8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of report (Date of earliest event reported)February 14, 2006

Cephalon, Inc.
(Exact Name of Registrant as Specified in Charter)
Delaware	0-19119	23-2484489
(State or Other Jurisdiction	(Commission	(IRS Employer
of Incorporation)	File Number)	Identification No.)
41 Moores Rd.
Frazer, Pennsylvania		19355
(Address of Principal Executive Offices)		(Zip Code)
Registrant’s telephone number, including area code             (610) 344-0200
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02Results of Operations and Financial Condition.

The information under this caption is furnished by Cephalon, Inc. (the “Company”) in accordance with Securities Exchange Commission Release No. 33-8216. This information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

On February 14, 2006, Cephalon, Inc. issued a press release announcing certain financial results for the fourth quarter and full year 2005, stating full year 2006 basic adjusted income per common share guidance and introducing sales and basic adjusted income per common share guidance for the first quarter of 2006. A copy of the press release is attached hereto as Exhibit 99.1 and incorporated herein by reference.

In the attached press release, the Company discloses “Net income (loss), as adjusted,” “Basic income (loss) per common share, as adjusted,” “Diluted income (loss) per common share, as adjusted,” “Basic adjusted income per common share guidance” and “Adjusted net income guidance” for certain periods, all of which are considered “non-GAAP financial measures” under Securities and Exchange Commission rules. A “non-GAAP financial measure” is defined as a numerical measure of a company’s financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP in the Company’s financial statements. Management does not intend the presentation of non-GAAP financial measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

For all periods presented, our consolidated statements of operations include an “Adjusted” column that reconciles, among other things, net income (loss) on a GAAP basis to net income (loss), as adjusted. Management believes that the presentation of these measures, as adjusted, is useful to investors because it provides a means of evaluating the Company’s operating performance and results from period to period on a comparable basis not otherwise apparent on a GAAP basis, since many one-time or infrequent charges, including items that may not affect the Company’s operations, do not meet the strict GAAP definition of unusual non-recurring items. Furthermore, in preparing operating plans, budgets and forecasts, and in assessing historical performance, management relies, in part, on trends in the Company’s historical results, exclusive of these items, and provides its forecasts to investors on this basis. Finally, management believes that this presentation is useful in facilitating comparisons between the Company and other companies in its industry, many of whom exclude similar items.

Basic income (loss) per common share, as adjusted, and diluted income (loss) per common share, as adjusted, represent the Company’s net income (loss), as adjusted and described above, on a per share basis. Management believes that the presentation of these measures is meaningful to investors because it provides investors with a means of evaluating net income (loss), as adjusted, against the Company’s previously issued income per common share guidance. In addition, in assessing the Company’s performance against its previously issued per share guidance, management uses these adjusted per share measures. The presentation of guidance for adjusted net income and basic adjusted net income per common share reconciles the Company’s projected net income and basic income per common share on a GAAP basis to its current quarterly and full-year guidance. Management believes the presentation of these measures is useful to investors because it will enable investors to assess and compare the Company’s guidance on an adjusted and a GAAP basis with adjusted actual results, when issued. Moreover, these measures provide a straightforward view of the Company’s operations free from the complexity associated with determining the daily impact on the income per share calculation resulting from the Company’s outstanding convertible notes. Finally, management utilizes the adjusted net income and basic adjusted income per common share measures in connection with its internal budgeting and forecasting.

Item 9.01Financial Statements and Exhibits.

(a)	Financial Statements of Business Acquired.
	None

2

(b)	Pro forma Financial Information.
	None
(c)	Exhibits.
	Exhibit No.	Description of Document
	99.1	Press Release dated February 14, 2006 – Cephalon Reports Outstanding Financial Results for 2005

3

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 hereunto duly authorized.

	CEPHALON, INC.
Date: February 14, 2006	By:	/s/ J. Kevin Buchi
		J. Kevin Buchi
		Executive Vice President & Chief Financial
		Officer

4

EXHIBIT INDEX

Exhibit
Number	Description
99.1	Press Release dated February 14, 2006 – Cephalon Reports Outstanding Financial Results for 2005

5

EX-99.1

Exhibit 99.1

	News
	Contacts:
	Media:
	Steve Holzman
	610.738.6126
	sholzman@cephalon.com
	Investors:
	Robert (Chip) Merritt
	610.738.6376
	cmerritt@cephalon.com

For Immediate Release

Cephalon Reports Outstanding Financial Results for 2005

Revenue increases 19 percent;

Cephalon updates and raises 2006 guidance

Frazer, Pa. – February 14, 2006 – Cephalon, Inc. (Nasdaq: CEPH) today reported 2005 revenue of $1.2 billion, a 19 percent increase over 2004.  Diluted loss per share was $3.01.  Excluding amortization expense and certain other items, diluted adjusted income per share was $2.76, a 14 percent increase over the comparable figure of $2.42 in 2004 and within the range of the company’s previously issued 2005 guidance.

Sales totaled $1.16 billion in 2005, an 18 percent increase compared to 2004.  In 2005, sales of PROVIGIL^® (modafinil) Tablets [C-IV] increased 17 percent to $512.8 million; sales of ACTIQ^® (oral transmucosal fentanyl citrate) [C-II] increased 19 percent to $411.8 million; and sales of GABITRIL^® (tiagabine hydrochloride) Tablets were $72.3 million, a 23 percent decrease. Sales of other products totaled $159.7 million in 2005.

“Cephalon delivered strong top- and bottom-line growth in 2005,” said Frank Baldino Jr., Ph.D., Chairman and CEO.  “We also completed a series of acquisitions and collaborations that created a fully integrated oncology business and expanded our business geographically.  We continued to make progress in our plan to launch five new drugs.  Finally, we eliminated uncertainty and added significant upside for our business by settling our litigation over PROVIGIL.  As a result, we enter 2006 in a position of strength, poised to deliver our best performance ever.”

SOURCE:  Cephalon, Inc. • 41 Moores Road • Frazer, PA  19355 • (610) 344-0200 • Fax (610) 344-0065

— more —

For the fourth quarter of 2005, the company reported total revenue of $336.4 million, a 13 percent increase from the fourth quarter of 2004 and sales of $322.9 million, up 15 percent from the same quarter last year. Diluted income per share for the fourth quarter of 2005 was $0.30. Excluding amortization expense and certain other items, diluted adjusted income per share was $0.71.

Cephalon is updating its guidance for 2006 for sales of $1.55-1.60 billion, an increase of $200 million over its previously issued 2006 sales guidance. This includes central nervous system (CNS) franchise sales of $765-815 million, pain franchise sales of $425-475 million and other product sales of $285-335 million.  SG&A and R&D guidance for 2006 is estimated at $630-660 million and $315-335 million, respectively.

The company is introducing adjusted net income guidance for 2006 of $220-230 million, which represents a 24 percent increase over the adjusted net income figure used in the calculation of its previously issued guidance.  The company also is introducing basic adjusted income per common share guidance of $3.80-4.00.  This new per share guidance is based on 58.1 million shares outstanding, which is the weighted average number of common shares outstanding as of December 31, 2005, and does not include any shares associated with the company’s existing convertible notes and outstanding employee stock options.  The number of diluted shares is affected by daily fluctuations in the market price of the company’s common stock.  For this reason, the company believes the use of basic shares in the calculation of income per share provides a better measure of the underlying performance of the business.

The company is introducing first-quarter 2006 sales guidance of $355-365 million and basic adjusted income per share of $0.65-0.70.  Basic adjusted income per common share guidance for the first-quarter 2006 and full-year 2006 is reconciled below and is subject to the assumptions set forth therein.

Cephalon’s management will discuss the company’s fourth-quarter and full-year 2005 performance in a conference call with investors beginning at 5:00 p.m. U.S. EST on Tuesday, February 14, 2006.  To participate in the conference call, dial +1-(913) 981-5543 and refer to conference code number 9425834. Investors can listen to the call live by logging on to the company’s website at www.cephalon.com and clicking on “Newsroom,” then “Webcast.”  The conference call will be archived and available to investors for one week after the call.

Cephalon, Inc.

Founded in 1987, Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and marketing of innovative products in four core therapeutic areas: central nervous system, pain, oncology and addiction. Cephalon currently employs approximately 3,000 people in the United States and Europe. U.S. sites include the company’s headquarters in Frazer, Pennsylvania, and offices, laboratories or manufacturing

2

facilities in West Chester, Pennsylvania, Salt Lake City, Utah, and suburban Minneapolis, Minnesota. Cephalon’s European headquarters are located in Maisons-Alfort, France.

The company currently markets four proprietary products in the United States: PROVIGIL, GABITRIL, ACTIQ and TRISENOX^® (arsenic trioxide) injection, and numerous products internationally. Full prescribing information on its U.S. products is available at www.cephalon.com or by calling 1-800-896-5855.

In addition to historical facts or statements of current condition, this press release may contain forward-looking statements.  Forward-looking statements provide Cephalon’s current expectations or forecasts of future events.  These may include statements regarding anticipated scientific progress on its research programs; development of potential pharmaceutical products; interpretation of clinical results; prospects for regulatory approval; manufacturing development and capabilities; market prospects for its products; sales and earnings guidance; and other statements regarding matters that are not historical facts, including the Company’s position and expected performance in 2006.  You may identify some of these forward-looking statements by the use of words in the statements such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” or other words and terms of similar meaning.  Cephalon’s performance and financial results could differ materially from those reflected in these forward-looking statements due to general financial, economic, regulatory and political conditions affecting the biotechnology and pharmaceutical industries as well as more specific risks and uncertainties facing Cephalon such as those set forth in its reports on Form 8-K, 10-Q and 10-K filed with the U.S. Securities and Exchange Commission.  Given these risks and uncertainties, any or all of these forward-looking statements may prove to be incorrect.  Therefore, you should not rely on any such factors or forward-looking statements.  Furthermore, Cephalon does not intend to update publicly any forward-looking statement, except as required by law.  The Private Securities Litigation Reform Act of 1995 permits this discussion.

This press release and/or the financial results attached to this press release include “Adjusted Net Income,” “Basic Adjusted Income per Common Share,” “Basic Adjusted Income per Common Share Guidance,” “Diluted Adjusted Income Per Common Share,” and “Diluted Adjusted Income Per Share Guidance” amounts that are considered “non-GAAP financial measures” under SEC rules. As required, we have provided reconciliations of these measures. Additional required information is located in the Form 8-K furnished to the SEC in connection with this press release.

# # #

3

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Thousands, Except per Share)

(Unaudited)

	Three Months Ended December 31, 2005									Three Months Ended December 31, 2004
	GAAP			Adjustments			“Adjusted”			GAAP			Adjustments			“Adjusted”
REVENUES:
Sales	$	322,930					$	322,930		$	281,400					$	281,400
Other revenues	13,474						13,474			17,599						17,599
	336,404			$	—		336,404			298,999			$	—		298,999
COSTS AND EXPENSES:
Cost of sales	50,130						50,130			30,374						30,374
Research and development	99,235			(3,944		)(1)	95,291			75,764						75,764
Selling, general and administrative	140,957			(13,192		)(2)	127,765			95,569						95,569
Depreciation and amortization	23,154			(15,473		)(3)	7,681			15,871			(11,297		)(3)	4,574
Impairment charges	20,820			(20,820		)(4)	—			—						—
Acquired in-process research and development	71,200			(71,200		)(5)	—			—			—			—
	405,496			(124,629		)	280,867			217,578			(11,297		)	206,281
INCOME (LOSS) FROM OPERATIONS	(69,092		)	124,629			55,537			81,421			11,297			92,718
OTHER INCOME AND (EXPENSE):
Interest income	6,612						6,612			4,847						4,847
Interest expense	(5,924		)				(5,924		)	(5,298		)				(5,298		)
Debt exchange expense	—						—			—			—			—
Write-off of deferred debt issuance costs	(27,109		)	27,109		(6)	—			—			—			—
Gain (charge) on early extinguishment of debt	—			—			—			—			—			—
Other income (expense), net	(55		)				(55		)	(2,931		)				(2,931		)
	(26,476		)	27,109			633			(3,382		)	—			(3,382		)
INCOME (LOSS) BEFORE INCOME TAXES	(95,568		)	151,738			56,170			78,039			11,297			89,336
INCOME TAX (EXPENSE) BENEFIT	113,641			(127,097		)(7)	(13,456		)	66			(38,276		)(7)	(38,210		)
NET INCOME (LOSS)	$	18,073		$	24,641		$	42,714		$	78,105		$	(26,979	)	$	51,126
BASIC INCOME PER COMMON SHARE	$	0.31					$	0.74		$	1.35					$	0.89
DILUTED INCOME PER COMMON SHARE	$	0.30					$	0.71		$	1.23					$	0.82
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING	58,099						58,099			57,754						57,754
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION	60,351						60,351			64,889						64,889

CEPHALON, INC. AND SUBSIDIARIES

Notes to Reconciliation of GAAP Net Income (Loss) to “Adjusted” Net Income

Three Months Ended December 31, 2005 and December 31, 2004

(1)	To exclude the write-off of an investment in a development stage company ($1.0 million) and the restructuring of certain research and development activities at Cephalon France ($2.9 million).
(2)	To exclude charges relating to the termination of Salmedix’s facility lease ($2.6 million) and agreements executed with Teva and Ranbaxy related to the settlement of the PROVIGIL patent litigation ($10.6 million).
(3)	To exclude the ongoing amortization of acquired intangible assets.
(4)	To exclude the write-off of an intangible asset due to the expected termination of a distribution agreement in the United Kingdom.
(5)	To exclude the write-off of acquired in-process research and development related to the acquisition of Zeneus.
(6)	To exclude the write-off of deferred debt issuance costs related to the 2% senior subordinated convertible notes.
(7)	To reflect the tax effect of adjustments at the applicable tax rates and $95.5 million and $24.3 million of tax benefits due to the reassessment of the realizability of deferred tax assets in 2005 and 2004, respectively.

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Thousands, Except per Share)

(Unaudited)

	Year Ended December 31, 2005									Year Ended December 31, 2004
	GAAP			Adjustments			“Adjusted”			GAAP			Adjustments			“Adjusted”
REVENUES:
Sales	$	1,156,518					$	1,156,518		$	980,375					$	980,375
Other revenues	55,374						55,374			35,050						35,050
	1,211,892			$	—		1,211,892			1,015,425			$	—		1,015,425
COSTS AND EXPENSES:
Cost of sales	164,223						164,223			119,973						119,973
Research and development	354,826			(3,944		)(1)	350,882			273,972						273,972
Selling, general and administrative	443,861			(13,192		)(2)	430,669			339,477			4,214		(2)	343,691
Depreciation and amortization	84,305			(57,651		)(3)	26,654			52,798			(37,753		)(3)	15,045
Impairment charges	20,820			(20,820		)(4)	—			30,071			(30,071		)(4)	—
Acquired in-process research and development	366,815			(366,815		)(5)	—			185,700			(185,700		)(5)	—
	1,434,850			(462,422		)	972,428			1,001,991			(249,310		)	752,681
INCOME (LOSS) FROM OPERATIONS	(222,958		)	462,422			239,464			13,434			249,310			262,744
OTHER INCOME AND (EXPENSE):
Interest income	26,171						26,171			16,486						16,486
Interest expense	(25,235		)				(25,235		)	(22,186		)				(22,186		)
Debt exchange expense	—						—			(28,230		)	28,230		(9)	—
Write-off of deferred debt issuance costs	(27,109		)	27,109		(6)	—			—			—			—
Gain (charge) on early extinguishment of debt	2,085			(2,085		)(7)	—			(2,313		)	2,313		(7)	—
Other income (expense), net	1,928						1,928			(5,375		)				(5,375		)
	(22,160		)	25,024			2,864			(41,618		)	30,543			(11,075		)
INCOME (LOSS) BEFORE INCOME TAXES	(245,118		)	487,446			242,328			(28,184		)	279,853			251,669
INCOME TAX (EXPENSE) BENEFIT	70,164			(145,375		)(8)	(75,211		)	(45,629		)	(56,737		)(8)	(102,366		)
NET INCOME (LOSS)	$	(174,954	)	$	342,071		$	167,117		$	(73,813	)	$	223,116		$	149,303
BASIC INCOME (LOSS) PER COMMON SHARE	$	(3.01	)				$	2.88		$	(1.31	)				$	2.63
DILUTED INCOME (LOSS) PER COMMON SHARE	$	(3.01	)				$	2.76		$	(1.31	)				$	2.42
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING	58,051						58,051			56,489						56,489
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION	58,051						62,073			56,489						64,358

CEPHALON, INC. AND SUBSIDIARIES

Notes to Reconciliation of GAAP Net Income (Loss) to “Adjusted” Net Income

Years Ended December 31, 2005 and December 31, 2004

(1)	To exclude the write-off of an investment in a development stage company ($1.0 million) and the restructuring of certain research and development activities at Cephalon France ($2.9 million).
(2)	In 2005, to exclude charges relating to the termination of Salmedix’s facility lease ($2.6 million) and agreements executed with Teva and Ranbaxy related to the settlement of the PROVIGIL patent litigation ($10.6 million). In 2004, to exclude the gain resulting from the cancellation of postretirement health care benefits for current employees at Cephalon France.
(3)	To exclude the ongoing amortization of acquired intangible assets.
(4)	In 2005, to exclude the write-off of an intangible asset due to the expected termination of a distribution agreement in the United Kingdom. In 2004, to exclude the impairment charge for the write-off of an investment in MDS Proteomics, Inc.
(5)	In 2005, to exclude the write-off of acquired in-process research and development related to the acquisition of Salmedix ($130.1 million), VIVITROL product rights ($160.0 million), Zeneus ($71.2 million), and other ($5.5 million). In 2004, to exclude the write-off of acquired in-process research and development related to the acquisition of CIMA LABS INC.
(6)	To exclude the write-off of deferred debt issuance costs related to the 2% senior subordinated convertible notes.
(7)	In 2005, to exclude the gain on early extinguishment of debt related to the tender offer of $511.7 million of the 2.5% convertible subordinated notes due 2006. In 2004, to exclude the charge on early extinguishment of debt related to the repurchase of $10 million and $33 million of the 3.875% convertible subordinated notes in March and August 2004, respectively.
(8)	To reflect the tax effect of adjustments at the applicable tax rates and $46.0 million and $7.1 million of tax benefits due to the reassessment of the realizability of deferred tax assets in 2005 and 2004, respectively.
(9)	To exclude the expense related to the exchange of $78.3 million of the 2.5% convertible subordinated notes into common stock.

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED SALES DETAIL

(Amounts in Thousands)

(Unaudited)

	Three Months Ended												%
	December 31,												Increase
	2005						2004						(Decrease)
	United States		Europe		Total		United States		Europe		Total		United States		Europe		Total
Sales:
Provigil	$	137,028	$	11,239	$	148,267	$	130,167	$	10,208	$	140,375	5	%	10	%	6	%
Actiq	112,571		5,198		117,769		83,942		2,575		86,517		34	%	102	%	36	%
Gabitril	12,494		1,179		13,673		19,977		2,156		22,133		(37	)%	(45	)%	(38	)%
Other	13,376		29,845		43,221		8,046		24,329		32,375		66	%	23	%	34	%
	$	275,469	$	47,461	$	322,930	$	242,132	$	39,268	$	281,400	14	%	21	%	15	%
	Year Ended												%
	December 31,												Increase
	2005						2004						(Decrease)
	United States		Europe		Total		United States		Europe		Total		United States		Europe		Total
Sales:
Provigil	$	475,557	$	37,248	$	512,805	$	406,238	$	33,429	$	439,667	17	%	11	%	17	%
Actiq	394,676		17,102		411,778		337,072		7,925		344,997		17	%	116	%	19	%
Gabitril	66,517		5,741		72,258		87,349		6,815		94,164		(24	)%	(16	)%	(23	)%
Other	49,695		109,982		159,677		13,270		88,277		101,547		274	%	25	%	57	%
	$	986,445	$	170,073	$	1,156,518	$	843,929	$	136,446	$	980,375	17	%	25	%	18	%

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Data)

(Unaudited)

	December 31,			* December 31,
	2005			2004
CURRENT ASSETS:
Cash and cash equivalents	$	205,060		$	574,244
Investments	279,030			217,432
Receivables, net	199,086			208,225
Inventory, net	137,886			86,629
Deferred tax asset	202,573			47,118
Other current assets	40,339			39,915
Total current assets	1,063,974			1,173,563
PROPERTY AND EQUIPMENT, net	323,830			244,834
GOODWILL	471,051			372,534
INTANGIBLE ASSETS, net	742,874			449,402
DEBT ISSUANCE COSTS, net	13,172			25,401
DEFERRED TAX ASSET, net	243,488			163,620
OTHER ASSETS	18,813			22,549
	$	2,877,202		$	2,451,903
CURRENT LIABILITIES:
Current portion of long-term debt	$	933,160		$	5,114
Accounts payable	53,699			52,488
Accrued expenses	291,744			170,436
Total current liabilities	1,278,603			228,038
LONG-TERM DEBT	763,097			1,284,410
DEFERRED TAX LIABILITIES	168,699			94,100
OTHER LIABILITIES	54,632			15,311
Total liabilities	2,265,031			1,621,859
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value	584			580
Additional paid-in capital	1,166,166			1,172,499
Treasury stock, at cost	(17,125		)	(14,860		)
Accumulated deficit	(570,072		)	(395,118		)
Accumulated other comprehensive income	32,618			66,943
Total stockholders’ equity	612,171			830,044
	$	2,877,202		$	2,451,903

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

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

	Year Ended December 31,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(174,954	)	$	(73,813	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred income tax (benefit) expense	(79,825		)	40,081
Tax benefit from equity compensation	5,826			8,017
Debt exchange expense	—			28,230
Tax effect on conversion of convertible notes	—			(10,100		)
Depreciation and amortization	89,967			59,016
Amortization of debt issuance costs	34,410			8,275
Stock-based compensation expense	10,784			5,372
Non-cash (gain) charge on early extinguishment of debt	(4,549		)	2,313
Pension curtailment	—			(4,214		)
Loss on disposals of property and equipment	1,107			1,423
Impairment charges	20,820			30,071
Acquired in-process research and development	201,815			185,700
Other	531			—
Changes in operating assets and liabilities, net of effect from acquisitions:
Receivables	35,070			(105,523		)
Inventory	(44,167		)	(16,699		)
Other assets	8,894			(27,042		)
Accounts payable, accrued expenses and deferred revenues	91,955			47,864
Other liabilities	(11,953		)	(367		)
Net cash provided by operating activities	185,731			178,604
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(118,050		)	(50,244		)
Acquisition of CIMA, net of cash acquired	—			(482,521		)
Acquisition of Salmedix, net of cash acquired	(130,733		)	—
Acquisition of TRISENOX	(69,722		)	—
Acquisition of Zeneus, net of cash acquired	(365,786		)	—
Acquisition of intangible assets	(33,459		)	(45,771		)
Sales and (purchases) of investments, net	(62,730		)	(106,678		)
Net cash used for investing activities	(780,480		)	(685,214		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock options	11,460			12,051
Acquisition of treasury stock	(2,265		)	(1,168		)
Payments on and retirements of long-term debt	(504,113		)	(51,905		)
Net proceeds from issuance of convertible subordinated notes	891,949			—
Proceeds from sale of warrants	217,071			—
Purchase of convertible note hedge	(382,261		)	—
Net cash provided by (used for) financing activities	231,841			(41,022		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(6,276		)	6,177
NET DECREASE IN CASH AND CASH EQUIVALENTS	(369,184		)	(541,455		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	574,244			1,115,699
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	205,060		$	574,244

CEPHALON, INC. AND SUBSIDIARIES

Reconciliation of Projected GAAP Basic Income per Common Share

to Basic Adjusted Income Per Common Share Guidance

(Unaudited)

	Three Months						Twelve Months
	Ended						Ended
	March 31,						December 31,
	2006						2006
Projected GAAP basic income per common share	$	0.39	-	$	0.43		$	2.77	-	$	2.91
Amortization of current intangibles	$	0.32	-	$	0.32		$	1.27	-	$	1.27
Impact of Statement of Financial Accounting Standard No. 123R	$	0.08	-	$	0.10		$	0.30	-	$	0.40
“Share Based Payment” (“SFAS 123R”)
Tax effect of adjustments at the applicable tax rates	$	(0.14	) -	$	(0.15	)	$	(0.54	) -	$	(0.58	)
Basic adjusted income per common share guidance	$	0.65	-	$	0.70		$	3.80	-	$	4.00

The Company’s guidance is being issued based on the following assumptions:

• SPARLON^™ and NUVIGIL^Ò are approved and launched in the second quarter of 2006;

• PROVIGIL sales for the entire year 2006;

• Fentanyl effervescent buccal tablet (FEBT) is approved and launched late in 2006;

• Barr Laboratories enters with a generic version of ACTIQ late in 2006;

• Adjusted effective tax rate of 33 - 35 percent for 2006;

• Weighted average number of common shares outstanding of 58.1 million shares; and

• For SFAS 123R calculation, that the assumed tax rate is 36.7 percent and other key assumptions remain constant since adoption, and that any stock option grants that may be made during 2006 are excluded.