product from the market. In particular, ACTIQ has been approved under regulations concerning drugs with certain safety profiles, under which the FDA has established special restrictions to ensure safe use. Any violation of these special restrictions could lead to the imposition of further restrictions or withdrawal of the product from the market.

We face significant 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 whether or not the drugs are actually at fault for causing an injury. Furthermore, our products may cause, or may appear to have caused, adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug has been administered to patients for some time. As our products are used more widely and in patients with varying medical conditions, the likelihood of an adverse drug reaction, unintended side effect or incidence of misuse may increase. Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a negative effect on our financial performance. The costs of product liability insurance have increased dramatically in recent years, and the availability of coverage has decreased. Nevertheless, we maintain product liability insurance in amounts we believe to be commercially reasonable. Any claims could easily exceed our coverage limits. Even if a product liability claim is not successful, the adverse publicity and time and expense of defending such a claim may interfere with our business.

Our activities and products are subject to significant government regulations and approvals, which are often costly and could result in adverse consequences to our business if we fail to comply.

We currently have a number of products that have been approved for sale in the United States, foreign countries or both. All of our approved products are subject to extensive continuing regulations relating to, among other things, testing, manufacturing, quality control, labeling, and promotion. The failure to comply with any rules and regulations of the FDA or any foreign medical authority, or the post-approval discovery of previously unknown problems relating to our products, could result in, among other things:

•fines, recalls or seizures of products;

•total or partial suspension of manufacturing or commercial activities;

•non-approval of product license applications;

•restrictions on our ability to enter into strategic relationships; and

•criminal prosecution.

On September 7, 2004, we announced that we had received subpoenas from the U.S. Attorney’s Office in Philadelphia requesting generally relating to our sales and promotional practices for PROVIGIL, ACTIQ and GABITRIL.  We are cooperating with the investigation and are providing documents to the Government.  In addition, we have engaged in ongoing discussions with the Attorney General in Pennsylvania regarding recent media reports of instances of abuse

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and diversion of ACTIQ.  We have had similar discussions with the Office of the Attorney General in Connecticut; in September 2004, we received a voluntary request for information from the Office of the Connecticut Attorney General asking us to provide information generally relating to our sales and promotional practices for our U.S. products.  We have agreed to comply with this voluntary request.  These matters may involve the bringing of criminal charges and fines, and/or civil penalties.  We cannot predict or determine the outcome of these matters or reasonably estimate the amount or range of amounts of any fines or penalties that might result from an adverse outcome.  However, an adverse outcome could have a material adverse effect on our financial position, liquidity and results of operations.

It is both costly and time-consuming for us to comply with these inquiries and regulations. Additionally, incidents of adverse drug reactions, unintended side effects or misuse relating to our products could result in additional regulatory controls or restrictions, or even lead to withdrawal of a product from the market.

With respect to our product candidates and for new therapeutic indications for our existing products, we conduct research, preclinical testing and clinical trials, each of which requires us to comply with extensive government regulations. We cannot market these product candidates or these new indications in the United States or other countries without receiving approval from the FDA or the appropriate foreign medical authority. The approval process is highly uncertain and requires substantial time, effort and financial resources. Ultimately, we may never obtain approval in a timely manner, or at all. Without these required approvals, our ability to substantially grow revenues in the future could be adversely affected.

In addition, because PROVIGIL and ACTIQ contain active ingredients that are controlled substances, we are subject to regulation by the DEA and analogous foreign organizations relating to the manufacture, shipment, sale and use of the applicable products. These regulations also are imposed on prescribing physicians and other third parties, making the storage, transport and use of such products relatively complicated and expensive. With the increased concern for safety by the FDA and the DEA with respect to products containing controlled substances and the heightened level of media attention given to this issue, it is possible that these regulatory agencies could impose additional restrictions on marketing or even withdraw regulatory approval for such products. In addition, adverse publicity may bring about a rejection of the product by the medical community. If the DEA, FDA or a foreign medical authority withdrew the approval of, or placed additional significant restrictions on the marketing of any of our products, our product sales and ability to promote our products could be substantially affected.

We may be unable to repay our substantial indebtedness and other obligations.

As of September 30, 2004, we had $1,296.7 million of indebtedness outstanding, including $1,272.0 million outstanding under convertible notes with stated conversion prices or restricted conversion prices higher than our stock price as of the date of this filing. Of our convertible notes outstanding as of the filing date of this report, $521.8 million matures in 2006. There are no restrictions on our use of our existing cash, cash equivalents and investments, and we cannot be sure that these funds will be available or sufficient in the future to enable us to repay our indebtedness. In the future, these factors, among other things, could make it difficult for us to service, repay or refinance our indebtedness or to obtain additional financing, or limit our flexibility and make us more vulnerable in the event of a downturn in our business. Unless we are able to generate cash flow from operations that, together with our available cash on hand, is sufficient to repay our indebtedness, we will be required to raise additional funds. Because the financing markets may be unwilling to provide funding to us or may only be willing to provide funding on terms that we would consider unacceptable, we may not have cash available or be able to obtain funding to permit us to meet our repayment obligations, thus adversely affecting the market price for our securities.

Our internal control over financial reporting may not be considered effective, which could result in possible regulatory sanctions and a decline in our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to furnish a report on our internal controls over financial reporting beginning with our Annual Report on Form 10-K for the year ending December 31, 2004.  This internal control report will contain an assessment by our management of the effectiveness of our internal control over financial reporting (including the disclosure of any material weakness) and a statement that our independent auditors have attested to and reported on management’s evaluation of such internal controls.  The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and

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internal controls over financial reporting.  We are currently reviewing and documenting our internal control processes and procedures and have begun testing such controls.  Ultimately, our internal control over financial reporting may not be considered effective if, among others things:

•any material weakness in our internal controls over financial reporting exist; or

•we fail to remediate assessed deficiencies.

For example, as previously disclosed, during the preparation of our financial statements for the period ended September 30, 2004, we discovered that a clerical error made during the second quarter of 2004 resulted in cost of sales related to our manufacturing operations in France being understated by $2.5 million on a pre-tax basis.  Our independent registered public accountants have advised our management that this condition, as it existed at June 30, 2004, constituted a material weakness in internal financial controls over cost of sales and inventory valuation.  We have implemented procedures that we believe will fully and effectively remediate this deficiency in our internal controls over financial reporting over cost of sales and inventory valuation in France as of the end of the third quarter of 2004.

Due to the number of controls to be examined, the complexity of the project, and the subjectivity involved in determining the effectiveness of controls, we cannot be certain that all of our controls will be considered effective by management or, if considered effective by our management, that our auditors will agree with such assessment.

If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on our management’s evaluation, we could be subject to regulatory sanctions or lose investor confidence in the accuracy and completeness of our financial reports, either of which could have an adverse effect on the market price for our securities.

Our product sales and related financial results will fluctuate, and these fluctuations may cause our stock price to fall, especially if investors do not anticipate them.

A number of analysts and investors who follow our stock have developed models to attempt to forecast future product sales and expenses, and have established earnings expectations based upon those models. These models, in turn, are based in part on estimates of projected revenue and earnings that we disclose publicly. Forecasting future revenues is difficult, especially when we only have a few years of commercial history and when the level of market acceptance of our products is changing rapidly.  Forecasting is further complicated by the difficulties in estimating both existing stocking levels at pharmaceutical wholesalers and retail pharmacies and the timing of their purchases to replenish these stocks. As a result, it is likely that our revenues will fluctuate significantly, which may not meet with market expectations and which also may adversely affect our stock price. There are a number of other factors that could cause our financial results to fluctuate unexpectedly, including:

•cost of product sales;

•achievement and timing of research and development milestones;

•collaboration revenues;

•cost and timing of clinical trials and regulatory approvals;

•marketing and other expenses;

•manufacturing or supply disruptions; and

•costs associated with the operations of recently-acquired businesses and technologies.

The efforts of government entities and third party payers to contain or reduce the costs of health care may adversely affect our sales and limit the commercial success of our products.

In certain foreign markets, pricing or profitability of pharmaceutical products is subject to various forms of direct and indirect governmental control, including the control over the amount of reimbursements provided to the patient who is prescribed specific pharmaceutical products. For example, we are aware of governmental efforts in France to limit or eliminate reimbursement for some of our products, which could impact revenues from our French operations.

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In the United States, there have been, and we expect there will continue to be, various proposals to implement similar controls. The commercial success of our products could be limited if federal or state governments adopt any such proposals. In addition, in the United States and elsewhere, sales of pharmaceutical products depend in part on the availability of reimbursement to the consumer from third party payers, such as government and private insurance plans. These third party payers increasingly challenge the prices charged for pharmaceutical products and seek to limit reimbursement levels offered to consumers for such products. These third party payers could focus their cost control efforts on our products, especially with respect to prices of and reimbursement levels for products prescribed outside their labeled indications. In these cases, their efforts could negatively impact our product sales and profitability.

We experience intense competition in our fields of interest, which may adversely affect our business.

Large and small companies, academic institutions, governmental agencies and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for product development in competition with us. Products developed by any of these entities may compete directly with those we develop or sell.

The conditions that our products treat, and some of the other disorders for which we are conducting additional studies, are currently treated with many drugs, several of which have been available for a number of years or are available in inexpensive generic forms. With respect to PROVIGIL, and, if approved, NUVIGIL, there are several other products used for the treatment of excessive sleepiness or narcolepsy in the United States, including methylphenidate products such as RITALIN® by Novartis, and in our other territories, many of which have been available for a number of years and are available in inexpensive generic forms. If we are successful in obtaining FDA approval of modafinil for the treatment of ADHD in children and adolescents, we will face competition from stimulants such as RITALIN® by Novartis, STRATERRA® by Eli Lilly, and CONCERTA® by McNeil Consumer, as well as from amphetamines such as DEXDERINE® by GlaxoSmithKline and ADDERALL® by Shire.  With respect to ACTIQ, we face competition from numerous short- and long-acting opioid products, including three products—Johnson & Johnson’s DURAGESIC®, Purdue Pharmaceutical’s OXYCONTIN® and MS-CONTIN®—that dominate the market as well as Purdue’s PALLADONE® which was approved in September 2004.  We also anticipate that we will face at least one generic competitor to ACTIQ beginning in late 2006 or early 2007. In addition, we are aware of numerous other companies developing other technologies for rapidly delivering opioids to treat breakthrough pain, including transmucosal, transdermal, nasal spray and inhaled delivery systems, among others, that will compete against ACTIQ and, if approved, OraVescent fentanyl.  For example, in September 2003, Johnson & Johnson filed an NDA with the FDA for E-Trans®, a battery-powered transdermal patch that allows on-demand delivery of fentanyl with rapid absorption. With respect to GABITRIL, there are several products, including NEURONTIN® (gabapentin) by Pfizer, used as adjunctive therapy for the partial seizure market. Some are well-established therapies that have been on the market for several years while others have recently entered the partial seizure marketplace. In addition, several treatments for partial seizures are available in inexpensive generic forms. If we are successful in our efforts to expand the label of GABITRIL to include anxiety disorders, we will face significant competition from well-established Selective Serotonin Reuptake Inhibitor (SSRI) products such as Paxil®, Effexor XR® and Lexapro®.  For all of our products, we need to demonstrate to physicians, patients and third party payers that the cost of our products is reasonable and appropriate in the light of their safety and efficacy, the price of competing products and the related health care benefits to the patient.

Many of our competitors have substantially greater capital resources, research and development staffs and facilities than we have, and substantially greater experience in conducting clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. These entities represent significant competition for us. In addition, competitors who are developing products for the treatment of neurological or oncological disorders might succeed in developing technologies and products that are more effective than any that we develop or sell or that would render our technology and products obsolete or noncompetitive. Competition and innovation from these or other sources, including advances in current treatment methods, could potentially affect sales of our products negatively or make our products obsolete. Furthermore, we may be at a competitive marketing disadvantage against companies that have broader product lines and whose sales personnel are able to offer more complementary products than we can. Any failure to maintain our competitive position could adversely affect our business and results of operations.

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We plan to consider and, as appropriate, make acquisitions of technologies, products and businesses, which may subject us to a number of risks and/or result in us experiencing significant charges to earnings that may adversely affect our stock price, operating results and financial condition.

As part of our efforts to acquire businesses or to enter into other significant transactions, we conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, we might not realize the intended advantages of the acquisition. We also must consolidate and integrate the operations of an acquired business with our business.  Integration efforts often take a significant amount of time, place a significant strain on our managerial, operational and financial resources and could prove to be more difficult and expensive than we predicted. If we fail to realize the expected benefits from acquisitions we may consummate in the future, whether as a result of unidentified risks, integration difficulties, regulatory setbacks or other events, our business, results of operations and financial condition could be adversely affected.

In our acquisition of CIMA, we secured rights to CIMA’s product development candidate, OraVescent fentanyl, as well as its existing drug delivery business.  We estimated a value for OraVescent fentanyl by making certain assumptions about, among other things, the likelihood and timing of OraVescent fentanyl approval and the potential market for the product.  This estimated value of OraVescent fentanyl comprised a significant portion of the total consideration we paid to CIMA shareholders.  Ultimately, our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of the CIMA transaction.

In addition, we have experienced, and will likely continue to experience, significant charges to earnings related to our efforts to consummate acquisitions.  For transactions that ultimately are not consummated, these charges may include fees and expenses for investment bankers, attorneys, accountants and other advisers in connection with our efforts.  Even if our efforts are successful, we may incur as part of a transaction substantial charges for closure costs associated with the elimination of duplicate operations and facilities and acquired in-process research and development charges.  In either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods.

The failure to successfully operate and manage CIMA LABS could negatively impact our results of operations.

The operation of CIMA LABS following our August 2004 acquisition involves a number of risks and presents financial, managerial and operational challenges, including:

•diversion of management attention from our existing business and operations;

•difficulty with integration of personnel, and accounting, financial reporting, internal control and other systems; and

•increased operations that may be difficult to manage, especially since we have limited experience operating in operating a drug delivery business.

In light of these challenges, we may not be able to successfully manage the operations and personnel of CIMA.  Customer dissatisfaction, manufacturing, supply, or distribution problems associated with the products that utilize CIMA’s technology and intense competition in the filed of drug delivery technology could cause CIMA’s pharmaceutical business to underperform relative to our expectations, which could have a material adverse effect on our business.   We also could experience financial or other setbacks if CIMA’s business has problems or liabilities of which we were not aware or that are substantially greater than we anticipated based on our evaluation of the business prior to the acquisition.  Currently, a significant majority of CIMA’s revenues are derived from only three customers.  The loss of any one of these customers, or a decline in the market acceptance of the products we develop and manufacture for them, could significantly impact revenues from the CIMA business.

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The results and timing of our research and development activities, including future clinical trials, are difficult to predict, subject to potential future setbacks and, ultimately, may not result in viable pharmaceutical products, which may adversely affect our business.

In order to sustain our business, we focus substantial resources on the search for new pharmaceutical products. These activities include engaging in discovery research and process development, conducting preclinical and clinical studies and seeking regulatory approval in the United States and abroad. In all of these areas, we have relatively limited resources and compete against larger, multinational pharmaceutical companies. Moreover, even if we undertake these activities in an effective and efficient manner, regulatory approval for the sale of new pharmaceutical products remains highly uncertain because the majority of compounds discovered do not enter clinical studies and the majority of therapeutic candidates fail to show the human safety and efficacy necessary for regulatory approval and successful commercialization.

Preclinical testing and clinical trials must demonstrate 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 these clinical trials may not demonstrate the safety and efficacy necessary to obtain regulatory approval for any product candidates. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. For ethical reasons, certain clinical trials are conducted with patients having the most advanced stages of disease and who have failed treatment with alternative therapies. During the course of treatment, these patients often die or suffer other adverse medical effects for reasons that may not be related to the pharmaceutical agent being tested. Such events can have a negative impact on the statistical analysis of clinical trial results.

The completion of clinical trials of our product candidates may be delayed by many factors, including the rate of enrollment of patients. Neither we nor our collaborators can control the rate at which patients present themselves for enrollment, and the rate of patient enrollment may not be consistent with our expectations or sufficient to enable clinical trials of our product candidates to be completed in a timely manner or at all. In addition, we may not be permitted by regulatory authorities to undertake additional clinical trials for one or more of our product candidates. Even if such trials are conducted, our product candidates may not prove to be safe and efficacious or receive regulatory approvals. Any significant delays in, or termination of, clinical trials of our product candidates could impact our ability to generate product sales from these product candidates in the future.

Our research and development and marketing efforts are often dependent on corporate collaborators and other third parties who may not devote sufficient time, resources and attention to our programs, which may limit our efforts to develop and market potential products.

Because we have limited resources, we have entered into a number of collaboration agreements with other pharmaceutical companies, including H. Lundbeck A/S with respect to our research efforts in Parkinson’s Disease, and with a number of marketing partners for our products in certain countries outside the United States. In some cases, our collaboration agreements call for our partners to control:

•the supply of bulk or formulated drugs for use in clinical trials or for commercial use;

•the design and execution of clinical studies;

•the process of obtaining regulatory approval to market the product; and/or

•marketing and selling of an approved product.

In each of these areas, our partners may not support fully our research and commercial interests because our program may compete for time, attention and resources with the internal programs of our corporate collaborators. As such, our program may not move forward as effectively, or advance as rapidly, as it might if we had retained complete control of all research, development, regulatory and commercialization decisions. We also rely on some of these collaborators and other third parties for the production of compounds and the manufacture and supply of pharmaceutical products. Additionally, we may find it necessary from time to time to seek new or additional partners to assist us in commercializing our products, though we might not be successful in establishing any such new or additional relationships.

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The price of our common stock has been and may continue to be highly volatile, which may make it difficult for holders to sell our common stock when desired or at attractive prices.

The market price of our common stock is highly volatile, and we expect it to continue to be volatile for the foreseeable future. For example, from January 1, 2003 through September 30, 2004 our common stock traded at a high price of $60.98 and a low price of $36.91. Negative announcements, including, among others:

•adverse regulatory decisions;

•disappointing clinical trial results;

•disputes and other developments concerning patent or other proprietary rights with respect to our products; or

•operating results that fall below the market’s expectations

could trigger significant declines in the price of our common stock. In addition, external events, such as news concerning economic conditions, our competitors, changes in government regulations impacting the biotechnology or pharmaceutical industries 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.

A portion of our revenues and expenses is subject to exchange rate fluctuations in the normal course of business, which could adversely affect our reported results of operations.

Historically, a portion of our revenues and expenses has been earned and incurred, respectively, in currencies other than the U.S. dollar. For the nine months ended September 30, 2004, approximately 14% of our revenues were denominated in currencies other than the U.S. dollar. We translate revenues earned and expenses incurred into U.S. dollars at the average exchange rate applicable during the relevant period. A weakening of the U.S. dollar would, therefore, increase both our revenues and expenses. Fluctuations in the rate of exchange between the U.S. dollar and the euro and other currencies may affect period-to-period comparisons of our operating results. Historically, we have not hedged our exposure to these fluctuations in exchange rates.

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

As a biopharmaceutical company, we are or may become a party to litigation in the ordinary course of our business, including, among others, matters alleging employment discrimination, product liability, patent or other intellectual property rights infringement, patent invalidity 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 results of operations and financial condition. We currently are vigorously defending ourselves against certain litigation matters.  While we currently do not believe that the settlement or adverse adjudication of these lawsuits would materially impact our results of operations or financial condition, the final resolution of these matters and the impact, if any, on our results of operations, financial condition or cash flows could be material.

Our customer base is highly concentrated.

Our principal customers are wholesale drug distributors. These customers comprise a significant part of the distribution network for pharmaceutical products in the United States. Three large wholesale distributors control a significant share of the market. For the nine months ended September 30, 2004, these wholesaler customers, Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, in the aggregate, accounted for 87% of our worldwide net sales. The loss or bankruptcy of any of these customers could materially and adversely affect our results of operations and financial condition.

Our dependence on key executives and scientists could impact the development and management of our business.

We are highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel. There is intense competition for qualified personnel in the pharmaceutical and biotechnology industries, and we cannot be sure that we will be able to continue to attract and retain the qualified personnel necessary for the development and management of our business. Although we do not believe the loss of one individual would materially harm our business, our research and development programs and our business might be harmed by the loss

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of the services of multiple existing personnel, as well as the failure to recruit additional key scientific, technical and managerial personnel in a timely manner. Much of the know-how we have developed resides in our scientific and technical personnel and is not readily transferable to other personnel. While we have employment agreements with our key executives, we do not ordinarily enter into employment agreements with our other key scientific, technical and managerial employees. We do not maintain “key man” life insurance on any of our employees.

We may be required to incur significant costs to comply with environmental laws and regulations, and our related compliance may limit any future profitability.

Our research and development activities involve the controlled use of hazardous, infectious and radioactive materials that could be hazardous to human health and safety or the environment. We store these materials, and various wastes resulting from their use, at our facilities pending ultimate use and disposal. We are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes, and we may be required to incur significant costs to comply with related existing and future environmental laws and regulations.

While we believe that our safety procedures for handling and disposing of these materials comply with foreign, federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of an accident, we could be held liable for any resulting damages, which could include fines and remedial costs. These damages could require payment by us of significant amounts over a number of years, which could adversely affect our results of operations and financial condition.

Anti-takeover provisions may delay or prevent changes in control of our management or deter a third party from acquiring us, limiting our stockholders’ ability to profit from such a transaction.

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock, $0.01 par value, of which 1,000,000 have been reserved for issuance in connection with our stockholder rights plan, and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders. Our stockholder rights plan could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.

We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 could have the effect of delaying or preventing a change of control of Cephalon. Section 203, the rights plan, and certain provisions of our certificate of incorporation, our bylaws and Delaware corporate law, may have the effect of deterring hostile takeovers, or delaying or preventing changes in control of our management, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to foreign currency exchange risk related to operations conducted by our European subsidiaries that have transactions, assets, and liabilities denominated in foreign currencies that are translated into U.S. dollars for consolidated financial reporting purposes.  Historically, we have not hedged any of these foreign currency exchange risks.  For the nine months ended September 30, 2004, an average 10% weakening of the U.S. dollar relative to the currencies in which our European subsidiaries operate would have resulted in an increase of $10.2 million in reported total revenues and a corresponding increase in reported expenses.  This sensitivity analysis of the effect of changes in foreign currency exchange rates does not assume any changes in the level of operations of our European subsidiaries.

In January 2003, we entered into an interest rate swap agreement with a financial institution, relating to our 2.5% convertible subordinated notes, in the aggregate notional amount of $200.0 million.Although we exchanged $78.3 million of these notes in July 2004 for 1,518,169 shares of our common stock, the interest rate swap remains at $200.0 million.We pay interest under the swap based on the 3-month LIBOR-BBA rate plus 29 basis points, adjusted quarterly.  Effective October 1, 2004, the interest rate is 2.265%.  At inception, we recognized a premium on the value of the bonds of $2.2 million that we will amortize and recognize as interest expense over the remaining term of the notes.  We also recognize adjustments to interest expense based on changes in the fair values of the bonds and the swap agreement each quarter.  If LIBOR increases or decreases by 100 basis points, our annual interest expense would change by $2.0 million.  Changes in interest rates and the price and volatility of our common stock would also affect the fair values of the notes and the swap agreement, resulting in adjustments to interest expense.

Except for the interest rate swap agreement described above, our exposure to market risk for a change in interest rates relates to our investment portfolio, since all of our outstanding debt is fixed rate. Our investments are classified as short-term and as “available for sale.” We do not believe that short-term fluctuations in interest rates would materially affect the value of our securities.

ITEM 4.  CONTROLS AND PROCEDURES

(a)Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b)Change in Internal Control over Financial Reporting

As previously disclosed, during the preparation of our financial statements for the period ended September 30, 2004, we discovered that a clerical error made during the second quarter of 2004 resulted in cost of sales related to our manufacturing operations in France being understated by $2.5 million on a pre-tax basis.  We communicated this error to our audit committee and independent registered public accountants. Although there was no impact on full year financial results, we chose to restate second quarter results.  Our independent registered public accountants have advised our management that this condition, as it existed at June 30, 2004, constituted a material weakness in internal financial controls over cost of sales and inventory valuation.  We have implemented procedures that we believe will fully and effectively remediate this deficiency in our internal controls over financial reporting over cost of sales and inventory valuation in France as of the end of the third quarter of 2004.  Our management believes that these additional procedures, together with those existing before, when appropriately applied, are effective to identify errors of this nature. Other than these additional procedures, there have been no changes in our internal control over financial

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reporting during our most recent fiscal quarter 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 footnote 8 of the Consolidated Financial Statements included in Part I, Item 1 of this Report.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Equity Securities Sold During the Period.  On July 7, 2004, a holder of our 2.5% convertible subordinated notes approached us, and we agreed, to exchange in a private transaction $78.3 million of these outstanding notes for 1,518,169 shares of our common stock.  The exchange was made in reliance on the exemption from the registration requirements of the Securities Act of 1933 afforded by Section 3(a)(9) thereof.  Based on interpretations of the staff of the Division of Corporation Finance of the SEC, we believe that the shares of common stock issued by us in this transaction may be offered for resale, resold or otherwise transferred by the holder without compliance with the registration requirements of the Securities Act.

Purchases of Equity Securities by the Company and Affiliated Purchasers. During the third quarter of 2004, we repurchased $33.0 million principal amount of our 3.875% convertible subordinated notes due March 2007.  Prior to the repurchases, a total of $33.0 million principal amount of the 3.875% Notes were outstanding.  The 3.875% Notes were convertible, at the holder’s option, into shares of our common stock at a price of $70.36 per share.  The following table sets forth information regarding our repurchases of the 3.875% Notes.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Principal Amount of 3.875% Notes Purchased			Average Price Paid Per $1,000 Principal Amount of the 3.875% Notes			Total Principal Amount of 3.875% Notes Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of 3.875% Notes that May Yet Be Purchased Under the Plans or Programs
July 1– July 31, 2004	—			—			—	—
August 1 – August 31, 2004	$	33,000,000	(1)	$	1,040	(2)	—	—
September 1 – September 30, 2004	—			—			—	—
Total	$	33,000,000		$	1,040		—	—

(1)   The total principal amount of these 3.875% Notes was convertible into 469,016 shares of the Company’s common stock as of the date of repurchase.

(2)   On an “as converted” basis, the average purchase price paid per share of common stock issuable upon conversion of the 3.875% Notes was $73.17.

ITEM 5.   OTHER EVENTS

Ratios of Earnings to Fixed Charges

Our deficiency of earnings available to cover fixed charges for the years ended December 31, 1999, 2000, 2001, and for the nine months ended September 30, 2004, was $82.8 million, $102.8 million, $61.1 million, and $106.2 million, respectively.  Since earnings were insufficient to cover fixed charges for the years ended December 31, 1999, 2000, 2001, and for the nine months ended September 30, 2004, we are unable to provide ratios of earnings to fixed charges for each respective period.

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Our ratio of earnings to fixed charges for the years ended December 31, 2002 and 2003 was 2.57x and 4.18x, respectively.

ITEM 6.EXHIBITS

Exhibit No.	Description
10.1(a)	License & Supply Agreement between Cephalon, Inc. and Barr Laboratories, Inc. dated July 7, 2004. (1)
10.1(b)	Amendment No. 1 to License & Supply Agreement between Cephalon, Inc. and Barr Laboratories, Inc. dated July 9, 2004.
10.2	Decision and Order of the Federal Trade Commission in the matter of Cephalon, Inc. and CIMA LABS INC. dated August 9, 2004.
10.3(a)+	Cephalon, Inc. 2000 Equity Compensation Plan—Form of Employee Non-Qualified Stock Option.
10.3(b)+	Cephalon, Inc. 2004 Equity Compensation Plan—Form of Employee Restricted Stock Grant Term Sheet.
10.3(c)+	Cephalon, Inc. 2004 Equity Compensation Plan—Form of Non-Employee Director Non-Qualified Stock Option.
10.3(d)+	Cephalon, Inc. 2004 Equity Compensation Plan—Form of Employee Non-Qualified Stock Option.
10.3(e)+	Cephalon, Inc. 2004 Equity Compensation Plan—Form of Employee Incentive Stock Option.
31.1	Certification of Frank Baldino, Jr., Chairman and Chief Executive Officer of the Company, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of J. Kevin Buchi, Senior Vice President and Chief Financial Officer of the Company, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Frank Baldino, Jr., Chairman and Chief Executive Officer of the Company, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of J. Kevin Buchi, Senior Vice President and Chief Financial Officer of the Company, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+      Compensation plans and arrangements for executives and others.

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

(1)   Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under 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.

	CEPHALON, INC.
	(Registrant)
November 9, 2004	By	FRANK BALDINO, JR.
		Frank Baldino, Jr., Ph.D.
		Chairman and Chief Executive Officer
		(Principal executive officer)
	By	J. KEVIN BUCHI
		J. Kevin Buchi
		Senior Vice President and Chief Financial Officer
		(Principal financial and accounting officer)

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EX-10.1(A)

Exhibit 10.1(a)

LICENSE AND SUPPLY AGREEMENT

This License and Supply Agreement (the “Agreement”) is entered into this 7th day of July 2004 by and between Cephalon, Inc., a Delaware corporation, having its principal place of business located at 145 Brandywine Parkway, West Chester, Pennsylvania 19380, and Barr Laboratories, Inc., a Delaware corporation, having its principal place of business located at Two Quaker Road, P.O. Box 2900, Pomona, New York 10970.

WHEREAS, on November 3, 2003, Cephalon entered into an Agreement and Plan of Merger with CIMA LABS INC. (“CIMA”) whereby Cephalon agreed to acquire CIMA, including the rights to CIMA’s investigational new drug product, OraVescent® fentanyl  (“Acquisition Agreement”);

WHEREAS, in connection with Cephalon’s acquisition of CIMA, Cephalon filed its pre-merger notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with the Federal Trade Commission (the “Commission”);

WHEREAS, Cephalon controls and has the right to grant rights under certain patent rights relating to Cephalon’s proprietary pharmaceutical product known as ACTIQ®, a drug indicated for the treatment of breakthrough cancer pain, and is the assignee or exclusive licensee of certain rights in, and has the right to grant sublicenses under certain patent rights relating to ACTIQ®;

WHEREAS, Cephalon is developing a substantially sugar-free formulation of ACTIQ® (hereinafter referred to as “ACTIQ SF”) and controls and has the right to grant rights under certain patent rights relating to ACTIQ SF; and

WHEREAS, in order to resolve the antitrust concerns raised by the Commission in the alleged breakthrough cancer pain market, and as a condition of Commission approval of Cephalon’s acquisition of CIMA, Cephalon will enter into an Agreement Containing Consent Order (“Consent Agreement”), which, if accepted by the Commission, will require Cephalon to enter into a license and supply agreement with Barr, or other Commission approved licensee, to effect the remedial purposes of the Commission’s Order to enable Barr, or other Commission approved licensee, to develop, manufacture and market generic versions of ACTIQ® and ACTIQ SF, including contingent supply of both products, in order to compete effectively and independently in the market with Cephalon;

NOW, THEREFORE, in consideration of the foregoing and for good and valuable consideration, the receipt and adequacy of which is hereby affirmed, and intending to be legally bound hereby, the Parties hereby agree as follows.

1.DEFINITIONS

1.1“A/B Rated” or “A/B Rating” means the designation of an approved drug product by the FDA as “A/B Rated,” or the equivalent thereof, to another approved drug product.

1.2“ACTIQ” means any product that contains a pharmaceutical troche/lozenge formulation for oral transmucosal administration of a composition comprising fentanyl citrate [C-II] as the active pharmaceutical ingredient, that is manufactured and sold by or on behalf of Cephalon in the United States pursuant to the ACTIQ NDA.

1.3“ACTIQ Licensed Product” means a Barr Generic Product or a Cephalon Supplied Product, except for a Substantially Sugar-free product.

1.4“ACTIQ NDA” means the NDA No. 20-747, as supplemented or amended from time to time, or any other approved NDA, for the sale of ACTIQ.

1.5“ACTIQ SF NDA” means ACTIQ NDA, as supplemented or amended from time to time, for the sale of ACTIQ SF, and any other approved NDA for the sale of ACTIQ SF in the United States.

1.6“ACTIQ Patent Rights” means Patent Rights that relate to ACTIQ and ACTIQ Licensed Product, where the holder of the Patent Rights is Cephalon, and the Patent Rights include, but are not limited to, those U.S. patents and patent applications identified as set forth in Exhibit C, Exhibit D and Exhibit E, for purposes of clarification, ACTIQ Patent Rights do not include Patent Rights solely related to ACTIQ SF or ACTIQ SF Licensed Product.

1.7“ACTIQ Patent Rights License” has the meaning assigned in Section 2.1(a) of this Agreement.

1.8“ACTIQ Patent Rights License Effective Date” has the meaning assigned in Section 2.1(b).

1.9“ACTIQ Risk Management Program” means the Risk Management Program approved by the FDA under the ACTIQ NDA or ACTIQ SF NDA, as the case may be, and incorporated in this Agreement as Exhibit G, and as may be amended from time to time by Cephalon.

1.10“ACTIQ SF” means ACTIQ having a Substantially Sugar-free pharmaceutical formulation.

1.11“ACTIQ SF Licensed Product” means a Barr Generic SF Product or a Cephalon Supplied Product that is Substantially Sugar-free.

1.12“ACTIQ SF Patent Rights” means Patent Rights that relate to ACTIQ SF and ACTIQ SF Licensed Product, where the holder of the Patent Rights is Cephalon, and the Patent

Rights include, but are not limited to, those U.S. patents and patent applications identified as set forth in Exhibit F.

1.13“ACTIQ SF Patent Rights License” has the meaning assigned in Section 2.2(a) of this Agreement.

1.14“ACTIQ SF Patent Rights License Effective Date” has the meaning assigned in Section 2.2(b) of this Agreement.

1.15“Affiliate” means any corporation, partnership, joint venture or firm which controls, is controlled by or under common control with a specified person or entity.  For purposes of this definition, “control” shall be presumed to exist if one of the following conditions is met: (a) in the case of corporate entities, direct or indirect ownership of at least fifty percent (50%) of the stock or shares having the right to vote for the election of directors; and (b) in the case of non-corporate entities, direct or indirect ownership of at least fifty percent (50%) of the equity interest with the power to direct the management and policies decisions of such non-corporate entities.

1.16“AMP” means the Average Manufacturers Price as defined in §1927 of the Social Security Act, 42 U.S.C. §1396r-8(k)(1).

1.17“And” and “or” have both conjunctive and disjunctive meanings.

1.18“ANDA” means an Abbreviated New Drug Application, as defined under 21 U.S.C. § 355 (j) et seq.

1.19“Anticipated Final FDA Approval” means Cephalon’s good faith estimate of the earliest date on which the FDA is likely to grant Final FDA Approval.

1.20“Barr” means Barr Laboratories, Inc., its directors, officers, employees, agents and representatives, predecessors, successors, and assigns; its subsidiaries, divisions, groups, and Affiliates, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

1.21“Barr-Cephalon License Effective Date” means the date this Agreement is executed, which is set forth above.

1.22 “Barr Generic Product” means any product, other than a Barr Generic SF Product, having a pharmaceutical formulation for oral transmucosal administration of a composition comprising fentanyl citrate [C-II] as the active pharmaceutical ingredient, and that is manufactured and sold by or on behalf of Barr in the United States pursuant to an ANDA filed by and in the name of Barr that has received FDA ANDA Approval, for which ACTIQ is the reference listed drug.

1.23“Barr Generic SF Product” means any product having a Substantially Sugar-free

pharmaceutical formulation for oral transmucosal administration of a composition comprising fentanyl citrate [C-II] as the active pharmaceutical ingredient, and that is manufactured and sold by or on behalf of Barr in the United States pursuant to an ANDA filed by and in the name of Barr that has received FDA ANDA Approval, for which ACTIQ or ACTIQ SF is the reference listed drug.

1.24“Cephalon” means Cephalon, Inc., its directors, officers, employees, agents and representatives, predecessors, successors, and assigns; its subsidiaries (including Anesta Corp.), divisions, groups, and Affiliates, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

1.25“Cephalon Supplied Products” means ACTIQ or ACTIQ SF, as the case may be, sold to Barr in accordance with Section 6.1 of this Agreement for ultimate resale in the United States.

1.26“cGMP” means current good manufacturing practices as described in 21 C.F.R. § 210 and 21 C.F.R. § 211.

1.27“CIMA” has the meaning assigned in the Recitals.

1.28“Citizen Petition” means a petition filed with the FDA pursuant to 21 C.F.R. § 10.

1.29“Commercial Launch” means the date on which a product is first commercially available for sale in the United States by any one of the following:  pharmaceutical wholesalers, hospitals, health maintenance organizations, pharmaceutical benefit management organizations, group purchasing organizations and member hospitals, retail pharmacies, supermarkets, grocery stores, discount stores, convenience stores, mass merchandisers, non-federal non-GFO hospitals, U.S. Veterans Affairs/military, state and local governments, clinics and long-term care facilities, mail order, and public health provider that qualifies as a covered entity under Section 340B of the Public Health Services Act, created under Section 602 of the Veterans Health Care Act of 1992, Public Law 102-585.

1.30“Commercially Reasonable Efforts” means efforts and resources that would normally be expected to be used by a pharmaceutical company to develop, seek required FDA approvals for, manufacture, control and assure quality of, introduce into markets and otherwise commercialize a drug product owned by it or to which it has rights, which is of similar market potential at a similar stage of development or product life, taking into account issues of safety and efficacy, competitiveness in the marketplace, the proprietary position of the drug product, the regulatory structure(s) involved, the profitability of the drug product, and other material and relevant factors.

1.31“Commission” has the meaning assigned in the Recitals.

1.32“Confidential Information” has the meaning assigned in Section 9.1 of this Agreement.

1.33“Consent Agreement” has the meaning assigned in the Recitals.

1.34“Consent Agreement Effective Date” means the earlier of:  (i) the date Cephalon and CIMA close on the Acquisition Agreement; or (ii) the date the merger contemplated by the Acquisition Agreement becomes effective by filing the certificate of merger with the Secretary of State of the State of Delaware.

1.35“Develop” means to engage in all preclinical and clinical Development.

1.36“Development” means all preclinical and clinical drug development activities (including formulation),  including test method development and stability testing, toxicology, formulation, process development, manufacturing scale-up, development-stage manufacturing, quality assurance/quality control development, statistical analysis and report writing, conducting clinical trials for the purpose of obtaining any and all approvals, licenses, registrations or authorizations from any agency necessary for the manufacture, use, storage, import, export, transport, promotion, marketing and sale of a product (including any governmental price or reimbursement approvals), product approval and registration, and regulatory affairs related to the foregoing.

1.37“FDA” means the United States Food and Drug Administration.

1.38“FDA ANDA Approval” means final approval by the FDA under Section 505(j) of the U.S. Federal Food, Drug and Cosmetic Act, with an A/B Rating to the reference listed drug.

1.39“FDA Approvable Letter” means a letter from the FDA that a product is basically approvable providing that certain issues are resolved as described in 21 C.F.R. Part 314.110

1.40“Final FDA Approval” means approval by the FDA under Section 505(b) of the U.S. Federal Food, Drug and Cosmetic Act.

1.41“First Delivery Date” has the meaning assigned in Section 6.1 of this Agreement.

1.42“Gross Sales” means the number of units of ACTIQ Licensed Product or ACTIQ SF Licensed Product, as the case may be, sold and distributed to third party customers in the United States by Barr and its Affiliates multiplied by the invoiced price per unit for the applicable product.  Where such product(s) are sold as one of a number of items without a separate price, the Gross Sales applicable to any such transaction shall be deemed to be Barr’s average gross sales for the applicable quantity of such product(s) during the period in which the transaction occurred.

1.43“Interim Monitor” means a monitor appointed by the Commission pursuant to the Consent Agreement.

1.44“License Effective Date” means the ACTIQ License Effective Date or ACTIQ SF License Effective Date, as the case may be.

1.45“Manufacturing Know How” means technical information (whether patented, patentable or otherwise), including all product specifications, processes, product designs, plans, trade secrets, ideas, concepts, manufacturing, engineering and other manuals and drawings, standard operating procedures, flow diagrams, chemical, pharmacological, toxicological, pharmaceutical, physical and analytical, safety, efficacy, stability, quality assurance, quality control and clinical data, data, research records, compositions, annual product reviews, process validation reports, analytical method validation reports, specifications for stability trending and process controls, testing and reference standards for impurities in and degradation of products, technical data packages, chemical and physical characterizations, dissolution test methods and results, formulations for administration, clinical trial reports, regulatory communications and labeling and all other confidential or proprietary technical and business information, in each such case owned or licensed by Cephalon relating to the manufacturing of ACTIQ, ACTIQ Licensed Product, ACTIQ SF and ACTIQ SF Licensed Product, as the case may be.

1.46“Manufacturing Technology” means all technology, research and development, formulae, know how, inventions, discoveries, processes, compositions, test procedures, manufacturing procedures, techniques, developments, enhancements and modifications, confidential, technical, or proprietary information and knowledge not generally known to the public, whether or not patentable, commercially useful, or reducible to writing or practice that are or have been used in the manufacture, packaging, release testing, stability and/or shelf life of the ACTIQ, ACTIQ Licensed Product, ACTIQ SF and ACTIQ SF Licensed Product, as the case may be, or any component thereof; provided, however, that Manufacturing Technology shall not include any plant, tangible property, equipment or employees.

1.47“NDA” means New Drug Application, as defined under 21 U.S.C. § 355(b) et seq.

1.48“Net Sales” means Gross Sales, less accrued deductions for the following:

(a)sales and excise taxes and duties (including import duties) paid or allowed by a selling party and any other governmental charges imposed upon the manufacture or sale of any products to the extent included in Gross Sales;

(b)ordinary and customary trade, quantity and cash discounts and rebates, charge-backs and administrative fees (including rebates to social and welfare systems and amounts paid to third parties on account of rebate payments);

(c)allowances, charge-backs and credits to third parties on account of rejected, damaged, outdated, returned, withdrawn or recalled ACTIQ Licensed Product or ACTIQ SF Licensed Product, as the case may be, or on account of retroactive price reductions affecting any such products; and

(d)any external costs or expenses paid by or on behalf of Barr or any of its Affiliates for carriage of goods from the location set forth in Section 5.1(d) of this Agreement.

For clarity, sales between Barr and its Affiliates shall be excluded from the computation of Net Sales and Gross Sales, but Gross Sales and Net Sales shall include the subsequent final sale to third parties by any such affiliate.

1.49“OVF” means CIMA’s investigational new drug product, OraVescent® fentanyl, filed with the FDA under IND No. 65,447.

1.50“Party” or “Parties” means a party, or the parties, to this Agreement.

1.51“Pediatric Exclusivity” means exclusivity obtained in accordance with the requirements of Section 505A of the U.S. Federal Food, Drug and Cosmetic Act (21 U.S.C. § 355a).

1.52“Patent Rights” means all patents and patent applications, including any continuations, continuations-in-part, divisions, provisionals or any substitute applications, any patent issued with respect to any such patent applications, any reissue, reexamination, renewal or extension of any such patent, any United States patents originating from international patent applications designating the United States, and any patent applications filed after the License Effective Date that claim any inventions that were conceived prior to the License Effective Date; and the rights to which patents and patent applications are owned by or licensed to a holder of the Patent Rights and which patents and patent applications contain claims which would be infringed by the manufacture, use, importation, offer for sale, sale, distribution, promotion or advertising of ACTIQ Licensed Product, or the ACTIQ SF Licensed Product, as the case may be, or any component thereof.

1.53“Providing Party” has the meaning assigned in Section 9.1 of this Agreement.

1.54“Reasonable Best Efforts” means efforts and resources that would normally be expected to be used by a pharmaceutical company to develop, seek required FDA approvals for, manufacture, control and assure quality of, introduce into markets and otherwise commercialize a drug product owned by it or to which it has rights, which is of similar market potential at a similar stage of development or product life.

1.55“Receiving Party” has the meaning assigned in Section 9.1 of this Agreement.

1.56“Risk Management Program” (or “RMP”) means a strategic safety program designed to decrease product risk by using one or more interventions or tools beyond the package insert, which program may be modified or amended from time to time and may be a condition of Final FDA Approval.

1.57“Scientific and Regulatory Material” means all technological, scientific, chemical, biological, pharmacological, toxicological, regulatory and clinical trial materials and information related to the ACTIQ, ACTIQ Licensed Product, ACTIQ SF and ACTIQ SF Licensed Product,

and all rights thereto, in any and all jurisdictions.

1.58“Skeeper” means a child-resistant temporary storage container or a child-resistant disposal container for the ACTIQ Licensed Product, ACTIQ SF Licensed Product, ACTIQ or ACTIQ SF, as the case may be.

1.59“Substantially Sugar-free” means either:  (i) a product containing less than 0.5 grams of Sugar(s) per dosage; or (ii) a product approved by the FDA for labeling as “Sugar-Free.” The term “Sugar(s)” means the sum of all free mono- and disaccharides (such as glucose, fructose, lactose, and sucrose) as defined in 21 C.F.R. §101.9(c)(6)(ii).

1.60“University of Utah Research Foundation License Agreement” means the Technology License Agreement dated as of September 16, 1985, as amended, by and between the University of Utah Research Foundation (“UURF”) Anesta Corp., pursuant to which UURF licensed to Anesta Corp. the patents identified in Exhibit D hereof.  A copy of the University of Utah Research Foundation License Agreement is attached hereto as Exhibit A.

2.GRANT OF RIGHTS

2.1License to ACTIQ Patent Rights.

(a)Grant of License.  Subject to Section 2.1(b) of this Agreement, Cephalon grants to Barr, a fully paid-up, royalty-free, except as provided under Article 3 of this Agreement, irrevocable license, which conveys the following rights and licenses, in the United States, to develop, make or have made, use, sell, offer for sale, distribute or have distributed, promote or advertise, import or have imported ACTIQ Licensed Product (the “ACTIQ Patent Rights License”):

(i) a non-exclusive right and license to ACTIQ Patent Rights, including those patents owned by Cephalon and identified in Exhibits C and E;

(ii) a non-exclusive sublicense to the ACTIQ Patent Rights licensed to Cephalon, including those identified in Exhibit D;

(iii) an exclusive, except as to Cephalon, right and license to Manufacturing Know How, Manufacturing Technology, and Scientific and Regulatory Material, but does not include any rights or license in the trademark ACTIQ or any goodwill associated therewith; and

(iv) an exclusive, except as to Cephalon, right and license to: (a) the U.S. Trademark Registration No. 2,622,734 as needed for a single dose entity of an ACTIQ Licensed Product; (b) any trademark or trade dress covering the size, shape and color of a single dose entity of ACTIQ Licensed Product, to the extent Barr desires; and (c) the appearance, structure, textual or graphical content and/or color scheme of any labeling, dosing information, product

inserts, Skeeper or other materials, and any Risk Management Program, as may be necessary for the marketing and sale of ACTIQ Licensed Product.

(b)ACTIQ Patent Rights License Effective Date.  The ACTIQ Patent Rights License granted pursuant to Section 2.1(a)(iii) shall become effective upon the Barr-Cephalon License Effective Date.  Except as provided under Section 2.3 of this Agreement, the ACTIQ Patent Rights License granted pursuant to Section 2.1 (a) (i), (ii) and (iv) shall become effective upon the earliest of:  (1) Final FDA Approval of OVF, (2) September 5, 2006, if Cephalon is not granted Pediatric Exclusivity with respect to ACTIQ, or (3) February 3, 2007, if Cephalon is granted Pediatric Exclusivity with respect to ACTIQ.

(c)Pediatric Exclusivity.  Immediately upon the ACTIQ Patent Rights License Effective Date for the ACTIQ Patent Rights License granted pursuant to Section 2.1(a)(i),(ii) and (iv) as determined under Section 2.1(b), Cephalon shall grant a license to Barr with respect to any Pediatric Exclusivity that may then exist or thereafter arise with respect to ACTIQ (except for any Pediatric Exclusivity that may exist solely with respect to ACTIQ SF). Cephalon shall reasonably cooperate with Barr in notifying the FDA that Cephalon has waived Pediatric Exclusivity with respect to Barr, including, but not limited to, by filing with the FDA a dated and executed copy of the letter attached hereto as Exhibit H.

2.2Contingent License to ACTIQ SF Patent Rights.

(a)Grant of License.  Subject to Section 2.2(b) of this Agreement, Cephalon grants to Barr a fully paid-up, royalty-free, irrevocable license, which conveys the following rights and licenses, in the United States, to develop, make or have made, use, sell, offer for sale, distribute or have distributed, promote or advertise, import or have imported ACTIQ SF Licensed Product (the “ACTIQ SF Patent Rights License”):

(i) a non-exclusive right and license to ACTIQ SF Patent Rights, including those patents owned by Cephalon and identified in Exhibit F;

(ii) an exclusive, except as to Cephalon, right and license to Manufacturing Know How, Manufacturing Technology, and Scientific and Regulatory Material, but not any rights or license in the trademark ACTIQ or any goodwill associated therewith; and

(iii) an exclusive, except as to Cephalon, right and license to:  (a) the U.S. Trademark Registration No. 2,622,734 as needed for a single dose entity of an ACTIQ SF Licensed Product; (b) any trademark or trade dress covering the size, shape and color of a single dose entity of ACTIQ SF Licensed Product, to the extent Barr desires; and (c) the appearance, structure, textual or graphical content and/or color scheme of any labeling, dosing information, product inserts, Skeeper or other materials and any Risk Management Program, as may be necessary for the marketing and sale of ACTIQ SF Licensed Product.

(b)ACTIQ SF Patent Rights License Effective Date.  The ACTIQ SF Patent Rights License granted pursuant to Section 2.2(a)(ii) shall become effective upon the Barr-

Cephalon License Effective Date.  Except as provided under Section 2.3 of this Agreement, the ACTIQ SF Patent Rights License granted pursuant to Section 2.2(a)(i) and (iii) shall become effective upon the later of: (1) the ACTIQ Patent Rights License Effective Date; or (2) the earliest to occur of any of the following: (a) final FDA Approval of OVF; (b) a determination by the FDA that ACTIQ may no longer be sold in the United States; (c) a determination by the FDA that ACTIQ SF is not A/B Rated to ACTIQ; (d) a determination by the FDA that Barr Generic Product is not A/B Rated to either ACTIQ or ACTIQ SF; (e) no determination by the FDA at least sixty (60) days prior to the ACTIQ Patent Rights Effective Date that either (i) ACTIQ SF is A/B Rated to ACTIQ or (ii) Barr Generic Product or Barr Generic SF Product is A/B rated to ACTIQ SF; and (f) Final FDA Approval of ACTIQ SF, if Cephalon fails to include in its ACTIQ SF NDA filing a request under 21 C.F.R.§ 355(j) to have FDA make a determination that ACTIQ SF is A/B Rated to ACTIQ. Cephalon shall promptly notify Barr of any FDA determinations described in this Paragraph.

(c)Pediatric Exclusivity.  Immediately upon the ACTIQ SF Patent Rights License Effective Date for the ACTIQ SF Patent Rights License granted pursuant to Section 2.2(a)(i) and (iii) as determined under Section 2.2(b), Cephalon shall grant a license to Barr with respect to any Pediatric Exclusivity that may then exist or thereafter arise solely with respect to ACTIQ SF. Cephalon  shall  reasonably cooperate with Barr in notifying the FDA that Cephalon has waived Pediatric Exclusivity with respect to Barr, including, but not limited to, by filing with the FDA a dated and executed copy of the letter attached hereto as Exhibit H.

2.3ACTIQ SF Incentive.  Cephalon shall use all Reasonable Best Efforts to develop ACTIQ SF.  If Cephalon has not obtained by July 1, 2005, either Final FDA Approval or an FDA Approvable Letter of the ACTIQ NDA as supplemented for the marketing of ACTIQ SF, then the ACTIQ Patent Rights License Effective Date and ACTIQ SF Patent Rights License Effective Date shall be no later than September 5, 2006; provided, however, that if Cephalon has obtained by July 1, 2005 an FDA Approvable Letter but has not obtained within 180 days of the date of such an FDA Approvable Letter Final FDA Approval of the ACTIQ NDA as supplemented for the marketing of ACTIQ SF, then the ACTIQ Patent Rights License Effective Date and ACTIQ SF Patent Rights License Effective Date shall be no later than September 5, 2006.

2.4Patent Rights.  Cephalon, at its own expense, shall prepare, file, prosecute and maintain the ACTIQ Patent Rights and ACTIQ SF Patent Rights in the United States until the earlier of (i) August 3, 2007 or (ii) the earlier of one hundred eighty (180) days after (a) the ACTIQ Patent Rights License Effective Date or (b) ACTIQ SF Patent Rights License Effective Date.  Upon written request, Cephalon shall provide a copy to Barr of any patent application that is (1) within the scope of the ACTIQ Patent Rights or the ACTIQ SF Patent Rights and (2) regarded as abandoned by the U.S. Patent & Trademark Office before such patent application either is published under 35 U.S.C. §  122(b), or issues under 35 U.S.C. § 151 et seq or that is the subject of a request filed with the U.S. Patent & Trademark Office seeking to prevent publication of such patent application under 35 U.S.C. § 122(b).

2.5Infringement.

(a)Notice Regarding and Authority to Take Action Against Infringers.  During the period set forth in Section 2.4 of this Agreement, each Party shall promptly notify the other Party of any known infringement by third parties of the proprietary rights of either Party with regard to ACTIQ Patent Rights and the ACTIQ SF Patent Rights.  If any of the patents of the ACTIQ Patent Rights or the ACTIQ SF Patent Rights are infringed, Cephalon shall have the right but not the obligation to commence appropriate legal action to enjoin such infringement at its sole expense; in such case Barr shall provide its complete cooperation to Cephalon at its expense, but Cephalon shall be entitled to retain any damages or awards that may result from its initiation of said action.  If Cephalon fails to initiate such action within ninety (90) days after being notified of the infringement, then Barr shall have the right, but not the obligation, to undertake such action at its own expense in the name of Cephalon, and Cephalon shall provide its complete cooperation to Barr at its expense.  Any damages or awards resulting from the prosecution of such claim by Barr shall be applied first to reimburse Barr for its costs and expenses, with any balance to be shared by the Parties with an amount equal to [**] percent ([**]%) of such balance being retained by Barr and [**] percent ([**]%) of such balance being given to Cephalon.

(b)Infringement of Third Party Patents.  Each Party shall have the right, but not the obligation, to defend against a claim alleging infringement by its own products of the Patent Rights of third parties.  For purposes of clarification, Cephalon shall have the right, but not the obligation, to defend such claims against ACTIQ, ACTIQ SF, and Cephalon Supplied Product, and Barr shall have the right, but not the obligation, to defend such claims against Barr Generic Product and Barr Generic SF Product.

3.ACTIQ PATENT RIGHTS LICENSE MILESTONE PAYMENTS.

3.1Milestone Payment.  In consideration of the grant by Cephalon to Barr of the ACTIQ Patent Rights License pursuant to Section 2.1(a), and as a condition to the continued effectiveness of the ACTIQ Patent Rights License, Barr shall make a payment to Cephalon as set forth in Exhibit B.

3.2Royalty Payments to the University of Utah Research Foundation.  Pursuant to Section 4.1 of the University of Utah Research Foundation License Agreement, Barr shall make payments of earned royalty of [**]% on Net Sales Value as defined under and required by the University of Utah Research Foundation License Agreement directly to UURF with respect to all sales of ACTIQ Licensed Product or ACTIQ SF Licensed Product during the period commencing on the ACTIQ Patent License Effective Date and ending on September 5, 2006.  Barr shall be bound by the applicable terms of the University of Utah Research Foundation License Agreement.

** Portions of this exhibit have been omitted and filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

4.COVENANTS OF CEPHALON; CITIZEN PETITION

4.1Covenants.

(a)Cephalon hereby covenants that Cephalon shall not directly or indirectly, alone or in participation with any other Person, seek to enjoin, or file, prosecute or maintain any suit, legal or other action or proceeding for damages or any legal, equitable or other relief against Barr or any sublicensees, manufacturers, suppliers, distributors, and customers of Barr, or of such Barr-affiliated entities, for infringement of any ACTIQ Patent Rights or ACTIQ SF Patent Rights to which Barr has an effective license under this Agreement or of any other Patent Rights owned by or licensed to Cephalon for infringement by any ACTIQ Licensed Product or ACTIQ SF Licensed Product, provided, however, that nothing contained in this Section 4.1(a) shall prevent, preclude or otherwise prohibit Cephalon from joining, filing, prosecuting or maintaining any suit, in law or equity, against Barr with respect to this Agreement.

(b)Cephalon agrees that it will not launch, cause to be launched or supply to a third party other than Barr, a generic version of ACTIQ Licensed Product or ACTIQ SF Licensed Product in the United States prior to the Commercial Launch by Barr of Barr Generic Product, Barr Generic SF Product, or Cephalon Supplied Product, as the case may be.  For the avoidance of doubt, Cephalon’s supplying to Barr the Cephalon Supplied Product pursuant to the terms of this Agreement shall not be considered a breach of the foregoing sentence.

4.2Citizen Petition.  Cephalon agrees not to file or cause to be filed a Citizen Petition with the FDA challenging: the marketing approval of ACTIQ Licensed Product, or ACTIQ SF Licensed Product.

5.TECHNICAL TRANSFER

5.1Technical Transfer Assistance.  Cephalon shall use all reasonable efforts to facilitate Barr’s ability to manufacture and Develop Barr Generic Product and Barr Generic SF Product (collectively hereinafter referred to as “Barr Generic Products”) and to facilitate FDA’s approval of Barr’s ANDA for Barr Generic Products, including but not limited to: (i) providing Barr with the appropriate and necessary technical assistance, as requested by Barr; (ii) enabling Barr to develop the expertise to manufacture the Barr Generic Products under this Section 5.1 within the shortest possible period of time (in any event no later than the respective License Effective Dates), which reasonable efforts, for purposes of clarity does not include the payment of funds or the transfer of tangible property, by Cephalon to Barr, except as may be provided under this Agreement; Barr shall have the right at reasonable intervals and upon reasonable prior notice, to visit any Cephalon plant or facility, review any equipment and observe the processes involved in the manufacturing of Cephalon Supplied Product, ACTIQ or ACTIQ SF, in a manner that will not interrupt Cephalon’s internal operations; (iii) providing Barr within ten (10) days after the Consent Agreement Effective Date a copy of each patent application that is within the scope of the ACTIQ Patent Rights and ACTIQ SF Patent Rights and that has not been published or issued, as provided under Section 2.4 of this Agreement; and (iv) providing Barr access to Scientific and Regulatory Materials.  Failure of Cephalon to fulfill its technical transfer obligations of this Section 5.1 shall constitute a material breach.

5.2Transfer of Manufacturing Know How, Manufacturing Technology and Scientific and Regulatory Material.  Cephalon will transfer or make available the Manufacturing Know How, Manufacturing Technology and the Scientific and Regulatory Material, and such other information and materials as Barr requests, as soon as possible after the Barr-Cephalon License Effective Date in order to enable Barr to manufacture the Barr Generic Product and Barr Generic SF Product.  Barr shall use its Commercially Reasonable Efforts to assume the labeling and packaging obligations with respect to the Barr Generic Products.

5.3Cost and Charges.  Cephalon shall provide assistance as set forth in Section 5.1 above for a cumulative period of two hundred and fifty (250) days of support free of any charge to Barr, except that Cephalon shall be entitled to charge and Barr shall be obligated to pay for any reasonable out of pocket costs or disbursements incurred by Cephalon in rendering such assistance.  For any assistance provided after such period, Cephalon will be entitled to charge Barr Cephalon’s fully absorbed labor cost plus reasonable direct out of pocket costs and disbursements.  Cephalon shall render invoices for all such costs and disbursements that it incurs to Barr and Barr shall pay to Cephalon the full amount due on all such invoices within thirty (30) days of receipt.

6.CEPHALON SUPPLIED PRODUCT

6.1Contingent Supply of Cephalon Supplied Product.  In the event that Barr is unable to obtain, on or before 30 days prior to the earliest of:   (i) September 5, 2006, if Cephalon is either not granted Pediatric Exclusivity with respect to ACTIQ or Cephalon did not obtain Final FDA approval of ACTIQ NDA or ACTIQ SF NDA, as the case may be, for the marketing of ACTIQ SF, as set forth in Section 2.3 of this Agreement; (ii) February 3, 2007, if Cephalon is granted Pediatric Exclusivity with respect to ACTIQ; or (iii) the Anticipated Final FDA Approval of OVF (such earliest date being the “First Delivery  Date”), FDA ANDA Approval necessary to permit the manufacture and sale of Barr Generic Product or Barr Generic SF Product, as the case may be, and subject to the terms and conditions set forth in this Article 6, then Cephalon will manufacture and supply to Barr for resale in the United States Cephalon Supplied Product commencing on the First Delivery Date; provided, however, that Cephalon shall not be required to supply Cephalon Supplied Product in a Substantially Sugar-free formulation more than 30 days prior to the ACTIQ SF Patent Rights License Effective Date.  Barr shall have the option to have Cephalon manufacture and supply to Barr a Cephalon Supplied Product that is either Substantially Sugar-free or not Substantially Sugar-free; provided, however, that if Cephalon is simultaneously selling both ACTIQ and ACTIQ SF in the United States, Barr shall have the option to have Cephalon manufacture and supply both Substantially Sugar-free and not Substantially Sugar-free formulations of Cephalon Supplied Product.

Cephalon will supply such Cephalon Supplied Products in finished dosage form in bulk containers ready for packaging and labeling by Barr, irrespective of Cephalon’s continued manufacture or production of ACTIQ or ACTIQ SF for its own purposes.

For purposes of clarification, Barr’s receipt at any time during the term of the supply

provisions of this Agreement of Cephalon Supplied Product that is not Substantially Sugar-free shall not otherwise terminate Cephalon’s obligations to supply to Barr a Substantially Sugar-free formulation of Cephalon Supplied Product under the terms and conditions of this Article 6.

In the event that Barr has obtained FDA ANDA Approval necessary to permit the manufacture and sale of Barr Generic Product, but FDA withdraws such FDA ANDA Approval prior to Barr’s Commercial Launch of the Barr Generic Product, Cephalon will manufacture and supply to Barr for resale in the United States Cephalon Supplied Products, commencing as soon as reasonably practicable following Barr’s notice to Cephalon of FDA’s withdrawal of such FDA ANDA Approval.

(a)ACTIQ as Cephalon Supplied Product.  To ensure that Barr has a timely and uninterrupted supply of Cephalon Supplied Product, Cephalon and Barr shall prepare and file, at Cephalon’s cost and immediately as of the Consent Agreement Effective Date, such filings and other actions necessary to qualify Barr’s sale of Cephalon Supplied Product.  Additionally, Cephalon and Barr shall prepare and file, at Cephalon’s cost and immediately upon Final FDA Approval of ACTIQ SF such filings necessary to qualify Barr’s sale of Substantially Sugar-free formulation of Cephalon Supplied Product.  Further, Cephalon and Barr agree that in the event of any interruptions in supply of Cephalon Supplied Product during the term of the supply provisions of this Agreement, the manufacture and supply of Cephalon Supplied Product shall take priority over the manufacture, supply, and sale of Cephalon’s branded products, ACTIQ or ACTIQ SF.  Notwithstanding Cephalon’s efforts to supply Cephalon Supplied Product in accordance with the preceding sentence, if Cephalon is unable to meet Barr’s forecasted requirements of Cephalon Supplied Product, then Cephalon shall provide to Barr ACTIQ and ACTIQ SF, as the case may be, out of its existing finished goods inventory at the price per unit set forth herein and shall promptly supplement the ACTIQ NDA to enable the distribution by Barr of ACTIQ and ACTIQ SF.

(b)Term of Supply Agreement.  Cephalon shall supply Cephalon Supplied Products until the date that is earlier:  (i) six (6) years from the Barr-Cephalon License Effective Date; or (ii) three (3) years from the First Delivery Date of Cephalon Supplied Products to Barr under this Agreement.

(c)Unit Definition; Delivery.  A unit shall mean a single dose entity of the Cephalon Supplied Products in finished dosage form, ready for packaging and labeling by Barr.  Barr shall purchase Cephalon Supplied Products in not less than full lot quantities of each strength (i.e., 200mcg, 400mcg, 600mcg, 800mcg, 1200mcg, 1600mcg, or as may otherwise be available and bioequivalent to that product as marketed by Cephalon) of Cephalon Supplied Products.  Cephalon Supplied Products shall be delivered FOB Cephalon’s Salt Lake City, Utah manufacturing facility.  Cephalon shall properly store and retain appropriate samples (identified by lot and batch number) of each shipment in conditions and for times consistent with all Applicable Law and to permit appropriate or required internal and regulatory checks and references (collectively, the “Shipment Samples”).

(d)Price/Payment.  Barr shall purchase Cephalon Supplied Products at a price equal to the lesser of (i) $[**] plus an adjustment to reflect the percentage increase in the U.S. Bureau of Labor Statistics Producer Price Index for SIC 28341 in the proceeding year (“PPI Adjustment”) per unit for the first twelve month period commencing on the First Delivery Date; $[**] plus a PPI Adjustment per unit for the twelve month period commencing one year after the First Delivery Date; and $[**]  plus a PPI Adjustment per unit for the twelve month period commencing two years after the First Delivery Date; or (ii) [**] percent ([**]%) of the AMP for ACTIQ or ACTIQ SF, as the case may be, on a weighted average basis across all dosage strengths.  Barr shall pay for all Cephalon Supplied Products within thirty (30) days after receipt of Cephalon’s invoice.  If Cephalon has not received payment within such thirty day period, Cephalon will charge Barr a penalty at the lower of (i) interest accruing on any such unpaid balance at a rate of [**] percent ([**]%) per month, compounded daily or (ii) the highest rate allowable under applicable law.

(e)Ordering/Forecasting.  Cephalon shall inform Barr, the Commission, and any Interim Monitor, in writing every sixty (60) days from the Effective Date until FDA approval of: (1) Barr Generic Product and (2) Barr Generic SF Product, concerning the date of Anticipated Final FDA Approval of OVF.  Barr shall immediately notify Cephalon of the receipt of FDA ANDA Approval of Barr Generic Product and Barr generic SF Product.  Cephalon shall immediately notify Barr, the Commission, and any Interim Monitor, in writing, upon the occurrence of each of the following events: (i) submission of the NDA for OVF, (ii) receipt of a FDA Approvable Letter for OVF,  (iii) Final FDA Approval of OVF, (iv) any determination by the FDA that ACTIQ may no longer be sold in the United States; and (v) any determination by the FDA that ACTIQ is not A/B Rated to ACTIQ SF.  Failure of Cephalon to provide Barr with such notifications shall constitute material breach.  Commencing [**] months prior to the Anticipated Final FDA Approval of OVF, as provided by Cephalon, Barr shall provide Cephalon with rolling [**] month forecast of its requirements of Cephalon Supplied Products.  The forecasts shall be updated [**] and shall be provided to Cephalon not less than [**] ([**]) months prior to the first requested delivery of product under the then-current forecasts.  In addition, the first [**] months of each forecast shall be firm purchase orders binding on Barr and Cephalon.  Within [**] ([**]) business days of receipt of each forecast from Barr, Cephalon and Barr shall discuss the manufacturing schedule for Cephalon Supplied Products.  Cephalon shall use Commercially Reasonable Efforts to supply Cephalon Supplied Products in excess of forecasted amounts.  In the event that the FDA Final Approval of OVF occurs prior to the Anticipated Final FDA Approval of OVF previously indicated to Barr by Cephalon, Cephalon shall supply Barr with Cephalon Supplied Products no later than thirty (30) days following FDA Final Approval of OVF.

(f)Scope of Liability for Material Breach by Licensor.  IN THE EVENT OF ANY BREACH OF THIS AGREEMENT BY A PARTY, THE OTHER PARTY HERETO  SHALL BE ENTITLED TO SEEK ALL REMEDIES AVAILABLE AT LAW OR EQUITY INCLUDING, BUT NOT LIMITED TO INDIRECT DAMAGES, SPECIAL DAMAGES, CONSEQUENTIAL DAMAGES, LOST PROFITS, LEGAL FEES AND COSTS.   NOTWITHSTANDING THE FOREGOING, CEPHALON SHALL NOT BE PERMITTED TO

** Portions of this exhibit have been omitted and filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

TERMINATE OR RESCIND THE GRANT OF RIGHTS BY CEPHALON TO BARR UNDER ARTICLE 2 OF THIS AGREEMENT OR CEPHALON’S SUPPLY OBLIGATIONS HEREUNDER OR OTHERWISE REFUSE TO SUPPLY BARR WITH CEPHALON SUPPLIED PRODUCT AS A RESULT OF ANY BREACH BY BARR.  HOWEVER, IN THE EVENT BARR BREACHES ITS OBLIGATIONS UNDER SECTION 8.5 HEREOF, CEPHALON SHALL BE ENTITLED TO SEEK ANY MONETARY REMEDIES AVAILABLE TO IT, INCLUDING THE PAYMENT BY BARR OF LIQUIDATED DAMAGES EQUAL TO THE DOLLAR AMOUNT OF CEPHALON SUPPLIED PRODUCT PURCHASED BY BARR UNDER ARTICLE 6 OF THIS AGREEMENT.  FAILURE OF CEPHALON TO TIMELY PROVIDE BARR WITH CEPHALON SUPPLIED PRODUCTS SHALL CONSTITUTE MATERIAL BREACH.

(g)Inspection.

(i)Barr shall inspect or shall cause to be inspected all shipments of Cephalon Supplied Products promptly upon receipt; provided that Barr shall have no obligation to inspect the Cephalon Supplied Products beyond a visual inspection of each shipment for obvious physical damage or quantity discrepancies that are evident upon visual inspection of the Cephalon Supplied Products as shipped by Cephalon.  Barr shall be entitled to reject any portion or all of any shipment of Cephalon Supplied Products that does not conform to the certificate of analysis or otherwise fails to comply with the warranties set forth in Section 8.3 of this Agreement; provided that (i) Barr shall notify Cephalon within [**] days after receipt of such shipment if it is rejecting a shipment due to obvious physical damage, obvious packaging defect or quantity discrepancies that are evident upon visual inspection of the Cephalon Supplied Products as shipped by Cephalon and (ii) in the case of Cephalon Supplied Products having defects other than those obvious defects, Barr shall notify Cephalon within [**] days after receipt of such Cephalon Supplied Products.  Any such rejection shall be made in writing and delivered to Cephalon and shall indicate the reasons for such rejection.

(ii)If Barr has not delivered a notice of rejection within the appropriate time period as set forth in Section 6.1(g)(i) hereof after receipt of the shipment of Cephalon Supplied Products, Barr shall, without in any way limiting Barr’s rights for indemnification as set forth in Section 10.1, be deemed to have accepted that shipment of Cephalon Supplied Products.  Once Barr has accepted or is deemed to have accepted the Cephalon Supplied Products, Barr shall have no claim or recourse against Cephalon relating to such Cephalon Supplied Products, other than Barr’s rights for indemnification as set forth in Section 10.1 of this Agreement.

(iii)Barr’s payment obligations under Section 6.1(e) for a shipment shall be suspended upon Barr’s rejection of such shipment pursuant to this Section 6.1(g) until a determination pursuant to Section 6.1(h) whether or not such rejection is justified.

(h)Rejection of Shipment.

(i)After notice of rejection is received by Cephalon, it shall cooperate

** Portions of this exhibit have been omitted and filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

with Barr in determining whether rejection is justified.  Cephalon will evaluate reasons for such non-compliance of the Cephalon Supplied Products with applicable specifications.  Cephalon shall notify Barr as promptly as reasonably possible whether it accepts Barr’s rejection.

(ii)Whether or not Cephalon accepts Barr’s rejection, Cephalon shall use Commercially Reasonable Efforts to replace such rejected Cephalon Supplied Products.  If the Cephalon Supplied Products rejected by Barr from such original shipment ultimately is found to be nonconforming (whether pursuant to Section 6.1(h)(iii) or if Cephalon so acknowledges in writing), Cephalon shall bear all expenses for such replacement (including all transportation and/or disposal charges and cost of manufacture for such replacement) to the extent Barr previously paid for any corresponding nonconforming Cephalon Supplied Products.  If it is determined subsequently that such Cephalon Supplied Products were in fact conforming (whether pursuant to Section 6.1(h)(iii) or if Barr so acknowledges in writing), then Barr shall be responsible not only for the purchase price of the allegedly nonconforming Cephalon Supplied Products (including all transportation charges), but also, upon receipt and acceptance by Barr in accordance with the procedures (and at the same price charged in the original shipment) set forth above, the replacement.  Replacement shipments shall also be subject to the procedures contained in Section 6.1(g).

(iii)If Cephalon disagrees with Barr’s rejection, the parties shall submit samples of the rejected Cephalon Supplied Products and the Shipment Sample to a mutually acceptable third party laboratory, which shall determine whether such Cephalon Supplied Products meets the applicable FDA approved specifications.  The parties agree that such laboratory’s determination shall be final and determinative.

(iv)If the laboratory determines that the Cephalon Supplied Products meet the applicable FDA approved specifications, the rejection by Barr is deemed to be unjustified, and Barr shall pay the full invoice price for the shipment which contained the Cephalon Supplied Products subject to the dispute.  If the laboratory determines that the Cephalon Supplied Products do not meet the applicable specifications, the parties shall proceed as provided in Section 6.1(h)(ii).  The party against whom the third party tester rules shall bear the reasonable costs of the third party testing.

(v)Barr shall destroy the rejected Cephalon Supplied Products promptly upon written instruction of Cephalon as to the lawful disposition of such Cephalon Supplied Products and at Cephalon’s cost and provide Cephalon with certification of such destruction.

(i)cGMP Manufacture.  Cephalon Supplied Products supplied to Barr hereunder shall be manufactured by Cephalon (or its designated Affiliates or agents) in accordance with cGMP and other applicable rules and regulations of the FDA and other United States governmental or regulatory agencies with jurisdiction over the manufacture of the Cephalon Supplied Products.  At all times during the term of the supply provisions of this Agreement, Cephalon (or its designated Affiliates or agents) shall maintain an FDA licensed or inspected manufacturing facility for the manufacture and supply of Cephalon Supplied Products. Cephalon’s manufacturing facility in Salt

Lake City, Utah has been inspected and licensed by the FDA.

(j)Testing. Cephalon shall test or cause to be tested each lot of Cephalon Supplied Products before delivery to Barr.  Each test shall set forth the items tested, specifications and test results in a certificate of analysis for each lot delivered to Barr under this Agreement.  Cephalon shall send such certificate of analysis together with a certificate of compliance to Barr together with the Cephalon Supplied Products lot delivered.

(k) Packing and Marking.  Each lot of Cephalon Supplied Products shall be shipped in accordance with Cephalon’s standard operating procedures.

(l)Compliance with Laws.  The Parties shall comply with all applicable laws, ordinances, codes and regulations of U.S. government agencies or other agencies of competent jurisdiction, including but not limited to, federal, state, municipal and local governing bodies having jurisdiction with respect to the conduct of work toward the manufacture, storage, shipment and sale of Cephalon Supplied Products.  Cephalon shall maintain all government permits and licenses, including but not limited to, health, safety and environmental permits, necessary for the conduct of the activities and procedures that Cephalon undertakes pursuant to this Agreement.

(m)Regulatory Inspections.

(i)Cephalon shall cooperate with any inspection of its facilities by a regulatory agency or authority in or outside the United States, including but not limited to any inspection by such regulatory agency or authority prior to the granting of FDA Approval to market the Cephalon Supplied Products in the United States.  Cephalon shall notify Barr promptly of any notification received by Cephalon from the FDA to conduct an inspection of its manufacturing or other facilities used in the manufacturing, storage or handling of Cephalon Supplied Products.  Copies of all written correspondence relevant to the Cephalon Supplied Products to and from any relevant regulatory authorities in the United States will be provided by Cephalon to Barr promptly after they are received or produced by or on behalf of Cephalon from or to the FDA or such other agency or authority.

(ii)Cephalon shall keep complete records of every production batch in accordance with generally accepted industry practices, including, but not limited to, the batch production records for each batch supplied to Barr.  Upon written request to Cephalon, Barr shall have the right to have its representatives visit Cephalon’s manufacturing areas, and review said records and books at a mutually agreed time during normal business hours to assess Cephalon’s compliance with cGMP and quality assurance standards.  Barr may exercise such right no more than one (1) time per calendar year; provided that if circumstances arise that in Barr’s reasonable judgment require that its representatives visit Cephalon’s manufacturing areas more than once per calendar year, the parties will discuss such circumstances and appropriate means to address them.

(n)Quality Agreement.  The Parties shall negotiate and agree within [**] days

** Portions of this exhibit have been omitted and filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

prior to Anticipated Final FDA Approval of OVF a quality agreement (the “Quality Agreement”), which shall be on terms consistent with those standard in the industry for transactions similar to this Agreement and shall include such other provisions relating to FDA and other regulatory matters as necessary or appropriate in connection with Cephalon’s supply of Cephalon Supplied Products to Barr.  Each Party shall comply with the procedures set forth in the Quality Agreement regarding quality and cGMP related responsibilities, complaints and Adverse Event Monitoring and Reporting.

6.2Disclaimer of Warranty.  EXCEPT AS EXPRESSLY SET FORTH HEREIN IN SECTION 8.3, NO GUARANTEE, WARRANTY, CONDITION, UNDERTAKING OR TERM, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, AS TO THE CONDITION, QUALITY, DURABILITY, PERFORMANCE, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE CEPHALON SUPPLIED PRODUCTS IS GIVEN OR ASSUMED BY CEPHALON, AND ALL SUCH GUARANTEES, WARRANTIES, CONDITIONS, UNDERTAKINGS AND TERMS ARE HEREBY EXCLUDED.

6.3Records for Cephalon Supplied Products; Recalls.  Barr shall keep written records sufficient to track the purchase and sale of Cephalon Supplied Products lots on a lot-by-lot, and customer-by-customer basis.  Barr shall keep written records on all Cephalon Supplied Products complaints, and shall provide to Cephalon summaries of such Cephalon Supplied Products complaints on a quarterly basis.  If Cephalon, Barr or the FDA determines that a Cephalon Supplied Products recall or withdrawal in the United States is necessary, then Barr shall take all actions appropriate in order to recall or withdraw such Cephalon Supplied Products sold by Barr; provided, however, that Barr shall consult with Cephalon prior to taking any action with respect to the Cephalon Supplied Products.  Barr shall bear the costs and expenses of such recall or withdrawal; provided, however, that if any Cephalon Supplied Products recall or withdrawal is also caused by the breach of Cephalon of this Agreement or its representations, warranties, covenant contained herein, such cost and expenses shall be apportioned between Cephalon and Barr in relation to each Party’s respective fault.

6.4Supply Default.  In the event that Cephalon is unable to supply Cephalon Supplied Products for any reason for more than [**] calendar days following the forecasted delivery date, Barr may notify Cephalon of its intention to manufacture or have manufactured by any third Person, for supply to Barr or any of its designees, such Cephalon Supplied Products.  Cephalon hereby grants Barr a license (i) under the ACTIQ Patent Rights or ACTIQ SF Patent Rights as necessary or material for the manufacturing of such Cephalon Supplied Products, (ii) under the ACTIQ NDA and ACTIQ SF NDA, as applicable, and (iii) all Manufacturing Know How, Manufacturing Technology and Scientific and Regulatory Material, to manufacture or have manufactured such Cephalon Supplied Products for such period until the day that is six months after Cephalon has given Barr written notice that it is ready and able to resume the performance of its obligations under this ARTICLE 6.  Cephalon shall promptly provide Barr with the physical embodiment of all such, ACTIQ NDA or ACTIQ SF NDA, as the case may be, and the ACTIQ Patent Rights and ACTIQ SF Patent Rights, and Manufacturing Know How, Manufacturing Technology, and Scientific and Regulatory Material, and access to appropriate personnel of Cephalon with relevant knowledge or experience with such Manufacturing Know How,

** Portions of this exhibit have been omitted and filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

Manufacturing Technology, and Scientific and Regulatory Material.  In addition, to the extent either required or permitted by FDA rules and regulations, Cephalon shall prepare and file, at Barr’s expense, such supplements or amendments, as applicable, to the ACTIQ NDA or ACTIQ SF NDA, as the case may be, as required by applicable laws as is necessary for Barr to manufacture or have manufactured such Cephalon Supplied Products at the designated facility as permitted by the license granted under this Section 6.4.

7.TERM AND TERMINATION

7.1Term.  This Agreement shall commence as of the Effective Date and shall remain in effect as follows:

(a)the licenses granted under Section 2.1(a) and 2.2(a), and the covenants in Section 4.1(a) of this Agreement shall be perpetual except the obligations under Section 3 shall terminate no later than the expiration of the last to expire of the patents under the ACTIQ Patent Rights and ACTIQ SF Patent Rights, as the case may be;

(b)the obligations of Cephalon relating to supply of Cephalon Supplied Products shall terminate as set forth in Section 6.1(b).

7.2Termination due to Material Breach by Either Party.  Upon material breach of any term of this Agreement, the breaching Party will be given written notice and a copy of such notice shall be simultaneously provided to the Commission and to any Interim Monitor, and [**] days within which to remedy such breach, or, if applicable, such longer period (not exceeding [**] days) as would be reasonably necessary for a diligent party to cure such material breach; provided, however, that the breaching Party has commenced and continues diligent efforts to cure during the initial [**] day period following receipt of such notice of breach.   In the event of the breaching party’s failure to remedy any such breach within this time period, the non-breaching party shall be entitled to seek all remedies available at law or equity as set forth in Section 6.1(f) of this Agreement; however, at no time shall Cephalon be permitted to terminate or rescind its supply obligations under this Agreement or otherwise refuse to supply Barr with Cephalon Supplied Product as a result of any breach by Barr.

7.3Survival of Rights and Terms.  Termination or expiration of this Agreement shall not affect any accrued rights of either Party.  The terms of Sections 4.1(b) and Section 4.2 shall survive any termination of the licenses under Section 7.1(a) or any termination of the supply obligations under Section 7.1(b).

7.4Commission Action as Condition Precedent.  The obligations of the parties under this Agreement are subject to the fulfillment of the following conditions:

(a)A majority of Commissioners of the Commission shall have issued a Decision and Order concerning the pending acquisition of CIMA by Cephalon; and

** Portions of this exhibit have been omitted and filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

(b)That Decision and Order shall include a requirement that Cephalon enter into a License and Supply Agreement with Barr, or other Commission approved licensee, and that the terms of this Agreement are acceptable.

8.REPRESENTATIONS, COVENANTS AND WARRANTIES

8.1General.  Cephalon and Barr hereby represent and warrant to the other that (i) the execution, delivery and performance of this Agreement by each of them does not conflict with, or constitute a breach of any order, judgment, agreement, or instrument to which they are a party; (ii) the execution, delivery and performance of this Agreement by each of them does not require the consent of any person or the authorization of (by notice or otherwise) any governmental or regulatory authority (other than those relating to the granting of approvals by the FDA as contemplated herein); and (iii) the rights granted by each of them does not conflict with any rights granted by either of them to any third party.

8.2(a)Cephalon warrants that it has rights to license or sublicense, as the case may be, the ACTIQ Patent Rights of Section 1.6 and the ACTIQ SF Patent Rights of Section 1.12  to Barr, in accordance with Section 2.1 and Section 2.2 respectively, and that as of the Barr-Cephalon License Effective Date, Exhibit C, Exhibit D,  Exhibit E, and Exhibit F are exhaustive of patents and patent applications owned or licensed by Cephalon that protect ACTIQ, ACTIQ SF, ACTIQ Licensed Product and ACTIQ SF Licensed Product.  Except as provided under Section 8.2(b) of this Agreement, so long as Barr is using or manufacturing or otherwise making, in furtherance of seeking regulatory approval, or selling or offering to sell ACTIQ Licensed Product and ACTIQ SF Licensed Product under the terms of this Agreement, Cephalon will take no action against Barr with respect to the ACTIQ Patent Rights or ACTIQ SF Patent Rights or the subject matter of the non-exclusive license or sublicense of Section 2.1 or Section 2.2 as further provided under this Section 8.2(a).  After the ACTIQ Patent Rights License Effective Date or ACTIQ SF Patent Rights License Effective Date, as the case may be, (except for the manufacture and Development of ACTIQ or ACTIQ SF, respectively, in which case, this Section 8.2(a) shall apply as of the Barr-Cephalon License Effective Date), Cephalon shall not join, or file, prosecute or maintain any suit, in Law or equity, against Barr or any entity controlled by or under common control with Barr, or any licensees, sublicensees, manufacturers, suppliers, distributors, and customers of Barr, or of such Barr Affiliates, for the research, Development, manufacture, use, import, export, distribution, offer for sale, promotion or sale of generic equivalents of ACTIQ or ACTIQ SF as the case may be (but only as to those ACTIQ or ACTIQ SF  products that are commercialized or in Development by Cephalon as of the  Barr-Cephalon License Effective Date) under any Patents Rights owned or licensed by Cephalon as of the Barr-Cephalon License Effective Date or acquired thereafter (other than such Patents Rights that claim inventions conceived by and reduced to practice by Cephalon’s employees after the  Barr-Cephalon License Effective Date): (A) that claim the use of ACTIQ or ACTIQ SF, as the case may be, in the Field of pain management; or (B) that claim any aspect of the research, Development, manufacture, use, import, export, distribution, or sale of  ACTIQ or ACTIQ SF, as the case may be.

(b)Cephalon reserves the right to enforce its ACTIQ Patent Rights against Barr until the ACTIQ Patent Rights License Effective Date and its ACTIQ SF Patent Rights  until the  ACTIQ SF Patent Rights License Effective Date, respectively, but only to the extent Cephalon seeks a remedy in the form of injunctive relief and/or actual montetary damages upon the filing by Barr of an ANDA under Section 1.18 or NDA under Section 1.47 of this Agreement, and further provided such enforcement action is terminated and such injunctive relief is waived upon the respective License Effective Date.

8.3Cephalon warrants that the Cephalon Supplied Products delivered under this Agreement will (i) be manufactured in accordance with cGMP requirements and (ii) conform to the applicable FDA approved specifications at the time of delivery thereof to Barr.

8.4Cephalon warrants that as of the Barr-Cephalon Licence Effective Date, it shall waive and release during the term of this Agreement its vendors, suppliers, contract manufacturers and all other entities possessing Cephalon Confidential Information and supplying or have supplied in the past to Cephalon raw materials, products, components or services used in the manufacturing of ACTIQ or ACTIQ SF from any and all obligations of confidentially as to Barr, and Cephalon will facilitate the disclosure of any such Confidential Information to Barr from such entities, which waiver, release and facilitated disclosure shall specifically include, but not be limited to such entities supplying Skeepers, application appliances or handles, compositions to permanently affix the application appliances or handles to the tablet formulation of ACTIQ or ACTIQ SF, and equipment and supplies for the manufacturing, assembling, packaging and labeling of ACTIQ or ACTIQ SF.

8.5Barr covenants that during the term of the supply provisions of this Agreement, it will use Commercially Reasonable Efforts to secure approval for and, as the case may be, maintain such approval for, the manufacturing, marketing and sale of Barr Generic Product and, to the extent Barr determines to avail itself of Cephalon Supplied Product that is Substantially Sugar-free, Barr Generic SF Product.

9.CONFIDENTIALITY

9.1Confidential Information.  During the term of this Agreement, and for ten (10) years after its termination or expiration, each Party shall maintain in confidence any information concerning the subject matter hereof provided by the other Party (the “Providing Party”), and that is considered to be confidential by the Providing Party, regardless of whether provided prior to or after the date of this Agreement.  Such information (collectively, the “Confidential Information”) includes but is not limited to documentation, business plans, cost and operational information, whether or not related to ACTIQ, ACTIQ SF, a Barr Generic Product, a Barr Generic SF Product, or Cephalon Supplied Products.  Confidential Information shall not be used or disclosed to others except for carrying out the purpose of this Agreement.  The foregoing obligation of confidentiality shall not apply to any portion of the Confidential Information that a Party (“Receiving Party”) can

demonstrate:

(a)was already known to the Receiving Party;

(b)was generally available to the public or otherwise part of the public domain at the time of its disclosure;

(c)became generally available to the public or otherwise part of the public domain after its disclosure to the Receiving Party, other than through any act or omission of the Receiving Party in breach of this Agreement;

(d)was subsequently lawfully disclosed to the Receiving Party by a third party; or

(e)the Receiving Party was compelled to disclose by governmental administrative agency or judicial requirements; provided, however, that any disclosure under this subsection 9.1(e) shall neither relieve the Receiving Party from attempting to impose confidentiality obligations on the governmental administrative agency or judicial body, to the extent feasible, nor shall it relieve the Receiving Party from maintaining the confidentiality of the Confidential Information with respect to third parties other than the agency or body as to which such compelled disclosure has been made.

9.2Protection of Confidential Information.  The Parties shall take all reasonable steps to eliminate the risk of disclosure of Confidential Information, including, without limitation, ensuring that only employees, agents, and representatives with a need to know the Confidential Information have access thereto.  The Parties acknowledge by the signing of this Agreement that such employees, agents, and representatives are to be bound by substantially similar obligations of confidentiality as are established under this Article 9.

9.3Presumptive Confidentiality of Information Exchanged.  All information exchanged by the Parties under the terms and conditions of this Agreement shall be considered Confidential Information and treated as such unless otherwise specified and agreed upon by the Parties; provided, however, that the fact of this Agreement shall not be considered Confidential Information.  In addition, Cephalon and Barr shall consult with one another before issuing, and provide each other the opportunity to review and make reasonable comment upon, any press release or other public disclosure under the Securities Act of 1934, as amended, with respect to this Agreement or the terms hereof, and shall not issue any such disclosure without the prior consent of the other party, which will not be unreasonably withheld or delayed; provided that a party need not obtain the consent of the other party to make public statements consistent with any press release or other public disclosure that previously has been issued by or consented to by the other party and may (but after prior consultation, to the extent practicable in the circumstances) issue such disclosure as may be required by applicable law or stock exchange rule.

10.INDEMNIFICATION

10.1Indemnification by Cephalon.  Cephalon shall indemnify and hold Barr, its Affiliates and subsidiaries, and the officers, directors and employees of each of them (“Barr Indemnitees”), harmless from any and all losses, liabilities, obligations, claims, fees or expenses, including reasonable attorneys’ fees, that stem from claims brought by third parties that are based upon (a) any infringement by Cephalon Supplied Products of the intellectual property rights of third parties; (b) the death or injury to person or damage to property resulting directly from damaged or defective, or otherwise nonconforming Cephalon Supplied Products at the time of delivery to Barr; (c) the material breach of any representations or warranties made by Cephalon in Article 8 herein; (d) the negligence, recklessness or willful misconduct of Cephalon or Cephalon’s officers, employees or agents hereunder; (e) the failure by Cephalon to deliver Cephalon Supplied Products in a timely manner as required under Section 6.1 of this Agreement unless, and to the extent that, Cephalon can demonstrate that their failure was entirely beyond the control of Cephalon and in no part the result of negligence or willful misconduct by Cephalon; or (f) the successful enforcement by Barr of its rights under this Section 10.1.  In addition, Cephalon shall not be obligated to indemnify Barr for any liability related to the Cephalon Supplied Products to the extent Barr has assumed an indemnification obligation under Section 10.2 below.

10.2Indemnification by Barr.  Barr shall indemnify and hold Cephalon, its Affiliates and subsidiaries, and the officers, directors and employees of each of them (Cephalon Indemnitees”), harmless from any and all losses, liabilities, obligations, claims, fees or expenses, including reasonable attorneys’ fees, that stem from claims brought by third parties that are based upon (a) any infringement by Barr Generic Product or Barr Generic SF Product of the intellectual property rights of third parties or by Cephalon Supplied Products relating to the packaging or labeling of Cephalon Supplied Products by Barr; (b) the failure by Barr to make the royalty payments to the University of Utah Research Foundation as set forth in Section 3.2, (c) the use or sale or other distribution of Cephalon Supplied Products by Barr or its Affiliate in violation of the terms of this Agreement; (d) any representation made or warranty given by Barr or subdistributors with respect to the Cephalon Supplied Products; (e) the death or injury to person or damage to property resulting from (i) improper handling, storage or transport of the Cephalon Supplied Products by Barr or any agents of the foregoing, (ii) the unauthorized alteration, modification or adulteration of the Cephalon Supplied Products by Barr; (f) the material breach of any representation or warranties made by Barr in Article 8 herein; (g) the negligence, recklessness or willful misconduct of Barr or Barr’s officers, employees or agents hereunder; and (h) the successful enforcement by Cephalon of its rights under this Section 10.2.  In addition, Barr shall not be obligated to indemnify Cephalon for any liability related to the Cephalon Supplied Products to the extent Cephalon has assumed an indemnification obligation under Section 10.1 above.

10.3Notification.  In the event that one Party receives notice of a claim, lawsuit, or liability for which it is entitled to indemnification by the other Party, the Party receiving notice shall give prompt notification to the indemnifying Party.

10.4Cooperation.  The Party being indemnified shall cooperate fully with the indemnifying Party throughout the pendency of the claim, lawsuit or liability, and the indemnifying Party shall have complete control over the conduct and disposition of the claim, lawsuit, or liability.

11.GENERAL

11.1Headings.  The headings and captions used herein are for the convenience of the Parties only and are not to be construed to define, limit or affect the construction or interpretation hereof.

11.2Severability.  In the event that any provision of this Agreement is found to be invalid or unenforceable, then the offending provision shall not render any other provision of this Agreement invalid or unenforceable, and all other provisions shall remain in full force and effect and shall be enforceable, unless the provisions which have been found to be invalid or unenforceable shall substantially affect the remaining rights or obligations granted or undertaken by either Party.

11.3Entire Agreement.  This Agreement contains the entire agreement of the Parties regarding the subject matter hereof and supersedes all prior agreements, understandings or conditions (whether oral or written) regarding the same.  This Agreement may not be changed, modified, amended or supplemented except by a written instrument signed by both Parties.  Nothing in this Agreement shall prevent Barr from asserting that ACTIQ Patent Rights or ACTIQ SF Patent Rights are invalid, unenforceable or will not be infringed by manufacture, use, sale or offer for sale of the Barr Generic Product or Barr Generic SF Product or Cephalon from asserting its rights against such assertions by Barr, except as provided under Section 8.2(b) of this Agreement.

11.4Assignment.  This Agreement and the rights established hereunder may not be assigned or transferred by either Party without the prior written consent of the other Party; provided, however, that prior written consent shall not be required in the case of a decision on the part of Barr to discontinue the sale of the ACTIQ Licensed Product or ACTIQ SF Licensed Product and to assign all of Barr’s rights thereto and obligations therefor under this Agreement to a third party; or in the case of a sale or transfer of all or substantially all of the assets of the assigning party or a merger of the assigning party in which the holders of such party’s capital stock prior to such merger do not hold a majority of the capital stock immediately following such merger.  In the event that this Agreement is assigned, it shall be binding upon and inure to the benefit of the Parties and their respective successors and assigns.

11.5Independent Contractors.  The Parties are independent contractors under this Agreement.  Nothing contained in this Agreement is to be construed so as to create a joint venture or to constitute Cephalon and Barr as partners, agents or employees of the other, including with respect to this Agreement.   Neither Party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of, or in the name of, the other Party or to bind the other Party to any contract, agreement or undertaking with any third party.  Each Party is solely responsible for the payment of any and all taxes arising from the existence or operation of its business or from the performance of its obligations hereunder including, without limitation, income

taxes, withholding taxes, employee payroll and social security and welfare taxes which may be imposed upon said Party in accordance with applicable laws.  Similarly, each Party is solely responsible for satisfying any and all obligations which may arise from its employment of any persons.

11.6Further Assurances.  Each Party hereto shall execute, acknowledge and deliver such further instruments, and to take such other actions, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

11.7Notices and Reports.  All notices, consents or approvals required by this Agreement shall be in writing and sent by express courier, certified or registered air mail, postage prepaid or by facsimile or cable (confirmed by such certified or registered mail) to the Parties at the following addresses or such other addresses as may be designated in writing by the respective Parties.  Notices shall be deemed effective on the date of mailing.

If to Cephalon:

Cephalon, Inc.

145 Brandywine Parkway

West Chester, Pennsylvania 19380

Attention: Senior Vice President & General Counsel

Facsimile: (610) 344-7563

If to Barr:

Barr Laboratories, Inc.

400 Chestnut Ridge Road

Woodcliff Lake, NJ  07677

Attention:  President

Facsimile: (201) 930-3335

11.8Disputes; Applicable Law

(a)Governing Laws.  This Agreement shall be governed by and interpreted in accordance with the substantive laws of the State of Delaware, United States of America.

(b)Dispute Resolution.  In the event that any dispute arising between the Parties relating to this Agreement cannot be resolved by their respective staffs, said dispute shall be referred promptly to the Chief Executive Officer of Cephalon and the Chief Executive Officer of Barr, who shall make a good faith effort to resolve the matter within thirty (30) days from the date of any such referral.  In the event that the Parties still cannot amicably resolve any such dispute or claim, then the parties shall be free to seek any remedy available at law or in equity.

11.9Force Majeure.  Either party’s failure to perform its obligations hereunder (except to make payments hereunder) shall be excused to the extent and for the period of time such

nonperformance is caused by an event of force majeure, including but not limited to war, invasion, fire, explosion, flood, riot, strikes, acts of God, delays or defaults of carriers, energy shortage, failure or curtailment in Cephalon’s usual sources of supply, acts of government (other than acts prohibiting the sale of Product resulting from Cephalon’s failure to supply Cephalon Supplied Product in compliance with the specifications or cGMPs (i.e., failure to comply with 21 C.F.R. §§210 and 211), Cephalon’s violations of EPA laws, OSHA non-compliance of Cephalon (including facilities) or Cephalon’s violations under 21 C.F.R. §11), its agencies or instrumentalities, or contingencies or causes beyond such party’s reasonable control.

11.10Waiver.  The waiver by either Party of a breach of any provisions contained herein shall be effective only if made in writing and shall in no way be construed as a waiver of any succeeding breach of such provision or the waiver of the provision itself.

11.11Counterparts.  This Agreement may be executed in multiple counterparts, each of which shall be considered and shall have the force and effect of an original.

IN WITNESS WHEREOF, the Parties have executed this Agreement by their duly authorized representatives, as of the day and year first above written.

BARR LABORATORIES, INC.				CEPHALON, INC.
By:	/s/ Paul M. Bizaro			By:	/s/ Frank Baldino, Jr.
Print Name:			Paul M. Bizaro	Print Name:			Frank Baldino, Jr.
Title:		President & COO		Title:		Chairman & CEO

Exhibit A

University of Utah Research Foundation License Agreement

[Filed as Exhibit 10.6 to the Registration Statement on Form S-1 filed by Anesta Corp. on May 31, 1996 (File No. 33-72608)]

Exhibit B

Milestone Payment pursuant to Section 3.1

In consideration of the grant by Cephalon to Barr of the ACTIQ Patent Rights License pursuant to Section 2.1(a), and as a condition to the continued effectiveness of the ACTIQ Patent Rights License, Barr shall pay to Cephalon a milestone payment of [**]dollars ($[**]) if Net Sales during the period beginning on the Commercial Launch of a Barr Generic Product, Barr Generic SF Product and/or a Cephalon Supplied Product and ending on either (1) September 5, 2006, if Cephalon is not granted Pediatric Exclusivity with respect to ACTIQ or (2) March 5, 2007, if Cephalon is granted Pediatric Exclusivity with respect to ACTIQ equal or exceed $[**].  For purposes of this Exhibit B, the calculation of Net Sales shall not include: (i) sales of Barr Generic Product prior to the ACTIQ Patent Rights License Effective Date and (ii) sales of Barr Generic SF Product prior to the ACTIQ SF Patent Rights License Effective Date.

Barr shall make such payment within [**]days after the achievement of such milestone.

** Portions of this exhibit have been omitted and filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

Exhibit C

Issued United States Patents

(i)Patent No. US 6,173,851;

(ii)Patent No. US 6,286,698; and

(iii)Patent No. US 6,264,981.

Exhibit D

Issued United States Patents

(i)Patent No. US 4,671,953;

(ii)Patent No. US 4,863,737;

(iii)Patent No. US 5,785,989;

(iv)Patent No. US 5,132,114; and

(v)Patent No. US 5,288,497.

Exhibit E

United States Patents Issuing from the following United States Patent Applications

(i)USSN 09/798,027 (filed 02/27/01);

(ii)USSN 10/013,266 (filed 12/10/01);

(iii)USSN 10/145,587 (filed 05/14/02).

Exhibit F

United States Patents Issuing from the following United States Patent Applications

(i)USSN 10/771,046 (filed 02/03/04).

Exhibit G

ACTIQ Risk Management Program

[**]

** This exhibit, totaling 76 pages, has been omitted and filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

Exhibit H

Letter by Cephalon to FDA Waiving Pediatric Exclusivity as to Barr

Director

Office of Generic Drugs, HFD-600

Food and Drug Administration

Metro Park North II

7500 Standish Place

Rockville, MD 20855-2773

RE:	NDA 20-747/S    ACTIQ, Fentanyl Citrate
		Waiver of Pediatric Exclusivity as to Barr Laboratories, Inc.

Cephalon, Inc. waives the period of Pediatric Exclusivity under NDA 20-747, as to any Abbreviated New Drug Application (ANDA) filed under Section 505(j) or New Drug Application (NDA) filed under Section 505(b)(2), submitted by Barr Laboratories, Inc. that references NDA 20-747 and relates to products containing fentanyl citrate.  Cephalon, as the holder of approved NDA 20-747, authorizes the Food and Drug Administration (FDA) to act upon such ANDA or NDA submitted by Barr Laboratories, Inc.

Pursuant to Section 505A of the Federal Food, Drug, and Cosmetic Act, as amended, the FDA issued a Notification of Acceptance to Cephalon, Inc. on [  ] that its Submission of Pediatric Study Reports - Pediatric Exclusivity Determination Requested relating to the use of ACTIQ (fentanyl citrate) and filed as NDA 20-747/S     on [  ] satisfies the requirements of Section 505A and that Pediatric Exclusivity attaches to NDA 20-747 effective [  ].

Cephalon, Inc., as part of a voluntary Consent Agreement under a Decision and Order of the Federal Trade Commission made final on [  ], entered into a License and Supply Agreement with Barr Laboratories, Inc., effective [  ].  Subject to certain conditions of the License and Supply Agreement, which have been met, Cephalon, Inc. agreed to grant to Barr Laboratories, Inc. a license with respect to any Pediatric Exclusivity that may then exist or thereafter arise with respect to ACTIQ and to notify the FDA that Cephalon has waived Pediatric Exclusivity with respect to Barr Laboratories, Inc.  This letter, hereby, accordingly serves to notify the FDA of waiver of Pediatric Exclusivity as to Barr Laboratories, Inc. by Cephalon, Inc. under NDA 20-747.

If you have any questions, please call [         ] at [         ].

Sincerely

CEPHALON, INC.

Cc:         President, Barr Laboratories, Inc.

EX-10.1(B)

Exhibit 10.1(b)

July 9, 2004

Barr Laboratories, Inc.

Two Quaker Road

P.O. Box 2900

Pomona, New York 10970

Attention: President

Re:Amendment No. 1 to License and Supply Agreement

Dear Sir:

This letter is to confirm our understanding concerning an amendment to be made with respect to the License and Supply Agreement dated as of July 7, 2004 (the “Agreement”), between Cephalon, Inc. (“Cephalon”) and Barr Laboratories, Inc. (“Barr”).  All terms not otherwise defined herein are used as defined in the Agreement.

The Agreement is hereby amended as follows:

1.Section 1.21 of the Agreement, the “Barr-Cephalon License Effective Date,” is hereby deleted in its entirety and replaced with the following:

“1.21  ‘Barr-Cephalon License Effective Date’ means the Consent Agreement Effective Date.”

2.Except as amended hereby, the Agreement remains in full force and effect.

If the foregoing accurately reflects your understanding as to these matters, please indicate your agreement in the space provided below, and return one fully-executed original to me.

		Very truly yours,
		CEPHALON, INC.
		By:	/s/ Paul Blake
		Name:		Paul Blake, FRCP
		Title:		Sr. V.P., Clinical Research &
				Regulatory Affairs
Acknowledged and agreed to by:
BARR LABORATORIES, INC.
By:	/s/ Frederick J. Killion
Name: Frederick J. Killion
Title: Sr. VP and General Counsel

A-1

EX-10.2

Exhibit 10.2

UNITED STATES OF AMERICA

BEFORE FEDERAL TRADE COMMISSION

COMMISSIONERS:	Timothy J. Muris, Chairman
	Mozelle W. Thompson
	Orson Swindle
	Thomas B. Leary
	Pamela Jones Harbour

	)
In the Matter of	)
	)
CEPHALON, INC,	)
a corporation;	)
	)
And	)
	)	Docket No.
CIMA LABS INC.,	)	DECISION AND ORDER
a corporation.	)
	)

The Federal Trade Commission (“Commission”) having initiated an investigation of the proposed merger of Respondent Cephalon, Inc. (“Cephalon”) and Respondent CIMA LABS INC. (“CIMA”), hereinafter referred to as “Respondents,” andRespondents having been furnished thereafter with a copy of a draft of Complaint that the Bureau of Competition proposed to present to the Commission for its consideration and which, if issued by the Commission, would charge Respondents with violations of Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45; and

Respondents, their attorneys, and counsel for the Commission having thereafter executed an Agreement Containing Consent Order (“Consent Agreement”), containing an admission by Respondents of all the jurisdictional facts set forth in the aforesaid draft of Complaint, a statement that the signing of said Consent Agreement is for settlement purposes only and does not constitute an admission by Respondents that the law has been violated as alleged in such Complaint, or that the facts as alleged in such Complaint, other than jurisdictional facts, are true, and waivers and other provisions as required by the Commission’s Rules; and

The Commission having thereafter considered the matter and having determined that it had reason to believe that Respondents have violated the said Acts, and that a Complaint should issue stating its charges in that respect, and having accepted the executed Consent Agreement

and placed such Consent Agreement on the public record for a period of thirty (30) days for the receipt and consideration of public comments, now in further conformity with the procedure described in Commission Rule 2.34, 16 C.F.R. § 2.34, the Commission hereby makes the following jurisdictional findings and issues the following Decision and Order (“Order”):

1.             Respondent Cephalon is a corporation organized, existing and doing business under and by virtue of the laws of the State of Delaware, with its offices and principal place of business located at 145 Brandywine Parkway, West Chester, Pennsylvania 19380.

2.             Respondent CIMA is a corporation organized, existing and doing business under and by virtue of the laws of the State of Delaware, with its offices and principal place of business located at 10000 Valley View Road, Eden Prairie, Minnesota 55344.

3.             The Federal Trade Commission has jurisdiction over the subject matter of this proceeding and of Respondents, and the proceeding is in the public interest.

ORDER

IT IS ORDERED that, as used in this Order, the following definitions shall apply:

A.“Cephalon” means Cephalon, Inc., its directors, officers, employees, agents, representatives, predecessors, successors, and assigns; its joint ventures, subsidiaries, divisions, groups and affiliates controlled by Cephalon, Inc. (including, but not limited to, MergerCo), and the respective directors, officers, employees, agents, representatives, successors, and assigns of each.  After the Effective Date, the term “Cephalon” shall include CIMA.

B.“CIMA” means CIMA LABS INC., its directors, officers, employees, agents, representatives, predecessors, successors, and assigns; its joint ventures, subsidiaries, divisions, groups and affiliates controlled by CIMA LABS, INC., and the respective directors, officers, employees, agents, representatives, successors, and assigns of each.

C.“Respondents” means Cephalon and CIMA, individually and collectively.

D.“Commission” means the Federal Trade Commission.

E.“Barr” means Barr Laboratories, Inc., a corporation organized, existing, and doing business under and by virtue of the laws of the State of Delaware, having its principal place of business located at Two Quaker Road, P.O. Box 2900, Pomona, New York 10970.

F.“Acquisition” means the acquisition contemplated by the “Agreement and Plan of Merger” dated as of November 3, 2003, by and among Cephalon, CIMA and MergerCo (“Acquisition Agreement”), whereby Cephalon agreed to acquire CIMA.

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G.“Agency(ies)” means any governmental regulatory authority or authorities in the world responsible for granting approval(s), clearance(s), qualification(s), license(s) or permit(s) for any aspect of the research, Development, manufacture, marketing, distribution or sale of  Oral Opioid Fentanyl.  The term “Agency” includes, but is not limited to, the United States Food and Drug Administration (“FDA”) and the United States Drug Enforcement Administration (“DEA”).

H.“Application”, “New Drug Application” (“NDA”), “Abbreviated New Drug Application” (“ANDA”), “Supplemental New Drug Application” (“SNDA”), or “Marketing Authorization Application” (“MAA”) mean the applications for a Product filed or to be filed with the FDA pursuant to 21 C.F.R. Part 314, or its foreign Agency equivalent, and all supplements, amendments, and revisions thereto, any preparatory work, drafts and data necessary for the preparation thereof, and all correspondence between Respondents and the FDA or other Agency relative thereto.

I.“Approvable Letter” means a letter from the FDA that an Application is basically approvable as described in 21 C.F.R. Part 314.110.

J.“Approval Letter” means a letter from the FDA approving an Application as described in 21 C.F.R. Part 314.105.

K.“Closing Date” means the date on which Respondents (or a Divestiture Trustee) and a Commission-approved Acquirer consummate a transaction to grant, license, deliver or otherwise convey relevant assets pursuant to this Order.  (Pursuant to Paragraph II.A. of this Order, the Closing Date is required to occur not later than ten (10) Days after the Effective Date.)

L.“Commission-approved Acquirer” means the following:

1.Barr, if Barr has not been rejected by the Commission pursuant to Paragraph II.A. of this Order; or

2.an entity approved by the Commission to acquire particular assets that the Respondents are required to grant, license, deliver or otherwise convey pursuant to this Order.

M.“Confidential Business Information” means all information owned by, or in the possession or control of, Respondents that is not in the public domain and that is related to the research, Development, manufacture, marketing, importation, exportation, supply, sales, sales support, or use of Oral Opioid Fentanyl.

N.“Contract Manufacture” means the manufacture of Oral Opioid Fentanyl to be supplied by Respondents or a Designee specifically identified in this Order for sale to the Commission-

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approved Acquirer.

O.“Day(s)” means the period of time prescribed under this Order as computed pursuant to 16 C.F.R. § 4.3 (a).

P.“Designee” means any entity other than the Respondent(s) that will manufacture Oral Opioid Fentanyl for a Commission-approved Acquirer.

Q.“DD5” means the Product in preclinical development by Respondent Cephalon as of the Effective Date that is a buccal patch formulation comprising Fentanyl and is designated “DD5.”

R.“Development” means all preclinical and clinical drug development activities (including formulation), including test method development and stability testing, toxicology, bioequivalency, formulation, process development, manufacturing scale-up, development-stage manufacturing, quality assurance/quality control development, statistical analysis and report writing, conducting clinical trials for the purpose of obtaining any and all approvals, licenses, registrations or authorizations from any Agency necessary for the manufacture, use, storage, import, export, transport, promotion, marketing and sale of a Product (including any governmental price or reimbursement approvals), Product approval and registration, and regulatory affairs related to the foregoing.  “Develop” means to engage in Development.

S.“Direct Cost” means the cost of direct labor and direct material used to provide the relevant assistance or service.

T.“Divestiture Trustee” means a trustee appointed by the Commission pursuant to the relevant provisions of this Order.

U.“Drug Master Files” means the information submitted to the FDA as described in 21 C.F.R. Part 314.420 related to a Product.

V.“Effective Date” means the earlier of the following dates:

1.the date the Respondents close on the Acquisition Agreement; or

2.the date the merger contemplated by the Acquisition Agreement becomes effective by filing the certificate of merger with the Secretary of State of the State of Delaware.

W.“Fentanyl” means the chemical substance known by the international non-proprietary name fentanyl citrate and/or all pharmaceutically active derivatives thereof including, without limitation, esters, salts, hydrates, solvates, polymorphs, prodrugs, metabolites and isomers thereof and all hydrates, solvates, polymorphs, prodrugs and isomers of such salts.

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X.“Field” means the prevention, treatment, diagnosis, or control of a particular medical condition.

Y.“Final FDA Approval” means approval of a Product by the FDA pursuant the Federal Food, Drug, and Cosmetic Act § 505(b), 21 U.S.C. 355(b).

Z.“Final Finished Form” means a Product packaged in final form and ready for sale by the Commission-approved Acquirer to the Commission-approved Acquirer’s ultimate customer (other than for the addition of the Commission-approved Acquirer’s specific packaging and/or labeling).

AA.“Generic Entrant Forbearance Date” means the earlier of the following dates:

1. August 3, 2007; or

2. one hundred eighty (180) Days after the Marketing Licensing Date.

BB.“Governmental Entity” means any Federal, state, local or non-U.S. government or any court, legislature, governmental agency or governmental commission or any judicial or regulatory authority of any government.

CC.“Interim Monitor” means a monitor appointed by the Commission pursuant to Paragraph III of this Order.

DD.“Law” means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law by any Governmental Entity.

EE.“Marketing Licensing Date” means the following dates:

1.with respect to Substantially Sugar-Free Formulations of Oral Opioid Fentanyl, the earliest of the following dates:

a.     the date of Final FDA Approval of OVF;

b.     the date of notice of a withdrawal of approval by the FDA of NDA No. 20-747; or

c.the date of Final FDA Approval of a Substantially Sugar-Free Formulation of Oral Opioid Fentanyl (unless, at least sixty (60) Days prior to the occurrence of the Marketing Licensing Date with respect to all other formulations of Oral Opioid Fentanyl (as determined below), the FDA determines such formulation is therapeutically equivalent to other formulations of Oral Opioid Fentanyl already approved by the FDA, i.e., the FDA determines that any actual or potential bioequivalence problems have been resolved with adequate evidence supporting bioequivalence);

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provided, however, that should Marketing Licensing Date with respect to Substantially Sugar-Free Formulations of Oral Opioid Fentanyl (as determined above) occur prior to the occurrence of the Marketing Licensing Date with respect to all other formulations of Oral Opioid Fentanyl (as determined below), then the Marketing Licensing Date for the Sugar-Free Formulations of Oral Opioid Fentanyl shall instead be defined to be the same date as Marketing Licensing Date with respect to all other formulations of Oral Opioid Fentanyl (as determined below); and

2.with respect to all other formulations of Oral Opioid Fentanyl the earliest of the following dates:

a.the date of Final FDA Approval of OVF;

b.September 5, 2006, if Respondents are not granted Pediatric Exclusivity with respect to Oral Opioid Fentanyl; or

c.February 3, 2007, if Respondents are granted Pediatric Exclusivity with respect to Oral Opioid Fentanyl,

provided, however, if Respondents have not obtained Final FDA Approval of a Substantially Sugar-Free Formulation of Oral Opioid Fentanyl on or before the later of the following dates:  (1) July 1, 2005; or (2) one hundred eighty (180) Days from the date of an Approvable Letter for a Substantially Sugar-Free Formulation of Oral Opioid Fentanyl issued to the Respondents (but only if such Approvable Letter is issued on or before July 1, 2005), then the Marketing Licensing Date with respect to Substantially Sugar Free Formulations and all other formulations of Oral Opioid Fentanyl shall be no later than September 5, 2006.

FF.“Not Approvable Letter” means a letter from the FDA that an Application may not be approved, as described in 21 C.F.R. Part 314.120.

GG.“Oral Opioid Fentanyl” means all Products that contain the active pharmaceutical ingredient Fentanyl and any dose form, presentation or line extension thereof existing as of the Effective Date.  The term “Oral Opioid Fentanyl” also includes all Products marketed or in Development by Respondent Cephalon on or before the Effective Date that contain active pharmaceutical ingredient Fentanyl and are planned to be marketed for use in the Field of pain management.  This includes all sugar-free versions of such Products (except where this Order specifically differentiates between Substantially Sugar-Free Formulation(s) and other formulations of the Products); provided, however, the term “Oral Opioid Fentanyl” does not include the following:  (1) Products that were owned or controlled by Respondent CIMA prior to the Effective Date and that were not owned or controlled by Respondent Cephalon

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prior to such date; and (2) Respondent Cephalon’s Product DD5.

HH.“Oral Opioid Fentanyl Assets” means all of Respondent Cephalon’s rights in and to all Product Intellectual Property and Product Manufacturing Technology related to Respondent Cephalon’s business in the United States related to the Oral Opioid Fentanyl to the extent legally transferable, including the research, Development, manufacture, distribution, marketing or sale of Oral Opioid Fentanyl, including, without limitation, the following:

1.license(s) to all Product Intellectual Property;

2.Right of Reference or Use to the Drug Master Files including, but not limited to, the pharmacology and toxicology data contained in all Applications, NDAs, ANDAs, SNDAs and MAAs;

3.Rights of Reference or Use (if such rights exist) to information similar to the Drug Master Files submitted to any Agency other than the FDA;

4.copies of all Product Scientific and Regulatory Material;

5.licenses to all Product Manufacturing Technology;

6.copies of all Respondents’ books, records and files related to the foregoing, including, but not limited to, the following specified documents:

a.the Product Registrations;

b.Drug Master Files, including, but not limited to, the pharmacology and toxicology data contained in all Applications, NDAs, ANDAs, SNDAs and MAAs; all data submitted to and all correspondence with the FDA and other Agencies; all validation documents and data; including, without limitation, clinical data, and quality control histories pertaining to Oral Opioid Fentanyl owned by, or in the possession or control of, Respondents, or to which Respondents have a right of access, in each case such as is in existence as of the Closing Date;

provided, however, the Oral Opioid Fentanyl Assets do not include the following:  (1) businesses and assets that were owned or controlled by Respondent CIMA prior to the Effective Date and that were not owned or controlled by Respondent Cephalon prior to such date; and (2) and assets solely related to Respondent Cephalon’s Product DD5.

II.“Oral Opioid Fentanyl Core Employees” means Product Manufacturing Employees, and Product Research and Development Employees.

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JJ.“Oral Opioid Fentanyl License and Supply Agreement” means the “License and Supply Agreement” by and between Cephalon Inc. and Barr Laboratories, Inc. dated July 7, 2004, and all amendments, exhibits, attachments, agreements, and schedules thereto, related to the Oral Opioid Fentanyl Assets to be granted, licensed, delivered, or otherwise conveyed, that have been approved by the Commission to accomplish the requirements of this Order.  The Oral Opioid Fentanyl License and Supply Agreement is attached to this Order as non-public Appendix I.

KK.“Oral Opioid Fentanyl Releasee(s)” means the Commission-approved Acquirer or any entity controlled by or under common control with the Commission-approved Acquirer, or any licensees, sublicensees, manufacturers, suppliers, distributors, and customers of the Commission-approved Acquirer, or of such Commission-approved Acquirer-affiliated entities.

LL.“Oral Opioid Risk Management Program” means a strategic safety program designed to decrease product risk by using one or more interventions or tools beyond the package insert, which program may be modified or amended from time to time and may be a condition of Final FDA Approval.

MM.“OVF” means the Product, OraVescent® Fentanyl, under development by Respondent CIMA that contains Fentanyl and is formulated with an effervescent agent and is the subject of an IND No. 65,447 or any other IND subsequently filed by Respondents.

NN.“Patents” means all patents, patent applications and statutory invention registrations, in each case existing as of the Effective Date (except where this Order specifies a different time), and includes all reissues, divisions, continuations, continuations-in-part, substitutions, reexaminations, restorations, and /or patent term extensions thereof, all inventions disclosed therein, all rights therein provided by international treaties and conventions, and all rights to obtain and file for patents and registrations thereto in the United States, related to a Product of or owned by Respondent Cephalon as of the Effective Date.

OO.“Pediatric Exclusivity” means exclusivity obtained in accordance with the requirements of Federal Food, Drug, and Cosmetic Act § 505a, 21 U.S.C. 355a.

PP.“Product” means any pharmaceutical, biological, or genetic composition containing any formulation or dosage of a compound referenced as its pharmaceutically, biologically or genetically active ingredient.

QQ.“Product Employee Information” means the following:

1.a complete and accurate list containing the name of each relevant employee as of the execution date of the related Remedial Agreement.  This list shall be organized by the relevant respective employee categories defined in this Order, (i.e., “Product

8

Manufacturing Employees,” or “Product Research and Development Employees,” as applicable);

2.with respect to each such employee the following information:

a.job title or position held;

b.a specific description of the employee’s responsibilities related to Oral Opioid Fentanyl; provided, however, in lieu of this description, Respondents may provide the employee’s most recent performance appraisal.

RR.“Product Intellectual Property” means all of the following related to the Product(s):

1.Patents;

2.Product Trademarks;

3.trade secrets, know-how, techniques, data, inventions, practices, methods and other confidential or proprietary technical, business, research, Development and other information; and

4.rights to obtain and file for Patents and registrations thereof;

provided, however, “Product Intellectual Property” does not include the names “CIMA”, “Cephalon,” or the names of any other corporations or companies owned by Respondents or related logos to the extent used on other of Respondent CIMA’s or Respondent Cephalon’s Products;

provided further, however, “Product Intellectual Property” does not include the trade name Actiq^®.

SS.“Product Manufacturing Employees” means all salaried employees of Respondent(s) who directly participated (irrespective of the portion of working time involved) in the manufacture of the Oral Opioid Fentanyl, including, but not limited to, the Senior Director of Commercial Manufacturing, the Associate Director of Production Planning, and the Manager of Commercial Manufacturing, and all those involved in the quality assurance and quality control of the Oral Opioid Fentanyl, within the eighteen (18) month period immediately prior to the Closing Date.

TT.“Product Manufacturing Technology” means all technology, trade secrets, know-how, and proprietary information (whether patented, patentable or otherwise) related to the manufacture (including all equipment used to manufacture a Product in Final Finished Form), validation, packaging, release testing, stability and shelf life of Oral Opioid Fentanyl,

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including all product formulations, in existence and in the possession of Respondents as of the Closing Date, product specifications, processes, product designs, plans, trade secrets, ideas, concepts, manufacturing, engineering and other manuals and drawings, standard operating procedures, flow diagrams, chemical, pharmacological, toxicological, pharmaceutical, physical and analytical, safety, efficacy, bioequivalency, quality assurance, quality control and clinical data, research records, compositions, annual product reviews, process validation reports, analytical method validation reports, specifications for stability trending and process controls, testing and reference standards for impurities in and degradation of products, technical data packages, chemical and physical characterizations, dissolution test methods and results, formulations for administration, clinical trial reports, regulatory communications and labeling and all other information related to the manufacturing process, and supplier lists.

UU.“Product Research and Development Employees” means all employees of Respondent(s) who directly participated (irrespective of the portion of working time involved) in the research, Development, regulatory approval process, or clinical studies of Oral Opioid Fentanyl within the eighteen (18) month period immediately prior to the Closing Date.

VV.“Product Scientific and Regulatory Material” means all technological, scientific, chemical, biological, pharmacological, toxicological, regulatory and clinical trial materials and information related to Oral Opioid Fentanyl, and full rights to use such materials, in any and all jurisdictions.

WW.“Product Trademark(s)” means the following as related to Oral Opioid Fentanyl:

1.the U.S. Trademark Registration No. 2,622,734 as needed for a single dose entity of any generic version of Oral Opioid Fentanyl;

2.at the Commission-approved Acquirer’s option, any trademark or trade dress covering the size, shape and color of a single dose entity of any generic version of Oral Opioid Fentanyl;

3.the Oral Opioid Risk Management Program; and

4.the appearance, structure, textual or graphical content and/or color scheme of any labeling, dosing information, product inserts, storage containers and/or other materials, to the extent that the FDA or and other Agency requires the Commission-approved Acquirer to duplicate such appearance, structure, textual or graphical content and/or color scheme of any labeling, dosing information, product inserts, storage containers and/or other materials.

XX.“Proposed Acquirer” means an entity proposed by the Respondents (or a Divestiture Trustee) to the Commission and submitted for the approval of the Commission as the acquirer for

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particular assets required to be granted, licensed, delivered or otherwise conveyed by Respondents pursuant to this Order.

YY.“Remedial Agreement” means the following:

1.the Oral Opioid Fentanyl License and Supply Agreement, if such agreement has not been rejected by the Commission pursuant to Paragraph II.A. of this Order; or

2.any agreement between a Respondent(s) and a Commission-approved Acquirer (or between a Divestiture Trustee and a Commission-approved Acquirer) that has been approved by the Commission to accomplish the requirements of this Order, and all amendments, exhibits, attachments, agreements, and schedules thereto, related to the relevant assets to be granted, licensed, delivered or otherwise conveyed that have been approved by the Commission to accomplish the requirements of this Order.

ZZ.“Right of Reference or Use” means the authority to rely upon, and otherwise use, an investigation for the purpose of obtaining approval of an Application, including the ability to make available the underlying raw data from the investigation for FDA audit.

AAA.“Substantially Sugar-Free Formulation(s)” means either of the following:

1.a Product containing less than one-half (0.5) grams of Sugar(s) per dosage; or

2. a Product approved by the FDA for labeling as “Sugar-Free.”

BBB.“Sugar(s)” means the sum of all free mono- and disaccharides (such as glucose, fructose, lactose, and sucrose) as defined in 21 C.F.R. §101.9(c)(6)(ii).

CCC.“Supply Cost” means the manufacturer’s average direct per unit cost of manufacturing the Product plus costs of manufacturing the Product that are directly attributable to FDA regulatory, quality control and compliance.  “Supply Cost” shall expressly exclude any intracompany business transfer profit.

DDD.“Third Party(ies)” means any private entity other than the following:  (1) the Respondents, or (2) the Commission-approved Acquirer.

II.

IT IS FURTHER ORDERED that:

A.Not later than ten (10) Days after the Effective Date, Respondents shall grant irrevocable, perpetual, fully paid-up and royalty-free license(s) in the United States to the Oral Opioid

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Fentanyl Assets and shall grant, license, deliver or otherwise convey the Oral Opioid Fentanyl Assets, absolutely and in good faith, on a non-exclusive basis to Barr pursuant to and in accordance with the Oral Opioid Fentanyl License and Supply Agreement (which agreement shall not vary or contradict, or be construed to vary or contradict, the terms of this Order, it being understood that nothing in this Order shall be construed to reduce any rights or benefits of Barr or to reduce any obligations of Respondents under such agreement).  Such licenses shall be effective as follows:

1.as of the Closing Date, as to Barr’s rights to manufacture and Develop Oral Opioid Fentanyl using the Oral Opioid Fentanyl Assets; and

2.not later than the Marketing Licensing Date, as to Barr’s rights to distribute, market or sell Oral Opioid Fentanyl using the Oral Opioid Fentanyl Assets.

If Respondents do not grant, license, deliver or otherwise convey the Oral Opioid Fentanyl Assets to Barr within ten (10) Days after the Effective Date as provided above, the Commission may, pursuant to Paragraph IV of this Order, appoint a Divestiture Trustee to license, grant, deliver and otherwise convey the Oral Opioid Fentanyl Assets;

provided, however, that, if Respondents have granted, licensed, delivered or otherwise conveyed the Oral Opioid Fentanyl Assets to Barr prior to the date this Order becomes final, and if, at the time the Commission determines to make this Order final, the Commission notifies Respondents that Barr is not an acceptable purchaser of the Oral Opioid Fentanyl Assets, then Respondent shall immediately rescind the transaction with Barr and shall grant, license, deliver or otherwise convey the Oral Opioid Fentanyl Assets within six (6) months from the date the Order becomes final, absolutely and in good faith, at no minimum price, to a Commission-approved Acquirer and only in a manner that receives the prior approval of the Commission;

provided further, however, that if the Respondents have granted, licensed, delivered or otherwise conveyed the Oral Opioid Fentanyl Assets to Barr prior to the date this Order becomes final, and if, at the time the Commission determines to make this Order final, the Commission notifies the Respondents that the manner in which the grant, license, delivery or conveyance was accomplished is not acceptable, the Commission may direct the Respondents, or appoint a Divestiture Trustee, pursuant to Paragraph IV of this Order, to effect such modifications to the manner of granting, licensing, delivery or conveyance of the Oral Opioid Fentanyl Assets to Barr (including, but not limited to, entering into additional agreements or arrangements) as the Commission may be necessary to satisfy the requirements of this Order.

B.Not later than ten (10) Days after the Closing Date, Respondents shall begin to deliver to the Commission-approved Acquirer, at Respondent’s expense, copies of all Confidential Business Information related to the Product Manufacturing Technology, Product Scientific and Regulatory Material, and Product Trademarks related to Oral Opioid Fentanyl Assets.

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Not later than one hundred eighty (180) Days after the Closing Date, Respondents shall complete delivery of all such Confidential Business Information to the Commission-approved Acquirer and certify to the Commission that such delivery has occurred in accordance with this Order.  Respondents shall deliver such Confidential Business Information as follows:  (1) in good faith; (2) as soon as practicable, avoiding any delays in transmission of the respective information; and (3) in a manner that insures its completeness and accuracy and that fully preserves its usefulness.  Pending complete delivery of all such Confidential Business Information to the Commission-approved Acquirer, Respondents shall provide the Commission-approved Acquirer and the Interim Monitor (if any has been appointed) with access to all such Confidential Business Information and employees that possess or are able to locate such information for the purposes of identifying the books, records, and files related to the Oral Opioid Fentanyl Assets that contain such Confidential Business Information and facilitating the delivery in a manner consistent with this Order.

C.Respondents shall not enforce any agreement against a Third Party or the Commission-approved Acquirer to the extent that such agreement may limit or otherwise impair the ability of the Commission-approved Acquirer to acquire the Product Manufacturing Technology or related equipment from the Third Party.  Such agreements include, but are not limited to, agreements with respect to the disclosure of Confidential Business Information related to the Product Manufacturing Technology.

D.Not later than ten (10) Days after the Effective Date, Respondents shall grant a release to each Third Party that is subject to an agreement as described in Paragraph II.C. that allows the Third Party to provide the relevant Product Manufacturing Technology or related equipment to the Commission-approved Acquirer.  Within five (5) Days of the execution of each such release, Respondents shall provide a copy of the release to the Commission-approved Acquirer.

E.Any Remedial Agreement that has been approved by the Commission between Respondents (or a Divestiture Trustee) and a Commission-approved Acquirer of the Oral Opioid Fentanyl Assets shall be deemed incorporated into this Order, and any failure by Respondents to comply with any term of such Remedial Agreement related to the Oral Opioid Fentanyl Assets shall constitute a failure to comply with this Order.

F.Respondents shall include in any Remedial Agreement related to the Oral Opioid Fentanyl Assets the following provisions:

1.At the Commission-approved Acquirer’s Option, Respondents shall Contract Manufacture and deliver to the Commission-approved Acquirer, in a timely manner and under reasonable terms and conditions, a supply of Oral Opioid Fentanyl, including such Product in Final Finished Form, at Respondents’ Supply Cost, for a period of time sufficient to allow the Commission-approved Acquirer (or the Designee of the Commission-approved Acquirer) to obtain all FDA approvals necessary to manufacture

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Oral Opioid Fentanyl independently of Respondents; provided, however, Respondents’ obligation to Contract Manufacture shall not exceed six (6) years from the Closing Date.

2.After the Closing Date and continuing for the term of the Contract Manufacture related to Oral Opioid Fentanyl, Respondents will make inventory of Oral Opioid Fentanyl available for sale or resale only to the Commission-approved Acquirer (other than for use in Respondents’ own business related to Oral Opioid Fentanyl).

3.The Respondents’ obligation to supply Oral Opioid Fentanyl to the Commission-approved Acquirer shall take priority over the manufacture and supply of Oral Opioid Fentanyl for Respondents’ own use or sale.

4.Respondents shall make representations and warranties to the Commission-approved Acquirer that the Oral Opioid Fentanyl supplied through Contract Manufacture pursuant to the Remedial Agreement meets current good manufacturing practices of the FDA, as set forth in 21 C.F.R. Parts 210 and 211.  Respondents shall agree to indemnify, defend and hold the Commission-approved Acquirer harmless from any and all suits, claims, actions, demands, liabilities, expenses or losses alleged to result from the failure of the Oral Opioid Fentanyl supplied to the Commission-approved Acquirer pursuant to the Remedial Agreement by the Respondents to meet such specifications.  This obligation shall be contingent upon the Commission-approved Acquirer giving Respondents prompt, adequate notice of such claim and cooperating fully in the defense of such claim.  The Remedial Agreement shall be consistent with the obligations assumed by Respondents under this Order; provided, however, Respondents may reserve the right to control the defense of any such litigation, including the right to settle the litigation, so long as such settlement is consistent with the Respondents’ responsibilities to supply Oral Opioid Fentanyl in the manner required by this Order; provided further, however, this obligation shall not require Respondents to be liable for any negligent act or omission of the Commission-approved Acquirer or for any representations and warranties, express or implied, made by the Commission-approved Acquirer that exceed the representations and warranties made by the Respondents to the Commission-approved Acquirer.

5.Respondents shall make representations and warranties to the Commission-approved Acquirer that Respondents will hold harmless and indemnify the Commission-approved Acquirer for any liabilities including, but not limited to, indirect damages, special damages, consequential damages, lost profits, legal fees and costs resulting from the failure by Respondents to deliver Oral Opioid Fentanyl in a timely manner as required by the Remedial Agreement unless Respondents can demonstrate that their failure was entirely beyond the control of the Respondents and in no part the result of negligence or willful misconduct by Respondents.

6.During the term of the Contract Manufacture between Respondents and the Commission-approved Acquirer, upon request of the Commission-approved Acquirer or Interim

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Monitor (if applicable), Respondents shall make available to the Commission-approved Acquirer or the Interim Monitor all records that relate to the manufacture of Oral Opioid Fentanyl that are generated or created after the Closing Date.

7.Upon reasonable notice and request from the Commission-approved Acquirer to the Respondents, Respondents shall provide in a timely manner at no greater than Direct Cost the following:

a.assistance and advice to enable the Commission-approved Acquirer (or the Designee of the Commission-approved Acquirer) to obtain all necessary permits and approvals from any Agency or Governmental Entity to manufacture and sell Oral Opioid Fentanyl;

b.assistance to the Commission-approved Acquirer (or the Designee of the Commission-approved Acquirer) to manufacture Oral Opioid Fentanyl in substantially the same manner and quality employed or achieved by Respondent Cephalon; and

c.consultation with knowledgeable employees of Respondents and training, at the request of the Commission-approved Acquirer and at a facility chosen by the Commission-approved Acquirer, until the Commission-approved Acquirer (or the Designee of the Commission-approved Acquirer) obtains all FDA approvals necessary to manufacture Oral Opioid Fentanyl independently of the Respondents and sufficient to satisfy management of the Commission-approved Acquirer that its personnel (or the Designee’s personnel) are adequately trained in the manufacture of Oral Opioid Fentanyl.

8.Upon reasonable notice and request from the Commission-approved Acquirer to the Respondents, after the Marketing Licensing Date, Respondent shall provide in a timely manner, at no greater than Direct Cost, assistance with knowledgeable employees of the relevant Respondent to assist the Commission-approved Acquirer to defend against, respond to, or otherwise participate in any litigation related to the Product Intellectual Property related to Oral Opioid Fentanyl.

9.Respondents shall covenant to the Commission-approved Acquirer that, after the Marketing Licensing Date (except for the manufacture and Development of Oral Opioid Fentanyl, in which case, the covenant shall begin as of the Closing Date), Respondents shall not join, or file, prosecute or maintain any suit, in Law or equity, against the Commission-approved Acquirer or the Oral Opioid Fentanyl Releasee(s) for the research, Development, manufacture, use, import, distribution, or sale of Oral Opioid Fentanyl (but only as to those Products that are commercialized or in Development as of the Closing Date) under Patents that:

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a.are owned or licensed by Respondent Cephalon as of immediately prior to the closing on the acquisition of CIMA; or

b.may be assigned, granted, licensed, or otherwise conveyed to Respondents after the Effective Date, if such suit would have the potential to interfere with the Commission-approved Acquirer’s freedom to practice in the research, Development, manufacture, use, import, sale, marketing or distribution of Oral Opioid Fentanyl (but only as to those Products that are commercialized or in Development as of the Closing Date) in the Field of pain management.

10.Respondents shall covenant to the Commission-approved Acquirer that, after the Marketing Licensing Date (except for the manufacture and Development of Oral Opioid Fentanyl, in which case, the covenant shall begin as of the Closing Date):

a.any Third Party assignee or licensee of the above-described Patents shall agree to provide a covenant not to sue the Oral Opioid Fentanyl Releasees, at least as protective as those extended pursuant to the preceding Paragraph II.F.9, as a condition of such assignment or license; and

b.with respect to any Third Party rights licensed to Respondents as of or after the Effective Date, and as to which Respondents do not control the right of prosecution of any suit, legal or other action, Respondents shall not actively induce, assist or participate in any suit, legal or other action or proceeding relating to the Oral Opioid Fentanyl Products (but only as to those Products that are commercialized or in Development as of the Closing Date) against the Oral Opioid Releasees, unless required by Law or contract (such contract not to be solicited or entered into for the purpose of circumventing any of the requirements of this Order).

provided, however, that if the Oral Opioid Fentanyl License and Supply Agreement is the Remedial Agreement for the Oral Opioid Fentanyl Assets, then Respondents shall be deemed to have complied with any of the Supply Cost and Direct Cost requirements described in this Paragraph II.F. by complying with the such cost provisions as provided in the Oral Opioid Fentanyl License and Supply Agreement.

G.For a period from the Closing Date until August 3, 2007, (“the Oral Opioid Fentanyl Access Period”), Respondents shall provide the Commission-approved Acquirer with the opportunity to enter into employment contracts with the Oral Opioid Fentanyl Core Employees.  Respondents shall remove any impediments within the control of Respondents that may deter these employees from accepting employment with the Commission-approved Acquirer, including, but not limited to, any non-compete provisions of employment or other contracts with Respondents that would affect the ability of those individuals to be employed by the Commission-approved Acquirer.

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H.Not later than the earlier of the following dates:  (1) ten (10) Days after notice by staff of the Commission to the Respondents to provide the Product Employee Information; or (2) ten (10) Days after the Closing Date, Respondents shall provide the Commission-approved Acquirer or the Proposed Acquirer the Product Employee Information related to the Oral Opioid Fentanyl Core Employees.  Failure by Respondents to provide the Product Employee Information for any relevant employee within the time provided herein shall extend the Oral Opioid Fentanyl Access Period with respect to that employee in an amount equal to the delay.

I.Prior to the Closing Date, Respondents shall secure all consents and waivers from all Third Parties that are necessary for the licensing of the Oral Opioid Fentanyl Assets to the Commission-approved Acquirer, or for the continued research, Development, manufacture, use, import, sale, marketing or distribution of Oral Opioid Fentanyl by the Commission-approved Acquirer.

J.Upon reasonable notice and request from the Commission-approved Acquirer to the Respondents, Respondents shall provide (in a timely manner and at no greater than Direct Cost) to the Commission-approved Acquirer consultation with, assistance, training, and advice from, knowledgeable employees of Respondents with respect to the Development and manufacture of Oral Opiod Fentanyl, that the Commission-approved Acquirer might reasonably need in order to receive and use the Oral Opioid Fentanyl Assets in a manner consistent with this Order, and shall continue providing such consultation, assistance, training and advice, at the request of the Commission-approved Acquirer, until the Commission-approved Acquirer (or the Designee of the Commission-approved Acquirer) is fully validated, qualified, and approved by the FDA, and able to manufacture Oral Opioid Fentanyl independently of the Respondents.

K.Pending the granting, licensing, delivery or conveyance of the Oral Opioid Fentanyl Assets, Respondents shall take such actions as are necessary to maintain the full economic viability, marketability and competitiveness of the business associated with the Oral Opioid Fentanyl Assets, to minimize any risk of loss of competitive potential for the business associated with the Oral Opioid Fentanyl Assets, and to prevent the destruction, removal, wasting, deterioration, or impairment of any of the Oral Opioid Fentanyl Assets except for ordinary wear and tear.

L.After the Marketing Licensing Date (except for the manufacture and Development of Oral Opioid Fentanyl, in which case, this Paragraph shall apply as of the Closing Date), Respondents shall not join, or file, prosecute or maintain any suit, in Law or equity, against the Commission-approved Acquirer or the Oral Opioid Fentanyl Releasee(s) for the research, Development, manufacture, use, import, sale, marketing or distribution of Oral Opioid Fentanyl (but only as to those Products that are commercialized or in Development as of the Closing Date) under the following:

1.any Patents owned or licensed by Respondents as of the Effective Date or acquired after

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the Effective Date that claim the use of Oral Opioid Fentanyl in the Field of pain management; or

2.that claim any aspect of the research, Development, manufacture, use, import, sale, marketing, or distribution of Oral Opioid Fentanyl other than such Patents that claim inventions conceived by and reduced to practice by Respondents’ employees after the Effective Date.

M.Respondents shall maintain manufacturing facilities for the Oral Opioid Fentanyl finished drug product, that are validated, qualified and approved by the FDA, and fully capable of producing Oral Opioid Fentanyl finished drug product and shall Contract Manufacture and supply such finished drug product to the Commission-approved Acquirer until the Commission-approved Acquirer (or the Designee of the Commission-approved Acquirer) is fully validated, qualified and approved by the FDA and able to manufacture Oral Opioid Fentanyl finished drug product in a facility that is independent of Respondents;

provided, however, this obligation shall not exceed six (6) years from the Closing Date;

provided further, however, the Commission may eliminate, or further limit the duration of, the Respondent’s obligation under this provision should the Commission determine that the Commission-approved Acquirer is not using commercially reasonable best efforts to secure the FDA approvals necessary to manufacture Oral Opioid Fentanyl finished drug product in a facility that is independent of Respondents.

N.At any time after the Generic Entrant Forbearance Date, Respondents shall not seek to enforce any Patent(s) related to Oral Opioid Fentanyl that is filed pursuant to 21 U.S.C. § 355(b)(1) as a part of the following:

1.the NDA No. 20-747, as supplemented, or amended; or

2.any Application filed by the Respondents for the purposes of obtaining an approval to label a formulation of Oral Opioid Fentanyl as  “Sugar-Free” or an equivalent labeling designation,

against any Third Party to the extent that such enforcement might prohibit, limit, or otherwise impair the Third Party’s ability to commercialize a Product under an ANDA filed by the Third Party that references such Patent(s) and the Product listed under the above-referenced NDA; provided, however, that this Paragraph shall not apply to Patents solely related to Substantially Sugar-Free Formulations of Oral Opioid Fentanyl until Final FDA Approval of OVF.

O.Not later than the Generic Entrant Forbearance Date, Respondents shall make available to the public those patent applications filed by Respondents, not already published, that are related

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to Oral Opioid Fentanyl.

P.The purpose of the grant, license, delivery and conveyance of the Oral Opioid Fentanyl Assets to a Commission-approved Acquirer is to create an independent, viable and effective competitor in the relevant market in which the Oral Opioid Fentanyl Assets were engaged at the time of the announcement of the Acquisition, and to remedy the lessening of competition resulting from the Acquisition as alleged in the Commission’s Complaint.

III.

IT IS FURTHER ORDERED that:

A.At any time after Respondents sign the Consent Agreement in this matter, the Commission may appoint a monitor (“Interim Monitor”) to assure that Respondents expeditiously comply with all of their obligations and perform all of their responsibilities as required by this Order, and the Remedial Agreements.

B.The Commission shall select the Interim Monitor, subject to the consent of Respondents, which consent shall not be unreasonably withheld.  If neither Respondent has opposed, in writing, including the reasons for opposing, the selection of a proposed Interim Monitor within ten (10) Days after notice by the staff of the Commission to Respondents of the identity of any proposed Interim Monitor, Respondents shall be deemed to have consented to the selection of the proposed Interim Monitor.

C.Not later than ten (10) Days after the appointment of the Interim Monitor, Respondents shall execute an agreement that, subject to the prior approval of the Commission, confers on the Interim Monitor all the rights and powers necessary to permit the Interim Monitor to monitor Respondents’ compliance with the relevant requirements of the Order in a manner consistent with the purposes of the Order.

D.If an Interim Monitors is appointed, Respondents shall consent to the following terms and conditions regarding the powers, duties, authorities, and responsibilities of the Interim Monitor:

1.The Interim Monitor shall have the power and authority to monitor Respondents’ compliance with the divestiture and asset maintenance obligations and related requirements of the Order, and shall exercise such power and authority and carry out the duties and responsibilities of the Interim Monitor in a manner consistent with the purposes of the Order and in consultation with the Commission.

2.The Interim Monitor shall act in a fiduciary capacity for the benefit of the Commission.

3.The Interim Monitor shall serve until the later of:

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a.the completion by Respondents of the divestiture of all relevant assets required to be granted, licensed, delivered, or otherwise conveyed pursuant to this Order in a manner that fully satisfies the requirements of the Order and notification by the Commission-approved Acquirer to the Interim Monitor that it is fully capable of producing the relevant Product(s) acquired pursuant to a Remedial Agreement independently of Respondents; or

b.the completion by Respondents of the last obligation under the Order pertaining to the Interim Monitor’s service;

provided, however, that the Commission may extend or modify this period as may be necessary or appropriate to accomplish the purposes of the Order.

4.Subject to any demonstrated legally recognized privilege, the Interim Monitor shall have full and complete access to Respondents’ personnel, books, documents, records kept in the normal course of business, facilities and technical information, and such other relevant information as the Interim Monitor may reasonably request, related to Respondents’ compliance with their obligations under the Order, including, but not limited to, their obligations related to the relevant assets.  Respondents shall cooperate with any reasonable request of the Interim Monitor and shall take no action to interfere with or impede the Interim Monitor’s ability to monitor Respondents’ compliance with the Order.

5.The Interim Monitor shall serve, without bond or other security, at the expense of Respondents on such reasonable and customary terms and conditions as the Commission may set.  The Interim Monitor shall have authority to employ, at the expense of the Respondents, such consultants, accountants, attorneys and other representatives and assistants as are reasonably necessary to carry out the Interim Monitor’s duties and responsibilities.

6.Respondents shall indemnify the Interim Monitor and hold the Interim Monitor harmless against any losses, claims, damages, liabilities, or expenses arising out of, or in connection with, the performance of the Interim Monitor’s duties, including all reasonable fees of counsel and other reasonable expenses incurred in connection with the preparations for, or defense of, any claim, whether or not resulting in any liability, except to the extent that such losses, claims, damages, liabilities, or expenses result from misfeasance, gross negligence, willful or wanton acts, or bad faith by the Interim Monitor.

7.Respondents shall report to the Interim Monitor in accordance with the requirements of this Order and/or as otherwise provided in any agreement approved by the Commission.  The Interim Monitor shall evaluate the reports submitted to the Interim Monitor by Respondents, and any reports submitted by the Commission-approved Acquirer with

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respect to the performance of Respondents’ obligations under the Order or the Remedial Agreement.  Within thirty (30) Days from the date the Interim Monitor receives these reports, the Interim Monitor shall report in writing to the Commission concerning performance by Respondents of their obligations under the Order.

8.Respondents may require the Interim Monitor and each of the Interim Monitor’s consultants, accountants, attorneys and other representatives and assistants to sign a customary confidentiality agreement; provided, however, that such agreement shall not restrict the Interim Monitor from providing any information to the Commission.

E.The Commission may, among other things, require the Interim Monitor and each of the Interim Monitor’s consultants, accountants, attorneys and other representatives and assistants to sign an appropriate confidentiality agreement related to Commission materials and information received in connection with the performance of the Interim Monitor’s duties.

F.If the Commission determines that the Interim Monitor has ceased to act or failed to act diligently, the Commission may appoint a substitute Interim Monitor in the same manner as provided in this Paragraph.

G.The Commission may on its own initiative, or at the request of the Interim Monitor, issue such additional orders or directions as may be necessary or appropriate to assure compliance with the requirements of the Order.

H.The Interim Monitor appointed pursuant to this Order may be the same person appointed as a Divestiture Trustee pursuant to the relevant provisions of this Order.

IV.

IT IS FURTHER ORDERED that:

A.If Respondents have not fully complied with the obligations to grant, license, deliver or otherwise convey relevant assets as required by this Order, the Commission may appoint a trustee (“Divestiture Trustee”) to grant, license, deliver or otherwise convey the assets required to be granted, licensed, delivered or otherwise conveyed pursuant to each of the relevant Paragraphs in a manner that satisfies the requirements of each such Paragraph.  In the event that the Commission or the Attorney General brings an action pursuant to § 5(l) of the Federal Trade Commission Act, 15 U.S.C. § 45(l), or any other statute enforced by the Commission, Respondents shall consent to the appointment of a Divestiture Trustee in such action to grant, license, deliver or otherwise convey the relevant assets.  Neither the appointment of a Divestiture Trustee nor a decision not to appoint a Divestiture Trustee under this Paragraph shall preclude the Commission or the Attorney General from seeking civil penalties or any other relief available to it, including a court-appointed Divestiture Trustee, pursuant to § 5(l) of the Federal Trade Commission Act, or any other statute enforced by the

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Commission, for any failure by Respondents to comply with this Order.

B.The Commission shall select the Divestiture Trustee, subject to the consent of Respondents, which consent shall not be unreasonably withheld.  The Divestiture Trustee shall be a person with experience and expertise in acquisitions and divestitures.  If Respondents have not opposed, in writing, including the reasons for opposing, the selection of any proposed Divestiture Trustee within ten (10) Days after notice by the staff of the Commission to Respondents of the identity of any proposed Divestiture Trustee, Respondents shall be deemed to have consented to the selection of the proposed Divestiture Trustee.

C.Not later than ten (10) Days after the appointment of a Divestiture Trustee, Respondents shall execute a trust agreement that, subject to the prior approval of the Commission, transfers to the Divestiture Trustee all rights and powers necessary to permit the Divestiture Trustee to effect the divestiture required by the Order.

D.If a Divestiture Trustee is appointed by the Commission or a court pursuant to this Paragraph, Respondents shall consent to the following terms and conditions regarding the Divestiture Trustee’s powers, duties, authority, and responsibilities:

1.Subject to the prior approval of the Commission, the Divestiture Trustee shall have the exclusive power and authority to grant, license, deliver or otherwise convey the assets that are required by this Order to be granted, licensed, delivered or otherwise conveyed.

2.The Divestiture Trustee shall have one (1) year after the date the Commission approves the trust agreement described herein to accomplish the divestiture, which shall be subject to the prior approval of the Commission.  If, however, at the end of the one (1) year period, the Divestiture Trustee has submitted a plan of divestiture or believes that the divestiture can be achieved within a reasonable time, the divestiture period may be extended by the Commission, or, in the case of a court-appointed Divestiture Trustee, by the court; provided, however, the Commission may extend the divestiture period only two (2) times.

3.Subject to any demonstrated legally recognized privilege, the Divestiture Trustee shall have full and complete access to the personnel, books, records and facilities related to the relevant assets that are required to be assigned, granted, licensed, divested, delivered or otherwise conveyed by this Order and to any other relevant information, as the Divestiture Trustee may request.  Respondents shall develop such financial or other information as the Divestiture Trustee may request and shall cooperate with the Divestiture Trustee.  Respondents shall take no action to interfere with or impede the Divestiture Trustee’s accomplishment of the divestiture.  Any delays in divestiture caused by Respondents shall extend the time for divestiture under this Paragraph in an amount equal to the delay, as determined by the Commission or, for a court-appointed Divestiture Trustee, by the court.

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4.The Divestiture Trustee shall use commercially reasonable efforts to negotiate the most favorable price and terms available in each contract that is submitted to the Commission, subject to Respondents’ absolute and unconditional obligation to divest expeditiously and at no minimum price.  Each divestiture shall be made in the manner and to an acquirer as required by this Order; provided, however, if the Divestiture Trustee receives bona fide offers from more than one acquiring entity, and if the Commission determines to approve more than one such acquiring entity, the Divestiture Trustee shall divest to the acquiring entity selected by Respondents from among those approved by the Commission; provided further, however, that Respondents shall select such entity within five (5) Days after receiving notification of the Commission’s approval.

5.The Divestiture Trustee shall serve, without bond or other security, at the cost and expense of Respondents, on such reasonable and customary terms and conditions as the Commission or a court may set.  The Divestiture Trustee shall have the authority to employ, at the cost and expense of Respondents, such consultants, accountants, attorneys, investment bankers, business brokers, appraisers, and other representatives and assistants as are necessary to carry out the Divestiture Trustee’s duties and responsibilities.  The Divestiture Trustee shall account for all monies derived from the divestiture and all expenses incurred.  After approval by the Commission of the account of the Divestiture Trustee, including fees for the Divestiture Trustee’s services, all remaining monies shall be paid at the direction of the Respondents, and the Divestiture Trustee’s power shall be terminated.  The compensation of the Divestiture Trustee shall be based at least in significant part on a commission arrangement contingent on the divestiture of all of the relevant assets that are required to be divested by this Order.

6.Respondents shall indemnify the Divestiture Trustee and hold the Divestiture Trustee harmless against any losses, claims, damages, liabilities, or expenses arising out of, or in connection with, the performance of the Divestiture Trustee’s duties, including all reasonable fees of counsel and other expenses incurred in connection with the preparation for, or defense of, any claim, whether or not resulting in any liability, except to the extent that such losses, claims, damages, liabilities, or expenses result from misfeasance, gross negligence, willful or wanton acts, or bad faith by the Divestiture Trustee.

7.In the event that the Divestiture Trustee determines that he or she is unable to grant, license, deliver or otherwise convey the relevant assets required to be granted, licensed,  delivered or otherwise conveyed in a manner that preserves their marketability, viability and competitiveness and ensures their continued use in the research, Development, manufacture, import, distribution, marketing, promotion, sale, or after-sales support of the relevant Product, the Divestiture Trustee may assign, grant, license, transfer, divest, deliver or otherwise convey such additional assets of Respondents and effect such arrangements as are necessary to satisfy the purposes and requirements of this Order.

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8.The Divestiture Trustee shall have no obligation or authority to operate or maintain the relevant assets required to be granted, licensed, transferred, delivered or otherwise conveyed by this Order.

9.The Divestiture Trustee shall report in writing to Respondents and to the Commission every sixty (60) Days concerning the Divestiture Trustee’s efforts to accomplish the divestiture.

10.Respondents may require the Divestiture Trustee and each of the Divestiture Trustee’s consultants, accountants, attorneys and other representatives and assistants to sign a customary confidentiality agreement; provided, however, such agreement shall not restrict the Divestiture Trustee from providing any information to the Commission.

E.If the Commission determines that a Divestiture Trustee has ceased to act or failed to act diligently, the Commission may a appoint a substitute Divestiture Trustee in the same manner as provided in this Paragraph.

F.The Commission or, in the case of a court-appointed Divestiture Trustee, the court, may on its own initiative or at the request of the Divestiture Trustee issue such additional orders or directions as may be necessary or appropriate to accomplish the divestiture required by this Order.

G.The Divestiture Trustee appointed pursuant to this Paragraph may be the same person appointed as Interim Monitor pursuant to the relevant provisions of this Order.

V.

IT IS FURTHER ORDERED that:

A.Within five (5) Days of the Acquisition, Respondents shall submit to the Commission a letter certifying the date on which the Acquisition occurred.

B.Within five (5) Days of the occurrence of each of the following events, Respondent shall notify the Commission, the Commission-approved Acquirer, and the Interim Monitor (if any has been appointed) in writing of the occurrence of such event:

1.the following events related to an Application related to OVF:

a.filing of an Application;

b.issuance of  an Approvable Letter; and

c.issuance of an Approval Letter; and

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2.the following events related to an Application seeking pediatric exclusivity related to Oral Opioid Fentanyl:

a.receipt by Respondents of a request from the FDA to submit a pediatric study to the FDA;

b.submission by the Respondents to the FDA of the protocol related to the pediatric study;

c.submission by the Respondents of the pediatric study to the FDA; and

d.receipt by Respondents of grant or denial of Pediatric Exclusivity from the FDA.

3.the following events related to an Application seeking approval of a Substantially Sugar-Free Formulation(s) of Oral Opioid Fentanyl:

a.filing of an Application;

b.issuance of an Approvable Letter;

c.issuance of a Not Approvable Letter; and

d.issuance of an Approval Letter.

C. Within thirty (30) Days after the date this Order becomes final, and every sixty (60) Days thereafter until Respondents have fully complied with Paragraphs II.A. (i.e. has granted, licensed, delivered or otherwise conveyed all relevant assets to the Commission-approved Acquirer in a manner that fully satisfies the requirements of the Order), II.B., II.D., and all its responsibilities to render transitional services to the Commission-approved Acquirer as provided in the Remedial Agreement(s), Respondents shall submit to the Commission a verified written report setting forth in detail the manner and form in which they intends to comply, are complying, and have complied with this Order.  Respondents shall submit at the same time a copy of its report concerning compliance with this Order to the Interim Monitor, if any Interim Monitor has been appointed.  Respondents shall include in their reports, among other things that are required from time to time:

1.a full description of the efforts being made to comply with the relevant Paragraphs of the Order;

2.if Barr is rejected by the Commission pursuant to Paragraph II.A., a description of all substantive contacts or negotiations related to the licensing of the Oral Opioid Fentanyl Assets and the identity of all parties contacted and copies of all written communications

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to and from such parties, all internal memoranda, and all reports and recommendations concerning completing its obligations to license the Oral Opioid Fentanyl Assets;

3.a detailed plan to deliver all Confidential Business Information required to be delivered to the Commission-approved Acquirer pursuant to Paragraph II.B, and agreed upon by the Commission-approved Acquirer and the Interim Monitor (if applicable) and any updates or changes to such plan;

4.a description of all Confidential Business Information delivered to the Commission-approved Acquirer, including the type of information delivered, method of delivery, and date(s) of delivery;

5.a description of the Confidential Business Information currently remaining to be delivered and a projected date(s) of delivery; and

6.a description of all technical assistance provided to the Commission-approved Acquirer during the reporting period.

D.One (1) year after the date this Order becomes final, annually for the next nine (9) years on the anniversary of the date this Order becomes final, and at other times as the Commission may require, Respondents shall file a verified written report with the Commission setting forth in detail the manner and form in which they have complied and are complying with this Order.

VI.

IT IS FURTHER ORDERED that Respondents shall notify the Commission at least thirty (30) Days prior to any proposed (1) dissolution of the Respondents, (2) acquisition, merger or consolidation of Respondents, or (3) any other change in the Respondents that may affect compliance obligations arising out of the order, including, but not limited to, assignment, the creation or dissolution of subsidiaries, or any other change in Respondents.

VII.

IT IS FURTHER ORDERED that, for the purpose of determining or securing compliance with this Order, and subject to any legally recognized privilege, and upon written request with reasonable notice to Respondents made to their principal United States offices, Respondents shall permit any duly authorized representative of the Commission:

A.Access, during office hours of Respondents and in the presence of counsel, to all facilities and access to inspect and copy all books, ledgers, accounts, correspondence, memoranda and all other records and documents in the possession or under the control of Respondents related to compliance with this Order; and

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B.Upon five (5) Days’ notice to Respondents and without restraint or interference from Respondents, to interview officers, directors, or employees of Respondents, who may have counsel present, regarding such matters.

VII.

IT IS FURTHER ORDERED that this Order shall terminate twenty (20) years from the date on which the Order becomes final.

By the Commission.

	Donald S. Clark
	Secretary
SEAL
ISSUED:

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APPENDIX I

NON-PUBLIC

ORAL OPIOID FENTANYL LICENSE AND SUPPLY AGREEMENT

EX-10.3(A)

EXHIBIT 10.3(a)

2000 EQUITY COMPENSATION PLAN
EMPLOYEE
NON-QUALIFIED STOCK OPTION

GRANT AGREEMENT

THIS AGREEMENT is made as of the Grant Date by and between Cephalon, Inc. (“Company”) and Grantee.

RECITALS

A.The Grantee has been granted an option to purchase shares of the common stock of the Company under the Cephalon, Inc. 2000 Equity Compensation Plan for Employees and Key Advisors (“Plan”).

B.The option granted to the Grantee is intended to be a non-qualified stock option (“NQSO”), which does not satisfy Section 422 of the Internal Revenue Code of 1986, as amended.

NOW, THEREFORE, it is hereby agreed as follows:

1.Grant of Option.

Subject to the terms and conditions set forth in this Agreement and the Plan, the Company hereby grants to the Grantee, as of the Grant Date, a NQSO to purchase the number of shares of the common stock of the Company (“Option Shares”) specified on the attached Notice of Grant of Stock Options (“Notice”), at the exercise price per share set forth in the Notice.

This option shall become null and void unless the Grantee accepts this Agreement by executing this Agreement in the space provided on the last page of the Agreement and returning it to the Company.

2.Option Term.

Unless sooner terminated in accordance with the provisions of the Plan or this Agreement, this option will terminate at the close of business on the date specified on the Notice, but in no event shall the option terminate later than ten years from the Grant Date, (“Expiration Date”).

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3.Option Nontransferable.

This option is not transferable or assignable by the Grantee other than by will or by the laws of descent and distribution, and during the lifetime of the Grantee, this option is exercisable only by the Grantee.

4.Dates of Exercise.

The option will become exercisable with respect to the Option Shares covered by the option according to the following four year exercisability schedule, provided that the Grantee is employed by the Company on the applicable dates:

Date	Option Shares Becoming Exercisable
1st anniversary of Grant Date	25	%
2nd anniversary of Grant Date	25	%
3rd anniversary of Grant Date	25	%
4th anniversary of Grant Date	25	%

Exercisable installments may be exercised in whole or in part, and, to the extent not exercised, will accumulate and be exercisable at any time on or before the Expiration Date, unless the option terminates earlier in accordance with the terms of this Agreement or the Plan.  The exercisability of the option is cumulative, but shall not exceed 100% of the Option Shares.  If the foregoing schedule would produce fractional Option Shares, the number of Option Shares for which the option becomes exercisable shall be rounded down to the nearest whole Option Share.

5.Termination of Employment.

(a)Should the Grantee cease to be an employee of the Company or one of its subsidiaries (other than by reason of death, permanent disability or termination for cause), this option will, solely to the extent that it is exercisable immediately prior to such cessation of employee status, remain exercisable during the three-month period following the date of such cessation of employee status.  If, at the time of the Grantee’s termination, he is unable to sell Option Shares (i) without liability under Section 16(b) of the Securities Exchange Act of 1934, as amended (or any successor provision) (“Section 16(b)”) or (ii) because he is in possession of material

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non-public information about the Company (“Non-public Information”), then the three-month period referred to in the preceding sentence shall not commence until the later of the first day that the Grantee may sell Option Shares without liability under Section 16(b) or the first day that the Grantee is not in possession of Non-public Information; provided, however, that in no event will this option be exercisable at any time after the Expiration Date.

(b)Should the Grantee become permanently disabled and cease by reason thereof to be an employee of the Company or one of its subsidiaries, this option will, solely to the extent that it is exercisable immediately prior to such cessation of employee status, remain exercisable during the one-year period following the date of such cessation of employee status; provided, however, in no event will this option be exercisable at any time after the Expiration Date.  The Grantee will be deemed to be permanently disabled if the Grantee is, by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of not less than one year, unable to engage in any substantial gainful employment.

(c)Should the Grantee die while still an employee of the Company or one of its subsidiaries, this stock option, to the extent it is at the time outstanding under this Plan, shall automatically accelerate and become fully exercisable as to all Option Shares subject to this option and shall remain exercisable until the Expiration Date or earlier surrender of this option.  In addition, if the Grantee dies during the three-month period referred to in subparagraph (a) or during the one-year period referred to in subparagraph (b), the option shall remain exercisable until the Expiration Date or earlier surrender of this option.  The executors or administrators of estate or heirs or legatees (as the case may be) will have the right to exercise this option, during the remainder of the option term.

(d)Should the Grantee’s employment be terminated for cause (including, but not limited to, any act of dishonesty, unethical conduct, willful misconduct, fraud or embezzlement, or any unauthorized disclosure of confidential information or trade secrets), this option will immediately terminate and cease to be exercisable when notice of termination of employment is given.

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6.Privilege of Stock Ownership.

The holder of this option will have none of the rights of a stockholder with respect to the Option Shares until such individual has exercised the option and has been issued a stock certificate for the Option Shares.

7.Manner of Exercising Option.

In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, the Grantee (or in the case of exercise after the Grantee’s death, the Grantee’s executor, administrator, heir or legatee, as the case may be) must take the following actions:

(a)Execute and deliver to the Senior Vice President of Human Resources of the Company a stock purchase agreement in substantially the form of Exhibit A to this Agreement (the “Purchase Agreement”), specifying the number of Option Shares with respect to which the option is being exercised;

(b)Pay the aggregate exercise price for the Option Shares in one or more of the following alternative forms:  (i) full payment, in cash or by check payable to the Company’s order, in the amount of the exercise price for the Option Shares being purchased; (ii) full payment in shares of common stock of the Company held for at least six months and having an aggregate fair market value on the day of exercise (as determined under the terms of the Plan) equal to the exercise price for the Option Shares being purchased; (iii) a combination of shares of common stock of the Company held for at least six months and valued at fair market value on the day of exercise (as determined under the terms of the Plan) and cash or check payable to the Company’s order, equal, in the aggregate, to the exercise price for the Option Shares being purchased; or (iv) to the extent permitted by applicable law, such other method as the Committee may approve; and

(c)Furnish the Company with appropriate documentation that the person or persons exercising the option, if other than the Grantee, have the right to exercise this option.

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8.Certain Company Transactions.

(a)“Change of Control” shall mean a change in ownership or control of the Company effected through either of the following transactions: (i) the direct or indirect acquisition by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than thirty percent (30%) of the combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders which the Board of Directors (“Board”) does not recommend such stockholders to accept; or (ii)  a change in the composition of the Board over a period of twenty-four (24) months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either: (1) have been Board members continuously since the beginning of such period, or (2) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (1) who were still in office at the time such election or nomination was approved by the Board.

(b)“Corporate Transaction” shall mean either of the following stockholder-approved transactions to which the Company is a party:  (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the combined voting power of the Company’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of more than 75% of the Company’s assets in a single or related series of transactions.

(c)“Involuntary Termination” shall mean the termination of the service of the Grantee which occurs by reason of (i) such individual’s involuntary dismissal or discharge by the Company or the successor thereto for reasons other than Misconduct (as defined below), or (ii) such individual’s voluntary resignation, in either case following: (a) a change in the Grantee’s position with the Company or the successor thereto which materially reduces the Grantee’s level of responsibility, (b) a reduction in the Grantee’s level of

5

compensation (including base salary, significant fringe benefits or any non-discretionary and objective-standard incentive payment or bonus award) by more than ten percent (10%) in the aggregate or (c) a relocation of the Grantee’s place of employment by more than fifty (50) miles, only if such change, reduction or relocation is effected by the Company or the successor thereto without the Grantee’s consent.  For purposes of this definition, the term “Misconduct” means the commission of any act of fraud, embezzlement or dishonesty by the Grantee, any unauthorized use or disclosure by such individual of confidential information or trade secrets of the Company or its successor, or any other intentional misconduct by such individual adversely affecting the business or affairs of the Company or its successor in a material manner.  The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Company or its successor may consider as grounds for the dismissal or discharge of the Grantee.

(d)Except as described below, in the event of any Corporate Transaction, this option, to the extent it is at the time outstanding under the Plan, shall automatically accelerate so that this option shall, immediately prior to the specified effective date for such Corporate Transaction, become fully exercisable with respect to the total number of Option Shares subject to the option and may be exercised for all or any portion of such shares as fully-exercisable shares.  However, the exercisability shall not so accelerate if and to the extent:  (i) such option is, in connection with such Corporate Transaction, either to be assumed by the successor corporation or parent thereof or replaced with a stock option for shares of the capital stock of the successor corporation or parent thereof having comparable value and  terms, (ii) such option is to be replaced with a cash incentive option or award of the successor corporation which preserves the option spread value existing at the time of such Corporate Transaction and provides for subsequent payout in accordance with the same terms and conditions of the option, (iii) such option is to be replaced by a grant under another incentive program which the Committee determines is reasonably equivalent in value, or (iv) the acceleration of the exercisability period under the option is subject to other limitations imposed by the Committee at the time of the Grant.  The determination of comparability under clauses (i), (ii) or (iii) above shall be made by the Committee, and its determination shall be final, binding and conclusive.

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(e)Upon the Grantee’s cessation of service by reason of an Involuntary Termination within thirty-six (36) months after a Corporate Transaction in which the Grantee’s outstanding options are assumed or replaced pursuant to clauses (d) (i), (ii) or (iii) above, each such option under clause (i) shall automatically accelerate and become fully exercisable and all restrictions applicable to such grants shall lapse, with respect to the total number of shares of stock at the time subject to such option and the cash incentive program under clause (ii) or other incentive program under clause (iii) shall become fully vested.  In addition, upon the Grantee’s cessation of service by reason of an Involuntary Termination within 36 months after a Change of Control, the option will automatically accelerate and become fully exercisable with respect to the total number of Option Shares at the time subject to the option.  The option as so accelerated shall remain exercisable until the earlier of the Expiration Date or the expiration of the one (1)-year period measured from the date of such Involuntary Termination.

(f)Immediately following the consummation of a Corporate Transaction, this option shall terminate and cease to remain outstanding, except to the extent assumed by the successor corporation or its parent company.

9.Compliance with Laws and Regulations.

(a)The exercise of this option and the issuance of Option Shares upon such exercise is subject to compliance by the Company and the Grantee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which shares of the Company’s common stock may be listed at the time of such exercise and issuance.

(b)In connection with the exercise of this option, the Grantee will execute and deliver to the Company such representations in writing as may be requested by the Company so that it may comply with the applicable requirements of federal and state securities laws.

10.Liability of Company.

(a)If the Option Shares exceed, as of the Grant Date, the number of shares that may without shareholder approval be issued under the Plan, then this option will be void with respect to such excess shares unless

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shareholder approval of an amendment sufficiently increasing the number of shares issuable under the Plan is obtained in accordance with the provisions of the Plan.

(b)The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of any common stock pursuant to this option will relieve the Company of any liability with respect to the non-issuance or sale of the common stock as to which such approval is not obtained.

11.No Employment Contract.

Nothing in this Agreement, the Notice or in the Plan confers upon the Grantee any right to continue in the employ of the Company (or any subsidiary) or interferes with or restricts in any way the rights of the Company (or any subsidiary), which are hereby expressly reserved, to discharge the Grantee at any time for any reason or no reason, with or without cause.  Except to the extent the terms of any employment contract between the Company (or any subsidiary) and the Grantee may expressly provide otherwise, neither the Company nor any of its subsidiaries is under any obligation to continue the employment of the Grantee for any period of specified duration.

12.Notices.

Any notice required to be given or delivered to the Company under the terms of this Agreement will be in writing and addressed to the Company in care of its Senior Vice President, Human Resources at its corporate office at 145 Brandywine Parkway, West Chester, Pennsylvania, 19380.  Any notice required to be given or delivered to the Grantee will be in writing and addressed to the Grantee at the address provided on the notice of grant or such other address provided in writing by the Grantee to the Company.  All notices will be deemed to have been given or delivered upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

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13.Construction.

This Agreement, the Notice and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan.

Capitalized terms not otherwise defined herein that are defined in the Plan shall have the meaning specified in the Plan.  All decisions of the Committee with respect to any question or issue arising under the Plan or this Agreement will be conclusive and binding on all persons having an interest in this option.

14.Governing Law.

The interpretation, performance and enforcement of this Agreement will be governed by the laws of the Commonwealth of Pennsylvania.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, Cephalon  has caused this Agreement to be executed in duplicate on its behalf by its duly authorized officer and the Grantee has also executed this Agreement in duplicate.

For Cephalon, Inc.

Date:

I hereby accept the option described in this Agreement and the Notice, and I agree to be bound by the terms of the Plan, this Agreement and the Notice.  I hereby further agree that all of the decisions and determinations of the Committee shall be final and binding.

Grantee:

Address:

Date:

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EX-10.3(B)

EXHIBIT 10.3(b)

2004 EQUITY COMPENSATION PLAN

EMPLOYEE

RESTRICTED STOCK GRANT

TERM SHEET

Cephalon, Inc. (“Company”) as specified in the Compensation Award Notice of Restricted Stock Grant (“Notice”) hereby grants to the person named in the Notice (“Grantee”) as of the date printed on the Notice (“Date of Grant”), the right to receive from the Company the total number of shares of restricted stock listed in the Notice, upon and subject to the terms and conditions set forth below.

1.Grant of Restricted Stock.

(a)Subject to the terms and conditions set forth herein and in the 2004 Equity Compensation Plan (“Plan”), the Company hereby grants to Grantee, as of the Date of Grant, the right to receive shares of the Company’s common stock (“Granted Shares”) upon the lapse of certain restrictions in accordance with the terms of the Plan and these terms and conditions.

(b)This grant shall become null and void unless the Grantee shall accept these terms and conditions by executing the Employee Acknowledgement on the Compensation Award sheet and returning it to Human Resources. The Company will not issue any portion of the Granted Shares until all of the restrictions on that portion of the Granted Shares have lapsed.

2.Restrictions.

(a)Restriction Period.  The restrictions on the Granted Shares (described in Section 2(b) below) shall lapse, and the Granted Shares shall no longer be forfeitable (as described in Section 3 below), in accordance with the following schedule:

Date	Granted Shares Becoming Nonforfeitable
1st Anniversary	25% of Granted Shares
2nd Anniversary	50% of Granted Shares
3rd Anniversary	75% of Granted Shares
4th Anniversary	100% of Granted Shares

(b)The period during which any portion of the Granted Shares actually remains subject to the restrictions of Section 2(b) below is referred to herein

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and in the Plan as the “Restriction Period” for such portion of the Granted Shares.

(c)Restrictions on Transfer; Shares Subject to Forfeiture.  Grantee may not sell, assign, transfer, pledge or otherwise dispose of any portion of the Granted Shares at any time during the Restriction Period for such Granted Shares, except to a Successor Grantee (as defined in the Plan) or as otherwise permitted under the Plan.

(d)Certificates.  Unless the Granted Shares are forfeited pursuant to Section 3 below, at the end of the Restriction Period applicable to each portion of the Granted Shares, Grantee will be entitled to receive an unrestricted certificate representing that portion of the Granted Shares.

3.Termination of Employment, Death and Disability.

(a)Should Grantee’s employment by the Company or one of its subsidiaries terminate (other than by reason of death) during the Restriction Period, Grantee will forfeit all of the Granted Shares as to which the Restriction Period has not expired on or before the effective date of such termination.

(b)Should Grantee die during the Restriction Period, all restrictions imposed under Section 2(b) above with respect to such Granted Shares shall lapse and such shares shall become transferrable and nonforfeitable.

4.Privilege of Stock Ownership.

Grantee shall not have, with respect to any Granted Shares, the right to vote the shares or the right to receive any cash or other dividends declared thereon, until the Restriction Period has expired with respect to such Granted Shares.

5.Certain Corporation Transactions.

(a)“Change in Control” shall mean a change in ownership or control of the Company effected through either of the following transactions: (i) the direct or indirect acquisition by any person or related group of persons (other

2

than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than thirty percent (30%) of the combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders which the Board does not recommend such stockholders to accept; or (ii) a change in the composition of the Board over a period of twenty-four (24) months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either: (1) have been Board members continuously since the beginning of such period, or (2) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (1) who were still in office at the time such election or nomination was approved by the Board.

(b)“Corporate Transaction” shall mean either of the following stockholder-approved transactions to which the Company is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the combined voting power of the Company’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of more than 75% of the Company’s assets in a single or related series of transactions.

(c)“Involuntary Termination” shall mean the termination of the service of any grantee under the Plan which occurs by reason of (i) such individual’s involuntary dismissal or discharge by the Company or the successor thereto for reasons other than Misconduct (as defined below), or (ii) such individual’s voluntary resignation, in either case following: (a) a change in his or her position with the Company or the successor thereto which materially reduces his or her level of responsibility, (b) a reduction in his or her level of compensation (including base salary, significant fringe benefits or any nondiscretionary and objective-standard incentive payment or bonus award) by more than ten percent (10%) in the aggregate or (c) a relocation of such individual’s place of employment by more than fifty (50) miles, only if such change, reduction or relocation is effected by the Company or the successor thereto without the individual’s consent.  For purposes of this definition, the

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term “Misconduct” means the commission of any act of fraud, embezzlement or dishonesty by a grantee under the Plan, any unauthorized use or disclosure by such individual of confidential information or trade secrets of the Company or its successor, or any other intentional misconduct by such individual adversely affecting the business or affairs of the Company or its successor in a material manner.  The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Company or its successor may consider as grounds for the dismissal or discharge of Grantee.

(d)In the event of any Corporate Transaction, if the Restriction Period has not expired with respect to any of the Granted Shares, the expiration of all such Restriction Periods shall automatically accelerate so that immediately prior to the specified effective date for such Corporate Transaction, all restrictions applicable to the Granted Shares shall lapse.  However, the restrictions on any Restricted Stock Grant shall not so lapse if and to the extent: (i) such Grant is, in connection with such Corporate Transaction, either to be assumed by the successor corporation or parent thereof or to be replaced with a restricted stock grant for shares of the capital stock of the successor corporation or parent thereof having comparable value and terms, (ii) such Grant is to be replaced with a cash incentive option or award of the successor corporation which preserves the value of the Grant existing at the time of such Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such Grant, (iii) such Grant is to be replaced by a grant under another incentive program which the Committee determines is reasonably equivalent in value, or (iv) the lapse of restrictions with respect to such Restricted Stock Grant is subject to other limitations imposed by the Committee at the time of the Grant.  The determination of comparability under clauses (i), (ii) or (iii) above shall be made by the Committee, and its determination shall be final, binding and conclusive.

(e)Upon the cessation of service of a grantee under the Plan by reason of an Involuntary Termination within thirty-six (36) months after a Corporate Transaction in which his or her outstanding Grants are assumed or replaced pursuant to clauses (d)(i), (ii) or (iii) above, all restrictions applicable to each such Grant under clause (i) shall lapse with respect to the total number of shares of stock at the time subject to such Grant, and the cash incentive program under clause (ii) or other incentive program under clause (iii) shall

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become fully vested.  In addition, upon a Grantee’s cessation of service by reason of an Involuntary Termination within thirty-six (36) months after a Change in Control, all restrictions applicable to Restricted Stock Grants shall lapse, with respect to the total number of shares of Company Stock at the time subject to such Grant.

(f)Immediately following the consummation of a Corporate Transaction, this grant shall terminate and cease to remain outstanding, except to the extent assumed by the successor corporation or its parent company.

(g)This grant, if assumed in connection with a Corporate Transaction, shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issued to Grantee, upon consummation of such Corporate Transaction.

(h)The provisions of Section 5(d) shall not operate as a limitation on the Committee’s discretionary authority, exercisable either at the time of the Grant or at any time while the Grant remains outstanding, to provide for the lapse of all restrictions applicable to a Restricted Stock Grant upon the occurrence of any change in the Company’s organization, ownership or structure not otherwise within the definition of a Corporate Transaction or a Change in Control.  The Committee also shall have full power and authority to condition any such restriction lapse upon the Optionee’s cessation of service by reason of an Involuntary Termination within a specified period following any such event.

(i)The acceleration or substitution of Grants under this Section 5 shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

6.Election to Withhold Shares.

Grantee may make an election to satisfy the Company income tax withholding obligation with respect to the Granted Shares by having shares withheld up to an amount that does not exceed Grantee’s maximum marginal tax rate for federal (including FICA), state and local tax liabilities. Such

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election must be in the form and manner prescribed by the Committee.  If Grantee is a director or officer (within the meaning of Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934, as amended), such election must be irrevocable and must be made six months prior to the date on which all restrictions lapse with respect to such Granted Shares.

7.Compliance with Laws and Regulations.

(a)This grant is subject to compliance by the Company and Grantee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which shares of the Company’s common stock may be listed at the time of such exercise and issuance.

(b)In connection with this grant, Grantee will execute and deliver to the Company such representations in writing as may be requested by the Company so that it may comply with the applicable requirements of federal and state securities laws.

8.Liability of Company.

(a)If the Granted Shares exceed, as of the Date of Grant, the number of shares that may without shareholder approval be issued under the Plan, then this grant will be void with respect to such excess shares unless shareholder approval of an amendment sufficiently increasing the number of shares issuable under the Plan is obtained in accordance with the provisions of the Plan.

(b)The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of any common stock pursuant to this option will relieve the Company of any liability with respect to the non-issuance or sale of the common stock as to which such approval is not obtained.

9.No Employment Contract

Nothing herein or in the Plan confers upon Grantee any right to continue in the employ of the Company (or any subsidiary) or interferes with or restricts in any way the rights of the Company (or any subsidiary), which are hereby

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expressly reserved, to discharge Grantee at any time for any reason or no reason, with or without cause.  Except to the extent the terms of any employment contract between the Company (or any subsidiary) and Grantee may expressly provide otherwise, neither the Company nor any of its subsidiaries is under any obligation to continue the employment of Grantee for any period of specified duration.

10.Notices.

Any notice required to be given or delivered to the Company under the terms herein will be in writing and addressed to the Company in care of its Senior Vice President, Human Resources, at its corporate office at 145 Brandywine Parkway, West Chester, Pennsylvania 19380.  Any notice required to be given or delivered to Grantee will be in writing and addressed to Grantee at the address provided on the notice of grant or such other address provided in writing by Grantee to the Company.  All notices will be deemed to have been given or delivered upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

11.Construction.

(a)These terms and conditions and the grant evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan. Capitalized terms not otherwise defined herein that are defined in the Plan shall have the meaning specified in the Plan.

(b)All decisions of the Committee with respect to any question or issue arising under the Plan or these terms and conditions will be conclusive and binding on all persons having an interest in this grant.

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EX-10.3(C)

EXHIBIT 10.3(c)

2004 EQUITY COMPENSATION PLAN

NON-EMPLOYEE DIRECTOR

NON-QUALIFIED STOCK OPTION

GRANT AGREEMENT

THIS AGREEMENT is made as of the                day of               , 200     (“Grant Date”) by and between Cephalon, Inc. (“Company”) and                       (“Grantee”).

RECITALS

A.Grantee, as a non-employee member of the Board of Directors of the Company (“Board”), has been granted an option to purchase shares of the common stock of the Company pursuant to Section 6(b) of the Cephalon, Inc. 2004 Equity Compensation Plan (“Plan”).

B.The option granted to the Grantee is intended to be a non-qualified stock option (“NQSO”), which does not satisfy Section 422 of the Internal Revenue Code of 1986, as amended.

NOW, THEREFORE, it is hereby agreed as follows:

1.Grant of Option.

Subject to the terms and conditions set forth in this Agreement and the Plan, the Company hereby grants to Grantee, as of the Grant Date, a NQSO to purchase the number of shares of the common stock of the Company (“Option Shares”) specified on the attached Notice of Grant of Stock Options (“Notice”), at the exercise price per share set forth in the Notice.

This option shall become null and void unless the Grantee accepts this Agreement by executing this Agreement in the space provided on the last page of the Agreement and returning it to the Company.

2.Option Term.

Unless sooner terminated in accordance with the provisions of the Plan or this Agreement, this option will terminate at the close of business on the date specified on the Notice, but in no event shall the option terminate later than ten years from the Grant Date, (“Expiration Date”).

3.Option Nontransferable.

(a)Except as described in subparagraph (b) below, this option is not transferable or assignable by the Grantee other than by will or by the laws of descent and distribution, and during the lifetime of the Grantee, this option is exercisable only by the Grantee.

(b)Anything contained in subparagraph (a) above notwithstanding, the Grantee may transfer this option to family members, or one or more trusts or other entities for the benefit of or owned by family members, consistent with applicable securities laws and in accordance with such procedures as the Company may prescribe; provided that the Grantee receives no consideration for the transfer of the option and the transferred option continues to be subject to the same terms and conditions as were applicable to the option immediately before the transfer.

4.Date of Exercise.

The option is fully exercisable on the Grant Date.  The option may be exercised in whole or in part, and will remain exercisable until the sooner of the Expiration Date or termination of the option as described in Paragraph 5 below.

5.Termination of Director Status.

(a)Should the Grantee cease to be a member of the Board (other than by reason of death, permanent disability, termination for cause or Involuntary Termination within thirty-six (36) months of a Change of Control (as provided in Paragraph 8)), this option will, solely to the extent that it is exercisable immediately prior to such cessation of membership on the Board, remain exercisable during the three-month period following the date of such cessation of such membership on the Board; provided, however, in no event will this option be exercisable at any time after the Expiration Date.

(b)Should the Grantee become permanently disabled and cease by reason thereof to be a member of the Board, this option will, solely to the extent that it is exercisable immediately prior to such cessation of membership on the Board, remain exercisable during the one-year period following the date

of such cessation of membership on the Board; provided, however, in no event will this option be exercisable at any time after the Expiration Date.  The Grantee will be deemed to be permanently disabled if the Grantee is, by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of not less than one year, unable to engage in any substantial gainful employment.

(c)Should the Grantee die while a member of the Board (or during the three-month period referred to in subparagraph (a) or during the one-year period referred to in subparagraph (b)), this option, to the extent it is at the time outstanding under the Plan, shall remain exercisable until the Expiration Date or earlier surrender of this option.  The executors or administrators of the Grantee’s estate or the Grantee’s heirs or legatees (as the case may be) will have the right to exercise this option, during the remainder of the option term.

(d)Should the Grantee’s membership on the Board be terminated for cause (including, but not limited to, any act of dishonesty, unethical conduct, willful misconduct, fraud or embezzlement, or any unauthorized disclosure of confidential information or trade secrets), this option will immediately terminate and cease to be exercisable when notice of such termination is given to the Grantee.

6.Privilege of Stock Ownership.

The holder of this option will have none of the rights of a stockholder with respect to the Option Shares until such individual has exercised the option and has been issued a stock certificate for the Option Shares.

7.Manner of Exercising Option.

In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Grantee (or in the case of exercise after Grantee’s death, Grantee’s executor, administrator, heir or legatee, as the case may be) must take the following actions:

(a)Execute and deliver to the Senior Vice President of Human Resources of the Company a stock purchase agreement in substantially the form of Exhibit A to this Agreement (the “Purchase Agreement”), specifying the number of Option Shares with respect to which the option is being exercised;

(b)Pay the aggregate exercise price for the purchased shares as specified by the Board in one or more of the following alternative forms:  (i) full payment, in cash or by check payable to the Company’s order, in the amount of the exercise price for the Option Shares being purchased; (ii) full payment in shares of common stock of the Company held for at least six months and having an aggregate fair market value on the day of exercise (as determined under the terms of the Plan) equal to the exercise price for the Option Shares being purchased; (iii) a combination of shares of common stock of the Company held for at least six months and valued at fair market value on the day of exercise (as determined under the terms of the Plan) and cash or check payable to the Company’s order, equal in the aggregate to the exercise price for the Option Shares being purchased; or (iv) to the extent permitted by applicable law, by such other method as the Board may approve; and

(c)Furnish the Company with appropriate documentation that the person or persons exercising the option, if other than the Grantee, have the right to exercise this option.

8.Certain Company Transactions.

(a)“Change of Control” shall mean a change in ownership or control of the Company effected through either of the following transactions: (i) the direct or indirect acquisition by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended of securities possessing more than thirty percent (30%) of the combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders which the Board does not recommend such stockholders to accept; or (ii)  a change in the composition of the Board over a period of twenty-four (24) months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (1) have been Board members continuously since the beginning of such period, or (2) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (1) who were still in office at the time such election or nomination was approved by the Board.

(b)“Corporate Transaction” shall mean either of the following stockholder-approved transactions to which the Company is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the combined voting power of the Company’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of more than 75% of the Company’s assets in a single or related series of transactions.

c)“Involuntary Termination” shall mean the termination of the service of the Grantee which occurs by reason of (i) such individual’s involuntary dismissal or discharge by the Company or the successor thereto for reasons other than Misconduct (as defined below), or (ii) such individual’s voluntary resignation, in either case following: (a) a change in the Grantee’s position with the Company or the successor thereto which materially reduces the Grantee’s level of responsibility, (b) a reduction in the Grantee’s level of compensation (including base salary, significant fringe benefits or any non-discretionary and objective-standard incentive payment or bonus award) by more than ten percent (10%) in the aggregate or (c) a relocation of the Grantee’s place of employment by more than fifty (50) miles, only if such change, reduction or relocation is effected by the Company or the successor thereto without the Grantee’s consent.  For purposes of this definition, the term “Misconduct” means the commission of any act of fraud, embezzlement or dishonesty by the Grantee, any unauthorized use or disclosure by such individual of confidential information or trade secrets of the Company or its successor, or any other intentional misconduct by such individual adversely affecting the business or affairs of the Company or its successor in a material manner.  The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Company or its successor may consider as grounds for the dismissal or discharge of the Grantee.

(d)Upon the occurrence of a Corporate Transaction or upon Involuntary Termination of the Grantee within thirty-six (36) months following a Change of Control, this option shall remain exercisable until the Expiration Date or earlier surrender of this option.

(e)Immediately following the consummation of a Corporate Transaction, this option shall terminate and cease to remain outstanding, except to the extent assumed by the successor corporation or its parent company.

9.Compliance with Laws and Regulations.

(a)The exercise of this option and the issuance of Option Shares upon such exercise is subject to compliance by the Company and Grantee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which shares of the Company’s common stock may be listed at the time of such exercise and issuance.

(b)In connection with the exercise of this option, Grantee will execute and deliver to the Company such representations in writing as may be requested by the Company so that it may comply with the applicable requirements of federal and state securities laws.

10.Liability of Company.

(a)If the Option Shares exceed, as of the Grant Date, the number of shares that may without stockholder approval be issued under the Plan, then this option will be void with respect to such excess shares unless stockholder approval of an amendment sufficiently increasing the number of shares issuable under the Plan is obtained in accordance with the provisions of the Plan.

(b)The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of any common stock pursuant to this option will relieve the Company of any liability with respect to the non-issuance or sale of the common stock as to which such approval is not obtained.

11.No Employment Contract.

Nothing in this Agreement, the Notice or in the Plan confers upon Grantee any right to continue membership on the Board or interferes with or restricts in any way the rights of the Company (or any subsidiary), which are hereby expressly reserved, to discharge the Grantee at any time for any reason or no reason, with or without cause.  Except to the extent the terms of any written contract between the Company and the Grantee may expressly provide otherwise, neither the Company nor any of its subsidiaries is under any obligation to continue the Grantee’s membership on the Board for any period of specified duration.

12.Withholding.

Grantee hereby agrees to make appropriate arrangements with the Company for the satisfaction of any federal, state or local income tax withholding requirements applicable to the exercise of this option.

13.Notices.

Any notice required to be given or delivered to the Company under the terms of this Agreement will be in writing and addressed to the Company in care of its Senior Vice President, Human Resources at its corporate office at 145 Brandywine Parkway, West Chester, Pennsylvania, 19380.  Any notice required to be given or delivered to the Grantee will be in writing and addressed to the Grantee at the address indicated below the Grantee’s signature line on the Agreement.  All notices will be deemed to have been given or delivered upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

14.Construction.

This Agreement, the Notice and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan.  Capitalized terms not otherwise defined herein that are defined in the Plan shall have the meaning specified in the Plan.

All decisions of the Committee or the Board, as applicable, with respect to any question or issue arising under the Plan or this Agreement will be conclusive and binding on all persons having an interest in this option.

15.Governing Law.

The interpretation, performance and enforcement of this Agreement will be governed by the laws of the Commonwealth of Pennsylvania.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in duplicate on its behalf by its duly authorized officer and the Grantee has also executed this Agreement in duplicate, all as of the day and year indicated above.

For Cephalon, Inc.

Date:

I hereby accept the option described in this Agreement and the Notice, and I agree to be bound by the terms of the Plan, this Agreement and the Notice.  I hereby further agree that all of the decisions and determinations of the Committee and the Board, as applicable, shall be final and binding.

Grantee:

Address:

Date:

EX-10.3(D)

EXHIBIT 10.3(d)

2004 EQUITY COMPENSATION PLAN

EMPLOYEE

NON-QUALIFIED STOCK OPTION

GRANT AGREEMENT

THIS AGREEMENT is made as of Grant Date by and between Cephalon, Inc. (“Company”) and Grantee.

RECITALS

A.The Grantee has been granted an option to purchase shares of the common stock of the Company under the Cephalon, Inc. 2004 Equity Compensation Plan (“Plan”).

B.The option granted to the Grantee is intended to be a non-qualified stock option (“NQSO”), which does not satisfy Section 422 of the Internal Revenue Code of 1986, as amended.

NOW, THEREFORE, it is hereby agreed as follows:

1.Grant of Option.

Subject to the terms and conditions set forth in this Agreement and the Plan, the Company hereby grants to the Grantee, as of the Grant Date, a NQSO to purchase the number of shares of the common stock of the Company (“Option Shares”) specified on the attached Notice of Grant of Stock Options (“Notice”), at the exercise price per share set forth in the Notice.

This option shall become null and void unless the Grantee accepts this Agreement by executing this Agreement in the space provided on the last page of the Agreement and returning it to the Company.

2.Option Term.

Unless sooner terminated in accordance with the provisions of the Plan or this Agreement, this option will terminate at the close of business on the date specified on the Notice, but in no event shall the option terminate later than ten years from the Grant Date, (“Expiration Date”).

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3.Option Nontransferable.

This option is not transferable or assignable by the Grantee other than by will or by the laws of descent and distribution, and during the lifetime of the Grantee, this option is exercisable only by the Grantee.

4.Dates of Exercise.

The option will become exercisable with respect to the Option Shares covered by the option according to the following four year exercisability schedule, provided that the Grantee is employed by the Company on the applicable dates:

Date	Option Shares Becoming Exercisable
1st anniversary of Grant Date	25	%
2nd anniversary of Grant Date	25	%
3rd anniversary of Grant Date	25	%
4th anniversary of Grant Date	25	%

Exercisable installments may be exercised in whole or in part, and, to the extent not exercised, will accumulate and be exercisable at any time on or before the Expiration Date, unless the option terminates earlier in accordance with the terms of this Agreement or the Plan.  The exercisability of the option is cumulative, but shall not exceed 100% of the Option Shares.  If the foregoing schedule would produce fractional Option Shares, the number of Option Shares for which the option becomes exercisable shall be rounded down to the nearest whole Option Share.

5.Termination of Employment.

(a)Should the Grantee cease to be an employee of the Company or one of its subsidiaries (other than by reason of death, permanent disability or termination for cause), this option will, solely to the extent that it is exercisable immediately prior to such cessation of employee status, remain exercisable during the three-month period following the date of such cessation of employee status.  If, at the time of the Grantee’s termination, he is unable to sell Option Shares (i) without liability under Section 16(b) of

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the Securities Exchange Act of 1934, as amended (or any successor provision) (“Section 16(b)”) or (ii) because he is in possession of material non-public information about the Company (“Non-public Information”), then the three-month period referred to in the preceding sentence shall not commence until the later of the first day that the Grantee may sell Option Shares without liability under Section 16(b) or the first day that the Grantee is not in possession of Non-public Information; provided, however, that in no event will this option be exercisable at any time after the Expiration Date.

(b)Should the Grantee become permanently disabled and cease by reason thereof to be an employee of the Company or one of its subsidiaries, this option will, solely to the extent that it is exercisable immediately prior to such cessation of employee status, remain exercisable during the one-year period following the date of such cessation of employee status; provided, however, in no event will this option be exercisable at any time after the Expiration Date.  The Grantee will be deemed to be permanently disabled if the Grantee is, by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of not less than one year, unable to engage in any substantial gainful employment.

(c)Should the Grantee die while still an employee of the Company or one of its subsidiaries, this stock option, to the extent it is at the time outstanding under this Plan, shall automatically accelerate and become fully exercisable as to all Option Shares subject to this option and shall remain exercisable until the Expiration Date or earlier surrender of this option.  In addition, if the Grantee dies during the three-month period referred to in subparagraph (a) or during the one-year period referred to in subparagraph (b), the option shall remain exercisable until the Expiration Date or earlier surrender of this option.  The executors or administrators of estate or heirs or legatees (as the case may be) will have the right to exercise this option, during the remainder of the option term.

(d)Should the Grantee’s employment be terminated for cause (including, but not limited to, any act of dishonesty, unethical conduct, willful misconduct, fraud or embezzlement, or any unauthorized disclosure of confidential information or trade secrets), this option will immediately

3

terminate and cease to be exercisable when notice of termination of employment is given.

6.Privilege of Stock Ownership.

The holder of this option will have none of the rights of a stockholder with respect to the Option Shares until such individual has exercised the option and has been issued a stock certificate for the Option Shares.

7.Manner of Exercising Option.

In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, the Grantee (or in the case of exercise after the Grantee’s death, the Grantee’s executor, administrator, heir or legatee, as the case may be) must take the following actions:

(a)Execute and deliver to the Senior Vice President of Human Resources of the Company a stock purchase agreement in substantially the form of Exhibit A to this Agreement (the “Purchase Agreement”), specifying the number of Option Shares with respect to which the option is being exercised;

(b)Pay the aggregate exercise price for the purchased shares as specified by the Committee in one or more of the following alternative forms:  (i) full payment, in cash or by check payable to the Company’s order, in the amount of the exercise price for the Option Shares being purchased; (ii) full payment in shares of common stock of the Company held for at least six months and having an aggregate fair market value on the day of exercise (as determined under the terms of the Plan) equal to the exercise price for the Option Shares being purchased; (iii) a combination of shares of common stock of the Company held for at least six months and valued at fair market value on the day of exercise (as determined under the terms of the Plan) and cash or check payable to the Company’s order, equal in the aggregate to the exercise price for the Option Shares being purchased; or (iv) to the extent permitted by applicable law, by such other method as the Committee may approve; and

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(c)Furnish the Company with appropriate documentation that the person or persons exercising the option, if other than the Grantee, have the right to exercise this option.

8.Certain Company Transactions.

(a)“Change of Control” shall mean a change in ownership or control of the Company effected through either of the following transactions: (i) the direct or indirect acquisition by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than thirty percent (30%) of the combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders which the Board of Directors (“Board”) does not recommend such stockholders to accept; or (ii)  a change in the composition of the Board over a period of twenty-four (24) months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either: (1) have been Board members continuously since the beginning of such period, or (2) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (1) who were still in office at the time such election or nomination was approved by the Board.

(b)“Corporate Transaction” shall mean either of the following stockholder-approved transactions to which the Company is a party:  (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the combined voting power of the Company’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of more than 75% of the Company’s assets in a single or related series of transactions.

(c)“Involuntary Termination” shall mean the termination of the service of the Grantee which occurs by reason of (i) such individual’s involuntary dismissal or discharge by the Company or the successor thereto for reasons

5

other than Misconduct (as defined below), or (ii) such individual’s voluntary resignation, in either case following: (a) a change in the Grantee’s position with the Company or the successor thereto which materially reduces the Grantee’s level of responsibility, (b) a reduction in the Grantee’s level of compensation (including base salary, significant fringe benefits or any non-discretionary and objective-standard incentive payment or bonus award) by more than ten percent (10%) in the aggregate or (c) a relocation of the Grantee’s place of employment by more than fifty (50) miles, only if such change, reduction or relocation is effected by the Company or the successor thereto without the Grantee’s consent.  For purposes of this definition, the term “Misconduct” means the commission of any act of fraud, embezzlement or dishonesty by the Grantee, any unauthorized use or disclosure by such individual of confidential information or trade secrets of the Company or its successor, or any other intentional misconduct by such individual adversely affecting the business or affairs of the Company or its successor in a material manner.  The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Company or its successor may consider as grounds for the dismissal or discharge of the Grantee.

(d)Except as described below, in the event of any Corporate Transaction, this option, to the extent it is at the time outstanding under the Plan, shall automatically accelerate so that this option shall, immediately prior to the specified effective date for such Corporate Transaction, become fully exercisable with respect to the total number of Option Shares subject to the option and may be exercised for all or any portion of such shares as fully-exercisable shares.  However, the exercisability shall not so accelerate if and to the extent:  (i) such option is, in connection with such Corporate Transaction, either to be assumed by the successor corporation or parent thereof or replaced with a stock option for shares of the capital stock of the successor corporation or parent thereof having comparable value and terms, (ii) such option is to be replaced with a cash incentive option or award of the successor corporation which preserves the option spread value existing at the time of such Corporate Transaction and provides for subsequent payout in accordance with the same terms and conditions of the option, (iii) such option is to be replaced by a grant under another incentive program which the Committee determines is reasonably equivalent in value, or (iv) the acceleration of the exercisability period under the option is subject to other limitations imposed by the Committee at the time of the Grant.  The

6

determination of comparability under clauses (i), (ii) or (iii) above shall be made by the Committee, and its determination shall be final, binding and conclusive.

(e)Upon the Grantee’s cessation of service by reason of an Involuntary Termination within thirty-six (36) months after a Corporate Transaction in which the Grantee’s outstanding options are assumed or replaced pursuant to clauses (d) (i), (ii) or (iii) above, each such option under clause (i) shall automatically accelerate and become fully exercisable and all restrictions applicable to such grants shall lapse, with respect to the total number of shares of stock at the time subject to such option and the cash incentive program under clause (ii) or other incentive program under clause (iii) shall become fully vested.  In addition, upon the Grantee’s cessation of service by reason of an Involuntary Termination within 36 months after a Change of Control, the option will automatically accelerate and become fully exercisable with respect to the total number of Option Shares at the time subject to the option.  The option as so accelerated shall remain exercisable until the earlier of the Expiration Date or the expiration of the one (1)-year period measured from the date of such Involuntary Termination.

(f)Immediately following the consummation of a Corporate Transaction, this option shall terminate and cease to remain outstanding, except to the extent assumed by the successor corporation or its parent company.

9.Compliance with Laws and Regulations.

(a)The exercise of this option and the issuance of Option Shares upon such exercise is subject to compliance by the Company and the Grantee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which shares of the Company’s common stock may be listed at the time of such exercise and issuance.

(b)In connection with the exercise of this option, the Grantee will execute and deliver to the Company such representations in writing as may be requested by the Company so that it may comply with the applicable requirements of federal and state securities laws.

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10.Liability of Company.

(a)If the Option Shares exceed, as of the Grant Date, the number of shares that may without shareholder approval be issued under the Plan, then this option will be void with respect to such excess shares unless shareholder approval of an amendment sufficiently increasing the number of shares issuable under the Plan is obtained in accordance with the provisions of the Plan.

(b)The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of any common stock pursuant to this option will relieve the Company of any liability with respect to the non-issuance or sale of the common stock as to which such approval is not obtained.

11.No Employment Contract.

Nothing in this Agreement, the Notice or in the Plan confers upon the Grantee any right to continue in the employ of the Company (or any subsidiary) or interferes with or restricts in any way the rights of the Company (or any subsidiary), which are hereby expressly reserved, to discharge the Grantee at any time for any reason or no reason, with or without cause.  Except to the extent the terms of any employment contract between the Company (or any subsidiary) and the Grantee may expressly provide otherwise, neither the Company nor any of its subsidiaries is under any obligation to continue the employment of the Grantee for any period of specified duration.

12.Notices.

Any notice required to be given or delivered to the Company under the terms of this Agreement will be in writing and addressed to the Company in care of its Senior Vice President, Human Resources at its corporate office at 145 Brandywine Parkway, West Chester, Pennsylvania, 19380.  Any notice required to be given or delivered to the Grantee will be in writing and addressed to the Grantee at the address provided on the notice of grant or such other address provided in writing by the Grantee to the Company.  All notices will be deemed to have been given or delivered upon personal

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delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

13.Construction.

This Agreement, the Notice and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan.

Capitalized terms not otherwise defined herein that are defined in the Plan shall have the meaning specified in the Plan.  All decisions of the Committee with respect to any question or issue arising under the Plan or this Agreement will be conclusive and binding on all persons having an interest in this option.

14.Governing Law.

The interpretation, performance and enforcement of this Agreement will be governed by the laws of the Commonwealth of Pennsylvania.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, Cephalon has caused this Agreement to be executed in duplicate on its behalf by its duly authorized officer and the Grantee has also executed this Agreement in duplicate.

For Cephalon, Inc.

Date:

I hereby accept the option described in this Agreement and the Notice, and I agree to be bound by the terms of the Plan, this Agreement and the Notice.  I hereby further agree that all of the decisions and determinations of the Committee shall be final and binding.

Grantee:

Address:

Date:

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EX-10.3(E)

EXHIBIT 10.3(e)

2004 EQUITY COMPENSATION PLAN

EMPLOYEE

INCENTIVE STOCK OPTION

GRANT AGREEMENT

THIS AGREEMENT is made as of the Grant Date by and between Cephalon, Inc. (“Company”) and Grantee.

RECITALS

A.The Grantee has been granted an option to purchase shares of the common stock of the Company under the Cephalon, Inc. 2004 Equity Compensation Plan (“Plan”).

B.The option granted to the Grantee is intended to be an incentive stock option (“ISO”), which is intended to satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).

NOW, THEREFORE, it is hereby agreed as follows:

1.Grant of Option.

Subject to the terms and conditions set forth in this Agreement and the Plan, the Company hereby grants to the Grantee, as of the Grant Date, a ISO to purchase the number of shares of the common stock of the Company (“Option Shares”) specified on the attached Notice of Grant of Stock Options (“Notice”), at the exercise price per share set forth in the Notice.

This option shall become null and void unless the Grantee accepts this Agreement by executing this Agreement in the space provided on the last page of the Agreement and returning it to the Company.

2.Option Term.

Unless sooner terminated in accordance with the provisions of the Plan or this Agreement, this option will terminate at the close of business on the date specified on the Notice, but in no event shall the option terminate later than ten years from the Grant Date, (“Expiration Date”).

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3.Option Nontransferable.

This option is not transferable or assignable by the Grantee other than by will or by the laws of descent and distribution, and during the lifetime of the Grantee, this option is exercisable only by the Grantee.

4.Dates of Exercise.

The option will become exercisable with respect to the Option Shares covered by the option according to the following four year exercisability schedule, provided that the Grantee is employed by the Company on the applicable dates:

Date	Option Shares Becoming Exercisable
1st anniversary of Grant Date	25	%
2nd anniversary of Grant Date	25	%
3rd anniversary of Grant Date	25	%
4th anniversary of Grant Date	25	%

Exercisable installments may be exercised in whole or in part, and, to the extent not exercised, will accumulate and be exercisable at any time on or before the Expiration Date, unless the option terminates earlier in accordance with the terms of this Agreement or the Plan.  The exercisability of the option is cumulative, but shall not exceed 100% of the Option Shares.  If the foregoing schedule would produce fractional Option Shares, the number of Option Shares for which the option becomes exercisable shall be rounded down to the nearest whole Option Share.

5.Termination of Employment.

(a)Should the Grantee cease to be an employee of the Company or one of its subsidiaries (other than by reason of death, permanent disability or termination for cause), this option will, solely to the extent that it is exercisable immediately prior to such cessation of employee status, remain exercisable during the three-month period following the date of such cessation of employee status.  If, at the time of the Grantee’s termination, he is unable to sell Option Shares (i) without liability under Section 16(b) of

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the Securities Exchange Act of 1934, as amended (or any successor provision) (“Section 16(b)”) or (ii) because he is in possession of material non-public information about the Company (“Non-public Information”), then the three-month period referred to in the preceding sentence shall not commence until the later of the first day that the Grantee may sell Option Shares without liability under Section 16(b) or the first day that the Grantee is not in possession of Non-public Information; provided, however, that in no event will this option be exercisable at any time after the Expiration Date.  Any portion of the option that is exercised after the three-month period following the date of such cessation of employee status, as permitted by the immediately preceding sentence, shall be a non-qualified stock option.

(b)Should the Grantee become permanently disabled and cease by reason thereof to be an employee of the Company or one of its subsidiaries, this option will, solely to the extent that it is exercisable immediately prior to such cessation of employee status, remain exercisable during the one-year period following the date of such cessation of employee status; provided, however, in no event will this option be exercisable at any time after the Expiration Date.  The Grantee will be deemed to be permanently disabled if the Grantee is, by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of not less than one year, unable to engage in any substantial gainful employment.

(c)Should the Grantee die while still an employee of the Company or one of its subsidiaries, this stock option, to the extent it is at the time outstanding under this Plan, shall automatically accelerate and become fully exercisable as to all Option Shares subject to this option and shall remain exercisable until the Expiration Date or earlier surrender of this option.  In addition, if the Grantee dies during the three-month period referred to in subparagraph (a) or during the one-year period referred to in subparagraph (b), the option shall remain exercisable until the Expiration Date or earlier surrender of this option.  The executors or administrators of estate or heirs or legatees (as the case may be) will have the right to exercise this option, during the remainder of the option term.

(d)Should the Grantee’s employment be terminated for cause (including, but not limited to, any act of dishonesty, unethical conduct, willful

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misconduct, fraud or embezzlement, or any unauthorized disclosure of confidential information or trade secrets), this option will immediately terminate and cease to be exercisable when notice of termination of employment is given.

6.Designation as Incentive Stock Option.

(a)This option is designated as an incentive stock option within the meaning of Section 422 of the Code.  If the aggregate fair market value of the Company’s stock on the date of the grant with respect to which incentive stock options are exercisable for the first time by the Grantee during any calendar year, under the Plan or any other stock option plan of the Company or a parent or subsidiary, exceeds $100,000, then the option, as to the excess, shall be treated as a nonqualified stock option that does not meet the requirements of Section 422.  If and to the extent that the option fails to qualify as an incentive stock option under the Code, the option shall remain outstanding according to its terms as a nonqualified stock option.

(b)The Grantee understands that favorable incentive stock option tax treatment is available only if the option is exercised while the Grantee is an employee of the Company or a parent or subsidiary of the Company or within a period of time specified in the Code after the Grantee ceases to be an employee.  The Grantee understands that the Grantee is responsible for the income tax consequences of the option, and, among other tax consequences, the Grantee understands that he may be subject to the alternative minimum tax under the Code in the year in which the option is exercised.  The Grantee will consult with his tax adviser regarding the tax consequences of the option.

(c)The Grantee agrees that the Grantee shall immediately notify the Company in writing if the Grantee sells or otherwise disposes of any Option Shares acquired upon the exercise of the option and such sale or other disposition occurs on or before the later of (i) two years after the Grant Date or (ii) one year after the transfer of the shares upon the exercise of the option.  The Grantee also agrees to provide the Company with any information requested by the Company with respect to such sale or other disposition.

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7.Privilege of Stock Ownership.

The holder of this option will have none of the rights of a stockholder with respect to the Option Shares until such individual has exercised the option and has been issued a stock certificate for the Option Shares.

8.Manner of Exercising Option.

In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, the Grantee (or in the case of exercise after the Grantee’s death, the Grantee’s executor, administrator, heir or legatee, as the case may be) must take the following actions:

(a)Execute and deliver to the Senior Vice President of Human Resources of the Company a stock purchase agreement in substantially the form of Exhibit A to this Agreement (the “Purchase Agreement”), specifying the number of Option Shares with respect to which the option is being exercised;

(b)Pay the aggregate exercise price for the purchased shares as specified by the Committee in one or more of the following alternative forms:  (i) full payment, in cash or by check payable to the Company’s order, in the amount of the exercise price for the Option Shares being purchased; (ii) full payment in shares of common stock of the Company held for at least six months and having an aggregate fair market value on the day of exercise (as determined under the terms of the Plan) equal to the exercise price for the Option Shares being purchased; (iii) a combination of shares of common stock of the Company held for at least six months and valued at fair market value on the day of exercise (as determined under the terms of the Plan) and cash or check payable to the Company’s order, equal in the aggregate to the exercise price for the Option Shares being purchased; or (iv) to the extent permitted by applicable law, by such other method as the Committee may approve; and

(c)Furnish the Company with appropriate documentation that the person or persons exercising the option, if other than the Grantee, have the right to exercise this option.

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9.Certain Company Transactions.

(a)“Change of Control” shall mean a change in ownership or control of the Company effected through either of the following transactions: (i) the direct or indirect acquisition by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than thirty percent (30%) of the combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders which the Board of Directors (“Board”) does not recommend such stockholders to accept; or (ii)  a change in the composition of the Board over a period of twenty-four (24) months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either: (1) have been Board members continuously since the beginning of such period, or (2) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (1) who were still in office at the time such election or nomination was approved by the Board.

(b)“Corporate Transaction” shall mean either of the following stockholder-approved transactions to which the Company is a party:  (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the combined voting power of the Company’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of more than 75% of the Company’s assets in a single or related series of transactions.

(c)“Involuntary Termination” shall mean the termination of the service of the Grantee which occurs by reason of (i) such individual’s involuntary dismissal or discharge by the Company or the successor thereto for reasons other than Misconduct (as defined below), or (ii) such individual’s voluntary resignation, in either case following: (a) a change in the Grantee’s position with the Company or the successor thereto which materially reduces the

6

Grantee’s level of responsibility, (b) a reduction in the Grantee’s level of compensation (including base salary, significant fringe benefits or any non-discretionary and objective-standard incentive payment or bonus award) by more than ten percent (10%) in the aggregate or (c) a relocation of the Grantee’s place of employment by more than fifty (50) miles, only if such change, reduction or relocation is effected by the Company or the successor thereto without the Grantee’s consent.  For purposes of this definition, the term “Misconduct” means the commission of any act of fraud, embezzlement or dishonesty by the Grantee, any unauthorized use or disclosure by such individual of confidential information or trade secrets of the Company or its successor, or any other intentional misconduct by such individual adversely affecting the business or affairs of the Company or its successor in a material manner.  The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Company or its successor may consider as grounds for the dismissal or discharge of the Grantee.

(d)Except as described below, in the event of any Corporate Transaction, this option, to the extent it is at the time outstanding under the Plan, shall automatically accelerate so that this option shall, immediately prior to the specified effective date for such Corporate Transaction, become fully exercisable with respect to the total number of Option Shares subject to the option and may be exercised for all or any portion of such shares as fully-exercisable shares.  However, the exercisability shall not so accelerate if and to the extent:  (i) such option is, in connection with such Corporate Transaction, either to be assumed by the successor corporation or parent thereof or replaced with a stock option for shares of the capital stock of the successor corporation or parent thereof having comparable value and terms, (ii) such option is to be replaced with a cash incentive option or award of the successor corporation which preserves the option spread value existing at the time of such Corporate Transaction and provides for subsequent payout in accordance with the same terms and conditions of the option, (iii) such option is to be replaced by a grant under another incentive program which the Committee determines is reasonably equivalent in value, or (iv) the acceleration of the exercisability period under the option is subject to other limitations imposed by the Committee at the time of the Grant.  The determination of comparability under clauses (i), (ii) or (iii) above shall be made by the Committee, and its determination shall be final, binding and conclusive.

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(e)Upon the Grantee’s cessation of service by reason of an Involuntary Termination within thirty-six (36) months after a Corporate Transaction in which the Grantee’s outstanding options are assumed or replaced pursuant to clauses (d) (i), (ii) or (iii) above, each such option under clause (i) shall automatically accelerate and become fully exercisable and all restrictions applicable to such grants shall lapse, with respect to the total number of shares of stock at the time subject to such option and the cash incentive program under clause (ii) or other incentive program under clause (iii) shall become fully vested.  In addition, upon the Grantee’s cessation of service by reason of an Involuntary Termination within 36 months after a Change of Control, the option will automatically accelerate and become fully exercisable with respect to the total number of Option Shares at the time subject to the option.  The option as so accelerated shall remain exercisable until the earlier of the Expiration Date or the expiration of the one (1)-year period measured from the date of such Involuntary Termination.

(f)Immediately following the consummation of a Corporate Transaction, this option shall terminate and cease to remain outstanding, except to the extent assumed by the successor corporation or its parent company.

10.Compliance with Laws and Regulations.

(a)The exercise of this option and the issuance of Option Shares upon such exercise is subject to compliance by the Company and the Grantee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which shares of the Company’s common stock may be listed at the time of such exercise and issuance.

(b)In connection with the exercise of this option, the Grantee will execute and deliver to the Company such representations in writing as may be requested by the Company so that it may comply with the applicable requirements of federal and state securities laws.

11.Liability of Company.

(a)If the Option Shares exceed, as of the Grant Date, the number of shares that may without shareholder approval be issued under the Plan, then

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this option will be void with respect to such excess shares unless shareholder approval of an amendment sufficiently increasing the number of shares issuable under the Plan is obtained in accordance with the provisions of the Plan.

(b)The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of any common stock pursuant to this option will relieve the Company of any liability with respect to the non-issuance or sale of the common stock as to which such approval is not obtained.

12.No Employment Contract.

Nothing in this Agreement, the Notice or in the Plan confers upon the Grantee any right to continue in the employ of the Company (or any subsidiary) or interferes with or restricts in any way the rights of the Company (or any subsidiary), which are hereby expressly reserved, to discharge the Grantee at any time for any reason or no reason, with or without cause.  Except to the extent the terms of any employment contract between the Company (or any subsidiary) and the Grantee may expressly provide otherwise, neither the Company nor any of its subsidiaries is under any obligation to continue the employment of the Grantee for any period of specified duration.

13.Notices.

Any notice required to be given or delivered to the Company under the terms of this Agreement will be in writing and addressed to the Company in care of its Senior Vice President, Human Resources at its corporate office at 145 Brandywine Parkway, West Chester, Pennsylvania, 19380.  Any notice required to be given or delivered to the Grantee will be in writing and addressed to the Grantee at the address provided on the notice of grant or such other address provided in writing by the Grantee to the Company.  All notices will be deemed to have been given or delivered upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

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14.Construction.

This Agreement, the Notice and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan.

Capitalized terms not otherwise defined herein that are defined in the Plan shall have the meaning specified in the Plan.  All decisions of the Committee with respect to any question or issue arising under the Plan or this Agreement will be conclusive and binding on all persons having an interest in this option.

15.Governing Law.

The interpretation, performance and enforcement of this Agreement will be governed by the laws of the Commonwealth of Pennsylvania.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, Cephalon has caused this Agreement to be executed in duplicate on its behalf by its duly authorized officer and the Grantee has also executed this Agreement in duplicate.

For Cephalon, Inc.

Date:

I hereby accept the option described in this Agreement and the Notice, and I agree to be bound by the terms of the Plan, this Agreement and the Notice.  I hereby further agree that all of the decisions and determinations of the Committee shall be final and binding.

Grantee:

Address:

Date:

11

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Frank Baldino, Jr., certify that:

1.I have reviewed this quarterly report on Form 10-Q of Cephalon, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)[paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986];

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:November 9, 2004

/s/ FRANK BALDINO, JR.

Frank Baldino, Jr., Ph.D.

Chairman and Chief Executive Officer

(Principal executive officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, J. Kevin Buchi, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Cephalon, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)[paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986];

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:November 9, 2004

/s/ J. KEVIN BUCHI

J. Kevin Buchi

Senior Vice President and Chief Financial Officer

(Principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cephalon, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Frank Baldino, Jr., Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, based on my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/FRANK BALDINO, JR.

Frank Baldino, Jr., Ph.D.

Chairman and Chief Executive Officer

November 9, 2004

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cephalon, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Kevin Buchi, Sr. Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, based on my knowledge, that:

(1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/J. KEVIN BUCHI

J. Kevin Buchi

Sr. Vice President and Chief Financial Officer

November 9, 2004