10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to

Commission File Number 000-19119

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)
41 Moores Road, Frazer, Pennsylvania	19355
(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer ý  Accelerated filer o  Non-accelerated filer o

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

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 May 1, 2006
Common Stock, par value $.01	60,739,053 Shares

TABLE OF CONTENTS

Cautionary Note Regarding Forward-Looking Statements				ii
PART I – FINANCIAL INFORMATION
	Item 1.	Consolidated Financial Statements
			Consolidated Balance Sheets - March 31, 2006 and December 31, 2005	1
			Consolidated Statements of Operations - Three months ended March 31, 2006 and 2005	2
			Consolidated Statements of Stockholders’ Equity - March 31, 2006 and December 31, 2005	3
			Consolidated Statements of Cash Flows - Three months ended March 31, 2006 and 2005	4
			Notes to Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk		29
	Item 4.	Controls and Procedures		30
PART II – OTHER INFORMATION
	Item 1.	Legal Proceedings		31
	Item 1A.	Risk Factors		31
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		42
	Item 5.	Other Information		43
	Item 6.	Exhibits		44
SIGNATURES				45

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 and for our near-term product candidates, if approved;

•any potential expansion of the authorized uses of our existing products or approval of our product candidates, including SPARLONÔ (modafinil) tablets [C-IV];

•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 unpredictability 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 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 to sell our product candidates, particularly with respect to SPARLON, and to launch such products successfully;

•scientific or regulatory setbacks with respect to research programs, clinical trials, manufacturing activities and/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;

•the loss of key management or scientific personnel;

•the activities of our competitors in the industry, including the expected generic competition to ACTIQ;

•regulatory setbacks with respect to our recent settlements of the PROVIGIL and ACTIQ patent litigations;

•unanticipated conversion of our convertible notes by our note holders;

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

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

ii

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 above included in Part II, Item 1A of this report. This discussion is permitted by the Private Securities Litigation Reform Act of 1995.

iii

PART I –FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	March 31,			December 31,
	2006			2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	289,087		$	205,060
Investments	252,384			279,030
Receivables, net	225,352			199,086
Inventory, net	150,471			137,886
Deferred tax assets, net	186,835			187,436
Other current assets	50,519			40,339
Total current assets	1,154,648			1,048,837
PROPERTY AND EQUIPMENT, net	346,744			323,830
GOODWILL	464,681			471,051
INTANGIBLE ASSETS, net	729,695			742,874
DEBT ISSUANCE COSTS, net	49			13,172
DEFERRED TAX ASSETS, net	221,179			200,629
OTHER ASSETS	18,345			18,813
	$	2,935,341		$	2,819,206
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	1,683,614		$	933,160
Accounts payable	87,155			53,699
Accrued expenses	231,252			291,744
Total current liabilities	2,002,021			1,278,603
LONG-TERM DEBT	12,331			763,097
DEFERRED TAX LIABILITIES, net	108,876			110,703
OTHER LIABILITIES	55,242			54,632
Total liabilities	2,178,470			2,207,035
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, 60,735,557 and 58,445,405 shares issued, and 60,357,384 and 58,072,562 shares outstanding	607			584
Additional paid-in capital	1,305,420			1,166,166
Treasury stock, at cost, 378,173 and 372,843 shares outstanding	(17,532		)	(17,125		)
Accumulated deficit	(566,505		)	(570,072		)
Accumulated other comprehensive income	34,881			32,618
Total stockholders’ equity	756,871			612,171
	$	2,935,341		$	2,819,206

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

1

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended
	March 31,
	2006			2005
REVENUES:
Sales	$	345,587		$	266,609
Other revenues	11,356			13,372
	356,943			279,981
COSTS AND EXPENSES:
Cost of sales	58,893			41,114
Research and development	104,976			80,766
Selling, general and administrative	148,761			98,229
Depreciation and amortization	26,521			18,650
	339,151			238,759
INCOME FROM OPERATIONS	17,792			41,222
OTHER INCOME (EXPENSE):
Interest income	5,042			4,859
Interest expense	(4,536		)	(5,551		)
Write-off of deferred debt issuance costs	(13,105		)	—
Other income (expense), net	(852		)	1,335
	(13,451		)	643
INCOME BEFORE INCOME TAXES	4,341			41,865
INCOME TAX EXPENSE	(774		)	(15,203		)
NET INCOME	$	3,567		$	26,662
BASIC INCOME PER COMMON SHARE	$	0.06		$	0.46
DILUTED INCOME PER COMMON SHARE	$	0.05		$	0.44
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING	59,734			57,994
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING- ASSUMING DILUTION	73,508			65,065

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

2

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

																				Accumulated
										Additional										Other
	Comprehensive						Common Stock			Paid-in			Treasury Stock				Accumulated			Comprehensive
	Income (Loss)			Total			Shares	Amount		Capital			Shares	Amount			Deficit			Income
BALANCE, JANUARY 1, 2005				830,044			57,973,050	580		1,172,499			332,784	(14,860		)	(395,118		)	66,943
Net loss	$	(174,954	)	(174,954		)											(174,954		)
Foreign currency translation loss	(33,317		)
Unrealized investment losses	(1,008		)
Other comprehensive loss	(34,325		)	(34,325		)														(34,325		)
Comprehensive loss	$	(209,279	)
Sale of warrants associated with
convertible subordinated notes				217,071						217,071
Purchase of convertible note
hedge associated with convertible
subordinated notes				(382,261		)				(382,261		)
Tax benefit from the purchase of
convertible note hedge				133,791						133,791
Stock options exercised				11,460			346,730	3		11,457
Tax benefit from the exercise of
stock options, net of adjustment				2,826						2,826
Restricted stock award plan				10,784			125,625	1		10,783
Treasury stock acquired				(2,265		)							40,059	(2,265		)
BALANCE, DECEMBER 31, 2005				612,171			58,445,405	584		1,166,166			372,843	(17,125		)	(570,072		)	32,618
Net income	$	3,567		3,567													3,567
Foreign currency translation gain	1,869
Unrealized investment gains	394
Other comprehensive gain	2,263			2,263																2,263
Comprehensive income	$	5,830
Issuance of common stock upon conversion of convertible notes				50			841			50
Stock options exercised				107,738			2,289,311	23		107,715
Tax benefit from equity compensation				21,633						21,633
Stock-based compensation expense				9,856						9,856
Treasury stock acquired				(407		)							5,330	(407		)
BALANCE, MARCH 31, 2006				$	756,871		60,735,557	$	607	$	1,305,420		378,173	$	(17,532	)	$	(566,505	)	$	34,881

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

3

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three months ended
	March 31,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,567		$	26,662
Adjustments to reconcile net income to net cash (used for) provided by operating activities:
Deferred income tax (benefit) expense	(745		)	14,677
Tax benefit from stock-based compensation	21,633			652
Depreciation and amortization	29,238			26,586
Amortization of debt issuance costs	129			2,138
Write-off of debt issuance costs associated with Zero Coupon convertible subordinated notes	13,105			—
Stock-based compensation expense	9,856			2,543
Changes in operating assets and liabilities, net of effect from acquisitions:
Receivables	(25,868		)	60
Inventory	(12,020		)	(11,164		)
Other assets	(27,677		)	(23,650		)
Accounts payable, accrued expenses and deferred revenues	(21,583		)	6,486
Other liabilities	(1,767		)	1,172
Net cash (used for) provided by operating activities	(12,132		)	46,162
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(31,759		)	(24,164		)
Acquisition of intangible assets	(5,000		)	(384		)
Sales and maturities of investments	27,040			14,998
Purchases of investments	—			(18,922		)
Net cash used for investing activities	(9,719		)	(28,472		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock options	107,738			1,341
Acquisition of treasury stock	(407		)	—
Payments on and retirements of long-term debt	(922		)	119
Net cash provided by financing activities	106,409			1,460
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(531		)	(3,132		)
NET INCREASE IN CASH AND CASH EQUIVALENTS	84,027			16,018
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	205,060			574,244
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	289,087		$	590,262

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

4

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

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, 2005 and 2004 and for each of the three years in the period ended December 31, 2005. 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. ACQUISITIONS

VIVITROL LICENSE AND COLLABORATION

In June 2005, we entered into a license and collaboration agreement with Alkermes, Inc. to develop and commercialize VIVITROLÔ (naltrexone for extended-release injectable suspension) in the United States. In April 2006, the U.S. Food and Drug Administration (“FDA”) approved VIVITROL for the treatment of alcohol dependent patients who are able to abstain from drinking in an outpatient setting and are not actively drinking when initiating treatment.

Concurrent with the execution of this agreement, we entered into a supply agreement under which Alkermes will provide to us finished commercial supplies of VIVITROL. We made an initial payment of $160 million cash to Alkermes upon execution of the agreement, all of which was recorded as an IPR&D charge as the product had not yet received FDA approval. In April 2006, we made an additional cash payment of $110 million to Alkermes following FDA approval of the product. This payment will be capitalized and amortized over the life of the agreement. Alkermes also could receive up to an additional $220 million in milestone payments from us upon attainment of certain agreed-upon sales levels of VIVITROL.

Cephalon and Alkermes have formed a joint steering committee that shares responsibility for the commercialization, development and supply strategy for VIVITROL. We have primary responsibility for the commercialization of VIVITROL, while Alkermes is responsible for manufacturing the product. Until December 31, 2007, Alkermes is responsible for any cumulative losses up to $120 million and we are responsible for any cumulative losses in excess of $120 million. Pre-tax profit, as adjusted for certain items, and losses incurred after December 31, 2007 will be split equally between the parties. We will recognize all product sales following commercial launch.

ZENEUS HOLDINGS LIMITED

On December 22, 2005, we completed our acquisition of all of the issued share capital of Zeneus Holdings Limited (“Zeneus”). Total consideration paid in connection with the acquisition was $365.8 million. Total purchase price after transaction costs and other working capital adjustments was $385.6 million including $19.8 million of cash acquired. Zeneus was a European specialty pharmaceutical company, headquartered in the United Kingdom, with three key products that are currently marketed in key European countries: Myocet, used in the treatment of metastatic breast cancer; Abelcet, used as an antifungal treatment; and Targretin, used in the treatment for cutaneous T-cell lymphoma patients. Key customer targets are oncologists, hematologists and dermatologists.

The total purchase price of $385.6 million consists of $375.5 million for all the outstanding shares of Zeneus and $10.1 million paid for transaction costs and the settlement of other seller related liabilities. The acquisition was funded from our existing cash and short-term investments.

5

The purchase price allocation is still being finalized. During the first quarter, there were no significant adjustments to the purchase price allocation. During the second quarter, we expect to finalize the Zeneus integration plan. As a result of the finalization of the integration plan, we will likely record a reserve for employee termination benefits, lease termination costs and relocation costs as an adjustment to the purchase price allocation. These costs are not expected to have a significant effect on our cash flows. We expect to finalize the allocation by the end of the second quarter of 2006.

The following unaudited pro forma information shows the results of our operations for the three months ended March 31, 2005 as though the acquisition had occurred as of the beginning of the period presented:

	For the three
	months ended
	March 31, 2005
Total revenues	$	301,211
Net income	$	25,301
Basic and diluted net income per common share:
Basic income per common share	$	0.44
Diluted income per common share	$	0.42

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

Equity Compensation Plans

We have established equity compensation plans for our employees, directors and certain other individuals. All grants and terms are authorized by the Stock Option and Compensation Committee of our Board of Directors. We may grant non-qualified stock options under the Cephalon, Inc. 2004 Equity Compensation Plan (the “2004 Plan”) and the Cephalon, Inc. 2000 Equity Compensation Plan (the “2000 Plan”), and also may grant incentive stock options and restricted stock awards under the 2004 Plan. Options and restricted stock awards generally become exercisable or vest ratably over four years from the grant date, and options must be exercised within ten years of the grant date. There are currently 9.7 million and 4.3 million shares authorized for issuance under the 2004 Plan and the 2000 Plan, respectively. At March 31, 2006, the shares available for future stock option grants and restricted stock grants were 345,144 and 7,409, respectively.

Prior to the January 1, 2006 adoption of the Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share Based Payment” (“SFAS 123(R)”), we accounted for stock option plans and restricted stock award plans in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been recognized for stock options since all options granted had an exercise price equal to the market value of the underlying stock on the grant date. Restricted stock awards have been recorded as compensation cost over the requisite vesting periods based on the market value on the date of grant. As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation (“SFAS 123”), stock-based compensation was presented as a pro forma disclosure in the notes to the consolidated financial statements.

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), using the modified-prospective transition method. Under this transition method, stock-based compensation is recognized in the consolidated financial statements for stock granted. Compensation expense recognized in the financial statements includes estimated expense for stock options granted after December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R), and the estimated expense for the options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. SFAS 123(R) also requires us to estimate forfeitures in calculating the expense relating to stock-based compensation as opposed to only recognizing forfeitures and the corresponding reduction in expense as they occur. We recorded an adjustment for this cumulative effect for restricted stock awards and recognized a reduction in stock-based compensation in the first quarter of 2006 consolidated statements of operations allocated evenly between research and development and selling, general and administrative expenses based on the employees’ compensation allocation between these line items. The adjustment was not significant to the consolidated statement of operations.

Total stock-based compensation expense recognized in the consolidated statement of operations for the three months ended March 31, 2006 was $9.9 million before income taxes or $6.3 million after-tax which had an impact of $0.16 basic and diluted income per common share. Stock-based compensation expense consisted of stock option and restricted stock expense of $7.6 million and $2.3 million, respectively. This expense was allocated evenly between research and development and selling, general and administrative expenses based on the employees’ compensation allocation between these line items. Compensation expense is recognized in the period the employee performs the service in accordance with FASB Interpretation Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (FIN 28). The impact of capitalizing stock-based compensation was not significant at March 31, 2006.

Prior to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating activities in the consolidated statement of cash flows. SFAS 123(R) requires the cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing activities in the consolidated statement of cash flows. We realized a slight tax shortfall for the three months ended March 31, 2006. As there were no excess tax deductions, there was no impact on cash flows for the three months ended March 31, 2006.

Based on our historical experience of option pre-vesting forfeitures, we have assumed an annualized, expected forfeiture rate of 12% for all new options granted. Under the provisions of SFAS 123(R), we will record additional expense if the actual pre-vesting forfeiture rate is lower than we estimated and will record a recovery of prior expense if the actual forfeitures are higher than its estimate. As of January 1, 2006, the memo cumulative after-tax effect of this change in accounting for forfeitures for option awards, if this adjustment were recorded, would have been to increase stock-based compensation by $0.6 million.

Our expected term of options granted was derived from the average midpoint between vesting and the contractual term, as described in SEC’s Staff Accounting Bulletin No. 107, “Share-Based Payment.”  For 2006, expected volatilities are

6

based on a combination of implied volatilities from traded options on our stock and the historical volatility of our stock for the related vesting period. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. We have not paid dividends in the past and do not plan to pay any dividends in the foreseeable future.

The following table illustrates the effect on pro forma net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123 for the three months ended March 31, 2005:

	For the three months ended March 31, 2005
Net income, as reported	$	26,662
Add: Stock-based compensation expense included in net income, net of related tax effects	1,620
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(6,880		)
Pro forma net income	$	21,402
Earnings per share:
Basic income per share, as reported	$	0.46
Basic income per share, pro forma	$	0.37
Diluted income per share, as reported	$	0.44
Diluted income per share, pro forma	$	0.36

The fair value of each option grant at the grant date is calculated using the Black-Scholes option-pricing model with the following weighted average assumptions for the three months ended March 31, 2006 and 2005:

	March 31, 2006			March 31, 2005
				(Pro forma)
Risk free interest rate	4.48		%	3.99		%
Expected term (years)	6.25			6.5
Expected volatility	54.20		%	57.00		%
Expected dividend yield	—		%	—		%
Estimated fair value per option granted	$	40.31		$	28.81

Stock Options

The following tables summarize the aggregate option activity under the plans for the three months ended March 31, 2006:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value
Outstanding, January 1, 2006	9,955,904		$	50.84
Granted	15,100		70.89
Exercised	(2,289,311	)	46.96
Forfeited	(38,775	)	49.84
Expired	(24,581	)	44.65
Outstanding, March 31, 2006	7,618,337		$	52.03	6.9	$	78,750
Vested options at end of period	4,466,463		$	53.83	3.4	$	44,639

7

		Options Outstanding				Vested Options
Range of Exercise Price		Shares	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$	6.00-$14.99	282,600	2.3	$	9.02	282,600	$	9.02
$	15.00-$29.99	172,543	3.3	26.05		172,543	26.05
$	30.00-$50.99	2,588,194	7.7	47.61		866,682	47.34
$	51.00-$59.99	3,026,325	6.7	51.97		1,611,063	52.00
$	60.00-$71.96	1,548,675	5.7	70.66		1,533,575	70.66
		7,618,337	6.9	52.03		4,466,463	53.83

As of March 31, 2006, there was approximately $41.4 million of unrecognized compensation cost related to outstanding options which is recognized over a weighted-average period of 1.4 years. During the first quarter of 2006 and 2005, we received net proceeds of $107.7 million and $1.3 million, respectively, from the exercise of stock options.

The intrinsic value of stock options exercised during the first quarter of 2006 and 2005 was $64.3 million and $2.0 million, respectively. The estimated fair value of shares that vested during the first quarter of 2006 and 2005 was $1.2 million, respectively.

Restricted Stock

The following table summarizes restricted stock award activity for the three months ended March 31, 2006:

	2006			Weighted Average Fair Value
Nonvested, January 1, 2006	624,575			$	49.52
Granted	5,000			70.50
Vested	—			—
Forfeited	(2,450		)	49.90
Nonvested, March 31, 2006	627,125			$	49.13
Intrinsic Value as of March 31, 2006	$	37,784

As of March 31, 2006, there was approximately $19.7 million of total unrecognized compensation cost related to nonvested restricted stock awards. Such cost is expected to be recognized over a weighted-average period of 1.6 years. Total compensation for restricted stock was $2.3 million and $2.5 million, respectively, for the three months ended March 31, 2006 and 2005.

There were no restricted stock awards shares released from restriction during the first quarter of 2006 and 2005.

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4. INVENTORY, NET

Inventory consisted of the following:

	March 31,		December 31,
	2006		2005
Raw materials	$	57,682	$	67,164
Work-in-process	39,418		28,430
Finished goods	53,371		42,292
	$	150,471	$	137,886

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. At March 31, 2006, we had $66.3 million, $8.6 million and $0.6 million of capitalized inventory costs related to NUVIGIL, SPARLON and other pre-launch products, respectively. In the first quarter of 2006, we recorded a reserve of $1.7 million for capitalized inventory costs related to certain batches of SPARLON inventory as we do not expect that these batches will be sold prior to their expiration date. At December 31, 2005, we had $44.6 million, $5.9 million and $0.6 million of capitalized inventory costs related to NUVIGIL, SPARLON and other pre-launch products, respectively.

5. INTANGIBLE ASSETS, NET

Other intangible assets consisted of the following:

		March 31, 2006						December 31, 2005
	Estimated  Useful  Lives	Gross  Carrying  Amount		Accumulated Amortization		Net  Carrying  Amount		Gross  Carrying  Amount		Accumulated Amortization		Net  Carrying Amount
Developed technology acquired from Group Lafon	10-15 years	$	132,000	$	41,933	$	90,067	$	132,000	$	39,467	$	92,533
Trademarks/tradenames acquired from Group Lafon	15 years	16,000		4,533		11,467		16,000		4,267		11,733
GABITRIL product rights	9-15 years	115,817		40,042		75,775		115,371		38,053		77,318
ACTIQ marketing rights	10 years	75,465		33,271		42,194		75,465		31,359		44,106
Modafinil marketing rights	10 years	9,056		3,159		5,897		8,937		2,896		6,041
DuraSolv® technology	14 years	70,000		7,913		62,087		70,000		6,696		63,304
OraSolv® technology	6 years	32,700		8,484		24,216		32,700		7,210		25,490
ORAVESCENT® technology	15 years	10,400		1,099		9,301		10,400		930		9,470
NAXY® and MONO-NAXY® product rights	5 years	39,018		9,847		29,171		38,503		7,780		30,723
TRISENOX product rights	8-13 years	112,966		6,743		106,223		112,942		4,494		108,448
Trademarks/tradenames acquired from Zeneus	9-20 years	236,300		3,348		232,952		236,300		—		236,300
Other product rights	5-14 years	49,953		9,608		40,345		50,125		12,717		37,408
		$	899,675	$	169,980	$	729,695	$	898,743	$	155,869	$	742,874

Other intangible assets are amortized over their estimated useful economic life using the straight line method. Amortization expense was $19.0 million and $13.3 million for the three months ended March 31, 2006 and 2005, respectively.

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6. LONG-TERM DEBT

Long-term debt consisted of the following:

	March 31,			December 31,
	2006			2005
2.0% convertible senior subordinated notes due June 1, 2015	$	920,000		$	920,000
2.5% convertible subordinated notes due December 2006	10,007			10,007
Zero Coupon convertible subordinated notes first putable June 2008 (Old)	265			313
Zero Coupon convertible subordinated notes first putable June 2010 (Old)	97			99
Zero Coupon convertible subordinated notes first putable June 2008 (New)	375,026			374,958
Zero Coupon convertible subordinated notes first putable June 2010 (New)	375,113			375,070
Mortgage and building improvement loans	8,793			8,975
Capital lease obligations	3,656			3,658
Other	2,988			3,177
Total debt	1,695,945			1,696,257
Less current portion	(1,683,614		)	(933,160		)
Total long-term debt	$	12,331		$	763,097

In January 2006, our 2008 and 2010 Zero Coupon Notes (collectively, the “Zero Coupon Notes”) became convertible and the related deferred debt issuance costs of $13.1 million were written off. Our 2.0% convertible senior subordinated notes due June 1, 2015 (the “2.0% Notes”) and Zero Coupon Notes are considered to be current liabilities and are presented in current portion of long-term debt in our March 31, 2006 consolidated balance sheet because the fair market value of our common stock as of the balance sheet date exceeded the conversion price set forth in these notes. The classification of this debt will continue to be current as long as our stock price is above the conversion price at the balance sheet date.

In the event that a significant conversion did occur, we believe that we have the ability to fund the payment of principal amounts due through a combination of utilizing our existing cash on hand, raising money in the capital markets or selling our note hedge instruments for cash.

7. LEGAL PROCEEDINGS

In March 2003, we filed a patent infringement lawsuit in the U.S. District Court in New Jersey against four companies—Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals, Inc., Ranbaxy Laboratories Limited and Barr Laboratories, Inc.—based upon the ANDAs filed by each of these firms with the FDA seeking approval to market a generic form of modafinil. The lawsuit claimed infringement of our U.S. Patent No. RE37,516 (the “‘516 Patent”) which covers the pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL and which expires on April 6, 2015. We believe that these four companies were the first to file ANDAs with Paragraph IV certifications and thus are eligible for the 180-day exclusivity provided by the provisions of the Federal Food, Drug and Cosmetic Act.

In late 2005 and early 2006, we announced that we had entered into settlement agreements with each of these four defendants. As part of these separate settlements, we agreed to grant to each of Teva, Mylan, Ranbaxy and Barr a non-exclusive royalty-bearing right to market and sell a generic version of PROVIGIL in the United States. These licenses will become effective in April 2012. An earlier entry may occur based upon the entry of another generic version of PROVIGIL. Each of these settlements has been filed with both the FTC and the Antitrust Division of the DOJ as required by the Medicare Modernization Act. The FTC has requested from us, and we have provided, certain information in connection with its review of the settlements. The FTC, the DOJ, or a private party could challenge in an administrative or judicial proceeding any or all of the settlements if they believe that the agreements violate the antitrust laws. For example, we are aware of a number of civil antitrust class action complaints recently filed by private parties in U.S. District Court for the Eastern District of Pennsylvania, each naming Cephalon, Barr, Mylan, Teva and Ranbaxy as co-defendants and claiming, among other things, that the patent litigation settlements concerning PROVIGIL violate the antitrust laws of the United States.  The complaints seek to certify two separate, purported classes of plaintiffs: direct purchasers of PROVIGIL, and consumers and indirect purchasers of PROVIGIL.  The plaintiffs are seeking monetary damages and/or equitable relief.  We have reviewed copies of the cases as filed and believe these actions are without merit.  While we intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

As a result of the settlement agreements, we received licenses to certain modafinil-related intellectual property developed by each party and in exchange for these licenses, we agreed to make payments to Barr, Ranbaxy

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and Teva collectively totaling up to $136.0 million over the next several years, consisting of upfront payments, milestones and royalties on net sales of our modafinil products. In order to maintain an adequate supply of the active drug substance modafinil, we entered into agreements with three modafinil suppliers whereby we will purchase an annual minimum amount of modafinil over a six year period beginning in 2006, with the aggregate payments over that period totaling approximately $82.6 million. The impact on the first quarter of 2006 consolidated statements of operations was a $4.0 million selling, general and administrative charge for these agreements.

In early 2005, we also filed a patent infringement lawsuit in the U.S. District Court in New Jersey against Carlsbad Technology, Inc. based upon the Paragraph IV ANDA filed related to modafinil that Carlsbad filed with the FDA. Carlsbad has asserted counterclaims for non-infringement of the ‘516 Patent and invalidity of the ‘516 Patent. Carlsbad also has asserted a counterclaim for non-infringement of our U.S. Patent No. 4,927,855 (which we have not asserted against Carlsbad). We have moved to dismiss all of Carlsbad’s counterclaims; Carlsbad has opposed the motion, and a decision is pending. Discovery in this action has only recently commenced. This ongoing litigation with Carlsbad is unaffected by each of the settlement agreements we have signed with Teva, Mylan, Ranbaxy and Barr.

In November 2005 and March 2006, we received notice that Caraco Pharmaceutical Laboratories, Ltd. and Apotex, Inc., respectively, also filed Paragraph IV ANDAs with the FDA in which each firm is seeking to market a generic form of PROVIGIL. We have not filed a patent infringement lawsuit against either Caraco or Apotex to date.

In February 2006, we also announced that we had agreed to settle with Barr our pending patent infringement dispute in the United States related to Barr’s ANDA filed with the FDA seeking to sell a generic version of ACTIQ. Under the settlement, we will grant Barr an exclusive royalty bearing right to market and sell a generic version of ACTIQ in the United States, effective on December 6, 2006. Barr will pay specified royalties on net profits of a generic ACTIQ product for the period December 6, 2006 through February 3, 2007, subject to certain limitations. The patents covering the current formulation of the product are set to expire as early as September 2006. If we are successful in our ongoing efforts to complete a clinical study of ACTIQ in pediatric patients prior to September 5, 2006, the FDA could grant us six months of exclusivity beyond the September 5, 2006 patent expiration. While enrollment to date in the study has been slow, we believe that our submission to the FDA in early September should be sufficient for the FDA to grant us pediatric exclusivity for ACTIQ. Under the license and supply agreement we entered into with Barr in July 2004, we could face generic competition from Barr prior to December 6, 2006 if we receive FDA approval of FEBT before this date or if we have not received a pediatric extension of exclusivity for ACTIQ. The settlement with Barr related to ACTIQ has been filed with both the FTC and the Antitrust Division of the DOJ as required by the Medicare Modernization Act. The FTC has requested from us, and we have provided, certain information in connection with its review of this settlement. The FTC, the DOJ, or a private party could challenge in an administrative or judicial proceeding the settlement with Barr if they believe that the agreement violates the antitrust laws. If the settlement is challenged, there is no assurance that we could successfully defend against such challenge and, in that case, we could be subject to, among other things, damages, fines and possible invalidation of the settlement agreement.

In September 2004, we announced that we had received subpoenas from the U.S. Attorney’s Office in Philadelphia with respect to PROVIGIL, ACTIQ and GABITRIL. This investigation is ongoing and appears to be focused on our sales and promotional practices. We are cooperating with the investigation and are providing documents to the U.S. Attorney’s Office. In addition, we have engaged in ongoing discussions with the Attorney General in Pennsylvania regarding media reports of instances of abuse and diversion of ACTIQ. We have had similar discussions with the Office of the Connecticut Attorney General; 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, 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.

8. COMPREHENSIVE INCOME

Our comprehensive income includes net income, unrealized gains and (losses) from foreign currency translation adjustments and unrealized investment gains (losses). Our total comprehensive income is as follows:

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	Three months ended  March 31,
	2006		2005
Net income	$	3,567	$	26,662
Foreign currency translation gain (loss)	1,869		(14,118		)
Unrealized investment gains (losses)	394		(1,583		)
Other comprehensive gain (loss)	2,263		(15,701		)
Comprehensive income	$	5,830	$	10,961

9. 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 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, restricted stock awards, the Zero Coupon Convertible Notes issued in December 2004 (the “New Zero Coupon Notes”), the 2.0% Notes and the warrants are measured using the treasury stock method. The dilutive effect of our other convertible notes, including the remaining outstanding portions of the 2.5% Notes and the Zero Coupon Convertible Notes issued in June 2003 (the “Old Zero Coupon Notes”), are measured using the “if-converted” method. Common stock equivalents are not included in periods where there is a loss, as they are anti-dilutive.

The 2.0% Notes and New Zero Coupon Notes each are considered to be instrument C securities as defined by EITF 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion”; therefore, these notes are included in the dilutive earnings per share calculation using the treasury stock method. Under the treasury stock method, we must calculate the number of shares issuable under the terms of these notes based on the average market price of the stock during the period, and include that number in the total diluted shares figure for the period. Since the average share price of our stock during the first quarter of 2006 exceeded the conversion price of $46.70 for the 2.0% Notes and $56.50 and $59.50 for the New Zero Coupon Notes, the impact of these notes during the period was an additional 7.1 million and 2.7 million of incremental shares, respectively, included to calculate diluted EPS.

We have entered into convertible note hedge and warrant agreements that, in combination, have the economic effect of reducing the dilutive impact of the 2.0% Notes and the New Zero Coupon Notes by increasing the effective conversion price for these notes, from our perspective, to $67.92 and $72.08, respectively. SFAS No. 128, however, requires us to analyze separately the impact of the convertible note hedge and warrant agreements on diluted EPS. As a result, the purchases of the convertible note hedges are excluded because their impact will always be anti-dilutive. SFAS No. 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 December 31, 2005 had been $65.00, $75.00, $85.00 or $95.00, the shares from the warrants to be included in diluted EPS would have been zero, 2.4 million, 5.9 million and 8.7 million shares, respectively. The total number of shares that could potentially be included under the warrants is 32.6 million. Since the average share price of our stock during the first quarter of 2006 exceeded the effected conversion prices of the 2.0% Notes and New Zero Coupon Notes, the impact of the warrants during the period was the inclusion of an additional 1.4 million and 0.2 million of incremental shares, respectively, to calculate diluted EPS.

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

	Three months ended
	March 31,
	2006		2005
Basic income per common share computation:
Numerator:
Net income used for basic income per common share	$	3,567	$	26,662
Denominator:
Weighted average shares used for basic income per common share	59,734		57,994
Basic income per common share	$	0.06	$	0.46
Diluted income per common share computation:
Numerator:
Net income used for basic income per common share	$	3,567	$	26,662
Interest on convertible notes (net of tax) per common share	—		2,189
Net income used for diluted income per common share	$	3,567	$	28,851
Denominator:
Weighted average shares used for basic income per common share	59,734		57,994
Effect of dilutive securities:
Convertible subordinated notes	11,319		6,449
Employee stock options and restricted stock awards	2,455		622
Weighted average shares used for diluted income per common share	73,508		65,065
Diluted income per common share	$	0.05	$	0.44

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

	Three months ended
	March 31,
	2006	2005
Weighted average shares excluded:
Employee stock options	15	5,328
Convertible subordinated notes	31,221	12,940
	31,236	18,268

10. SEGMENT AND SUBSIDIARY INFORMATION

Revenue and pre-tax income (loss) for the three months ended March 31, 2006 and 2005, and long-lived assets as of March 31, 2006 and December 31, 2005 are provided below:

Revenues for the three months ended March 31:

	2006									2005
	United  States			Europe			Total			United  States			Europe			Total
PROVIGIL sales	$	139,551		$	9,022		$	148,573		$	92,149		$	7,981		$	100,130
ACTIQ sales	112,334			5,168			117,502			98,868			3,057			101,925
GABITRIL sales	11,356			1,416			12,772			24,701			1,689			26,390
Other sales	15,070			51,670			66,740			9,194			28,970			38,164
Other revenues	9,779			1,577			11,356			11,565			1,807			13,372
Total External Revenues	288,090			68,853			356,943			236,477			43,504			279,981
Inter-Segment Revenues	3,444			24,783			28,227			1,475			18,743			20,218
Elimination of Inter-Segment Revenues	(3,444		)	(24,783		)	(28,227		)	(1,475		)	(18,743		)	(20,218		)
Total Revenues	$	288,090		$	68,853		$	356,943		$	236,477		$	43,504		$	279,981

Pre-tax income (loss) for the three months ended March 31:

	2006			2005
United States	$	14,777		$	37,932
Europe	(10,436		)	3,933
Total	$	4,341		$	41,865

	March 31,  2006		December 31,  2005
Long-lived assets:
United States	$	1,110,561	$	1,084,619
Europe	670,132		685,750
Total	$	1,780,693	$	1,770,369

We perform our annual test of impairment of goodwill as of July 1. We allocate goodwill to each of our reporting units based on their relative fair value. Accordingly, $268.8 million of goodwill was allocated to our United States segment and $195.9 million was allocated to our Europe segment at March 31, 2006.

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11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

At Cephalon France, we have a defined benefit pension plan for current employees and a postretirement benefit plan for employees who retired prior to 2003. 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						Other Benefits
	For the three months						For the three months
	ended March 31,						ended March 31,
	2006			2005			2006			2005
Service cost	$	133		$	133		$	10		$	9
Interest cost	67			84			13			15
Recognized actuarial (gain) loss	(1		)	(68		)	4			(9		)
Amortization of prior improvements	—			—			(6		)	—
Change in benefit obligation	$	199		$	149		$	21		$	15

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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, 2005.

EXECUTIVE SUMMARY

Cephalon is an international biopharmaceutical company dedicated to the discovery, development and marketing of innovative products in four core therapeutic areas: central nervous system (CNS) disorders, pain, cancer and addiction. In addition to conducting an active research and development program in these areas, we market four products in the United States and numerous products in various countries throughout Europe.

Our three most important products, PROVIGIL, ACTIQ and GABITRIL, comprised approximately 81% of our worldwide net sales for the three months ended March 31, 2006, of which approximately 94% was in the U.S. market. Consistent with our core therapeutic areas, we have aligned our U.S. field sales and sales management teams by area, with approximately 440 persons focused on CNS, 115 persons focused on pain, 30 persons focused on cancer and 135 persons focused on addiction. In Europe, we have a sales and marketing organization numbering approximately 360 persons that supports our presence in 18 European countries, including France, the United Kingdom, Germany, Italy and Spain.

On April 13, 2006, the FDA approved VIVITROL for the treatment of alcohol dependence. VIVITROL is indicated for alcohol dependent patients who are able to abstain from alcohol in an outpatient setting and are not actively drinking when initiating treatment. Treatment with VIVITROL should be used in combination with psychosocial support, such as counseling or group therapy. Under the license and collaboration agreement we signed with Alkermes in June 2005, Alkermes is responsible for manufacturing commercial supplies of VIVITROL and we have primary responsibility for the marketing and sale of the product. Assuming adequate supply of material from Alkermes, we expect to be in a position to launch VIVITROL to the market in June 2006. As a result of the FDA’s approval, we paid Alkermes a $110 million milestone payment in April 2006 as required by our agreement.

We are seeking to attain FDA approval to market four near-term product candidates. The following chart summarizes our progress with respect to these product opportunities, as well as our current expectations with respect to the timing of regulatory filings and possible launch dates, assuming FDA approval:

Product Candidate	Anticipated Indication	Anticipated Filing Date	Target Launch Date	Status
SPARLONÔ (modafinil)*	ADHD in children and adolescents	Filed sNDA 4Q 2004	2nd Half 2006	Current FDA action date: August 22, 2006; See additional discussion below
NUVIGILÔ (armodafinil)	Excessive sleepiness	Filed NDA 1Q 2005	2nd Half 2006	Received approvable letter from FDA in May 2006
fentanyl effervescent buccal tablets (FEBT)	Breakthrough cancer pain	Filed NDA 3Q 2005	Late 2006	Current PDUFA date: June 30, 2006
GABITRIL® (tiagabine hydrochloride)	Generalized Anxiety Disorder	2nd Half 2006	2nd Half 2007	Phase 3 clinical trial results expected 2Q 2006

*For SPARLON, we are a party to a co-promotion agreement with McNeil Consumer & Specialty Pharmaceuticals, the term of which is generally three years from the date of the first commercial sale of SPARLON. If the first commercial sale of SPARLON does not occur by December 31, 2006, the agreement will terminate on that date unless extended by the parties.

In March 2006, we announced that the FDA’s Psychopharmacologic Drugs Advisory Committee voted not to recommend FDA approval of SPARLON. The advisory committee voted unanimously that SPARLON is effective for its intended use but recommended that we collect additional data to support the safety of the drug in children and adolescents with ADHD. This recommendation was the result of concerns expressed by the advisory committee regarding a suspected case of Stevens-Johnson syndrome (“SJS”), a rare but serious skin rash condition, in a child who participated in one of the

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Phase 3 clinical trials. While the FDA is not bound by the advisory committee’s recommendation, the FDA takes the advisory committee’s advice into consideration when reviewing investigational drugs seeking approval. In April 2006, we announced that we had gathered additional information about this suspected case of SJS since the date of the advisory committee meeting. Our efforts included, among other things, discussions with the treating physicians, consultations with leading dermatology experts and informal discussions with the FDA. We have formally submitted this new information to the FDA in support of the position that this case is not, in fact, SJS. In April 2006, we announced that the FDA has extended the action date for the SPARLON sNDA to August 22, 2006. We cannot assure you that the FDA will conclude that this case was not SJS or that we will ever achieve FDA approval of SPARLON. As of March 31, 2006, we have $8.6 million of capitalized inventory costs related to SPARLON. In the first quarter of 2006, we recorded a reserve of $1.7 million for capitalized inventory costs related to certain batches of SPARLON inventory as we do not expect that these batches will be sold prior to their expiration date.

Settlements of Patent Infringement Lawsuits

As a biopharmaceutical company, our future success is highly dependent on obtaining and maintaining patent protection for our products and technology. We intend to vigorously defend the validity, and prevent infringement of, our patents. The loss of patent protection on any of our existing products, whether by third-party challenge, invalidation, circumvention, license or patent expiration, would materially impact our results of operations.

In late 2005 and early 2006, we announced the settlement of four separate patent infringement lawsuits related to modafinil that we had filed against Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc., Ranbaxy Pharmaceuticals Inc., and Barr Laboratories, Inc. As part of these separate settlements, we agreed to grant to each of Teva, Mylan, Ranbaxy and Barr a non-exclusive royalty-bearing right to market and sell a generic version of PROVIGIL in the United States. These licenses will become effective in April 2012. An earlier entry may occur based upon the entry of another generic version of PROVIGIL.

In connection with the Barr, Ranbaxy and Teva settlements, we also entered into a series of business arrangements related to modafinil with Barr, Ranbaxy and Teva. We received licenses to certain modafinil-related intellectual property developed by each party and in exchange for these licenses, we agreed to make payments to these three companies collectively totaling up to $136.0 million over the next several years, consisting of upfront payments, milestones and royalties on net sales of our modafinil products. In order to maintain an adequate supply of the active drug substance modafinil, we entered into agreements with three modafinil suppliers whereby we will purchase an annual minimum amount of modafinil over a six year period beginning in 2006, with the aggregate payments over that period totaling approximately $82.6 million.

In February 2006, we also announced that we had settled our pending United States patent infringement dispute with Barr related to its abbreviated new drug application (“ANDA”) filed with the FDA seeking to sell a generic version of ACTIQ. Under the settlement, we will grant Barr an exclusive royalty bearing right to market and sell a generic version of ACTIQ in the United States, effective on December 6, 2006. Barr will pay specified royalties on net profits of a generic ACTIQ product for the period December 6, 2006 through February 3, 2007, subject to certain limitations. The patents covering the current formulation of the product are set to expire as early as September 5, 2006. If we are successful in our ongoing efforts to complete a clinical study of ACTIQ in pediatric patients prior to September 5, 2006, the FDA could grant us six months of exclusivity beyond the September 5, 2006 patent expiration. While enrollment to date in the study has been slow, we believe that our submission to the FDA in early September should be sufficient for the FDA to grant us pediatric exclusivity for ACTIQ. Under the license and supply agreement we entered into with Barr in July 2004, we could face generic competition from Barr prior to December 6, 2006 if we receive FDA approval of FEBT before this date or if we have not received a pediatric extension of exclusivity for ACTIQ.

Each of these settlements has been filed with both the FTC and the Antitrust Division of the DOJ as required by the Medicare Modernization Act. As previously disclosed, the FTC has requested from us, and we have provided, certain information in connection with its review of the settlements. The FTC, the DOJ, or a private party could challenge in an administrative or judicial proceeding any or all of the settlements if they believe that the agreements violate the antitrust laws. For example, we are aware of a number of civil antitrust class action complaints recently filed by private parties in U.S. District Court for the Eastern District of Pennsylvania, each naming Cephalon, Barr, Mylan, Teva and Ranbaxy as co-defendants and claiming, among other things, that the patent litigation settlements concerning PROVIGIL violate the antitrust laws of the United States.  The complaints seek to certify two separate, purported classes of plaintiffs: direct purchasers of PROVIGIL, and consumers and indirect purchasers of PROVIGIL.  The plaintiffs are seeking monetary damages and/or equitable relief.  We have reviewed copies of the cases as filed and believe these actions are without merit.  While we intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

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Indebtedness

We have significant levels of indebtedness outstanding, nearly all of which consists of convertible notes with restricted conversion prices lower than our stock price as of March 31, 2006. Under the terms of the indentures governing the notes, we are obligated to repay in cash the aggregate principal balance of any such notes presented for conversion. For a more complete description of these notes, see Note 9 to our Consolidated Financial Statements included in Part II, Item 8 of our Annual Report on Form 10-K. We do not have available cash, cash equivalents and investments sufficient to repay all of the convertible notes, if presented. In addition, there are no restrictions on our use of this cash, and the cash available to repay indebtedness may decline over time.

As of March 31, 2006, the fair value of both the 2.0% Notes and the Zero Coupon Notes is greater than the value of the shares into which such notes are convertible. We believe that the share price of our common stock would have to significantly increase over the market price as of March 31, 2006 before the fair value of the convertible notes would be less than the value of the common stock shares underlying the notes and, as such, we believe it is highly unlikely that holders of the 2.0% Notes or Zero Coupon Notes will present significant amounts of such notes for conversion. In the unlikely event that a significant conversion did occur, we believe that we have the ability to raise sufficient cash to repay the principal amounts due through a combination of utilizing our existing cash on hand, raising money in the capital markets or selling our note hedge instruments for cash. 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.

While we seek to increase profitability and cash flow from operations, we will need to continue to achieve growth of product sales and other revenues sufficient for us to attain these objectives. The rate of our future growth will depend, in part, upon our ability to obtain and maintain adequate intellectual property protection for our currently marketed products, or to successfully develop or acquire and commercialize new product candidates.

2005 ACQUISITIONS AND TRANSACTIONS

Zeneus Holdings Limited Acquisition

On December 22, 2005, we completed our acquisition of all of the issued share capital of Zeneus Holdings Limited. Total consideration paid in connection with the acquisition was approximately $365.8 million, net of cash acquired.

TRISENOX Acquisition

On July 18, 2005, we completed the acquisition of substantially all assets related to TRISENOX® (arsenic trioxide) from Cell Therapeutics, Inc. (“CTI”) and CTI Technologies, Inc., a wholly-owned subsidiary of CTI, for $69.7 million in cash, funded from existing cash on hand. The acquisition agreement provides for contingent future cash payments to CTI, totaling up to $100.0 million, upon the achievement of certain label expansions and sales milestones. The results of operations of TRISENOX have been included in the consolidated statements of operations since the acquisition date.

VIVITROL License and Collaboration

In June 2005, we entered into a license and collaboration agreement with Alkermes, Inc. to develop and commercialize VIVITROL in the United States. Concurrent with the execution of this agreement, we entered into a supply agreement under which Alkermes will provide to us finished commercial supplies of VIVITROL. We made an initial payment of $160 million to Alkermes upon execution of the agreement, all of which was recorded as an IPR&D charge as the product had not yet received FDA approval. In April 2006, we made an additional payment of $110 million to Alkermes following FDA approval of the product. Alkermes also could receive up to an additional $220 million in milestone payments from us upon attainment of certain agreed-upon sales levels of VIVITROL. Until December 31, 2007, Alkermes is responsible for any cumulative losses up to $120 million, and we are responsible for any cumulative losses in excess of $120 million. Pre-tax profit, as adjusted for certain items, and losses incurred after December 31, 2007 will be split equally between the parties. We will recognize product sales upon commercial launch.

Salmedix, Inc. Acquisition

On June 14, 2005, we completed our acquisition of Salmedix, Inc. Under the agreement relating to the acquisition, we acquired all of the outstanding capital stock of Salmedix for $160.9 million in cash and future payments totaling up to $40 million upon achievement of certain regulatory milestones. The acquisition was funded from our existing cash on hand and was accounted for as an asset acquisition, as Salmedix is a development stage company. As a result of the acquisition, we

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obtained the rights to market TREANDAÔ (bendamustine hydrochloride). The results of operations for Salmedix have been included in our consolidated financial statements as of the acquisition date.

Co-Promotion Agreement with McNeil

In August 2005, we entered into an agreement with McNeil Consumer & Specialty Pharmaceuticals Division of McNeil-PPC, Inc. concerning the co-promotion of SPARLON. The term of the co-promotion agreement is generally three years from the date of the first commercial sale of SPARLON. If the first commercial sale of SPARLON does not occur by December 31, 2006, the agreement will terminate on that date unless extended by the parties. Under the co-promotion agreement, McNeil has agreed to have at least 300 McNeil sales representatives co-promote and detail SPARLON upon FDA approval in the United States primarily to pediatricians, psychiatrists and pediatric neurologists. We will promote the product to psychiatrists, neurologists, primary care physicians, and other appropriate health care professionals and will retain all responsibility for the development, manufacture, distribution and sale of the product. We will pay McNeil commission fees calculated as a percentage of annual net sales of SPARLON during the term of the agreement and, if specified sales levels are reached in the final year of the agreement, during the three calendar years following the expiration of the agreement. Commission fees will be recognized as Sales and Marketing expenses in the same period that the related net sales are recognized.

McNeil may terminate the co-promotion agreement prior to the end of the three-year term of the agreement if “Lost CONCERTA Market Exclusivity” occurs, subject to the following conditions:

•Except as set forth in the next bullet point, McNeil may only terminate the co-promotion agreement effective on or after a date that is six months following the first commercial sale of SPARLON in the United States by providing us with at least 90 days’ advance written notice of termination; and

•If Lost CONCERTA Market Exclusivity occurs prior to the first commercial sale of SPARLON in the United States, McNeil may terminate the Agreement on or after the four-month anniversary of Lost CONCERTA Market Exclusivity by providing us with at least 90 days’ advance written notice of termination; provided that if the first commercial sale of the product occurs before the effective date of termination, then McNeil may only terminate the co-promotion agreement effective on or after a date that is at least six (6) months following the first commercial sale of SPARLON.

“Lost CONCERTA Market Exclusivity” will occur if a generic form of McNeil’s ADHD product CONCERTA (methylphenidate HCl) Extended-release Tablets is sold in the United States for at least 60 days during the term of the co-promotion agreement. If McNeil exercises its option to terminate the co-promotion agreement because of the Lost CONCERTA Market Exclusivity, then we have the right to offer employment at that time to some or all of McNeil’s sales force covered by the co-promotion agreement.

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RESULTS OF OPERATIONS

Three months ended March 31, 2006 compared to three months ended March 31, 2005:

	2006						2005						% Increase (Decrease)
	United  States		Europe		Total		United  States		Europe		Total		United  States		Europe		Total
Sales:
PROVIGIL	$	139,551	$	9,022	$	148,573	$	92,149	$	7,981	$	100,130	51	%	13	%	48	%
GABITRIL	11,356		1,416		12,772		24,701		1,689		26,390		(54	)%	(16	)%	(52	)%
CNS	150,907		10,438		161,345		116,850		9,670		126,520		29	%	8	%	28	%
Pain	112,334		5,168		117,502		98,868		3,057		101,925		14	%	69	%	15	%
Other	15,070		51,670		66,740		9,194		28,970		38,164		64	%	78	%	75	%
Total Sales	278,311		67,276		345,587		224,912		41,697		266,609		24	%	61	%	30	%
Other Revenues	9,779		1,577		11,356		11,565		1,807		13,372		(15	)%	(13	)%	(15	)%
Total Revenues	$	288,090	$	68,853	$	356,943	$	236,477	$	43,504	$	279,981	22	%	58	%	27	%

Sales—In the United States, we sell our products to pharmaceutical wholesalers, the largest three of which accounted for 81% of our worldwide net sales for the three months ended March 31, 2006. Decisions made by these wholesalers regarding the levels of inventory they hold (and thus the amount of product they purchase from us) 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 (“IMS Health”).

In 2005, we finalized wholesaler service agreements with our major wholesaler customers. These agreements obligate the wholesalers to provide us with periodic retail demand information and current inventory levels for our products held at their warehouse locations; additionally, the wholesalers have agreed to manage the variability of their purchases and inventory levels within specified limits based on product demand.

As of March 31, 2006, we received information from all of our U.S. wholesaler customers about the levels of inventory they held for our products. Based on this information, which we have not independently verified, we believe that total inventory held at these wholesalers is approximately two weeks supply at our current sales levels.

For the three months ended March 31, 2006, total sales increased by 30% over the prior year. This change was impacted by changes in the relative levels of the number of units of inventory held in the supply chain and by changes in the product sales allowances deducted from gross sales. The other key factors that contributed to the increase in sales are summarized by product as follows:

•In CNS Disorders, sales of PROVIGIL increased 48 percent. Demand for PROVIGIL increased as evidenced by an increase in U.S. prescriptions for PROVIGIL of 15%, according to IMS Health. During the first quarter of 2006, sales of PROVIGIL also were impacted by domestic price increases of approximately 22% from period to period.

•Sales of GABITRIL decreased 52 percent. U.S. prescriptions for GABITRIL decreased 47% according to IMS Health. This decrease was driven primarily by our decision to reduce our sales and marketing efforts following an update in February 2005 to the label information for GABITRIL. During the first quarter of 2006, sales of GABITRIL also were impacted by domestic price increases of approximately 34% from period to period.

•In Pain, sales increased 15 percent. Demand for ACTIQ increased as evidenced by an increase in U.S. prescriptions of 5%, according to IMS Health. During the first quarter of 2006, sales of ACTIQ also were impacted by an increase in domestic prices of approximately 35% from period to period.

•Other sales, which consist primarily of sales of other products and certain third party products, increased 75 percent. This increase is attributable to sales of products acquired in the TRISENOX and Zeneus acquisitions in July 2005 and December 2005, respectively.

Other Revenues—The decrease of 15% from period to period is primarily due to the termination of our Lundbeck and Novartis collaboration agreements.

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Analysis of gross sales to net sales—The following table presents the product sales allowances deducted from gross sales to arrive at a net sales figure:

	For the three months ended
	March 31,
	2006			2005			Change			% Change
Gross sales:	$	391,817		$	307,730		$	84,087		27	%
Product sales allowances:
Prompt payment discounts	6,031			5,166			865			17	%
Wholesaler discounts	—			7,298			(7,298		)	(100	)%
Returns	1,427			3,995			(2,568		)	(64	)%
Coupons	7,374			4,723			2,651			56	%
Medicaid discounts	20,102			15,445			4,657			30	%
Medicare Part D discounts	954			—			954			100	%
Managed care and governmental contracts	10,342			4,494			5,848			130	%
	46,230			41,121			5,109
Net sales	$	345,587		$	266,609		$	78,978		30	%
Product sales allowances as a percentage of gross sales	11.8		%	13.4		%

Increases in the product sales allowances were impacted by (1) higher Medicaid discounts primarily resulting from increased rebate percentages caused by price increases on our products and (2) increased usage of and additional rebates for certain governmental programs. This increase was partially offset by the fact that no incremental wholesaler discounts were required during the first quarter of 2006. Returns allowances also decreased in the first quarter of 2006 as compared to the first quarter of 2005 as a result of improved actual returns experience for our products. In the future, we expect product sales allowances as a percentage of gross sales to continue to trend upward due to the impact of potential future price increases on Medicaid discounts and potential increases related to Medicaid, managed care and governmental contracts sales.

We also established a reserve for Medicare Part D discounts in the first quarter of 2006 of $1.0 million. This reserve was established based on the number of Medicare Part D contracts that we had signed or expected to sign and an estimate of the amounts expected to be incurred under each contract based on expected enrollment and usage. These estimates are based on preliminary data and may change significantly in the future based on actual experience.

	For the three months ended
	March 31,
	2006		2005		Change		% Change
Costs and expenses:
Cost of sales	$	58,893	$	41,114	$	17,779	43	%
Research and development	104,976		80,766		24,210		30	%
Selling, general and administrative	148,761		98,229		50,532		51	%
Depreciation and amortization	26,521		18,650		7,871		42	%
	$	339,151	$	238,759	$	100,392	42	%

Cost of Sales—The cost of sales was 17% of net sales for the three months ended March 31, 2006 and 15% of net sales for the three months ended March 31, 2005. The increase is primarily due to the inclusion of Zeneus’ product sales in 2006 for which the margin is lower than the average margin of our other products, as well as additional royalty expenses for PROVIGIL. This increase was partially offset by the net effect of price increases on our three major US products.

Research and Development Expenses—Research and development expenses increased $24.2 million, or 30%, for the first quarter of 2006 as compared to the first quarter of 2005. This increase is due to $30.0 million of up-front payments related to rights acquired to certain development stage products in the first quarter under two product development collaboration agreements, the recognition of $3.4 million of stock-based compensation expense (represents half of the total stock-based compensation expense recorded) as a result of the adoption of SFAS 123(R) and the inclusion of clinical expenses related to Zeneus partially offset by lower expenses associated with reduced levels of clinical activity in 2006.

Selling, General and Administrative Expenses—Selling, general and administrative expenses increased $50.5 million, or 51%, for the first quarter of 2006, primarily due to higher selling and marketing costs in anticipation of the approval of certain of our product candidates, increased spending for PROVIGIL and the inclusion of Zeneus sales and marketing expenses (approximately $12.7 million) in 2006. In addition, we paid $4.0 million in the first quarter in connection with the PROVIGIL

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settlement agreements and recognized $3.4 million of stock-based compensation expense (represents half of the total stock-based compensation expense recorded) as a result of the adoption of SFAS 123(R).

Depreciation and Amortization Expenses—Depreciation and amortization expenses increased $7.9 million, or 42%, for the first quarter of 2006 primarily as a result of increased capital investments at our West Chester and Frazer locations and additional amortization expense resulting from intangible acquisitions during 2005.

	For the three months ended
	March 31,
	2006			2005			Change			% Change
Other income (expense):
Interest income	$	5,042		$	4,859		$	183		4	%
Interest expense	(4,536		)	(5,551		)	1,015			18	%
Write-off of deferred debt issuance costs	(13,105		)	—			(13,105		)	(100	)%
Other income (expense), net	(852		)	1,335			(2,187		)	(164	)%
	$	(13,451	)	$	643		$	(14,094	)	2192	%

Other Income (Expense)—Other income (expense), net decreased $14.1 million for the first quarter of 2006, attributable to the following factors:

•an increase in interest income in 2006 due to higher investment returns offset by lower average investment balances.

•A decrease in interest expense in 2006 due primarily to the repurchase of substantially all of our 2.5% convertible subordinated notes in July 2005 and to the write-off of deferred debt issuance costs related to our Zero Coupon convertible subordinated notes in January 2006. This decrease was offset by interest expense on our 2.0% convertible senior subordinated notes issued in June 2005.

•A $13.1 million write-off of deferred debt issuance costs in 2006 related to our Zero Coupon convertible subordinated notes.

•A $2.2 million decrease in other income (expense), net primarily due to fluctuations in foreign currency gains and losses in the comparable periods.

	For the three months ended
	March 31,
	2006			2005			Change		% Change
Income tax expense	$	(774	)	$	(15,203	)	$	14,429	95	%

Income Taxes—During the first quarter of 2006, we recognized $0.8 million of income tax expense on income before income taxes of $4.3 million, resulting in an overall effective tax rate of 17.8%. The variance in the first quarter of 2006 effective tax rate from the U.S. statutory rate is primarily due to a release of valuation allowance related to the sale of Pennsylvania research and development state tax credits in the first quarter of 2006. This compared to income tax expense in the first quarter of 2005 of $15.2 million on income before income taxes of $41.9 million, yielding an effective tax rate of 36.3%.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and investments at March 31, 2006 were $541.5 million, representing 18% of total assets, up from $484.1 million, representing 17% of total assets, at December 31, 2005.

The change in cash and cash equivalents is as follows:

	For the three months ended
	March 31,
	2006			2005
Net cash (used for) provided by operating activities	$	(12,132	)	$	46,162
Net cash used for investing activities	(9,719		)	(28,472		)
Net cash provided by financing activities	106,409			1,460
Effect of exchange rate changes on cash and cash equivalents	(531		)	(3,132		)
Net increase in cash and cash equivalents	$	84,027		$	16,018

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Our working capital deficit, which is calculated as current assets less current liabilities, increased to $847.4 million at March 31, 2006 compared to $229.8 million at December 31, 2005 primarily due to the reclassification of $750.5 million of our Zero Coupon convertible subordinated notes from long-term liabilities to current liabilities. Our 2.0% convertible senior subordinated notes due June 1, 2015 and Zero Coupon convertible subordinated notes are considered to be current liabilities at March 31, 2006 because the fair market value of our common stock as of March 31, 2006 exceeded the conversion price set forth in these notes.

Net Cash (Used for) Provided by Operating Activities

Net cash used for operating activities was $12.1 million for the quarter ended March 31, 2006 as compared to net cash provided by operating activities of $46.2 million for the quarter ended March 31, 2005. The change from period to period is primarily a result of an increase in outstanding receivables associated with sales of our products from December 31, 2005 to March 31, 2006 and a decrease in accrued expenses during that same period. Operating activities for the first quarter of 2006 included $30.0 million of up-front payments related to rights acquired to certain development stage products in the first quarter and $4.0 million associated with the PROVIGIL settlement agreements.

Net Cash Used for Investing Activities

Net cash used for investing activities was $9.7 million for the quarter ended March 31, 2006 as compared to $28.5 million for the quarter ended March 31, 2005. The decrease from period to period was primarily due to an increase in sales and maturities of our investment portfolio partially offset by the acquisition of intangible assets and increases in purchases of property and equipment predominantly related to facilities improvements at our locations to accommodate our growth.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $106.4 million for the quarter ended March 31, 2006, as compared to $1.5 million for the quarter ended March 31, 2005.

The volume of exercises of common stock options increased significantly in the first quarter of 2006 as compared to the first quarter of 2005. 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

In April 2006, we made a $110 million milestone payment to Alkermes following FDA approval of VIVITROL. 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 regulatory, sales or other milestones that may become due to third parties, and/or the purchase, redemption or retirement of our convertible notes. However, in 2006, we expect that sales of our currently marketed products, together with sales of our near-term product candidates, assuming approval in the anticipated time frames, should allow us to generate positive cash flow from operations. At this time, we cannot accurately predict the effect of certain developments on the rate of sales growth in 2007 and beyond, such as the degree of market acceptance, patent protection 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, receive approval for and successfully launch our near-term product candidates.

Based on our current level of operations, projected sales of our existing products and estimated sales from VIVITROL which was approved in April 2006 and our product candidates, if approved, 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, particularly if such indebtedness is presented for conversion by holders (see “—Indebtedness” below), or for our future operational needs, and we cannot be certain that funding will be available on terms acceptable to us, or at all.

Marketed Products

Continued sales growth of PROVIGIL beyond the June 2006 expiration of orphan drug exclusivity depends, in part, on the continued effectiveness of the various settlement agreements we entered into in late 2005 and early 2006, as well as our maintenance of protection in the United States and abroad of the modafinil particle-size patent through its expiration beginning in 2014. See Note 7 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Future growth of modafinil-based product sales in 2006 and beyond also will depend in part on our ability to achieve final FDA approval of NUVIGIL, which we anticipate in the second half of 2006, and SPARLON. In March 2006, we announced that the FDA’s Psychopharmacologic Drugs Advisory Committee voted not to recommend FDA approval of SPARLON. The advisory committee voted unanimously that SPARLON is effective for its intended use but recommended that we collect additional data to support the safety of the drug in children and adolescents with ADHD. This recommendation was the result of concerns expressed by the advisory committee regarding a suspected case of SJS in a child who participated in one of the Phase 3 clinical trials. While the FDA is not bound by the advisory committee’s recommendation, the FDA takes the advisory committee’s advice into consideration when reviewing investigational drugs seeking approval. In April 2006, we announced that we had gathered additional information about this suspected case of SJS since the date of the advisory committee meeting. Our efforts included, among other things, discussions with the treating physicians, consultations with leading dermatology experts and informal discussions with the FDA. We have formally submitted this new information to the FDA in support of the position that this case is not, in fact, SJS. In April 2006, we announced that the FDA has extended the action date for the SPARLON sNDA to August 22, 2006. We cannot assure you that the FDA will conclude that this case was not SJS or that we will ever achieve FDA approval of SPARLON.

Our sales of ACTIQ depend on our existing patent protection for the approved compressed powder formulation, which expires in the U.S. in September 2006. The patent covering the previous formulation of ACTIQ expired in May 2005. See Part II, Item 1A “Risk Factors” below. Even if we receive pediatric exclusivity, Barr’s license to the ACTIQ patents could become effective as early as December 6, 2006 or the date of launch of FEBT (expected in the fourth quarter of 2006). The entry of Barr with a generic form of ACTIQ later this year likely will significantly and negatively impact future ACTIQ sales.

For VIVITROL, our ability to achieve commercial success with this product in 2006 and thereafter will be impacted by our ability to build awareness and acceptance of the product among the 2,000 – 3,000 addiction specialists and physicians who have been actively treating alcohol dependence with pharmacotherapy and our work towards educating the counseling community about VIVITROL. In addition, the timing of the planned commercial launch of VIVITROL in June 2006 will depend to a large degree on Alkermes’ ability to supply us with commercial supply of VIVITROL in adequate quantities and in a timely manner.

Clinical Studies

Over the past few years, we have incurred significant expenditures related to conducting clinical studies to develop new pharmaceutical products and exploring the utility of our existing products in treating disorders beyond those currently approved in their respective labels. For 2006, we expect to continue to incur significant levels of research and development expenditures. We also expect to continue a number of significant clinical programs including, among others, a Phase 3 program evaluating TREANDA for the treatment of non-Hodgkin’s lymphoma (“NHL”) and a Phase 2 program evaluating CEP-701 for the treatment of acute myelogenous leukemia (“AML”). 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

In 2006, we expect to incur significant expenditures associated with manufacturing, selling and marketing our products. The aggregate amount of our sales and marketing expenses in 2006 will likely be higher than that incurred in 2005, primarily as a result of higher expenses associated with an increase in the size of our sales force and planned product launches for NUVIGIL and FEBT, if approved. In 2006, we expect to continue in-process capital expenditure projects at our research and development facilities in France and West Chester and at our Salt Lake City manufacturing facility.

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Indebtedness

We have significant indebtedness outstanding, consisting principally of indebtedness on convertible subordinated notes. The following table summarizes the principal terms of our most significant convertible subordinated notes outstanding as of March 31, 2006:

Security	Outstanding		Conversion Price			Redemption Rights and Obligations
	(in millions)
2.0% Convertible Senior Subordinated Notes due June 2015 (the “2.0% Notes”)	$	920.0	$	46.70	*	Generally not redeemable by the holder prior to December 2014.
Zero Coupon Convertible Notes due June 2033, first putable June 15, 2008 (the “2008 Zero Coupon Notes”)	$	374.8	$	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 (the “2010 Zero Coupon Notes”)	$	374.9	$	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 $56.04, $71.40 or $67.80 with respect to the 2.0% Notes, the 2008 Zero Coupon Notes or the 2010 Zero Coupon Notes, respectively. For a more complete description of these notes, including the associated convertible note hedge, see Note 9 to our Consolidated Financial Statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2005.

As of March 31, 2006, we have approximately $1,680.4 million of convertible notes outstanding, all of which are considered to be current liabilities and are presented in current portion of long-term debt in our March 31, 2006 consolidated balance sheet. These notes will remain as current liabilities unless our stock price decreases to a level where these notes are no longer convertible. Under the terms of the indentures governing the notes, we are obligated to repay in cash the aggregate principal balance of any such notes presented for conversion. As of the filing date of this Quarterly Report on Form 10-Q, we do not have available cash, cash equivalents and investments sufficient to repay all of the convertible notes, if presented. In addition, there are no restrictions on our use of this cash and the cash available to repay indebtedness may decline over time. If we do not have sufficient funds available to repay any principal balance of notes presented for conversion, 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.

As of March 31, 2006, the fair value of both the 2.0% Notes and the Zero Coupon Notes is greater than the value of the shares into which such notes are convertible. We believe that the share price of our common stock would have to significantly increase over the market price as of March 31, 2006 before the fair value of the convertible notes would be less than the value of the common stock shares underlying the notes and, as such, we believe it is highly unlikely that holders of the 2.0% Notes or Zero Coupon Notes will present significant amounts of such notes for conversion. In the unlikely event that a significant conversion did occur, we believe that we have the ability to raise sufficient cash to repay the principal amounts due through a combination of utilizing our existing cash on hand, raising money in the capital markets or selling our note hedge instruments for cash.

The annual interest payments on our convertible notes outstanding as of March 31, 2006 are $18.7 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 or retire all or a portion of the outstanding convertible notes.

Our 2.0% Notes and 2008 and 2010 Zero Coupon Notes each are considered instrument C securities as defined by EITF 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion”; therefore, these notes are included in the dilutive earnings per share calculation using the treasury stock method. Under the treasury stock method, we must calculate the number of shares issuable under the terms of these notes based on the average market price of our common stock during the period, and include that number in the total diluted shares figure for the period. At the time we sold our 2.0% Notes and Zero Coupon Notes, we entered into convertible note hedge and warrant agreements that together are intended to have the economic effect of reducing the net number of shares that will be issued upon conversion of the notes by increasing the effective conversion price for these notes, from our perspective, to $67.92 and $72.08, respectively. However, from a U.S. GAAP perspective, SFAS No. 128 considers only the impact of the convertible notes and the warrant agreements; since the impact of the convertible note hedge agreements is always anti-dilutive, SFAS No. 128 requires that we exclude from the calculation of fully diluted shares the number of shares of our common stock that we would receive from the counterparties to these agreements upon settlement.

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Under the treasury stock method, changes in the share price of our common stock can have a significant impact on the number of shares that we must include in the fully diluted earnings per share calculation. The following table provides examples of how changes in our stock price will require the inclusion of additional shares in the denominator of the fully diluted earnings per share calculation (“Total Treasury Stock Method Incremental Shares”). The table also reflects the impact on the number of shares we could expect to issue upon concurrent settlement of the convertible notes, the warrant and the convertible note hedge (“Incremental Shares Issued by Cephalon upon Conversion”):

Share Price	Convertible  Notes Shares	Warrant  Shares	Total Treasury  Stock Method  Incremental  Shares(1)	Shares Due to  Cephalon under  Note Hedge		Incremental  Shares Issued by  Cephalon upon  Conversion(2)
$65.00	6,947	—	6,947	(6,947	)	—
$75.00	10,374	2,363	12,737	(10,374	)	2,363
$85.00	12,993	5,926	18,919	(12,993	)	5,926
$95.00	15,061	8,738	23,799	(15,061	)	8,738
$105.00	16,735	11,014	27,749	(16,735	)	11,014

(1)Represents the number of incremental shares that must be included in the calculation of fully diluted shares under
U.S. GAAP.

(2)Represents the number of incremental shares to be issued by us upon conversion of the convertible notes, assuming concurrent settlement of the convertible note hedges and warrants.

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 such acquisitions and it may be necessary for us to issue stock or raise substantial additional funds in the future to complete future 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.

Other

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

•cost of product sales;

•achievement and timing of research and development milestones;

•collaboration revenues;

•cost and timing of clinical trials, regulatory approvals and product approvals;

•marketing and other expenses;

•manufacturing or supply disruptions; and

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

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America. In preparing these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We develop and periodically change these estimates and assumptions based on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2005 in the “Critical Accounting Policies and Estimates” section and the “Recent Accounting Pronouncements” section.

Product Sales Allowances—We record product sales net of the following significant categories of product sales allowances, each of which is described in more detail in our Form 10-K: prompt payment discounts, wholesaler discounts, returns, coupons, Medicaid discounts and managed care and governmental contracts. In addition to these product sales allowances, in the first quarter of 2006 we also began recording an allowance to product sales for Medicare Part D discount reserves. Calculating each of these items involves significant estimates and judgments and requires us to use information from external sources.

1) Medicare Part D discounts—Beginning in 2006, we have entered into agreements with certain customers covered under Part D of the Medicare Prescription Drug Improvement and Modernization Act of 2003 whereby we provide agreed-upon discounts to such entities based on formulary positioning. We record accruals for these discounts as a reduction of sales when product is sold based on the discount rates and expected levels of sales volume of these customers during a period. We estimate eligible sales based on expected amounts and trends of sales by these entities and on any expected changes to the trends of our product sales. Discounts are generally invoiced and paid quarterly in arrears, so that our accrual consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual for prior quarters’ unpaid rebates and an accrual for inventory in the distribution channel.

In the first quarter of 2006, we recorded a provision for Medicare Part D discounts at a weighted average rate of 0.2% of gross sales. Actual Medicare Part D discounts could exceed our estimates of expected future Medicare patient activity or unit rebate amounts. If the Medicare Part D discounts provision percentage were to increase by 0.5% of 2006 gross sales for the first quarter of 2006 from our four products marketed in the U.S., then an additional provision of $2.0 million would result.

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The following table summarizes activity in each of the above categories for the year ended December 31, 2005 and the three months ended March 31, 2006:

	Prompt  Payment  Discounts			Wholesaler  Discounts			Returns*			Coupons			Medicaid  Discounts			Medicare  Part D  Discounts			Managed  Care &  Governmental Contracts			Total
Balance at January 1, 2005	$	(2,899	)	$	—		$	(11,727	)	$	(4,165	)	$	(18,075	)	$	—		$	(4,409	)	$	(41,275	)
Provision:
Current period	(22,284		)	(24,373		)	(13,132		)	(23,313		)	(66,653		)	—			(26,072		)	(175,827		)
Prior periods	—			—			(2,721		)	—			(592		)	—			56			(3,257		)
Total	(22,284		)	(24,373		)	(15,853		)	(23,313		)	(67,245		)	—			(26,016		)	(179,084		)
Actual:
Current period**	20,367			21,645			(1,572		)	18,633			33,199			—			19,506			111,778
Prior periods	2,899			—			6,554			4,150			18,667			—			4,353			36,623
Total	23,266			21,645			4,982			22,783			51,866			—			23,859			148,401
Balance at December 31, 2005	$	(1,917	)	$	(2,728	)	$	(22,598	)	$	(4,695	)	$	(33,454	)	$	—		$	(6,566	)	$	(71,958	)
Provision:
Current period	(6,031		)	—			(1,427		)	(6,794		)	(20,815		)	(954		)	(9,968		)	(45,989		)
Prior periods	—			—			—			(580		)	713			—			(374		)	(241		)
Total	(6,031		)	—			(1,427		)	(7,374		)	(20,102		)	(954		)	(10,342		)	(46,230		)
Actual:
Current period	3,827			—			—			—			—			—			4,213			8,040
Prior periods	1,917			2,728			3,369			4,266			21,412			—			5,545			39,237
Total	5,744			2,728			3,369			4,266			21,412			—			9,758			47,277
Balance at March 31, 2006	$	(2,204	)	$	—		$	(20,656	)	$	(7,803	)	$	(32,144	)	$	(954	)	$	(7,150	)	$	(70,911	)

*Given our return goods policy, we assume that all returns in a current year relate to prior period sales.

**Includes beginning reserve balances related to TRISENOX, which was acquired in the third quarter of 2005, of $0.1 million for prompt payment discounts and $1.6 million for returns.

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Stock-based compensation— Effective January 1, 2006, we adopted the Financial Accounting Standards Board Statement No. 123(R), “Share Based Payment” (“SFAS 123(R)”) using the modified prospective method, in which compensation cost was recognized based on the requirements of SFAS 123(R) for (a) all share-based payments granted after the effective date and (b) for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. SFAS 123(R) requires the use of judgment and estimates in performing multiple calculations. We estimate the fair value using the Black-Scholes option-pricing model when assessing the fair value of options granted. The Black-Scholes option-pricing model requires several inputs, one of which is volatility. The fair value of options is most sensitive to the volatility input. Our estimate of volatility is based upon the historical volatility experienced in our stock price as well as the implied volatility from publicly traded options on our stock. To the extent volatility of our stock price or the option market on our stock increases in the future, our estimates of the fair value of options granted in the future could increase, thereby increasing stock-based compensation expense in future periods. For instance, an increase in estimated volatility of ten percentage points on all options would result in additional estimated annual pre-tax expense of approximately $3.2 million in 2006.  In addition, we apply an expected forfeiture rate when amortizing stock-based compensation expense. Our estimate of the forfeiture rate is based primarily upon historical experience of employee turnover. To the extent we revise this estimate in the future or actual experience differs from this estimate, our stock-based compensation expense could be materially impacted. An estimated forfeiture rate of one percentage point lower would have resulted in an increase of approximately $369,000 in stock-based compensation expense in 2006. Our expected term of options granted was derived from the average midpoint between vesting and the contractual term, as described in SEC’s Staff Accounting Bulletin No. 107, “Share-Based Payment.” In the future, as information regarding post vesting termination becomes more accessible, we may change our method of deriving the expected term. This change could impact our fair value of options granted in the future. We expect to refine our method of deriving expected term no later than January 1, 2008.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to foreign currency exchange risk related to our operations in 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 three months ended March 31, 2006, 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 $6.9 million in reported total revenues and a corresponding increase in reported expenses. This sensitivity analysis of the effects of changes in foreign currency exchange rates does not assume any changes in the level of operations of our European subsidiaries.

Since all of our outstanding debt is fixed rate, our only exposure to market risk for a change in interest rates relates to our investment portfolio. 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.

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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

During the first quarter of 2006, we implemented a new, worldwide financial reporting system from SAP. The Zeneus businesses acquired in December 2005 have not yet implemented SAP. Our management believes that the implementation of this new system will improve and enhance our internal control over financial reporting.  There have been no other changes in our internal control over financial 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 7 of the Consolidated Financial Statements included in Part I, Item 1 of this Report.

ITEM 1A. RISK FACTORS

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

A significant portion of our anticipated 2006 revenues is derived from our U.S. products, and our future success will depend on the continued acceptance and growth of these products.

For the quarter ended March 31, 2006, approximately 81% 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 level and effectiveness of our sales and marketing efforts;

•any unfavorable publicity regarding these products or similar products;

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

•the entrance of generic competition to ACTIQ in the fourth quarter of 2006 or earlier;

•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 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 obtain regulatory approval for new products or for new formulations or indications for our existing products, which would significantly hamper future sales and earnings growth.

Our long-term prospects, particularly with respect to the growth of our future sales and earnings, depend to a large extent on our ability to obtain FDA approval for our near-term product candidates: NUVIGIL, SPARLON, FEBT and GABITRIL for GAD. We do not know whether we will succeed in obtaining final regulatory approval to market any of these products or what level of market acceptance these products may achieve. In March 2006, we announced that the FDA’s Psychopharmacologic Drugs Advisory Committee voted not to recommend FDA approval of SPARLON. The advisory committee voted unanimously that SPARLON is effective for its intended use but recommended that we collect additional data to support the safety of the drug in children and adolescents with ADHD. This recommendation was the result of concerns expressed by the advisory committee regarding a suspected case of SJS, in a child who participated in one of the Phase 3 clinical trials. While the FDA is not bound by the advisory committee’s recommendation, the FDA takes the advisory committee’s advice into consideration when reviewing investigational drugs seeking approval. In April 2006, we announced that we had gathered additional information about this suspected case of SJS since the date of the advisory committee meeting. Our efforts included, among other things, discussions with the treating physicians, consultations with leading dermatology experts and informal discussions with the FDA. We have formally submitted this new information to the FDA in support of the position that this case is not, in fact, SJS. In April 2006, we announced that the FDA extended the action date for the SPARLON sNDA to August 22, 2006. We cannot assure you that the FDA will conclude that this case was not SJS or that we will ever achieve FDA approval of SPARLON.

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It is also possible that the sale of a generic version of ACTIQ by Barr as early as September 2006 could negatively impact sales of FEBT. For GABITRIL, we have only recently completed Phase 3 studies of the product for use in treating GAD. We expect to have the results of these studies in the second quarter of 2006 and the results of one or more of these studies are negative or adverse, this could undermine physician and patient comfort with the current product, limit its commercial success, and diminish its acceptance. Even if the results of these studies are positive, the impact on sales of GABITRIL may be minimal unless we are able to obtain regulatory 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.

We may not be able to maintain adequate protection for our intellectual property or market exclusivity for our key 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. 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 the technology or product in dispute. In addition, even if such licenses are available, the terms of any license requested by a third party could be unacceptable to us.

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 and cover pharmaceutical compositions and uses of modafinil, specifically, 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. While we intend to vigorously defend the validity of these patents and prevent infringement, these efforts will be both expensive and time consuming and, ultimately, may not be successful. The loss of patent protection for PROVIGIL would significantly and negatively impact future PROVIGIL sales.

As of the filing date of this Quarterly Report on Form 10-Q, we are aware of seven ANDAs on file with the FDA for pharmaceutical products containing modafinil. Each of these ANDAs contains 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. In March 2003, we filed a patent infringement lawsuit in the U.S. District Court in New Jersey against four companies—Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals, Inc., Ranbaxy Laboratories Limited and Barr Laboratories, Inc.—based upon the ANDAs filed by each of these companies with the FDA seeking approval to market a generic form of modafinil. The lawsuit claimed infringement of our U.S. Patent No. RE37,516 (the “‘516 Patent”) which covers the pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL and which, as a result of a pediatric extension granted by the FDA, now extends to April 6, 2014. We believe that these four companies were the first to file ANDAs with Paragraph IV certifications and thus are eligible for the 180-day exclusivity provided by the provisions of the Federal Food, Drug and Cosmetic Act.

In late 2005 and early 2006, we announced that we had entered into settlement agreements with each of these four defendants. As part of these separate settlements, we agreed to grant to each of Teva, Mylan, Ranbaxy and Barr a non-exclusive royalty-bearing right to market and sell a generic version of PROVIGIL in the United States. These licenses become effective in April 2012. An earlier entry may occur based upon the entry of another generic version of PROVIGIL. Each of these settlements has been filed with both the FTC and the Antitrust Division of the DOJ as required by the Medicare Modernization Act. The FTC has requested from us, and we have provided, certain information in connection with its review of the settlements. The FTC, the DOJ, or a private party could challenge in an administrative or judicial proceeding any or all of the settlements if they believe that the agreements violate the antitrust laws. For example, we are aware of a number of civil antitrust class action complaints recently filed by private parties in U.S. District Court for the Eastern District of Pennsylvania, each naming Cephalon, Barr, Mylan, Teva and Ranbaxy as co-defendants and claiming, among other things, that the patent litigation settlements concerning PROVIGIL violate the antitrust laws of the United States.  The complaints seek to certify two separate, purported classes of plaintiffs: direct purchasers of PROVIGIL, and consumers and indirect purchasers of PROVIGIL.  The plaintiffs are seeking monetary damages and/or equitable relief.  We have reviewed copies of the cases as filed and believe these actions are without merit.  While we intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

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In early 2005, we also filed a patent infringement lawsuit in the U.S. District Court in New Jersey against Carlsbad Technology, Inc. based upon the Paragraph IV ANDA filed related to modafinil that Carlsbad filed with the FDA. Carlsbad has asserted counterclaims for non-infringement of the ‘516 Patent and invalidity of the ‘516 Patent. Carlsbad also has asserted a counterclaim for non-infringement of our U.S. Patent No. 4,927,855 (which we have not asserted against Carlsbad). We have moved to dismiss all of Carlsbad’s counterclaims; Carlsbad has opposed the motion, and a decision is pending. Discovery in this action has only recently commenced. This ongoing litigation with Carlsbad is unaffected by each of the settlement agreements we have signed with Teva, Mylan, Ranbaxy and Barr.

In November 2005 and March 2006, we received notice that Caraco Pharmaceutical Laboratories, Ltd. and Apotex, Inc., respectively, also filed Paragraph IV ANDAs with the FDA in which each firm is seeking to market a generic form of PROVIGIL. We have not filed patent infringement lawsuits against either Caraco or Apotex to date.

ACTIQ

With respect to ACTIQ, we hold an exclusive license to U.S. patents covering the currently marketed compressed powder pharmaceutical composition and methods for administering fentanyl via this composition that are set to expire in September 2006. If we are successful in our ongoing efforts to complete a clinical study of ACTIQ in pediatric patients prior to September 5, 2006, the FDA could grant us six months of exclusivity beyond the September 5, 2006 patent expiration. While enrollment to date in the study has been slow, we believe that our submission to the FDA in early September should be sufficient for the FDA to grant us pediatric exclusivity for ACTIQ. 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 expired in May 2005.

In February 2006, we announced that we had agreed to settle with Barr our pending patent infringement dispute in the United States related to Barr’s ANDA filed with the FDA seeking to sell a generic version of ACTIQ. Under the settlement, we will grant Barr an exclusive royalty bearing right to market and sell a generic version of ACTIQ in the United States, effective on December 6, 2006. This license could become effective prior to December 6, 2006 if we receive final FDA approval of FEBT before this date or if we have not received a pediatric extension of exclusivity for ACTIQ. The entry of Barr with a generic form of ACTIQ likely will significantly and negatively impact future ACTIQ sales.

GABITRIL

With respect to GABITRIL, we hold an exclusive sublicense to four U.S. composition-of-matter patents covering the currently approved product: a patent claiming tiagabine, the active drug substance contained in GABITRIL; a patent claiming crystalline tiagabine hydrochloride monohydrate and its use as an anti-epileptic agent; a patent claiming the pharmaceutical formulation; and a patent claiming anhydrous crystalline tiagabine hydrochloride and processes for its preparation. These patents currently are set to expire in 2011, 2012, 2016 and 2017, respectively. Supplemental Protection Certificates based upon corresponding foreign patents covering this product are set to expire in 2011.

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.

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;

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•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.

In September 2004, we announced that we had received subpoenas from the U.S. Attorney’s Office in Philadelphia. That same month, we received a voluntary request for information from the Office of the Connecticut Attorney General. Both the subpoenas and the voluntary request for information appear to be focused on Cephalon’s sales and promotional practices with respect to ACTIQ, GABITRIL and PROVIGIL, including the extent of off-label prescribing of our products by physicians. We are cooperating with the U.S. Attorney’s Office and the Office of the Connecticut Attorney General and are providing documents and other information to both offices in response to these and additional requests. 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 with the extensive regulations to which we are subject. 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, 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 our products PROVIGIL and ACTIQ and our product candidates SPARLON, NUVIGIL and FEBT 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 ability to promote our products and product sales could be substantially affected.

We rely on third parties for the timely supply of specified raw materials, equipment, contract manufacturing, formulation or packaging services, product distribution services, customer service activities and product returns processing. Although we actively manage these third party relationships to ensure continuity and quality, some events beyond our control could result in the complete or partial failure of these goods and services. Any such failure could have a material adverse effect on our financial condition and result of operations.

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 cGMP regulations. In addition, we must comply with all applicable regulatory requirements of the DEA 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.

For certain of our products and near-term product candidates in the United States and abroad, we depend upon single sources for the manufacture of both the active drug substances contained in our products and for finished commercial supplies.

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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.

With respect to VIVITROL, Alkermes is obligated to provide to us finished commercial supplies of the product under the terms of a supply agreement. While Alkermes has manufactured VIVITROL in small quantities for use in clinical trials, we cannot be sure that they will be able to successfully manufacture VIVITROL at a commercial scale in a timely or economical manner to permit the launch of the product in June 2006. If Alkermes is unable to successfully increase its manufacturing scale or capacity, the commercial launch of VIVITROL could be delayed or there could be a shortage in supply of the product, either of which could harm the commercial prospects for the product. In addition, Alkermes is responsible for the entire supply chain for VIVITROL, including the sourcing of raw materials and active pharmaceutical agents from third parties. Alkermes has no previous experience in managing a complex, cGMP supply chain and issues with its supply sources could impair its ability to supply VIVITROL under the supply agreement and have a material adverse effect on our commercial prospects for VIVITROL.

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. For example, in February 2005, working with the FDA, we updated our prescribing information for GABITRIL to include a bolded warning describing the risk of new onset seizures in non-induced patients without epilepsy. 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 cost of product liability insurance has increased in recent years, and the availability of coverage has decreased. Nevertheless, we maintain product liability insurance in amounts we believe to be commercially reasonable but which would be unlikely to cover the potential liability associated with a significant unforeseen safety issue. Any claims could easily exceed our current 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 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. As a result, it is reasonably likely that our product sales will fluctuate to an extent, that may not meet with market expectations and that 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;

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•collaboration revenues;

•cost and timing of clinical trials, regulatory approvals and product launches;

•marketing and other expenses;

•manufacturing or supply disruptions; and

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

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

As of March 31, 2006, our 2.0% Notes, 2008 Zero Coupon Notes and 2010 Zero Coupon Notes are convertible. As a result, these notes have been classified as a current liability on our balance sheet as of March 31, 2006. Under the terms of the indentures governing the notes, we are obligated to repay in cash and common stock the aggregate principal balance of any such notes presented for conversion. As of the filing date of this report, we do not have available cash, cash equivalents and investments sufficient to repay all of the convertible notes, if presented. In addition, there are no restrictions on our use of this cash and the cash available to repay indebtedness may decline over time. If we do not have sufficient funds available to repay the principal balance of notes presented for conversion, 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 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.

To maximize our growth opportunities, we have entered into a number of collaboration agreements with third parties. For example, in the United States, we are party to an agreement with McNeil Consumer & Specialty Pharmaceuticals Division of McNeil-PPC, Inc. under which McNeil will co-promote SPARLON, our proprietary pediatric formulation of modafinil for ADHD, for up to three years following the commercial launch of the product, if approved by FDA. Our ability to successfully commercialize SPARLON, if approved, will depend to a significant degree on the efforts of our partner. If McNeil fails to meet its obligations under the co-promotion agreement, is ineffective in its efforts, or determines to terminate the agreement prior to the end of its term, the launch and subsequent marketing of SPARLON could be materially and negatively impacted. Additionally, if McNeil elects to terminate the agreement early as provided for by the agreement, we may be unsuccessful in our efforts to hire the McNeil sales representatives, as permitted under the agreement, or in our efforts to promote SPARLON on our own.

In certain countries outside the United States, we have entered into agreements with a number of partners with respect to the development, manufacturing and marketing of our products. 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 ultimately might not be successful in establishing any such new or additional relationships.

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.

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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, particularly SPASFON and FONZYLANE, which could impact revenues from our French operations.

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 are increasingly utilizing their significant purchasing power to challenge the prices charged for pharmaceutical products and seek to limit reimbursement levels offered to consumers for such products. Moreover, many governments and private insurance plans have instituted reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive brand-name pharmaceuticals. In the United States in particular, generic substitution statutes have been enacted in virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of an original branded drug. 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.

On January 1, 2006, the U.S. Department of Health & Human Services began implementing Medicare Part D in accordance with the Medicare Modernization Act. Under this plan, voluntary prescription drug coverage, subsidized by Medicare, is offered to over 40 million Medicare beneficiaries through competing private prescription drug plans (PDPs) and Medicare Advantage (MA) plans. At this time, it is difficult to estimate the potential impact that this program will have on our business, as it is not clear how the law will be implemented by regulators or received by consumers and physicians. While the overall usage of pharmaceuticals may increase as the result of the expanded access to prescription drugs afforded under Medicare Part D, this may be offset by reduced pharmaceutical prices resulting from limited coverage of particular products in a therapeutic category and the enhanced purchasing power of the Medicare Part D plan sponsors. In addition, it is unclear what impact this legislation will have on the pricing, rebates and discounts for our products.

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. In addition, we expect that ACTIQ will face generic competition in the fourth quarter of 2006.

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 SPARLON, we will face well established and intense competition from stimulants such as RITALIN^® by Novartis, STRATERRA^® by Eli Lilly, and CONCERTA^® by McNeil, as well as from amphetamines such as DEXEDRINE^® by GlaxoSmithKline and ADDERALL^® by Shire. With respect to ACTIQ and, if approved, FEBT, we face competition from numerous short-and long-acting opioid products, including three products—Johnson & Johnson’s DURAGESIC^® and Purdue Pharmaceutical’s OXYCONTIN^® and MS-CONTIN^®—that dominate the market. In addition, we are aware of numerous other companies developing other technologies for rapidly delivering opioids to treat breakthrough pain, that will compete against ACTIQ and, if approved, FEBT. With respect to GABITRIL, there are several products, including NEURONTIN^® (gabapentin) by Pfizer, used as adjunctive therapy for the partial seizure market. 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 products such as Paxil^®, Effexor XR^® and Lexapro^®. With respect to TRISENOX, the pharmaceutical market for the treatment of patients with relapsed or refractory APL is served by a number of available therapeutics, particularly those that are indicated for the treatment of hematologic cancers, such as THALOMID^® by Celgene and VELCADE^® by Millennium Pharmaceuticals. 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

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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.

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. 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. For example, in connection with our acquisitions in 2005 of Zeneus, Salmedix and TRISENOX and the license and collaboration agreement with Alkermes, we estimated the values of these transactions by making certain assumptions about, among other things, likelihood of regulatory approval for unapproved products and the market potential for each of the marketed products and the product candidates. Ultimately, our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of these transactions.

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.

We may be unable to successfully consolidate and integrate the operations of businesses we acquire, which may adversely affect our stock price, operating results and financial condition.

We must consolidate and integrate the operations of acquired businesses with our business. In 2005, we completed the acquisitions of Zeneus and Salmedix, purchased assets related to TRISENOX, entered into a license agreement with Alkermes for VIVITROL, and executed a co-promotion agreement with McNeil for SPARLON. 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. The diversion of our management’s attention and any delays or difficulties encountered in connection with these recent acquisitions, any future acquisitions we may consummate, could result in the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that could negatively affect our ability to maintain relationships with customers, suppliers, employees and others with whom we have business dealings.

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.

In the pharmaceutical business, the research and development process can take up to 12 years, or even longer, from discovery to commercial product launch. During each stage of this process, there is a substantial risk of failure. 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

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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.

The price of our common stock has been and may continue to be highly volatile, which may make it difficult for stockholders 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, 2005 through May 5, 2006 our common stock traded at a high price of $82.92 and a low price of $37.35. Negative announcements, including, among others:

•adverse regulatory decisions;

•disappointing clinical trial results;

•disputes and other developments concerning our patents or other proprietary products; or

•sales 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 or our customers, 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.

Our internal controls 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 annually a report on our internal controls over financial reporting. The internal control report must 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 internal controls over financial reporting. In order for management to evaluate our internal controls, we must regularly review and document our internal control processes and procedures and test such controls. Ultimately, we or our independent auditors could conclude that our internal control over financial reporting may not be effective if, among others things:

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

•we fail to remediate assessed deficiencies.

In early 2006, we implemented a new worldwide financial reporting system that has required changes to certain aspects of our existing system of internal control over financial reporting. Due to the number of controls to be examined, both with respect to the new reporting system and our other internal controls over financial reporting, the complexity of these projects, and the subjectivity involved in determining the effectiveness of controls, we cannot be certain that, in the future, all of our controls will continue to be considered effective by management or, if considered effective by our management, that our auditors will agree with such assessment.

If, in the future, 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

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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.

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 quarter ended March 31, 2006, approximately 19.3% 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.

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, Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, control a significant share of this network. These three wholesaler customers, in the aggregate, accounted for 81% of our worldwide net sales for the quarter ended March 31, 2006. Fluctuations in the buying patterns of these customers, which may result from seasonality, wholesaler buying decisions or other factors outside of our control, could significantly affect the level of our net sales on a period to period basis. Because of this, the amounts purchased by these customers during any quarterly or annual period may not correlate to the level of underlying demand evidenced by the number of prescriptions written for such products, as reported by IMS Health Incorporated. Furthermore, the loss or bankruptcy of any of these customers could materially and adversely affect our results of operations and financial condition.

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 in addition to those matters specifically described in Note 7 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. While we currently do not believe that the settlement or adverse adjudication of these other litigation matters 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 is unknown but could be material.

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 business might be harmed by the loss 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.

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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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Period	Total Number  of Shares of  Common Stock  Purchased(1)	Average Price  Paid Per Share(2)		Total Number of  Shares of Common  Stock Purchased as  Part of Publicly  Announced Plans or Programs	Approximate  Dollar Value of  Common Stock  that May Yet Be  Purchased Under  the Plans or  Programs
January 1-31, 2006	—	—		—	—
February 1-28, 2006	5,330	$	76.37	—	—
March 1-31, 2006	—	—		—	—
Total	5,330	$	76.37	—	—

(1)Consists entirely of shares repurchased from employees. Such repurchases are not part of a publicly announced plan or program.

(2)Price paid per share is a weighted average based on the closing price of our common stock on the various vesting dates.

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ITEM 5. OTHER INFORMATION

Ratios of Earnings to Fixed Charges

	Years ended December 31,													Three months  ended  March 31,
	2001			2002		2003		2004			2005			2006
Pre-tax income (loss) from continuing operations	$	(55,484	)	$	62,433	$	130,314	$	(28,184	)	$	(245,118	)	$	4,341
Fixed charges:
Interest expense and amortization of debt discount and premium on all indebtedness	20,630			38,215		28,905		22,186			25,235			4,536
Capitalized interest	—			—		—		—			1,044			534
Appropriate portion of rentals	1,092			1,433		2,286		3,437			5,750			2,279
Preferred stock dividend requirements of consolidated subsidiaries	5,664			—		—		—			—			—
Total fixed charges	27,386			39,648		31,191		25,623			32,029			7,349
Pre-tax income (loss) from continuing operations, plus fixed charges, less capitalized interest and preferred stock dividend requirements of consolidated subsidiaries	$	(33,762	)	$	102,081	$	161,505	$	(2,561	)	$	(214,133	)	$	11,156
Ratio of earnings to fixed charges(1)	—			2.57		5.18		—			—			1.52

(1)  For the years ended December 31, 2001, 2004 and 2005 no ratios are provided because earnings were insufficient to cover fixed charges and preferred dividends and fixed charges, respectively.

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ITEM 6. EXHIBITS

Exhibits:

Exhibit No.	Description
10.1*	Settlement Agreement dated January 9, 2006 by and between the Company and Mylan Pharmaceuticals Inc. (1)
10.2*	Provigil Settlement Agreement dated February 1, 2006 by and between the Company and Barr Laboratories, Inc. (1)
10.3*	Modafinil License and Supply Agreement dated as of February 1, 2006 by and between the Company and Barr Laboratories, Inc. (1)
10.4*	Actiq Settlement Agreement dated February 1, 2006 by and among the Company, the University of Utah Research Foundation and Barr Laboratories, Inc. (1)
10.5*	Actiq Supplemental License and Supply Agreement dated as of February 1, 2006 by and between the Company and Barr Laboratories, Inc. (1)
10.6*	Amended and Restated Aircraft Time Sharing Agreement dated March 27, 2006 between the Company and Frank Baldino, Jr., Ph.D.
31.1*	Certification of Frank Baldino, Jr., Ph.D., 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, Executive 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., Ph.D., 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, Executive Vice President and Chief Financial Officer of the Company, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed herewith.

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

(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)
May 10, 2006	By	/s/ FRANK BALDINO, JR
		Frank Baldino, Jr., Ph.D.
		Chairman and Chief Executive Officer
		(Principal executive officer)
	By	/s/ J. KEVIN BUCHI
		J. Kevin Buchi
		Executive Vice President and Chief Financial Officer
		(Principal financial and accounting officer)

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EX-10.1

Exhibit 10.1

AGREEMENT

THIS SETTLEMENT AGREEMENT (“Agreement”) is entered into effective this 9th day of January, 2006 (“Effective Date”), by and between CEPHALON, INC., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 41 Moores Road, Frazer, Pennsylvania 19355, and MYLAN PHARMACEUTICALS INC., a corporation organized and existing under the laws of the State of West Virginia, with its principal place of business at 781 Chestnut Ridge Road, Morgantown, West Virginia 26504.

WHEREAS, Cephalon is the owner by assignment of all right and title in U.S. Reissue Patent No. RE37,516 (“the RE ‘516 Patent”), issued by the United States Patent and Trademark Office on January 15, 2002 and expiring on October 6, 2014.

WHEREAS PROVIGIL® (modafinil), which is covered by claims of the RE ‘516 Patent, is the commercial formulation of modafinil developed, manufactured and sold by Cephalon pursuant to FDA approval of Cephalon’s NDA No. 20-717.

WHEREAS by letter dated February 12, 2003, Mylan notified Cephalon that Mylan had submitted ANDA No. 76-594 to the FDA under Section 505(j) of the Federal Food, Drug and Cosmetic Act (21 U.S.C. § 355(j)), seeking approval to engage in the commercial manufacture, use, and sale of tablets containing 100 mg and 200 mg of modafinil, a generic version of PROVIGIL® (modafinil) tablets, before the expiration date of the RE ‘516 Patent.

WHEREAS Cephalon timely filed suit against Mylan and three other companies that had also filed Paragraph IV ANDAs concerning PROVIGIL® (modafinil) in an action captioned Cephalon, Inc. v. Mylan Pharmaceuticals Inc., et al., Civil Action No. 03-CV-1394 (JCL), in the United States District Court for the District of New Jersey, seeking, among other things, a

**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.

declaration that Mylan’s making, using, offering to sell, selling, or importing Mylan ANDA Modafinil Tablets would infringe the RE ‘516 Patent, an order providing that the effective date of any approval of Mylan’s ANDA No. 76-594 shall be a date which is not earlier than the date of the expiration of the RE ‘516 Patent; and an order permanently enjoining Mylan from making, using, offering to sell, selling, or importing tablets as described in Mylan’s ANDA No. 76-594 until after the date of the expiration of the RE ‘516 Patent.

WHEREAS, Mylan answered Cephalon’s complaint by asserting an affirmative defense that the RE ‘516 patent is invalid and unenforceable, and by filing counterclaims seeking declaratory judgment of invalidity and unenforceability.

WHEREAS, Cephalon and Mylan have taken discovery, but no partial or final judgment has entered as to any issue in dispute.

WHEREAS, to avoid the time and expense of further litigation, and in compromise of the disputed claims set forth above, the parties now desire to resolve their disputes by settlement.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and conditions herein set forth, the receipt and sufficiency of which consideration is hereby acknowledged, the parties agree as follows:

1.DEFINITIONS

1.1“Action” shall mean Cephalon, Inc. v. Mylan Pharmaceuticals Inc., et al., Civil Action No. 03-CV-1394 (JCL), pending in the United States District Court for the District of New Jersey.

1.2“Affiliate” shall mean any corporation, partnership, joint venture or firm which controls, is controlled by or under common control with a specified person or entity. For

**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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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 policy decisions of such non-corporate entities.

1.3“API” shall mean the active pharmaceutical ingredient in Subject Modafinil Product, modafinil.

1.4“Mylan Generic Modafinil” shall mean any Subject Modafinil Product marketed and sold by Mylan pursuant to the terms of this Agreement.

1.5“Mylan” shall mean MYLAN PHARMACEUTICALS INC., a corporation organized and existing under the laws of the State of West Virginia, with its principal place of business at 781 Chestnut Ridge Road, Morgantown, West Virginia 26504, and its directors, officers, employees, agents and representatives, predecessors, successors, and assigns; its subsidiaries, divisions, groups, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

1.6“Mylan ANDA Modafinil Product” shall mean [**].

1.7“Mylan Modafinil ANDA” shall mean ANDA No. 76-594.

1.8“Cephalon” shall mean CEPHALON, INC., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 41 Moores Road,

**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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Frazer, Pennsylvania, and its directors, officers, employees, agents and representatives, predecessors, successors, and assigns; its subsidiaries, divisions, groups, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

1.9“Date Certain” shall mean the later of: (a) October 6, 2011 (three years prior to the expiration of the Patent In Suit); or (b)in the event that Cephalon obtains a pediatric extension on the Patent in Suit, April 6, 2012 (three years prior to the expiration of the pediatric extension, if obtained).

1.10“Generic Modafinil Product” shall mean any Subject Modafinil Product that is not marketed under the mark PROVIGIL®

1.11“Listed Patents” shall mean [**].

1.12“Modafinil Litigation” shall mean (a) Cephalon, Inc. v. Mylan Pharmaceuticals Inc., et al., Civil Action No. 03-CV-1394 (JCL), pending in the United States District Court for the District of New Jersey; (b) Cephalon, Inc. v. Carlsbad Tech., Inc., Civil Action No. 05-CV-1089 (JCL), pending in the United States District Court for the District of New Jersey; and (c) any action filed under Title 35, United States Code, 35 U.S.C. §§ 271 and 281 against any Modafinil Paragraph IV ANDA Filing Entity.

1.13“Modafinil Paragraph IV ANDA Filing Entity” shall mean any entity that has notified or subsequently notifies Cephalon that it has filed an ANDA with a Paragraph IV certification concerning a product containing modafinil as an active ingredient for which PROVIGIL® is the reference listed drug.

**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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1.14“Net Profits” shall mean the gross receipts derived in arms-length transactions from the sale of Mylan Generic Modafinil in the United States, or applicable other markets by Mylan (or by its Affiliates), to independent third parties in the United States or applicable other markets, less the sum of the following items:

(a)Import, export, excise and sales taxes and custom duties paid or allowed by the selling party and any other governmental charges imposed upon the production, importation, use or sale of Mylan Generic Modafinil by Mylan and/or its Affiliates;

(b)Credit for returns, refunds, rebates and allowances, or trades to customers for returned or recalled Mylan Generic Modafinil;

(c)Trade, quantity and cash discounts;

(d)Transportation, freight and insurance allowances;

(e)Rebates (direct or indirect) actually granted to wholesalers or other customers, rebates or administrative fees in lieu of rebates paid to managed care, institutions, government purchasers, Medicaid and other similar government programs, chargebacks and retroactive price adjustments, and any other similar allowances which effectively reduce the net selling price; and

(f)The purchase price paid to Cephalon for Mylan Generic Modafinil pursuant to any applicable Cephalon/Mylan License and Supply Agreement, or Mylan’s costs of making Mylan Generic Modafinil.

Net Profits shall be calculated according to US GAAP consistently applied. Sales or transfers between or among a party to this Agreement and its Affiliates shall be excluded from

**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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the computation of Net Profits except where such Affiliates are end users, but Net Profits shall include the subsequent final sales to third parties by such Affiliates.

Where (i) Mylan Generic Modafinil is sold as one of a number of items without a separate price; or (ii) the consideration for the Mylan Generic Modafinil shall include any non-cash element; or (iii) the Mylan Generic Modafinil shall be transferred in any manner other than an invoiced sale, the gross sales applicable to any such transaction shall be deemed to be the selling party’s average gross sales for the applicable quantity of Mylan Generic Modafinil during the calendar quarter. If there are no independent gross sales of Mylan Generic Modafinil in the United States or applicable other markets at that time, then Mylan and Cephalon shall appoint a mutually acceptable third party (that is not an Affiliate of either Mylan or Cephalon) to determine in good faith an estimate of the gross sales applicable to any such transactions based on a consideration of all relevant market factors, taking into account practices and policies customary in the industry.

In the event that any discounts, allowances, payments or rebates are offered for the Mylan Generic Modafinil where it is sold to a customer as a grouped set of products, the applicable discount, allowance, payment or rebate for the Mylan Generic Modafinil for purposes of calculating Net Profits under this Agreement shall be based upon the weighted average discount, allowance, payment or rebate of such grouped set of products; each to the extent consistent with Mylan’s usual course of dealing for its products other than the Mylan Generic Modafinil.

1.15“Other Modafinil Paragraph IV ANDA Filing Entity” shall mean any Modafinil Paragraph IV ANDA Filing Entity besides Mylan or Cephalon or its and their Affiliates.

**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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1.16“Patent In Suit” shall mean the RE ‘516 Patent.

1.17“Subject Modafinil Product” shall mean [**].

2.OBLIGATIONS OF THE PARTIES

2.1Mylan Warranty.

The parties agree that this Agreement includes a settlement which is a compromise of a disputed claim and that acceptance of the consideration herein is not to be construed as an admission by either party as to the underlying merits of the Action. However, as an express inducement to Cephalon to enter into this settlement, in consideration of the terms hereof, Mylan hereby warrants, represents and agrees that Mylan, on behalf of itself and its Affiliates, will not make, use, offer to sell, or sell, or actively induce or assist any other entity to make, use, offer to sell, or sell Mylan ANDA Modafinil Product within the United States, or import or cause to be imported any Mylan ANDA Modafinil Product into the United States, except as otherwise permitted under, and according to the terms of, the license granted by Cephalon in connection with this Agreement. The parties agree that, as used in this Section 2.1, “induce” and “assist” shall include Mylan’s provision of modafinil API to parties it knows or has reason to know will make, use, offer to sell, sell, import or cause to be imported a finished drug product which has modafinil as an active ingredient in the United States.

2.2Within [**], Cephalon shall make a [**] payment to Mylan of [**], in recognition of the savings inuring to Cephalon in terms of the avoidance of costs, expenditure of time and resources, disruption and burden associated with prosecuting the Action against Mylan, and in

**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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recognition of the legal fees and other litigation costs and expenses already incurred by Mylan in connection with the Action.

2.3Mylan Generic Rights. Cephalon shall also grant to Mylan the non-exclusive generic rights set forth in Section 3 below.

3.MYLAN GENERIC RIGHTS

3.1Cephalon grants to Mylan the non-exclusive right under the Listed Patents to manufacture, have manufactured, use, market and sell Generic Modafinil Product in the United States according to the following terms:

3.1.1.Mylan’s non-exclusive generic rights under section 3.1 shall be effective on or after the Date Certain. Mylan shall pay Cephalon a royalty equal to [**].

3.1.2.Notwithstanding Section 3.1.1, in the event that Cephalon licenses or permits any other entity to sell any Generic Modafinil Product in the United States prior to the Date Certain (other than pursuant to a license granted to a third party, whether by settlement or otherwise, that is subject to suspension provisions similar to those set forth in Sections 3.1.3.3 and 3.1.3.6), Mylan’s non-exclusive generic rights under section 3.1 shall become effective on the date on which such other licensed entity begins selling a Generic Modafinil Product in the United States. In the event that Mylan is permitted to sell Mylan Generic Modafinil in the United States prior to the Date Certain under the terms of this Section, Mylan shall pay

**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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Cephalon a royalty equal to [**] Mylan Generic Modafinil sold by Mylan and/or its Affiliates in the United States prior to the Date Certain.

3.1.3.Notwithstanding Section 3.1.1, in the event that any Other Modafinil Paragraph IV ANDA Filing Entity sells in the United States any Subject Modafinil Product prior to a non-appealable final judgment in any Modafinil Litigation to which such Other Modafinil Paragraph IV ANDA Filing Entity is a party, Mylan’s non-exclusive generic rights shall be effective at the same time, subject to the following restrictions:

3.1.3.1Mylan shall pay to Cephalon a royalty equal to [**] Mylan Generic Modafinil made by Mylan and/or its Affiliates pursuant to Section 3.1.3.

3.1.3.2In the event that Cephalon seeks a temporary restraining order or other relief against such Other Modafinil Paragraph IV ANDA Filing Entity to stop such Entity from offering to sell or selling in the United States its Subject Modafinil Product, Mylan and/or its Affiliates may continue to market and sell Mylan Generic Modafinil in the United States until a court of competent jurisdiction renders a decision on Cephalon’s request for a temporary restraining order or other relief, as further described in Sections 3.1.3.3 through 3.1.3.4  .

3.1.3.3If Cephalon obtains a temporary restraining order or other relief sufficient to stop further offers to sell or sales in the United States of Subject Modafinil Product by any Other Modafinil Paragraph IV ANDA Filing

**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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Entity, Mylan’s generic rights shall be suspended until the Date Certain, and Mylan and/or its Affiliates shall immediately cease offering to sell and/or selling any Mylan Generic Modafinil as of the earliest date on which such injunctive or other relief may be enforced.

3.1.3.4If Cephalon requests but does not obtain a temporary restraining order or other relief, Mylan may continue to market and sell Mylan Generic Modafinil in the United States until the resolution of pending Modafinil Litigation. Mylan shall continue to pay to Cephalon a royalty equal to [**] Mylan and/or its Affiliates as set forth in Section 3.1.3.1 above.

3.1.3.5Nothing in this Section or the Agreement shall obligate Cephalon to seek injunctive or other relief to stop such Other Modafinil Paragraph IV ANDA Filing Entity from offering to sell or selling Subject Modafinil Product in the United States.

3.1.3.6In the event that Cephalon prevails against such Other Modafinil Paragraph IV ANDA Filing Entity in Modafinil Litigation, such that offers to sell or sales in the United States of Subject Modafinil Product by such Other Modafinil Paragraph IV ANDA Filing Entity are admitted by such Other Modafinil Paragraph IV ANDA Filing Entity or held by the court to infringe one or more valid and enforceable claims of the Listed Patents, Mylan’s generic rights shall be suspended until the Date Certain and Mylan and/or its Affiliates shall immediately cease marketing and/or

**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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selling Mylan Generic Modafinil until the Date Certain. Cephalon shall [**].

3.1.3.7Notwithstanding Section 3.1.1., in the event that a final, non-appealable judgment in Modafinil Litigation is entered prior to the Date Certain declaring that one or more Other Modafinil Paragraph IV ANDA Filing Entities may offer to sell or sell Subject Modafinil Product in the United States without infringing any valid, enforceable claim of any Listed Patent on which Cephalon has brought suit, Mylan may then market and sell Mylan Generic Modafinil in the United States. If such final judgment is based on a finding of the invalidity of the Patent in Suit, no royalty will thereafter be due to Cephalon. Otherwise, Mylan shall pay to Cephalon a royalty of [**] Mylan Generic Modafinil in the United States made by Mylan and/or its Affiliates.

3.2Mylan shall have the right to commence manufacturing activities in preparation of launch a reasonable period of time prior to the agreed upon effective date of the non-exclusive generic rights granted to Mylan hereunder, provided however, that Mylan shall not have the right to launch in advance of such effective date, nor to communicate its ability to do so to third parties earlier than [**] prior to the anticipated launch date, without prior written consent of Cephalon.

3.3On Mylan’s request, Cephalon shall supply Mylan with finished modafinil product on terms to be mutually agreed, for sale by Mylan of Mylan Generic Modafinil in accordance with the terms of this Agreement.

**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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3.4In order for Mylan to exercise the rights under the Listed Patents as contemplated by this Section 3, Cephalon agrees to provide appropriate waivers of exclusivities or evidence of patent licenses as reasonably necessary for Mylan to obtain regulatory approval of Mylan Generic Modafinil in the United States.

3.5Notwithstanding the terms of this Section 3, Cephalon covenants that it will not sue Mylan for infringement under the Listed Patents, or any other patents now owned or subsequently acquired by Cephalon, or any other patents to which Cephalon now has or subsequently acquires license rights, for any sales by Mylan in the United States of a product that is manufactured or sold pursuant to an ANDA for which the reference listed drug is PROVIGIL®, provided that any such sales are in accordance with the terms of this Agreement. Mylan agrees that it will not challenge the validity or enforceability of the Listed Patents.

3.6(a)Mylan shall have the one time right, to be exercised upon thirty (30) days’ written notice from Mylan to Cephalon, and at any time following Mylan’s first commercial marketing of Mylan Generic Modafinil in accordance with the terms of this Agreement, to request that Cephalon provide to a mutually agreeable independent third-party accounting firm [**]. The [**] provided by Cephalon to the third-party accounting firm [**], and Cephalon shall take any other steps necessary to facilitate compliance with any confidentiality obligations owed by Cephalon and the requirements of applicable laws, while still providing sufficient information about [**]. These [**] shall not be disclosed to Mylan, except to the extent contemplated in Section 3.6(d) below.

(b)The information provided to the third-party accounting firm shall be

**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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limited solely to [**], and shall not include [**].

(c)Cephalon shall provide [**] to the third-party accounting firm for the sole purpose of enabling said accounting firm [**], so that said accounting firm may determine (in good faith and in accordance with the professional standards of the industry and principles of US GAAP, consistently applied) [**]. All fees and expenses of the third-party accounting firm shall be paid by Mylan.

(d)In the event that said accounting firm determines in good faith that [**], the accounting firm shall promptly notify Mylan of [**] (and also provide Cephalon a copy of such notice). By way of clarification, the accounting firm is not to determine [**], but rather is simply to provide Mylan with a copy of [**]. Mylan shall then have the one-time option (exercisable upon written notice to Cephalon, to be given within ten days of receipt of the notice from the accounting firm) to elect either [**].

(e)The license agreement contemplated by Section 7.1 below shall include a dispute resolution provision pursuant to which Cephalon can submit any dispute it might have with the conclusion reached by the third-party accounting firm. In the event of such a dispute, [**] shall continue to apply until the dispute is resolved, [**].

(f)The parties agree that, if at any time after the parties have completed the review process set forth in this Section 3.6, [**].

4.DISMISSAL

4.1Upon the execution of this Agreement, Cephalon and Mylan shall execute and file with the United States District Court for the District of New Jersey a Joint Stipulation for

**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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Dismissal, in the form attached hereto as Exhibit A. Each party shall bear its own costs with respect to the settlement of the Action.

4.2Cephalon and Mylan waive any right to appeal any order previously entered in the Action.

5.MUTUAL RELEASES

5.1Mylan, on behalf of itself and its subsidiaries, successors, and assigns, hereby releases, acquits, and forever discharges Cephalon from and against any and all claims, demands, liabilities, causes of action, damages, duties, or obligations arising under, concerning, or relating to the Action, but specifically excluding a breach by Cephalon of its covenants and obligations under this Agreement.

5.2Cephalon, on behalf of itself and its subsidiaries, successors, and assigns, hereby releases, acquits, and forever discharges Mylan from any and all claims, demands, liabilities, causes of action, damages, duties, or obligations arising under, concerning, or relating to the Action, but specifically excluding a breach by Mylan of its covenants and obligations under this Agreement.

6.CONFIDENTIALITY

6.1Cephalon and Mylan shall continue to be bound by and to comply with the terms of the Stipulated Protective Order previously executed in the Action and the confidentiality obligations agreed upon between the parties on November 25, 2005.

**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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6.2Cephalon and Mylan agree that the terms of this Agreement shall remain confidential and shall not be disclosed to third parties except subject to a nondisclosure agreement, and pursuant to business discussions relating to asset sales, mergers, or change of control transactions, or upon order of a court of competent jurisdiction or to the extent required by law or governmental regulation. Cephalon and Mylan agree that within 10 days of the execution of this Agreement, they will jointly agree in good faith upon the text of and disseminate appropriate press releases respecting the subject matter of this agreement, and that they will not otherwise publicize the terms and conditions this Agreement or make any statements or comments to any news media and/or trade publication, or any third person or entity (except as set forth above) regarding the terms and conditions of this Agreement, except as may be required by law, and then only after having conferred in good faith to obtain the reasonable agreement of the party. Information otherwise in the public domain is not subject to the provisions of this Section.

7.MISCELLANEOUS

7.1Cephalon and Mylan agree that, [**] of the date of this Agreement, they shall prepare and execute whatever documents are necessary (including license and supply agreements, as appropriate) to carry out the terms of Sections 2 and 3 above. However, subject to applicable laws, the terms and conditions contained in this Agreement are binding notwithstanding the failure of the parties to enter into the agreements referenced in this Section 7.1.

7.2The terms of this Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective successors, heirs, and assigns.

**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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7.3No party shall assign any of its rights or obligations hereunder to any non-Affiliated third party without first obtaining the written consent of the other party hereto, which consent may not be unreasonably withheld.

7.4The Agreement shall be interpreted in accordance with and governed by the law of the State of Delaware.

7.5Cephalon and Mylan agree that the United States District Court for the District of New Jersey shall be the proper and exclusive forum for any action to enforce this Agreement. Each party consents to the personal jurisdiction of that court for such purposes.

7.6Notices under this Agreement shall be sent by overnight or first class mail, return receipt or other proof of delivery requested, to the following:

If to Cephalon:

Legal Department
Cephalon, Inc.
41 Moores Road
Frazer, PA  19355
Attn:  John E. Osborn
Sr. Vice President, General Counsel & Secretary
Telephone:  (610) 738-6337
Fax:  (610) 738-6590

If to Mylan:

Mylan Pharmaceuticals Inc.

781 Chestnut Ridge Road

Morgantown, WV  26505

Attn:  Brian S. Roman

Vice President and General Counsel

Telephone:  (304) 598-5430 ext. 5376

Fax:  (304) 598-5408

**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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7.7This Agreement may not be modified, amended, supplemented or repealed except by written agreement executed by duly authorized representatives of the parties.

7.8Each party shall have the right, at its own expense, once each fiscal year upon reasonable advance notice, to have a mutually acceptable independent auditor conduct an audit (consistent with US GAAP and applicable laws) of the financial books and accounts of the other party for the purposes of ascertaining the payments due under this Agreement as well as the compliance with all financial obligations hereunder.

7.9This Agreement represents the entire agreement between Cephalon and Mylan with respect to the subject matter of this Agreement and supersedes all prior or contemporaneous agreements, proposals or understandings, whether written or oral, between Cephalon and Mylan with respect to that subject matter.

7.10If one or more provisions of this Agreement are ruled wholly or partly invalid or unenforceable by a court or other government body of competent jurisdiction, then the validity and enforceability of all other provisions of this Agreement shall not in any way be affected or impaired.

7.11No waiver of, failure of a party to object to, or failure of a party to take affirmative action with respect to any default, term, or condition of this Agreement, or any breach thereof, shall be deemed to imply or constitute a waiver of any other like default, term, or condition of this Agreement, or subsequent breach thereof.

**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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7.12Nothing in this Agreement shall be construed so as to result in a license under, or waiver of, any right of a party, in each case, without an express license or waiver by such party in writing, either hereunder or in a separate writing signed by the parties. For the avoidance of doubt:

(a)Nothing in this Agreement shall operate or be construed as granting Mylan a license under, or any other rights with respect to, any patents owned by Cephalon other than the Listed Patents, except as specifically stated in Section 3.5; and

(b)Nothing in this Agreement shall operate or be construed as a waiver by Mylan of any rights to challenge any patent owned by Cephalon other than [**].

7.13Cephalon and Mylan have had all desired counsel, legal and otherwise, in entering into this Agreement, and do so in accordance with their own free acts and deeds. This Agreement shall therefore be deemed to have been negotiated and prepared at the joint request, direction, and instruction of each of the parties, at arms length, with the advice and participation of counsel, and will be interpreted in accordance with its terms without favor to either party.

**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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7.14Each party represents that it is duly existing; that it has the full power and authority to enter into this Agreement; that there are no other persons or entities whose consent to this Agreement or whose joinder herein is necessary to make fully effective the provisions of this Agreement; that this Agreement does not and will not interfere with any other agreement to which it is a party and that it will not enter into any agreement the execution and/or performance of which would violate or interfere with this Agreement.

7.15This Agreement may be signed in counterparts, each of which shall be deemed an original hereof, but all of which together shall constitute one and the same instrument.

**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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IN WITNESS WHEREOF, Cephalon and Mylan have executed this Agreement effective as of the date first written above.

CEPHALON, INC.					MYLAN PHARMACEUTICALS INC.
By:	/s/ Frank Baldino, Jr., Ph.D.				By:	/s/ Brian S. Roman
Printed Name:				Frank Baldino, Jr., Ph.D.	Printed Name:			Brian S. Roman
Title:		Chairman and CEO			Title:		Vice President and General Counsel
Date:			January 9, 2006		Date:		January 9, 2006

**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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EX-10.2

Exhibit 10.2

PROVIGIL SETTLEMENT AGREEMENT

THIS SETTLEMENT AGREEMENT (“Agreement”) is entered into effective this 1st day of February, 2006, by and between CEPHALON, INC., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 41 Moores Road, Frazer, Pennsylvania, and BARR LABORATORIES, INC., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 400 Chestnut Ridge Road, Woodcliff Lake, New Jersey.

WHEREAS, Cephalon is the owner by assignment of all right and title in U.S. Reissue Patent No. RE37,516 (“the RE ‘516 Patent”), issued by the United States Patent and Trademark Office on January 15, 2002 and expiring on October 6, 2014.

WHEREAS, Provigil, which is covered by claims of the RE ‘516 Patent, is the commercial formulation of modafinil developed, manufactured and sold by Cephalon pursuant to FDA approval of Cephalon’s NDA 20-717.

WHEREAS, by letter dated February 20, 2003, Barr notified Cephalon that Barr had submitted ANDA No. 76-597 to the FDA under Section 505(j) of the Federal Food, Drug and Cosmetic Act (21 U.S.C. § 355(j)), seeking approval to engage in the commercial manufacture, use, and sale of tablets containing 100 mg and 200 mg of modafinil, a generic version of Provigil tablets, before the expiration date of the RE ‘516 Patent, and certifying that the RE ‘516 Patent is invalid, unenforceable, or not infringed by Barr’s generic product.

WHEREAS, Cephalon timely filed suit against Barr and three other companies that had also filed Paragraph IV ANDAs concerning Provigil in an action captioned Cephalon, Inc. v. Mylan Pharmaceuticals Inc., et al., Civil Action No. 03-CV-1394 (JCL), in the United States

**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.

District Court for the District of New Jersey, seeking, among other things, a declaration that Barr’s making, using, offering to sell, selling, or importing Barr ANDA Modafinil Tablets would infringe the RE ‘516 Patent, an order providing that the effective date of any approval of Barr’s ANDA No. 76-597 shall be a date which is not earlier than the date of the expiration of the RE ‘516 Patent; and an order permanently enjoining Barr from making, using, offering to sell, selling, or importing tablets as described in Barr’s ANDA No. 76-597 until after the date of the expiration of the RE ‘516 Patent.

WHEREAS, Barr answered Cephalon’s complaint by denying infringement, by asserting an affirmative defense that incorporated by reference Barr’s co-defendants’ allegations that the RE ‘516 patent is invalid and unenforceable, and by filing a counterclaim seeking declaratory judgment of noninfringement.

WHEREAS, Cephalon and Barr have taken discovery, but no partial or final judgment has entered as to any issue in dispute.

WHEREAS, to avoid the time and expense of further litigation, and in compromise of the disputed claims set forth above, the parties now desire to resolve their disputes by settlement.

WHEREAS, Cephalon desires to purchase and license from Barr, and Barr is willing to sell and license to Cephalon on the terms and conditions set forth herein, certain intellectual property rights owned by Barr.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and conditions herein set forth, the receipt and sufficiency of which consideration is hereby acknowledged, the parties agree as follows:

**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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1.DEFINITIONS

1.1“Action” shall mean Cephalon, Inc. v. Mylan Pharmaceuticals Inc., et al., Civil Action No. 03-CV-1394 (JCL), pending in the United States District Court for the District of New Jersey.

1.2“Affiliate” shall mean 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 policy decisions of such non-corporate entities.

1.3“[**] Application” shall mean [**].

1.4“Barr” shall mean BARR LABORATORIES, INC., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 400 Chestnut Ridge Road, Woodcliff Lake, New Jersey, and its directors, officers, employees, agents and representatives, predecessors, successors, and assigns (including without limitation any assignee of the Barr Modafinil ANDA); its subsidiaries, divisions, groups, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

1.5“Barr ANDA Modafinil Product” shall mean [**].

**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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1.6“Barr Modafinil ANDA” shall mean ANDA No. 76-597.

1.7“Cephalon” shall mean CEPHALON, INC., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 41 Moores Road, Frazer, Pennsylvania, and its directors, officers, employees, agents and representatives, predecessors, successors, and assigns; its subsidiaries, divisions, groups, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

1.8“Effective Date” shall mean the date first written above.

1.9“Intellectual Property Rights” shall mean any and all United States and foreign patent applications, including, without limitation, all provisional applications, continuations, continuations-in-part (but not continuations-in-part claiming patentably distinct subject matter) and divisionals, and any and all Letters Patent, whether United States or foreign, that are or may be granted therefrom, including, without limitation, all reissues, extensions, substitutions, confirmations, re-registrations, re-examinations, validations, supplementary protection certificates and patents of addition, and the underlying inventions described therein.

1.10“Listed Patents” shall mean [**].

1.11“Modafinil License and Supply Agreement” shall mean the Modafinil License and Supply Agreement attached hereto as Exhibit A.

1.12“Patent In Suit” shall mean the RE ‘516 Patent.

**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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1.13“Provigil” means the commercial formulation of modafinil developed, manufactured and, as of the date of this Agreement, sold by Cephalon pursuant to FDA approval of Cephalon’s NDA 20-717.

1.14“Subject Modafinil Product” shall mean [**].

2.EFFECTIVENESS

2.1This Agreement shall become effective on the Effective Date.

3.OBLIGATIONS OF THE PARTIES

3.1Barr agrees that it will not challenge the validity or the enforceability of the Patent in Suit. Barr agrees that the Patent in Suit would be infringed by making, using, offering to sell, or selling Barr ANDA Modafinil Product by Barr and/or its Affiliates within the United States, or by importing or causing to be imported any Barr ANDA Modafinil Product by Barr and/or its Affiliates into the United States, without a license to do so. Barr agrees that the Patent in Suit would be infringed by actively inducing any other entity to make, use, offer to sell, or sell Barr ANDA Modafinil Product within the United States, or to import or cause to be imported any Barr ANDA Modafinil Product into the United States, without a license to do so. Barr and its Affiliates shall make no representation or assertion to the contrary in any forum or context at any time.

**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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3.2Barr agrees that it will not sell Subject Modafinil Product in the United States prior to the effective date of the license granted by Cephalon to Barr pursuant to the terms of the Modafinil License and Supply Agreement.

3.3On [**], Cephalon shall make a [**] payment to Barr of [**], in recognition of the savings inuring to Cephalon in terms of the avoidance of costs, expenditure of time and resources, disruption and burden associated with prosecuting the Action against Barr.

3.4Transfers of Intellectual Property

(a)Barr hereby sells and assigns to Cephalon its entire right, title, and interest throughout the world in and to the [**] Application and the inventions claimed therein. Barr also hereby grants to Cephalon and its Affiliates a non-exclusive, non-royalty-bearing, world-wide license (including the right to sublicense) to all Intellectual Property Rights owned or controlled by Barr that are related to the [**] Application and necessary to permit Cephalon to practice the inventions claimed in the [**] Application (the “[**] Intellectual Property Rights”) to manufacture, have manufactured, develop, formulate, use, sell, offer to sell, and import API and finished pharmaceutical products.

(b)Cephalon hereby grants to Barr and its Affiliates a non-exclusive, non-royalty-bearing, world-wide license to the [**] Application and the inventions claimed therein to manufacture, have manufactured, develop, formulate, use, sell, offer to sell, and import API and finished pharmaceutical products.

(c)In consideration of the sale, assignment and license set forth in Section 3.4(a) above, Cephalon shall make a lump sum payment to Barr in the amount of [**]. This payment

**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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shall be made [**].

(d)Barr represents and warrants that, as of the Effective Date: (i) it owns all right, title, and interest in and to the [**] Application; (ii) it has the right to enter into this agreement with respect to the [**] Intellectual Property Rights; (iii) it has not granted and will not grant during the term of this agreement rights in or to the [**] Intellectual Property Rights that are inconsistent with the rights granted herein; (iv) to Barr’s knowledge, there are no claims of third parties that would call into question the rights of Barr to grant to Cephalon the rights contemplated hereunder; (v) except for the Intellectual Property Rights related to the [**] Application, as of the Effective Date, Barr does not own, control, or have any rights to any patents or patent applications that would dominate any practice of the Intellectual Property Rights related to the [**] Application; and (vi) to Barr’s knowledge, there are no threatened or pending actions, suits, investigations, claims, or proceedings in any way relating to the Intellectual Property Rights related to the [**] Application.

(e)At Cephalon’s request, Barr shall timely execute any and all documents necessary to reflect the sale and assignment set forth in Sections 3.4(a) above, including confirmatory patent assignments.

(f)Cephalon shall have the sole right, but not the obligation, to apply for, prosecute, maintain, renew, extend, abandon, disclaim in whole or in part, or otherwise dispose of, including without limitation the right to prosecute, defend, settle, resolve or otherwise dispose of any patent litigation or any patent interference with any third party’s patent rights, including without limitation any patent rights of Cephalon, whether before the United States Patent and Trademark Office (“PTO”) or any United States court (all of the foregoing, to “Prosecute”), the

**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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[**] Application and all other Intellectual Property Rights related to the [**] Application, using counsel selected by Cephalon. All reasonable costs and expenses of the Prosecution of the [**] Application and all other Intellectual Property Rights related to the [**] Application (including all governmental filing fees) shall be paid by Cephalon.

3.5Cephalon and Barr have entered into the Modafinil License and Supply Agreement.

3.6Cephalon covenants that it will not sue Barr for infringement under the Listed Patents, or any other patents now owned or subsequently acquired by Cephalon, for any sales by Barr in the United States of a product that is manufactured or sold pursuant to an ANDA for which the reference listed drug is Provigil, provided that any such sales are in accordance with the terms of this Agreement. Barr agrees that it will not challenge the validity or enforceability of the Listed Patents in any context or forum. Cephalon agrees that it will not assert the Listed Patents against Barr in any context or forum, including with regard to any pharmaceutical product, except in the event of a breach by Barr of this Section 3.6 or any provision of Sections 3.1 or 3.2 of this Agreement. Cephalon agrees to provide [**] notice to Barr prior to listing any patent other than [**]

**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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4.DISMISSAL

4.1Upon the Effective Date, Cephalon and Barr shall execute and file with the United States District Court for the District of New Jersey a Joint Stipulation for Dismissal, in the form attached hereto as Exhibit B. Each party shall bear its own costs with respect to the settlement of the Action.

4.2Cephalon and Barr waive any right to appeal any order previously entered in the Action.

5.MUTUAL RELEASES

5.1Barr, on behalf of itself and its subsidiaries, successors, and assigns, hereby releases, acquits, and forever discharges Cephalon from and against any and all claims, demands, liabilities, causes of action, damages, duties, or obligations arising under, concerning, or relating to the Patent In Suit, including, without limitation, any claim for declaratory judgment that the Patent In Suit is invalid, unenforceable, or would not be infringed by any Barr ANDA Modafinil Product, but specifically excluding a breach by Cephalon of its covenants and obligations under this Agreement.

5.2Cephalon, on behalf of itself and its subsidiaries, successors, and assigns, hereby releases, acquits, and forever discharges Barr from any and all claims, demands, liabilities, causes of action, damages, duties, or obligations arising under, concerning, or relating to infringement of the Patent In Suit by the filing of the Barr Modafinil ANDA with a Paragraph IV certification, but specifically excluding a breach by Barr of its covenants and obligations under this Agreement.

**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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6.CONFIDENTIALITY

6.1Cephalon and Barr shall continue to be bound by and to comply with the terms of the Stipulated Protective Order previously executed in the Action.

6.2Cephalon and Barr agree that the terms of this Agreement shall remain confidential and shall not be disclosed to third parties except subject to a nondisclosure agreement, and pursuant to business discussions relating to asset sales, mergers, or change of control transactions, or upon order of a court of competent jurisdiction or to the extent required by law or governmental regulation; provided that Cephalon and Barr may issue mutually agreeable press releases and make public statements consistent with the text of those press releases. Cephalon and Barr agree that they will not otherwise publicize the terms and conditions of this Agreement or make any statements or comments to any news media and/or trade publication, or any third person or entity (except as set forth above) regarding the terms and conditions of this Agreement. Information otherwise in the public domain is not subject to the provisions of this Section.

7.INDEMNIFICATION BY CEPHALON

7.1In the event that Barr becomes the subject of a civil complaint, state or federal inquiry, or other governmental proceeding or investigation (“Proceeding”) arising from this Agreement (excluding any action to enforce the terms of this Agreement), Cephalon shall indemnify Barr, its Affiliates and subsidiaries, the officers, directors, and employees of each of them, and Barr’s current supplier of modafinil API, Chemagis Ltd. and its applicable Affiliates, (collectively, the “Barr Indemnitees”), for expenses reasonably and in good faith incurred by or

**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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on behalf of the Barr Indemnitees in responding to, or defending against, any such Proceeding (including court costs, reasonable attorneys’ fees, economists’, accountants’, and other experts’ fees, or other related expenses of litigation or other proceedings), provided that Barr has given Cephalon notice of such Proceeding as set forth in Section 7.2 below.

7.2(a)Barr shall provide written notice to Cephalon of any Proceeding for which indemnification will be sought by the Barr Indemnitees within twenty (20) business days of Barr’s receipt of notice of such Proceeding. This notice to Cephalon (“Indemnification Notice”) shall include:  (i) a request for indemnification pursuant to the terms of this Section; (ii) a copy of any informal or formal notice of investigation, summons, subpoena, complaint, or other document relating to such Proceeding with which any of the Barr Indemnitees are served; and (iii) any other documentation and information available to Barr as is reasonably necessary to determine whether and to what extent the Barr Indemnitees are entitled to indemnification under this Section. However, the parties acknowledge and agree that the failure by Barr to provide such notice within the six months after the expiration of the 20-day time period set forth above shall not deprive the Barr Indemnitees of their right to indemnification, provided that the delay in the provision of such notice does not in any way prejudice Cephalon. It is understood and agreed, however, that if Cephalon has actual knowledge of the Proceeding for which indemnification is being sought within said six month period, then the failure by Barr to provide notice within the six month period shall not deprive the Barr Indemnitees of their right to indemnification.

(b)Within ten (10) business days of Cephalon’s receipt of an Indemnification Notice from Barr, Cephalon shall provide a written acknowledgement to Barr (“Indemnification

**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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Acknowledgement”) in which Cephalon shall:  (i) agree that the Barr Indemnitees are entitled to indemnification under this Section in connection with the Proceeding; or (ii) dispute that the Barr Indemnitees are entitled to such indemnification.

(c)During the thirty (30) day period following the date of an Indemnification Acknowledgement that reflects a dispute, Cephalon and Barr shall use good faith efforts to resolve the dispute. In the absence of an agreement, such dispute shall be resolved in accordance with Section 8.4 of this Agreement.

7.3Barr shall have the right to select its own legal counsel in connection with such Proceeding, subject to Cephalon’s consent which shall not be unreasonably withheld. Barr shall notify and keep Cephalon apprised in writing of such Proceeding, and shall consider and take into account Cephalon’s reasonable interests and requests regarding such Proceeding. Cephalon shall have the right, in Cephalon’s sole discretion and at Cephalon’s expense, to join or otherwise participate in such Proceeding, with legal counsel selected by Cephalon. Notwithstanding the above, nothing in this Section shall be construed as limiting or interfering with Barr’s right to pursue its own interests in the conduct of such Proceeding.

7.4In order to obtain payment for any indemnified expenses pursuant to this Section, Barr shall submit to Cephalon (either periodically while the Proceeding is ongoing, or after final disposition of such Proceeding) a statement of the expenses actually incurred by or on behalf of the Barr Indemnitees in connection with a Proceeding. Such statement shall include a copy of any invoices reflecting expenses for which Barr is seeking payment from Cephalon. Cephalon shall make payment to Barr within thirty (30) days after the receipt by Cephalon of each such statement from Barr.

**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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7.5In the event that either the FTC or the DOJ threatens to institute its own judicial or administrative proceeding against either of the parties related to this Agreement, the parties shall promptly meet in good faith to discuss the feasibility of possible modifications to this Agreement.

8.MISCELLANEOUS

8.1The terms of this Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective successors, heirs, and assigns.

8.2No party shall assign any of its rights or obligations hereunder to any non-Affiliated third party without first obtaining the written consent of the other party hereto, which consent may not be unreasonably withheld.

8.3The Agreement shall be interpreted in accordance with and governed by the law of the State of Delaware.

8.4Cephalon and Barr agree that the United States District Court for the District of New Jersey shall be the proper and exclusive forum for any action to enforce this Agreement. Each party consents to the personal jurisdiction of that court for such purposes.

8.5Notices under this Agreement shall be sent by overnight or first class mail, return receipt or other proof of delivery requested, to the following:

**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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If to Cephalon:

Legal Department

Cephalon, Inc.

41 Moores Road

Frazer, PA  19355

Attn:  John E. Osborn

Sr. Vice President, General Counsel & Secretary

Telephone: (610) 738-6337

Fax:           (610) 738-6590

If to Barr:

Barr Laboratories, Inc.

400 Chestnut Ridge Road

Woodcliff Lake, NJ 07677

Attention:  President

Facsimile:  (201) 930-3335

8.6This Agreement may not be modified, amended, supplemented, or repealed except by written agreement executed by duly authorized representatives of the parties.

8.7This Agreement and its attachments represent the entire agreement between Cephalon and Barr with respect to the subject matter of this Agreement and supersedes all prior or contemporaneous agreements, proposals, or understandings, whether written or oral, between Cephalon and Barr with respect to that subject matter.

8.8If one or more provisions of this Agreement are ruled wholly or partly invalid or unenforceable by a court or other government body of competent jurisdiction, then the validity and enforceability of all other provisions of this Agreement shall not in any way be affected or impaired.

**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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8.9No waiver of, failure of a party to object to, or failure of a party to take affirmative action with respect to any default, term, or condition of this Agreement, or any breach thereof, shall be deemed to imply or constitute a waiver of any other like default, term, or condition of this Agreement, or subsequent breach thereof.

8.10Nothing in this Agreement shall be construed so as to result in a license under, or waiver of, any right of a party, in each case, without an express license or waiver by such party in writing, either hereunder or in a separate writing signed by the parties. For the avoidance of doubt:

(a)Nothing in this Agreement shall operate or be construed as granting Barr a license under, or any other rights with respect to, any patents owned by Cephalon other than the Listed Patents, except as specifically stated in Sections 3.4(b) and 3.6; and

(b)Nothing in this Agreement shall operate or be construed as a waiver by Barr of any rights to challenge any patent owned by Cephalon other than [**].

8.11Cephalon and Barr have had all desired counsel, legal and otherwise, in entering into this Agreement, and do so in accordance with their own free acts and deeds. This Agreement shall therefore be deemed to have been negotiated and prepared at the joint request, direction, and instruction of each of the parties, at arms length, with the advice and participation of counsel, and will be interpreted in accordance with its terms without favor to either party.

8.12Each party represents that it is duly existing; that it has the full power and authority to enter into this Agreement and the Modafinil License and Supply Agreement; that there are no other persons or entities whose consent to this Agreement and the Modafinil License

**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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and Supply Agreement or whose joinder herein or therein is necessary to make fully effective the provisions of this Agreement and the Modafinil License and Supply Agreement; that this Agreement and the Modafinil License and Supply Agreement do not and will not interfere with any other agreement to which it is a party and that it will not enter into any agreement the execution and/or performance of which would violate or interfere with this Agreement and the Modafinil License and Supply Agreement.

8.13This Agreement may be signed in counterparts, each of which shall be deemed an original hereof, but all of which together shall constitute one and the same instrument.

**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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IN WITNESS WHEREOF, Cephalon and Barr have executed this Agreement effective as of the date first written above.

CEPHALON, INC.					BARR LABORATORIES, INC.
By:	/s/ Frank Baldino, Jr., Ph.D.				By:	/s/ Paul M. Bisaro
Printed Name:				Frank Baldino, Jr., Ph.D.	Printed Name:				Paul M. Bisaro
Title:		Chairman and CEO			Title:			President
Date:			February 1, 2006		Date:		February 1, 2006

**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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EX-10.3

Exhibit 10.3

MODAFINIL LICENSE AND SUPPLY AGREEMENT

This Modafinil License and Supply Agreement (this “Agreement”) is entered into as of this 1st day of February 2006 (the “Effective Date”) by and between Cephalon, Inc., a Delaware corporation, having its principal place of business located at 41 Moores Road, P.O. Box 4011, Frazer, Pennsylvania 19355, and Barr Laboratories, Inc., a Delaware corporation, having its principal place of business located at 400 Chestnut Ridge Road, Woodcliff Lake, New Jersey 07677.

WHEREAS, Cephalon is the owner by assignment of all right and title in U.S. Reissue Patent No. RE37,516 (the “RE ‘516 Patent”), issued by the United States Patent and Trademark Office on January 15, 2002 and expiring on October 6, 2014.

WHEREAS, PROVIGIL® modafinil, which is covered by claims of the RE ‘516 Patent, is the commercial formulation of modafinil developed, manufactured and sold by Cephalon pursuant to FDA approval of Cephalon’s NDA 20-717.

WHEREAS, by letter dated February 20, 2003, Barr notified Cephalon that Barr had submitted ANDA No. 76-597 to the FDA under Section 505(j) of the U.S. Federal Food, Drug, and Cosmetic Act (21 U.S.C. § 355(j)), seeking approval to engage in the commercial manufacture, use, and sale of tablets containing 100 mg and 200 mg of modafinil, a generic version of PROVIGIL® modafinil tablets, before the expiration date of the RE ‘516 Patent, and certifying that the RE ‘516 Patent is invalid, unenforceable, or not infringed by Barr’s generic product.

WHEREAS, Cephalon timely filed suit against Barr and three other companies that had also filed Paragraph IV ANDAs concerning PROVIGIL® modafinil in an action captioned Cephalon, Inc. v. Mylan Pharmaceuticals Inc., et al., Civil Action No. 03-CV-1394 (JCL), in the United States District Court for the District of New Jersey, seeking, among other things, a declaration that Barr’s making, using, offering to sell, selling, or importing tablets as described in Barr’s ANDA No. 76-597 would infringe the RE ‘516 Patent, an order providing that the effective date of any approval of Barr’s ANDA No. 76-597 shall be a date which is not earlier than the date of the expiration of the RE ‘516 Patent, and an order permanently enjoining Barr from making, using, offering to sell, selling, or importing tablets as described in Barr’s ANDA No. 76-597 until after the date of the expiration of the RE ‘516 Patent.

WHEREAS, Barr answered Cephalon’s complaint by denying infringement, by asserting an affirmative defense that incorporated by reference Barr’s co-defendants’ allegations that the RE ‘516 patent is invalid and unenforceable, and by filing a counterclaim seeking declaratory judgment of noninfringement.

WHEREAS, Cephalon and Barr have taken discovery, but no partial or final judgment has been entered as to any issue in dispute.

**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.

WHEREAS, to avoid the time and expense of further litigation, and in compromise of the disputed claims set forth above, the Parties now desire to resolve their disputes by settlement in accordance with that certain Provigil Settlement Agreement dated February 1, 2006 between the Parties (the “Provigil Settlement Agreement”).

WHEREAS, in connection with such settlement, Cephalon wishes to grant to Barr, and Barr wishes to receive, certain rights and licenses, subject to the terms and conditions of this Agreement.

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“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 policy decisions of such non-corporate entities.

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

1.3“Barr” means Barr Laboratories, Inc., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 400 Chestnut Ridge Road, Woodcliff Lake, New Jersey 07677, and its directors, officers, employees, agents and representatives, predecessors, successors, and assigns; its subsidiaries, divisions, groups, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

1.4“Barr ANDA Modafinil Product” means [**].

1.5“Barr Generic Modafinil Product” means a Barr ANDA Modafinil Product or a Cephalon Supplied Modafinil Product.

1.6“Barr Indemnitees” has the meaning assigned in Section 8.1.

1.7“Barr Modafinil ANDA” means ANDA No. 76-597.

1.8“Cephalon” means Cephalon, Inc., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 41 Moores Road, Frazer, Pennsylvania, and its directors, officers, employees, agents and representatives, predecessors,

**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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successors, and assigns; its subsidiaries, divisions, groups, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

1.9“Cephalon Indemnitees” has the meaning assigned in Section 8.2.

1.10“Cephalon Supplied Modafinil Product” means Subject Modafinil Product sold by Cephalon to Barr for ultimate resale in the United States pursuant to the terms and conditions of a separate supply agreement between the Parties as described in Article 4.

1.11“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.

1.12“Confidential Information” has the meaning assigned in Section 7.1.

1.13“Date Certain” means the later of: (a) October 6, 2011 (which is three years prior to the expiration of the RE ‘516 Patent); or (b) in the event that Cephalon obtains a pediatric extension of the RE ‘516 Patent, April 6, 2012 (which is three years prior to the expiration of Pediatric Exclusivity, if obtained).

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

1.15“Independent Auditor” has the meaning assigned in Section 3.7.

1.16“Listed Patents” means [**].

1.17“Modafinil License Effective Date” has the meaning assigned in Section 2.2.

1.18“Modafinil Litigation” means (a) Cephalon, Inc. v. Mylan Pharmaceuticals Inc., et al., Civil Action No. 03-CV-1394 (JCL), pending in the United States District Court for the District of New Jersey; (b) Cephalon, Inc. v. Carlsbad Tech., Inc., Civil Action No. 05-CV-1089 (JCL), pending in the United States District Court for the District of New Jersey; and (c) any action filed under Title 35, United States Code, 35 U.S.C. §§ 271 and 281 against any Modafinil Paragraph IV ANDA Filing Entity.

1.19“Modafinil Paragraph IV ANDA Filing Entity” shall mean any entity that has notified or subsequently notifies Cephalon that it has filed an ANDA with a Paragraph IV certification concerning a product containing modafinil as an active ingredient for which Provigil is the reference listed drug.

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

1.21“Net Profits” means the gross receipts derived in arm’s-length transactions from the sale of Barr Generic Modafinil Product in the United States by Barr (or by its Affiliates), to independent third parties in the United States, less the sum of the following items:

(a)Import, export, excise and sales taxes and custom duties paid or allowed by the selling party and any other governmental charges imposed upon the production, importation, use or sale of Barr Generic Modafinil Product by Barr and/or its Affiliates;

(b)Credits for returns, refunds, rebates and allowances, or trades to customers for returned or recalled Barr Generic Modafinil Product;

(c)Trade, quantity and cash discounts actually allowed;

(d)Transportation, freight and insurance allowances;

(e)Rebates to wholesalers, administrative fees in lieu of rebates paid to managed care and other similar institutions, chargebacks and retroactive price adjustments, including Shelf Stock Adjustments, and any other similar allowances which effectively reduce the net selling price; and

(f)The purchase price paid to Cephalon for such Barr Generic Modafinil Product that is Cephalon Supplied Modafinil Product or Barr’s direct and reasonable costs of making such Barr Generic Modafinil Product that is Barr ANDA Modafinil Product, as applicable.

Gross and Net Profits shall be calculated according to US GAAP. Sales or transfers between or among Barr and its Affiliates shall be excluded from the computation of Net Profits except where such Affiliates are end users, but Net Profits shall include the subsequent final sales to third parties by such Affiliates.

Where (i) Barr Generic Modafinil Product is sold as one of a number of items without a separate price; or (ii) the consideration for the Barr Generic Modafinil Product shall include any non-cash element; or (iii) the Barr Generic Modafinil Product shall be transferred in any manner other than an invoiced sale, the gross sales applicable to any such transaction shall be deemed to be the selling party’s average gross sales for the applicable quantity of Barr Generic Modafinil Product during the calendar quarter. If there are no independent gross sales of Barr Generic Modafinil Product in the United States at that time, then Barr and Cephalon shall mutually agree on a surrogate measure to be used in lieu thereof.

1.22“Other Modafinil Paragraph IV ANDA Filing Entity” means any Modafinil Paragraph IV ANDA Filing Entity besides Barr or Cephalon or its and their Affiliates.

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

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

1.25“Providing Party” has the meaning assigned in Section 7.1.

1.26“Provigil” means the commercial formulation of modafinil developed, manufactured and, as of the Effective Date, sold by Cephalon pursuant to FDA approval of Cephalon’s NDA 20-717.

1.27“Receiving Party” has the meaning assigned in Section 7.1 of this Agreement.

1.28“Shelf Stock Adjustment” means the customary practice of providing a purchaser of Barr Generic Modafinil Product an adjustment to the net purchase price for on-hand inventory in response to an offer from a supplier of a competing Subject Modafinil Product.

1.29“Subject Modafinil Product” shall mean [**].

2.GRANT OF RIGHTS

2.1Grant of License. Subject to Sections 2.2 and 2.3 below, Cephalon grants to Barr a royalty-bearing, non-exclusive license, without a right to sublicense, under the Listed Patents and any regulatory exclusivities, including Pediatric Exclusivity, to use, offer for sale, sell, distribute and have distributed, promote, market and advertise, import and have imported, the Barr Generic Modafinil Product, and to make and have made the Barr ANDA Modafinil Product, in the United States.

2.2Modafinil License Effective Date. The license granted by Cephalon to Barr pursuant to Section 2.1 shall become effective upon the earliest of:

(a)the Date Certain;

(b)the sale of a Subject Modafinil Product in the United States pursuant to a license or authorization granted by Cephalon to a third party (other than a license or authorization granted to a third party, whether by settlement or otherwise, under circumstances similar to those that would trigger Barr’s license under Section 2.2(c) below, and that is subject to suspension provisions similar to those set forth in Section 2.3);

(c)the sale of a Subject Modafinil Product by any Other Modafinil Paragraph IV ANDA Filing Entity in the United States that is not pursuant to a license or authorization granted by Cephalon (in which case, Barr would receive a license to enter the market which is subject to suspension as set forth in Section 2.3); and

(d)the entry of a final, non-appealable judgment in the Modafinil Litigation declaring that one or more Other Modafinil Paragraph IV ANDA Filing Entities may sell or offer

**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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to sell Subject Modafinil Products in the United States without infringing any valid, enforceable claim of any Listed Patent on which Cephalon has brought suit in such litigation.

The earliest to occur of the dates in subsections (a) through (d) of this Section 2.2 shall constitute the “Modafinil License Effective Date”.

2.3Suspension of License. If, at any time after the Modafinil License Effective Date (where such Modafinil License Effective Date is triggered as a result of an event set forth in Section 2.2(c)), (a) Cephalon obtains a temporary restraining order or other relief sufficient to stop further offers to sell or sales in the United States of Subject Modafinil Products by all Other Modafinil Paragraph IV ANDA Filing Entities, or (b) Cephalon prevails against all Other Modafinil Paragraph IV ANDA Filing Entities in any Modafinil Litigation, such that offers to sell or sales in the United States of Subject Modafinil Products by Other Modafinil Paragraph IV ANDA Filing Entities are admitted by such Other Modafinil Paragraph IV ANDA Filing Entities or held by the court to infringe one or more valid and enforceable claims of the Listed Patents, then (i) Barr’s license under Section 2.1 shall be suspended until the Date Certain, or, if applicable, the earlier occurrence of an event described in Section 2.2(b), (ii) Barr and/or its Affiliates shall immediately cease offering to sell and/or selling any Barr Generic Modafinil Product as of the earliest date on which such injunctive or other relief may be enforced, or otherwise when Cephalon prevails in the action described in subsection (b) above, and (iii) [**]. For purposes of clarity, nothing in this Agreement or in the Provigil Settlement Agreement shall obligate Cephalon to seek injunctive or other relief to stop any Other Modafinil Paragraph IV ANDA Filing Entity from offering to sell or selling Subject Modafinil Products in the United States.

2.4Notification to FDA of License. Subject to Section 2.3, immediately upon the Modafinil License Effective Date, Cephalon shall reasonably cooperate with Barr in notifying the FDA that Cephalon has granted Barr the license set forth in Section 2.1, including, but not limited to, by filing with the FDA such documentation as is necessary to affirm such license.

2.5Infringement.

(a)Notice Regarding and Authority to Take Action Against Infringers. Barr shall promptly notify Cephalon of any known infringement by third parties of the rights licensed to Barr under this Agreement. If any of the Listed Patents are infringed, Cephalon shall have the sole and exclusive right, but not the obligation, to commence appropriate legal action to enjoin such infringement at its sole expense. Barr shall provide its complete cooperation to Cephalon, at Cephalon’s expense. Cephalon shall be entitled to retain any damages or awards that may result from its initiation of any such action.

(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 patents and patent applications of third parties. For purposes of clarification, Cephalon shall have the right, but not the obligation, to defend such claims against Provigil and Subject Modafinil Product sold by Cephalon, and Barr shall have the right, but not the obligation, to

**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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defend such claims against Barr Generic Modafinil Product sold by Barr (other than Cephalon Supplied Modafinil Product where Cephalon elects to defend).

2.6Reservation. Cephalon reserves all rights not expressly granted hereunder, including, without limitation, the right to enforce the Listed Patents against Barr prior to the Modafinil License Effective Date (or during the period of any suspension pursuant to Section 2.3) and/or against any other person or entity at any time. Notwithstanding anything to the contrary herein, the rights and licenses granted to Barr hereunder exclude, and Cephalon retains, all rights and licenses with respect to Cephalon’s Sparlon^® and Nuvigil^® products and any generic versions thereof.

3.ROYALTIES; ESCROW

3.1Royalty.

(a)From and after the Modafinil License Effective Date, Barr shall pay Cephalon a royalty equal to [**] Barr Generic Modafinil Product sold by Barr or its Affiliates in the United States.

(b)Notwithstanding Section 3.1(a), in the event that a final, non-appealable judgment in the Modafinil Litigation is entered prior to the Date Certain declaring that one or more Other Modafinil Paragraph IV ANDA Filing Entities may sell Subject Modafinil Products in the United States without infringing any valid, enforceable claim of any Listed Patent on which Cephalon has brought suit, or in the event that any party is selling Subject Modafinil Product in the United States pursuant to a license from Cephalon, then, in lieu of the royalty set forth in Section 3.1(a):

(i)To the extent [**], Barr shall pay to Cephalon a royalty of [**] Barr Generic Modafinil Product sold by Barr or its Affiliates in the United States;

(ii)[**], Barr shall pay to Cephalon a royalty of [**] Barr Generic Modafinil Product sold by Barr or its Affiliates in the United States; and

(iii)In the event that (A) Cephalon offers to sell or sells a Subject Modafinil Product following such final, non-appealable judgment in the Modafinil Litigation or (B) such final, non-appealable judgment is based upon a finding of invalidity or unenforceability of the RE ‘516 Patent, Barr shall [**] to Cephalon [**] Barr Generic Modafinil Product in the United States made by Barr or its Affiliates. Cephalon shall provide Barr with written notice of any decision by Cephalon to offer to sell or sell a Subject Modafinil Product.

(c)The royalty obligations set forth in Sections 3.1(a) and 3.1(b)(i) and (ii) shall remain in effect until the later of (i) the expiration of the last-to-expire Listed Patent, or (ii) the end of Pediatric Exclusivity on Provigil, subject to any subsequent negotiation concerning an extension of generic rights.

**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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3.2Escrow.

(a)Withholding. In the event that any Other Modafinil Paragraph IV ANDA Filing Entity sells in the United States (other than pursuant to a license from Cephalon described in Section 2.2(b) above) any Subject Modafinil Product prior to a non-appealable final judgment in any Modafinil Litigation to which such Other Modafinil Paragraph IV ANDA Filing Entity is a party, such that Barr’s license hereunder would be subject to suspension in accordance with Section 2.3 above, then Cephalon shall [**] the royalty payments received from Barr pursuant to Section 3.1(a) or 3.1(b) above.

(b)Disbursement.

(i)In the event that Cephalon does not prevail against such Other Modafinil Paragraph IV ANDA Filing Entity in the Modafinil Litigation, such that offers to sell or sales in the United States of Subject Modafinil Products by such Other Modafinil Paragraph IV ANDA Filing Entity are admitted by Cephalon or held by the court not to infringe any valid and enforceable claims of any Listed Patent on which Cephalon has brought suit, or if Cephalon settles with such Other Modafinil Paragraph IV ANDA Filing Entity such that it permits such entity to continue to sell Subject Modafinil Products in the United States pursuant to license or authorization, [**] Cephalon pursuant to Section 3.2(a) above shall [**].

(ii)Upon any suspension pursuant to Section 2.3 of the license granted in Section 2.1, Cephalon shall [**] pursuant to Section 3.2(a).

3.3Reporting. Not later than [**] after the end of each calendar quarter during the period during which royalties are payable under Section 3.1, Barr shall deliver to Cephalon a statement setting forth the Net Profits generated during the preceding calendar quarter, itemized in such manner as may be reasonably requested by Cephalon and containing such sales information as Cephalon may reasonably require.

3.4Payment. Barr shall pay to Cephalon all royalties due in respect of any calendar quarter within [**] after the end of such calendar quarter. All payments hereunder shall be made by check or wire transfer to such bank and account as Cephalon may from time to time designate in writing. All payments shall be made in U.S. Dollars. All payments due hereunder but not paid on the due date shall bear interest (in U.S. Dollars) at the rate which is the lesser of: (a) [**] per month; and (b) the maximum interest rate permitted under applicable law. No part of any amount payable to Cephalon hereunder may be reduced due to any counterclaim, set-off, adjustment or other right which Barr might have against Cephalon or any of its Affiliates. Barr shall be permitted to withhold any applicable withholding taxes from any payments to Cephalon hereunder.

3.5Annual True-Up. Within [**] after the end of each calendar year during the Term, Barr shall perform a “true up” reconciliation (and shall provide Cephalon with a written report of such reconciliation) of the deductions specified in Section 1.21 (a), (b) (excluding returns), (c), (d), (e) and (f). The reconciliation shall be based on actual cash paid or credits issued and estimates related to the reported invoiced sales, but not yet issued for such items. If the foregoing reconciliation report shows either an underpayment or an overpayment to Barr,

**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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then Cephalon or Barr (respectively) shall pay the amount of the difference to the other within [**] of the date of delivery of such report.

3.6Final Returns True-Up. Within [**] of the termination or expiration of this Agreement, Barr shall perform a “true-up” reconciliation (and shall provide Cephalon with a written report of such reconciliation) of the deductions for returns specified in Section 1.21(b). The reconciliation shall be based on actual cash paid or credits issued for returns, through the [**] period following the termination or expiration. If the foregoing reconciliation report shows either an underpayment or an overpayment to Barr, then Cephalon or Barr (respectively) shall pay the amount of the difference to the other within [**] of the date of delivery of such report.

3.7Right to Audit. Barr agrees to make and keep full and accurate books and records in sufficient detail to enable royalties payable to Cephalon hereunder to be determined. Cephalon shall have the right to appoint an independent accounting firm, reasonably acceptable to Barr (“Independent Auditor”), to make a special audit of the books and records of Barr [**]. The Independent Auditor shall treat as confidential all information obtained in such audit and shall not disclose the same to Cephalon or others, except that the Independent Auditor may disclose to Cephalon such information as may pertain to [**]. Upon ten (10) days prior written notice to Barr, the Independent Auditor shall have full access to the books and records of Barr necessary [**]. [**]. If it is determined following such audit that [**], then Barr shall [**].

4.SUPPLY

On Barr’s request, Cephalon shall supply Barr with Cephalon Supplied Modafinil Product on commercially reasonable terms to be mutually agreed, for sale in accordance with the terms of this Agreement.

5.TERM AND TERMINATION

5.1Term. This Agreement shall commence as of the Effective Date and shall remain in effect unless terminated in accordance with Section 5.2 below.

5.2Termination due to Material Breach by Either Party. Upon material breach of any term of this Agreement, the breaching Party will be given written notice thereof and shall have [**] within which to remedy such breach; or, if applicable, such longer period (not exceeding [**]) 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 [**] 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 terminate this Agreement and seek available remedies at law or equity.

5.3Survival of Rights and Terms. Termination or expiration of this Agreement shall not affect any accrued rights of either Party. Notwithstanding termination of this Agreement for any reason, the following Sections shall survive: this Section 5.3 and Articles 3, 6, 7, 8 and 9.

**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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6.REPRESENTATIONS AND WARRANTIES

6.1General. Cephalon and Barr hereby represent and warrant to the other that (a) 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; (b) 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 (c) the rights granted by each of them does not conflict with any rights granted by either of them to any third party. In addition, Cephalon warrants that it has rights to license or sublicense, as the case may be, the Listed Patents as licensed hereunder.

6.2Disclaimer of Warranty. EXCEPT AS EXPRESSLY SET FORTH HEREIN IN SECTION 6.1, NO GUARANTEE, WARRANTY, CONDITION, UNDERTAKING OR TERM, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, IS GIVEN OR ASSUMED BY CEPHALON, AND ALL SUCH GUARANTEES, WARRANTIES, CONDITIONS, UNDERTAKINGS AND TERMS ARE HEREBY EXCLUDED.

7.CONFIDENTIALITY

7.1Confidential 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 Provigil or Barr Generic Modafinil Product. 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 Section 7.1(e) shall neither relieve the Receiving Party from attempting to impose confidentiality

**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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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.

7.2Protection 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 7.

7.3Presumptive 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.

8.INDEMNIFICATION

8.1Indemnification 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 Provigil or Subject Modafinil Product, other than Barr ANDA Modafinil Product, sold by Cephalon 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 Modafinil Products at the time of delivery to Barr, (c) the material breach of any representations or warranties made by Cephalon in Article 6 herein; (d) the negligence, recklessness or willful misconduct of Cephalon or Cephalon’s officers, employees or agents hereunder; or (e) the successful enforcement by Barr of its rights under this Section 8.1. Notwithstanding the foregoing, Cephalon shall not be obligated to indemnify Barr for any liability related to the Cephalon Supplied Modafinil Products to the extent Barr has assumed an indemnification obligation with respect thereto under Section 8.2 below.

**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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8.2Indemnification 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 Modafinil Product of the intellectual property rights of third parties; (b) the use or sale or other distribution of Barr Generic Modafinil Product by Barr or its Affiliate in violation of the terms of this Agreement; (c) any representation made or warranty given by Barr or subdistributors with respect to the Barr Generic Modafinil Product; (d) the death or injury to person or damage to property resulting from Barr ANDA Modafinil Product; (e) the death or injury to person or damage to property resulting from (i) improper handling, storage or transport of Cephalon Supplied Modafinil Product by Barr or (ii) the unauthorized alteration, modification or adulteration of Cephalon Supplied Modafinil Product by Barr; (f) the material breach of any representation or warranties made by Barr in Article 6 herein; (g) the negligence, recklessness or willful misconduct of Barr or Barr’s officers, employees or agents hereunder; or (h) the successful enforcement by Cephalon of its rights under this Section 8.2. Notwithstanding the foregoing, Barr shall not be obligated to indemnify Cephalon for any liability related to the Cephalon Supplied Modafinil Products to the extent Cephalon has assumed an indemnification obligation with respect thereto under Section 8.1 above.

8.3Notification. 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.

8.4Cooperation. 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.

9.GENERAL

9.1Headings. 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.

9.2Severability. 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.

9.3Entire Agreement. This Agreement and the Provigil Settlement Agreement contain the entire agreement of the Parties regarding the subject matter hereof and thereof and supersede all prior agreements, understandings or conditions (whether oral or written) regarding

**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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the same. This Agreement may not be changed, modified, amended or supplemented except by a written instrument signed by both Parties.

9.4Assignment. 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.

9.5Independent 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 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.

9.6Further Assurances. Each Party 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.

9.7Notices 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.

41 Moores Road

P.O. Box 4011

Frazer, Pennsylvania 19355

Attention:  Senior Vice President & General Counsel

Facsimile:  (610) 738-6258

If to Barr:

Barr Laboratories, Inc.

400 Chestnut Ridge Road

Woodcliff Lake, NJ 07677

Attention:  President

Facsimile:  (201) 930-3335

**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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9.8Disputes; 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 [**] 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.

9.9Force 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, its agencies or instrumentalities, or contingencies or causes beyond such Party’s reasonable control.

9.10Waiver. The waiver by either Party of a breach of any provision that is 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.

9.11Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be considered and shall have the force and effect of an original.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

**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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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. Bisaro			By:	/s/ Frank Baldino, Jr., Ph.D
Printed Name:			Paul M. Bisaro	Printed Name:			Frank Baldino, Jr., Ph.D
Title:		President		Title:		Chairman and CEO

**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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EX-10.4

Exhibit 10.4

ACTIQ SETTLEMENT AGREEMENT

THIS SETTLEMENT AGREEMENT (“Agreement”) is entered into this 1st day of February, 2006, by and between CEPHALON, INC., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 41 Moores Road, Frazer, Pennsylvania, the UNIVERSITY OF UTAH RESEARCH FOUNDATION, a nonprofit corporation organized and existing under the laws of the State of Utah, having its principal place of business at 615 Arapeen Dr., Suite 310, Salt Lake City, Utah, on the one hand, and BARR LABORATORIES, INC., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 400 Chestnut Ridge Road, Woodcliff Lake, New Jersey.

WHEREAS, United States Patent No. 4,863,737 (“the ‘737 Patent”), entitled “Compositions and Methods of Manufacture of Compressed Powder Medicaments,” was issued on September 5, 1989 by the United States Patent and Trademark Office to Theodore H. Stanley and Brian Hague, was assigned to the University of Utah, and was subsequently assigned to the UURF, which owns all right and title to the ‘737 Patent and has the right to sue for and obtain equitable relief and damages for infringement. The ‘737 Patent expires on September 5, 2006.

WHEREAS, Cephalon is the exclusive licensee under the ‘737 Patent, and has the right to sue for infringement of the ‘737 Patent by a third party.

WHEREAS, Cephalon is the approval holder of NDA 20-747 and sells drug products in the United States under the trademark ACTIQ®, an oral transmucosal fentanyl citrate product which is a solid drug matrix on a handle, is covered by claims of the ‘737 Patent, and was

**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.

approved by the FDA for the management of breakthrough cancer pain. The FDA’s official publication of approved drugs (the “Orange Book”) includes ACTIQ® listed together with the ‘737 Patent.

WHEREAS, Barr notified Cephalon and UURF that Barr had submitted ANDA No. 77-312 to the FDA under Section 505(j) of the Federal Food, Drug and Cosmetic Act (21 U.S.C. § 355(j)) with a Paragraph IV certification, seeking approval to engage in the commercial manufacture, use, and sale of oral transmucosal fentanyl citrate products in the form of a solid drug matrix on a handle and in various dosages equivalent to 0.2, 0.4, 0.6, 0.8, 1.2 and 1.6 mg of the fentanyl base, before the expiration date of the ‘737 Patent.

WHEREAS, Cephalon and UURF timely filed suit against Barr in an action captioned Cephalon, Inc., et al. v. Barr Laboratories, Inc., Civil Action No. 05-29 (JJF), in the United States District Court for the District of Delaware, seeking, among other things, a declaration that Barr’s making, using, offering to sell, selling, or importing oral transmucosal fentanyl citrate products as described in Barr’s ANDA No. 77-312 would infringe the ‘737 Patent, an order providing that the effective date of any approval of Barr’s ANDA No. 77-312 shall be a date which is not earlier than the date of the expiration of the ‘737 Patent; and an order permanently enjoining Barr and its affiliates and subsidiaries from making, using, offering to sell, selling, or importing oral transmucosal fentanyl citrate products as described in Barr’s ANDA No. 77-312 until after the date of the expiration of the ‘737 Patent.

WHEREAS, Barr answered the complaint by denying infringement, by asserting affirmative defenses of noninfringement and invalidity, and by filing counterclaims for declaratory judgment of noninfringement and invalidity.

**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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WHEREAS, Cephalon and Barr have taken fact discovery and are currently taking expert discovery, but no partial or final judgment has entered as to any issue in dispute.

WHEREAS, Cephalon has sought pediatric exclusivity for ACTIQ® through March 5, 2007.

WHEREAS, to avoid the time and expense of further litigation, and in compromise of the disputed claims set forth above, the parties now desire to resolve their disputes by settlement.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and conditions herein set forth, the receipt and sufficiency of which consideration is hereby acknowledged, the parties agree as follows:

1.DEFINITIONS

1.1“Action” shall mean Cephalon, Inc., et al. v. Barr Laboratories, Inc., Civil Action No. 05-29 (JJF), pending in the United States District Court for the District of Delaware.

1.2“ACTIQ” and “ACTIQ SF” shall have the same meaning as those terms are defined in the Existing License and Supply Agreement.

1.3“ACTIQ NDA” and “ACTIQ SF NDA” shall have the same meaning as those terms are defined in the Existing License and Supply Agreement.

1.4“Affiliate” shall mean 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

**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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(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 policy decisions of such non-corporate entities.

1.5“Barr” shall mean BARR LABORATORIES, INC., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 400 Chestnut Ridge Road, Woodcliff Lake, New Jersey, and its directors, officers, employees, agents and representatives, predecessors, successors, and assigns (including without limitation any assignee of Barr’s ANDA No. 77-312) ; its subsidiaries, divisions, groups, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

1.6“Barr Generic Product” shall mean both “Barr Generic Product” and “Barr Generic SF Product” as those terms are defined in the Existing License and Supply Agreement.

1.7“Cephalon” shall mean CEPHALON, INC., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 41 Moores Road, Frazer, Pennsylvania, and its directors, officers, employees, agents and representatives, predecessors, successors, and assigns; its subsidiaries, divisions, groups, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

1.8“Effective Date” shall mean the date first written above.

1.9“Existing License and Supply Agreement” shall mean the License and Supply Agreement entered into on July 7, 2004 by and between Cephalon and Barr.

**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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1.10“Existing License Effective Date” shall mean the date on which the license granted under Section 2.1(a) (i), (ii) and (iv) of the Existing License and Supply Agreement becomes effective under Section 2.1(b) of the Existing License and Supply Agreement.

1.11“FDA” shall mean the Food and Drug Administration.

1.12“FTC” shall mean the Federal Trade Commission.

1.13“FTC Consent” shall mean the FTC’s Decision and Order issuedSeptember 20, 2004, In the Matter of Cephalon, Inc. and Cima Labs Inc., FTC Docket No. C-4121.

1.14“OTFC” shall mean oral transmucosal fentanyl citrate.

1.15“Patent In Suit” shall mean the ‘737 Patent.

1.16“Subject OTFC Product” shall mean [**].

1.17“Supplemental License and Supply Agreement” shall mean the Actiq Supplemental License and Supply Agreement attached hereto as Exhibit A.

1.18“UURF” shall mean UNIVERSITY OF UTAH RESEARCH FOUNDATION, a nonprofit corporation organized and existing under the laws of the State of Utah, having its principal place of business at 615 Arapeen Dr., Suite 310, Salt Lake City, Utah, and its directors, officers, employees, agents and representatives, predecessors, successors, and assigns; its subsidiaries, divisions, groups, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

**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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2.EFFECTIVENESS

2.1This Agreement shall become effective on the Effective Date.

3.INFRINGEMENT

3.1Barr agrees that the Patent in Suit is valid and enforceable. Barr agrees that the Patent in Suit would be infringed by making, using, offering to sell or selling Barr Generic Product within the United States, or by importing or causing to be imported any Barr Generic Product into the United States, without a license to do so. Barr agrees that the Patent in Suit would be infringed by actively inducing any other entity to make, use, offer to sell, or sell Barr Generic Product within the United States, or to import or cause to be imported any Barr Generic Product into the United States, without a license to do so. Barr and its Affiliates shall make no representation or assertion to the contrary in any forum or context at any time.

3.2Barr agrees that it will not sell Subject OTFC Product prior to the earlier of December 6, 2006 and the Existing License Effective Date.

4.SUPPLEMENTAL LICENSE AND SUPPLY AGREEMENT

4.1Cephalon and Barr have entered into the Supplemental License and Supply Agreement. The terms of the Supplemental License and Supply Agreement are not intended to alter the rights and obligations in the FTC Consent, but rather are intended to, and do, grant Barr additional rights beyond those set out in the FTC Consent.

5.PAYMENTS

5.1Any royalty payments paid to Cephalon by Barr pursuant to the terms of the

**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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Supplemental License and Supply Agreement shall be credited against the [**] milestone payment set forth in Exhibit B to the Existing License and Supply Agreement.

6.DISMISSAL

6.1Upon the Effective Date, Cephalon, UURF and Barr shall execute and file with the United States District Court for the District of Delaware a Joint Stipulation for Dismissal, in the form attached hereto as Exhibit B. Each party shall bear its own costs with respect to the settlement of the Action.

6.2Cephalon, UURF and Barr waive any right to appeal any order previously entered in the Action.

7.MUTUAL RELEASES

7.1Barr, on behalf of itself and its subsidiaries, successors, and assigns, hereby releases, acquits, and forever discharges Cephalon and UURF from and against any and all claims, demands, liabilities, causes of action, damages, duties, or obligations arising under, concerning, or relating to the Patent In Suit, including, without limitation, any claim for declaratory judgment that the Patent In Suit is invalid, unenforceable, or would not be infringed by any Barr Generic Product, but specifically excluding a breach by Cephalon and/or UURF of their respective covenants and obligations under this Agreement.

7.2Cephalon, on behalf of itself and its subsidiaries, successors, and assigns, hereby releases, acquits and forever discharges Barr from any and all claims, demands, liabilities, causes of action, damages, duties, or obligations arising under, concerning, or relating to infringement of

**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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the Patent In Suit by any Barr Generic Product, but specifically excluding a breach by Barr of its covenants and obligations under this Agreement.

7.3UURF, on behalf of itself and its subsidiaries, successors, and assigns, hereby releases, acquits and forever discharges Barr from any and all claims, demands, liabilities, causes of action, damages, duties, or obligations arising under, concerning, or relating to infringement of the Patent In Suit by any Barr Generic Product, but specifically excluding a breach by Barr of its covenants and obligations under this Agreement.

8.CONFIDENTIALITY

8.1Cephalon, UURF and Barr shall continue to be bound by and to comply with the terms of the Protective Order previously entered by the Court in the Action.

8.2Except as otherwise required by law, Cephalon, UURF and Barr agree that the terms of this Agreement shall remain confidential and shall not be disclosed to third parties except subject to a nondisclosure agreement, and pursuant to business discussions relating to asset sales, mergers, or change of control transactions, or upon order of a court of competent jurisdiction or to the extent required by law or governmental regulation; provided that Cephalon, UURF and Barr may issue mutually agreeable press releases and make public statements consistent with the text of those press releases. Cephalon, UURF and Barr agree that they will not otherwise publicize the terms and conditions of this Agreement or make any statements or comments to any news media and/or trade publication, or any third person or entity (except as set forth above) regarding the terms and conditions of this Agreement. Information otherwise in the

**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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public domain is not subject to the provisions of this Section.

9.MISCELLANEOUS

9.1The terms of this Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective successors, heirs, and assigns.

9.2No party shall assign any of its rights or obligations hereunder to any non-Affiliated third party without first obtaining the written consent of the other party hereto, which consent may not be unreasonably withheld.

9.3The Agreement shall be interpreted in accordance with and governed by the law of the State of Delaware.

9.4Cephalon, UURF and Barr agree that the United States District Court for the District of Delaware shall be the proper and exclusive forum for any action to enforce this Agreement. Each party consents to the personal jurisdiction of that court for such purposes.

**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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9.5Notices under this Agreement shall be sent by overnight or first class mail, return receipt or other proof of delivery requested, to the following:

If to Cephalon:

Legal Department
Cephalon, Inc.
41 Moores Road
Frazer, PA  19355
Attn:  John E. Osborn
Sr. Vice President, General Counsel & Secretary
Telephone: (610)-738-6337
Fax:           (610)-738-6590

If to UURF:

University of Utah Research Foundation

Patent and Product Development Division

391-G Chipeta Way

Salt Lake City, UT  84108

Attention:  General Counsel

Facsimile:  (801) 585-7007

If to Barr:

Barr Laboratories, Inc.
400 Chestnut Ridge Road
Woodcliff Lake, NJ 07677
Attention:  President
Facsimile:  (201) 930-3335

9.6This Agreement may not be modified, amended, supplemented or repealed except by written agreement executed by duly authorized representatives of the parties.

**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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9.7This Agreement and its attachments represent the entire agreement between Cephalon, UURF and Barr with respect to the subject matter of this Agreement and supersedes all prior or contemporaneous agreements, proposals or understandings, whether written or oral, between Cephalon, UURF and Barr with respect to that subject matter. Except as specifically stated herein, however, all terms of the Existing License and Supply Agreement remain in effect.

9.8If one or more provisions of this Agreement are ruled wholly or partly invalid or unenforceable by a court or other government body of competent jurisdiction, then the validity and enforceability of all other provisions of this Agreement shall not in any way be affected or impaired.

9.9No waiver of, failure of a party to object to, or failure of a party to take affirmative action with respect to any default, term, or condition of this Agreement, or any breach thereof, shall be deemed to imply or constitute a waiver of any other like default, term, or condition of this Agreement, or subsequent breach thereof.

9.10Cephalon, UURF and Barr have had all desired counsel, legal and otherwise, in entering into this Agreement, and do so in accordance with their own free acts and deeds. This Agreement shall therefore be deemed to have been negotiated and prepared at the joint request, direction, and instruction of each of the parties, at arms length, with the advice and participation of counsel, and will be interpreted in accordance with its terms without favor to either party.

9.11Each party represents that it is duly existing; that it has the full power and authority to enter into this Agreement and the Supplemental License and Supply Agreement; that

**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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there are no other persons or entities whose consent to this Agreement and the Supplemental License and Supply Agreement or whose joinder herein or therein is necessary to make fully effective the provisions of this Agreement and the Supplemental License and Supply Agreement; that this Agreement and the Supplemental License and Supply Agreement do not and will not interfere with any other agreement to which it is a party and that it will not enter into any agreement the execution and/or performance of which would violate or interfere with this Agreement or the Supplemental License and Supply Agreement.

9.12This Agreement may be signed in counterparts, each of which shall be deemed an original hereof, but all of which together shall constitute one and the same instrument.

**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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IN WITNESS WHEREOF, Cephalon, UURF and Barr have executed this Agreement effective as of the date first written above.

CEPHALON, INC.

BARR LABORATORIES, INC.

By:

/s/ Frank Baldino, Jr., Ph.D.

By:

/s/ Paul M. Bisaro

Printed Name:

Frank Baldino, Jr., Ph.D.

Printed Name:

Paul M. Bisaro

Title:

Chairman and CEO

Title:

President

Date:

February 1, 2006

Date:

February 1, 2006

UNIVERSITY OF UTAH

RESEARCH FOUNDATION

By:

/s/ John Morris

Printed Name:

John Morris

Title:

Secretary

Date:

February 1, 2006

**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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EX-10.5

Exhibit 10.5

ACTIQ SUPPLEMENTAL LICENSE AND SUPPLY AGREEMENT

This ACTIQ Supplemental License and Supply Agreement (this “Agreement”) is entered into as of this 1^st day of February 2006 (the “Effective Date”) by and between Cephalon, Inc., a Delaware corporation, having its principal place of business located at 41 Moores Road, P.O. Box 4011, Frazer, Pennsylvania 19355, and Barr Laboratories, Inc., a Delaware corporation, having its principal place of business located at 400 Chestnut Ridge Road, Woodcliff Lake, New Jersey 07677.

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® (“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 certain antitrust concerns raised by the Federal Trade Commission (the “Commission”) in connection with Cephalon’s acquisition of CIMA LABS INC. (“CIMA”), and as a condition of Commission approval of such acquisition, Cephalon entered into an Agreement Containing Consent Order (“Consent Agreement”), which required Cephalon to enter into a license and supply agreement with Barr to develop, manufacture and market generic versions of ACTIQ® and ACTIQ SF, including contingent supply of both products;

WHEREAS, on July 7, 2004, Cephalon and Barr entered into that certain License and Supply Agreement (the “Existing License and Supply Agreement”) pursuant to which Cephalon granted to Barr certain rights and licenses and assumed certain supply and other obligations, as required under the Consent Agreement;

WHEREAS, in connection with Barr’s submission of ANDA No. 77-312 to the Food and Drug Administration (the “FDA”) under Section 505(j) of the U.S. Federal Food, Drug, and Cosmetic Act (21 U.S.C. § 355(j)), Cephalon filed suit against Barr in an action captioned Cephalon, Inc., et al. v. Barr Laboratories, Inc., Civil Action No. 05-29 (JJF), in the United States District Court for the District of Delaware, and Barr answered the complaint by denying infringement, by asserting affirmative defenses of noninfringement and invalidity, and by filing counterclaims for declaratory judgment of noninfringement and invalidity;

WHEREAS, simultaneously with the execution of this Agreement, Cephalon and Barr have entered into that certain Actiq Settlement Agreement pursuant to which the Parties have resolved and settled the claims described above; and

**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.

WHEREAS, in connection with such settlement, and without amending or modifying any terms and conditions of the Existing License and Supply Agreement, Cephalon wishes to grant to Barr, and Barr wishes to receive, the additional rights and licenses set forth in this Agreement, subject to the terms and conditions hereof.

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

All capitalized terms not defined herein shall have the respective meanings ascribed to such terms in the Existing License and Supply Agreement. The following terms shall have the following respective meanings:

1.1“ACTIQ Licensed Product” means both “ACTIQ Licensed Product” and “ACTIQ SF Licensed Product” as each of those terms are defined in the Existing License and Supply Agreement.

1.2“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 policy decisions of such non-corporate entities.

1.3“Barr” means Barr Laboratories, Inc., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 400 Chestnut Ridge Road, Woodcliff Lake, New Jersey 07677, and its directors, officers, employees, agents and representatives, predecessors, successors, and assigns; its subsidiaries, divisions, groups, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

1.4“Cephalon” means Cephalon, Inc., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 41 Moores Road, Frazer, Pennsylvania, and its directors, officers, employees, agents and representatives, predecessors, successors, and assigns; its subsidiaries, divisions, groups, and the respective directors, officers, employees, agents and representatives, successors, and assigns of each.

1.5“Exclusivity Period” means the period from December 6, 2006 through the Existing License Effective Date.

**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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1.6“Existing License Effective Date” means the date on which the license granted under Section 2.1(a) (i), (ii) and (iv) of the Existing License and Supply Agreement becomes effective under Section 2.1(b) of the Existing License and Supply Agreement.

1.7“Generic Subject OTFC Product” means any Subject OTFC Product that is not marketed under the ACTIQ® mark.

1.8“Licensed Patents” means the (a) ACTIQ Patent Rights, including those patents owned by Cephalon and identified in Exhibits C and E to the Existing License and Supply Agreement, (b) ACTIQ Patent Rights licensed to Cephalon, including those identified in Exhibit D to the Existing License and Supply Agreement, and (c) ACTIQ SF Patent Rights, including those patents owned by Cephalon and identified in Exhibit F to the Existing License and Supply Agreement.

1.9“Net Profits” shall mean the gross receipts derived in arms-length transactions from the sale of ACTIQ Licensed Product in the United States by Barr (or by its Affiliates), to independent third parties in the United States, less the sum of the following items:

(a)Import, export, excise and sales taxes and custom duties paid or allowed by the selling party and any other governmental charges imposed upon the production, importation, use or sale of ACTIQ Licensed Product by Barr and/or its Affiliates;

(b)Credit for returns, refunds, rebates and allowances, or trades to customers for returned or recalled ACTIQ Licensed Product;

(c)Trade, quantity and cash discounts actually allowed;

(d)Transportation, freight and insurance allowances;

(e)Rebates to wholesalers, administrative fees in lieu of rebates paid to managed care and other similar institutions, chargebacks and retroactive price adjustments, including Shelf Stock Adjustments, and any other similar allowances which effectively reduce the net selling price; and

(f)The purchase price paid to Cephalon for ACTIQ Licensed Product pursuant to Section 6.1(d) of the Existing License and Supply Agreement, as incorporated herein by Section 4.1(c) of this Agreement, or Barr’s direct and reasonable costs of making ACTIQ Licensed Product, as applicable, which shall in no event be greater than Barr’s costs of purchasing ACTIQ Licensed Product from Cephalon pursuant to Section 6.1(d) of the Existing License and Supply Agreement as so incorporated.

Gross and Net Profits shall be calculated according to US GAAP. Sales or transfers between or among a Party and its Affiliates shall be excluded from the computation of Net Profits except where such Affiliates are end users, but Net Profits shall include the subsequent final sales to third parties by such Affiliates.

Where (i) ACTIQ Licensed Product is sold as one of a number of items without a separate price; or (ii) the consideration for the ACTIQ Licensed Product shall include any non-cash element; or (iii) the ACTIQ Licensed Product shall be transferred in any manner other than

**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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an invoiced sale, the gross sales applicable to any such transaction shall be deemed to be the selling party’s average gross sales in the United States for the applicable quantity of ACTIQ Licensed Product during the calendar quarter. If there are no independent gross sales of ACTIQ Licensed Product in the United States at that time, then Barr and Cephalon shall mutually agree on a surrogate measure to be used in lieu thereof.

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

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

1.12“Shelf Stock Adjustment” means the customary practice of providing a purchaser of ACTIQ Licensed Product an adjustment to the net purchase price for on-hand inventory in response to an offer from a supplier of a competing Generic Subject OTFC Product,.

1.13“Subject OTFC Product” means [**].

2.GRANT OF RIGHTS

2.1Exclusivity; License. If, and only if, the Existing License Effective Date has not occurred on or prior to December 6, 2006, then the following terms and conditions shall apply:

(a)Exclusive Authorized Generic. During the Exclusivity Period, Cephalon shall not market or sell, nor shall it license or authorize any entity other than Barr to market or sell, Generic Subject OTFC Products in the United States.

(b)Grant of Licenses. Cephalon grants to Barr an irrevocable, non-transferable, exclusive (even as to Cephalon) license, without the right to sublicense, to develop, use, sell, offer for sale, distribute or have distributed, promote or advertise, import or have imported ACTIQ Licensed Product solely in the United States and solely during the Exclusivity Period, in each case, under:

(i)the Licensed Patents; and

(ii)(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.

The Parties acknowledge Barr’s rights to certain manufacturing know-how, technology and material with respect to ACTIQ Licensed Product under Sections 2.1(a)(iii) and 2.2(a)(ii) of the Existing License and Supply Agreement entered into effect as of July 7, 2004.

**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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(c)Pediatric Exclusivity. If, and only if, the Existing License Effective Date has not occurred on or prior to December 6, 2006, then, during the Exclusivity Period, Cephalon shall grant a license to Barr with respect to any such Pediatric Exclusivity that may exist during such period with respect to ACTIQ or 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 as Exhibit H to the Existing License and Supply Agreement.

(d)Expiration. Barr’s rights under Section 2.1(a), 2.1(b) and 2.1(c) shall expire as of the Existing License Effective Date. It is understood and agreed by the Parties that the terms of the FTC Consent and the Existing License and Supply Agreement may provide rights and obligations in addition to those set forth herein, and the grant or expiration of rights under this Section 2.1 shall not be deemed to change, modify, amend or supersede any such other rights or obligations.

(e)Reservation. For purposes of clarity, nothing in this Section 2.1 shall be deemed to limit or prevent Cephalon or its Affiliates or their respective licensees from developing, making, having made, using, selling, offering for selling, distributing or having distributed, promoting or advertising, importing or having imported ACTIQ or ACTIQ SF under the ACTIQ^® mark.

3.ROYALTIES

3.1Royalty. Barr shall pay Cephalon a royalty of [**] ACTIQ Licensed Product sold by Barr or its Affiliates during the Exclusivity Period.

3.2Reporting. Not later than [**], Barr shall deliver to Cephalon a statement setting forth the Net Profits generated during the Exclusivity Period, itemized in such manner as may be reasonably requested by Cephalon and containing such sales information as Cephalon may reasonably require.

3.3Payment. Barr shall pay to Cephalon all royalties due hereunder on or before [**]. All payments hereunder shall be made by check or wire transfer to such bank and account as Cephalon may from time to time designate in writing. All payments shall be made in U.S. Dollars. All payments due hereunder but not paid on the due date shall bear interest (in U.S. Dollars) at the rate which is the lesser of: (a) [**]; and (b) the maximum lawful interest rate permitted under applicable law. No part of any amount payable to Cephalon hereunder may be reduced due to any counterclaim, set-off, adjustment or other right which Barr might have against Cephalon or any of its Affiliates.

3.4Annual True-Up. Within [**] after the end of each calendar year during the Term, Barr shall perform a “true up” reconciliation (and shall provide Cephalon with a written report of such reconciliation) of the deductions specified in Section 1.9 (a), (b) (excluding returns), (c), (d), (e) and (f). The reconciliation shall be based on actual cash paid or credits

**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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issued and estimates related to the reported invoiced sales, but not yet issued for such items. If the foregoing reconciliation report shows either an underpayment or an overpayment to Barr, then Cephalon or Barr (respectively) shall pay the amount of the difference to the other within [**] of the date of delivery of such report.

3.5Final Returns True-Up. Within [**] of the termination or expiration of this Agreement, Barr shall perform a “true-up” reconciliation (and shall provide Cephalon with a written report of such reconciliation) of the deductions for returns specified in Section 1.9 (b). The reconciliation shall be based on actual cash paid or credits issued for returns, through the [**] period following the termination or expiration. If the foregoing reconciliation report shows either an underpayment or an overpayment to Barr, then Cephalon or Barr (respectively) shall pay the amount of the difference to the other within [**] of the date of delivery of such report.

3.6Right to Audit. Barr agrees to make and keep full and accurate books and records in sufficient detail to enable royalties payable to Cephalon hereunder to be determined. Cephalon shall have the right to appoint an independent accounting firm, reasonably acceptable to Barr (“Independent Auditor”), to make a special audit of the books and records of Barr that pertain to [**]. The Independent Auditor shall treat as confidential all information obtained in such audit and shall not disclose the same to Cephalon or others, except that the Independent Auditor may disclose to Cephalon such information as may pertain to [**]. Upon ten (10) days prior written notice to Barr, the Independent Auditor shall have full access to the books and records of Barr necessary [**]. [**]. If it is determined following such audit that [**], then [**].

4.OTHER PROVISIONS

4.1The following provisions of the Existing License and Supply Agreement shall be deemed to be incorporated herein, but only to the extent that such provisions apply with respect to the subject matter of this Agreement:

(a)Section 4.1(a) (except that, for purposes of this Agreement, such provision shall apply with respect to infringement of any ACTIQ Patent Rights or ACTIQ SF Patent Rights to which Barr has an effective license under this Agreement);

(b)Section 5.1 (except that, for purposes of this Agreement, the reference to “License Effective Dates” shall be deemed to refer to the first day of the Exclusivity Period, and excluding subsection (iii) of Section 5.1);

(c)Section 6.1 (except that, for purposes of this Agreement, (i) each reference to “30 days prior to” in the first paragraph of Section 6.1 shall be deemed to refer to 30 days prior to the start of the Exclusivity Period, (ii) Barr’s rights under such provision shall expire as of the expiration of the Exclusivity Period, (iii) the forecasts from Barr referenced in Section 6.1(e) shall be due starting [**] prior to the start of the Exclusivity Period, (iv) cross-references shall be deemed to refer to the corresponding provisions of this Agreement to the extent included

**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.

6

or incorporated herein; and (v) the quality agreement described in Section 6.1(n) shall be negotiated and agreed at least [**] prior to the start of the Exclusivity Period);

(d)Sections 6.2 through 6.4;

(e)Section 7.2;

(f)Section 8.1

(g)Section 8.2 (except that, for purposes of this Agreement, (i) the reference to “Section 2.1” and “Section 2.2” shall be deemed to be a reference to Section 2.1 of this Agreement, and (ii) references to the “ACTIQ Patent Rights License Effective Date” the “ACTIQ SF Patent Rights License Effective Date” and the “respective License Effective Date” shall be deemed to be references to the first day of the Exclusivity Period);

(h)Section 8.3;

(i)Article 9; and

(j)Article 10 (except that (i) cross-references shall be deemed to refer to the corresponding provisions of this Agreement to the extent included or incorporated herein, and (ii) in no event shall either Party be entitled to, or required to provide, any duplicative remedy, indemnification or recovery arising from the same act, omission, fact or circumstance);

provided, however, that the terms and conditions of this Article 4 shall apply herein as described above if, and only if, the Existing License Effective Date has not occurred on or prior to December 6, 2006.

4.2Supply Terms. The provisions of Sections 6.1 through 6.4 of the Existing License and Supply Agreement, as modified and incorporated herein pursuant to Section 4.1 above, shall govern the Parties’ rights and obligations with respect to the supply of ACTIQ Licensed Product by Cephalon to Barr for sale by Barr during the Exclusivity Period.

5.TERM

5.1Term. The term of this Agreement shall commence as of the Effective Date and shall remain in effect until the Existing License Effective Date.

5.2Survival of Rights and Terms. Termination or expiration of this Agreement shall not affect any accrued rights of either Party. The terms and conditions of Articles 3 and 6 and Sections 4(f) and 4(g) of this Agreement shall survive the expiration or termination of this Agreement for any reason.

**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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6.GENERAL

6.1Headings. 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.

6.2Severability. 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.

6.3Entire Agreement. This Agreement and the Actiq Settlement Agreement dated February 1, 2006 between the Parties contain the entire agreement of the Parties regarding the subject matter hereof and thereof and supersede all prior agreements, understandings or conditions (whether oral or written) regarding the same; provided, however, that nothing in this Agreement shall be deemed to change, amend, modify, supplement or supersede any term or condition of the Existing License and Supply Agreement, which agreement shall remain in full force and effect in accordance with its terms. In the event of any conflict between the terms and conditions of the Existing License and Supply Agreement and this Agreement, the terms and conditions of the Existing License and Supply Agreement shall govern. This Agreement may not be changed, modified, amended or supplemented except by a written instrument signed by both Parties.

6.4Assignment. 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 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.

6.5Independent 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 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

**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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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.

6.6Further Assurances. Each Party 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.

6.7Notices 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.

41 Moores Road

P.O. Box 4011

Frazer, Pennsylvania 19355

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

6.8Disputes; 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.

6.9Force 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

**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.

9

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 ACTIQ Licensed 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.

6.10Waiver. The waiver by either Party of a breach of any provision that is 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.

6.11Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be considered and shall have the force and effect of an original.

**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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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. Bisaro			By:	/s/ Frank Baldino, Jr., Ph.D
Printed Name:			Paul M. Bisaro	Printed Name:			Frank Baldino, Jr., Ph.D
Title:		President		Title:		Chairman and CEO

**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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EX-10.6

Exhibit 10.6

AMENDED AND RESTATED AIRCRAFT TIME SHARING AGREEMENT

THIS AMENDED AND RESTATED TIME SHARING AGREEMENT (this “Agreement”) is entered into on March 27, 2006 by Cephalon, Inc. (“Owner”), a Delaware corporation, with principal offices at 41 Moores Road, Frazer, PA 19355, and Frank Baldino, Jr., Ph.D. (“Lessee”).

BACKGROUND:

A.Owner is the registered owner of certain civil aircraft as described in the Specification Sheet attached hereto and made a part hereof, as Exhibit A (the “Aircraft”).

B.Owner employs a fully qualified flight crew to operate the Aircraft;

C.From time to time, Lessee may desire to lease the Aircraft and flight crew from owner for Lessee’s personal travel at Lessee’s discretion on a time sharing basis as defined in Section 91.501(c)(1) of the Federal Aviation Regulations (“FAR”).

D.This Agreement sets forth the understanding of the Parties as to the terms under which Owner will provide Lessee with the use, on a periodic basis, of the Aircraft; and

E.The use of the Aircraft will at all times be pursuant to and in full compliance with the requirements of FAR Part 91 and particularly, Sections 91.501(b)(6), 91.501(c)(1), and 91.501(d).

F.The Owner and Lessee entered that certain Time Sharing Agreement dated January 23, 2006 and now intend to amend and restate that agreement in its entirety.

NOW, THEREFORE, Owner and Lessee agree as follows:

1.Subject to the terms and conditions of this Agreement, Owner agrees to lease the Aircraft to Lessee at Lessee’s discretion from time-to-time on a non-exclusive basis and on an “as needed and as available basis” pursuant to the provisions of FAR Section 91.501(b)(6), 91.501(c)(1), and 91.501(d) and to provide a fully qualified flight crew for all operations for flights scheduled in accordance with the terms of this Agreement.

2.This Agreement shall remain in effect unless and until terminated by either party for any reason upon written notice to the other, such termination to become effective ten (10) days from the date of the notice or upon the earlier of (a) the

termination of this Agreement by consent of Owner and Lessee, (b) the date of Lessee’s termination of employment with Owner and (c) the date of Lessee’s death.

3.Lessee may use the Aircraft from time-to-time, subject to the prior permission and approval of Owner, for any and all purposes allowed by FAR Section 91.501(b)(6). Lessee’s use shall include the use of the Aircraft by guests of the Company if they accompany him or her on the flight. Lessee shall not accept any compensation whatsoever for any flight conducted under this Agreement.

4.Lessee shall pay Owner for each flight conducted under this Agreement the actual expenses of each specific flight as authorized by FAR Section 91.501(d) as in effect from time to time. On the date of this Agreement these expenses include and are limited to:

(a)fuel, oil, lubricants and other additives;

(b)travel expenses of the crew, including food, lodging and ground transportation;

(c)hangar and tie down costs away from the Aircraft’s base of operation;

(d)insurance obtained for the specific flight;

(e)landing fees, airport taxes and similar assessments;

(f)customs, foreign permit and similar fees directly related to the flight;

(g)in-flight food and beverages;

(h)passenger ground transportation;

(i)flight planning and weather contract services; and

(j)an additional charge equal to one hundred percent (100%) of the expenses listed in clause (a) above.

5.Owner will pay all expenses related to the operation of the Aircraft when incurred and will provide monthly invoices to Lessee for the expenses enumerated in Section 4 hereof. Lessee shall pay the amounts invoiced within fifteen (15) days after receipt of the related invoice.

6.The Parties acknowledge that with the exception of the expenses for in-flight food and beverages and passenger ground transportation, the payment of expenses set forth in Section 4 hereof are subject to the federal excise tax imposed under Section

4261 of the Internal Revenue Code. Lessee shall pay Owner for such expenses and the amount of such taxes within fifteen (15) days of receipt of the applicable invoice. Owner agrees to collect and remit to the Internal Revenue Service for the benefit of Lessee all such federal excise taxes.

7.In the event that Lessee desires to use the Aircraft pursuant to this Agreement, Lessee will so notify Owner and will provide Owner with requests for flight time and proposed flight schedules as far as possible in advance of any given flight. Requests for flight time shall be in a form, whether oral or written, mutually convenient to and agreed upon by Owner and Lessee. In addition to proposed schedules and flight times, Lessee shall provide at least the following information for each proposed flight at some time prior to scheduled departure as required by Owner or Owner’s flight crew:

(a)departure point;

(b)destinations;

(c)date and time of flight;

(d)the number and identity of any anticipated passengers;

(e)the nature and extent of luggage and/or cargo to be carried;

(f)the date and time of a return flight, if any; and

(g)any other information concerning the proposed flight that may be pertinent or required by Owner or Owner’s flight crew.

8.Owner shall have sole and exclusive authority over the scheduling of the Aircraft, including which aircraft is used for any particular flight.

9.Owner shall be solely responsible for securing maintenance, preventive maintenance, and required or otherwise necessary inspections on the Aircraft and shall take such requirements into account in scheduling flights of the Aircraft. No period of maintenance, preventive maintenance, or inspection shall be delayed or postponed for the purpose of scheduling the Aircraft, unless such maintenance or inspection can be safely conducted at a later time in compliance with all applicable laws and regulations, and within the sound discretion of the pilot-in-command. The pilot-in-command shall have final and complete authority to cancel any flight for any reason or condition that in his or her judgment would compromise the safety of the flight.

10.Owner shall be responsible for the physical and technical operation of the Aircraft and the safe performance of all flights and shall retain full authority and control, including exclusive operational control, and possession of the Aircraft at all times during the term of this Agreement. Owner shall employ, pay for, and provide to Lessee a qualified flight crew for each flight undertaken under this Agreement. In accordance with

applicable FAR, the qualified flight crew provided by Owner will exercise all of its duties and responsibilities with respect to the safety of each flight conducted under this Agreement. Lessee agrees that the flight crew, in its sole discretion, may terminate any flight, refuse to commence any flight, or take other action that in the considered judgment of the pilot-in-command is necessitated by considerations of safety. Without limiting the generality of Section 11, no such action of the pilot-in-command shall create or support any liability for loss, injury, damage, or delay to Lessee or any other person.

11.THE OWNER AND LESSEE AGREE THAT OWNER SHALL IN NO EVENT BE LIABLE TO LESSEE OR HIS EMPLOYEES, AGENTS, REPRESENTATIVES, GUESTS, OR INVITEES FOR ANY INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES AND/OR PUNITIVE DAMAGES OF ANY KIND OR NATURE UNDER ANY CIRCUMSTANCES OR FOR ANY REASON INCLUDING ANY DELAY OR FAILURE TO FURNISH THE AIRCRAFT OR CAUSED OR OCCASIONED BY THE PERFORMANCE OR NON-PERFORMANCE OF ANY SERVICES COVERED BY THIS AGREEMENT.

12.Owner may maintain such insurance coverage with respect to the Aircraft and any flights made under this Agreement as Owner may elect in its sole discretion, including all-risk physical damage insurance (hull Coverage), aircraft bodily injury and property damage liability insurance. The risk of loss during the period when the Aircraft is operated on behalf of Lessee under this Agreement shall remain with Owner, and Owner will retain all rights and benefits with respect to the proceeds payable under policies of hull insurance maintained by Owner that may be payable as a result of any incident or occurrence while an Aircraft is being operated on behalf of Lessee under this Agreement. Lessee shall be named as an additional insured on liability insurance policies maintained by Owner on the Aircraft with respect to flights conducted pursuant to this Agreement. The liability insurance policies on which Lessee is named an additional insured shall provide that as to Lessee coverage shall not be invalidated or adversely affected by any action or inaction, omission or misrepresentation by Owner or any other person (other than Lessee). Any hull insurance policies maintained by Owner on any Aircraft used by Lessee under this Agreement shall include a waiver of any rights of subrogation of the insurers against Lessee.

13.Lessee agrees that the insurance specified in Section 12 shall provide its sole recourse for all claims, losses, liabilities, obligations, demands, suits, judgments or causes of action, penalties, fines, costs and expenses of any nature whatsoever, including attorneys’ fees and expenses for or on account of or arising out of, or in any way connected with the use of the Aircraft by Lessee or its guests, including injury to or death of any persons, including Lessee and its guests which may result from or arise out of the use or operation of the Aircraft during the term of this Agreement. This Section 13 shall survive termination of this Agreement.

14.A copy of this Agreement shall be carried in the Aircraft and available for review upon the request of the FAA on all flights conducted pursuant to this Agreement.

15.Lessee represents, warrants and covenants to Owner that:

(a)He will use each Aircraft for and on his own account only and will not use any Aircraft for the purposes of providing transportation of passengers or cargo in air commerce for compensation or hire;

(b)He shall refrain from incurring any mechanics or other lien in connection with the Aircraft, whether permissible or impermissible under this Agreement, and he shall not attempt to convey, mortgage, assign, lease or any way alienate the Aircraft or create any kind of lien or security interest involving the Aircraft or do anything or take any action that might mature into such a lien, and Lessee shall, at his own expense, promptly take such action as may be necessary to discharge any such lien;

(c)During the term of this Agreement, he will abide by and conform to all such laws, governmental, and airport orders, rules, and regulations as shall from time to time be in effect relating in any way to the operation and use of the Aircraft by a time-sharing lessee.

16.For purposes of this Agreement, the permanent base of operation of the Aircraft shall be New Castle County Airport, c/o Cephalon Flight Department, 6 DBRA Way, New Castle, DE, 19720 unless changed by Owner, in which event Owner shall notify Lessee of the new permanent base of operation of the Aircraft.

17.Lessee hereby indemnifies Owner and agrees to hold harmless Owner from and against any Losses imposed on, incurred by or asserted against Owner (i) arising out of or resulting from the willful misconduct or gross negligence of Lessee, (ii) to the extent such Loss is a direct result of any failure of Lessee to comply with any covenants required to be performed or observed by him, or (iii) to the extent such Loss is a direct result of any breach by Lessee of any of Lessee’s warranties or representations contained in this Agreement. Losses shall be determined after taking into account the available proceeds of any applicable insurance policies.

18.Neither this Agreement nor Lessee’s interest in this Agreement shall be assignable to any other person or entity without the prior written consent of Owner.

19.[Intentionally omitted]

20.Legal title to the Aircraft shall remain in the Owner at all times.

21.This Agreement shall be governed by and construed in accordance with the laws of Pennsylvania (excluding the conflicts of law rules thereof).

22.This Agreement constitutes the entire understanding between Owner and Lessee with respect to its subject matter, and there are no representations, warranties,

conditions, covenants, or Agreements other than as set forth expressly herein. Any changes or modifications to this Agreement must be in writing and signed by authorized representatives of both parties. This Agreement may be executed in counterparts, which shall, singly or in the aggregate, constitute a fully executed and binding Agreement.

23.Any notice, request, or other communication to any party by the other party under this Agreement shall be conveyed in writing and shall be deemed given on the earlier of the date (i) notice is personally delivered with receipt acknowledged, (ii) a facsimile notice is transmitted, or (iii) three (3) days after notice is mailed by certified mail, return receipt requested, postage paid, and addressed to the party at the address set forth below. The address of a party to which notices or copies of notice are to be given may be changed from time to time by such party by written notice to the other party.

If to Owner:

Cephalon, Inc.

41 Moores Road

Frazer, PA 19355

Attention: General Counsel

FAX: 1-610-738-6258

If to Lessee:

Frank Baldino, Jr., Ph.D.

c/o Cephalon, Inc.

41 Moores Road

Frazer, PA 19355

24.If any one or more of the provisions of the Agreement shall be held invalid, illegal, or unenforceable, the remaining provisions of this Agreement shall be unimpaired, and the invalid, illegal, or unenforceable provision shall be replaced by a mutually acceptable provision, which, being valid, legal, and enforceable, comes closest to the intention of the parties underlying the invalid, illegal, or unenforceable provision. To the extent permitted by applicable law, the parties hereby waive any provision of law, which renders any provision of this Agreement prohibited or unenforceable in any respect.

25.The failure of a party to require performance of any provision of this Agreement shall in no way affect that party’s right thereafter to enforce such provision nor shall the waiver by a party of any breach of any provision of this Agreement be taken or held to be a waiver of any further breach of the same provision or any other provision.

26.NEITHER OWNER (NOR ITS AFFILIATES) MAKES, HAS MADE OR SHALL BE DEEMED TO MAKE OR HAVE MADE, AND OWNER (FOR ITSELF AND ITS AFFILIATES) HEREBY DISCLAIMS, ANY WARRANTY OR

REPRESENTATION, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO ANY AIRCRAFT TO BE USED HEREUNDER OR ANY ENGINE OR COMPONENT THEREOF INCLUDING, WITHOUT LIMITATION, ANY WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS, QUALITY OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR OPERATION, AIRWORTHINESS, SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT OR TITLE.

27.Truth in leasing statement under FAR Section 91.23:  Owner shall mail a copy of this Agreement for and on behalf of both Parties to:  Flight Standards Technical Division, P.O. Box 25724, Oklahoma City, Oklahoma 73125, within twenty-four (24) hours of its execution, as provided by FAR Section 91.23(c)(1). Additionally, Owner agrees to comply with the notification requirements of FAR Section 91.23 by notifying by telephone or in person the FAA Flight Standards District Office nearest the airport where the first flight will originate at least forty-eight (48) hours prior to the first flight under this Agreement.

(a)OWNER HEREBY CERTIFIES THAT THE AIRCRAFT HAS BEEN INSPECTED AND MAINTAINED WITHIN THE TWELVE (12) MONTH PERIOD PRECEDING THE DATE OF THIS AGREEMENT, EXCEPT TO THE EXTENT THE AIRCRAFT IS LESS THAN TWELVE (12) MONTHS OLD, IN ACCORDANCE WITH THE PROVISIONS OF FAR PART 91 AND ALL APPLICABLE REQUIREMENTS FOR THE MAINTENANCE AND INSPECTION THERE UNDER HAVE BEEN MET AND ARE VALID FOR THE OPERATIONS TO BE CONDUCTED UNDER THIS AGREEMENT.

(b)OWNER WHOSE ADDRESS APPEARS IN SECTION 23 ABOVE AND WHOSE AUTHORIZED SIGNATURE APPEARS BELOW, AGREES, CERTIFIES, AND KNOWINGLY ACKNOWLEDGES THAT WHEN THE AIRCRAFT IS OPERATED UNDER THIS AGREEMENT, OWNER SHALL BE KNOWN AS, CONSIDERED, AND SHALL IN FACT BE THE OPERATOR OF THE AIRCRAFT AND THAT OWNER UNDERSTANDS ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS.

(c)AN EXPLANATION OF FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT FARS CAN BE OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE, GENERAL AVIATION DISTRICT OFFICE, OR AIR CARRIER DISTRICT OFFICE. EACH PARTY AGREES TO UNDERSTAND AND ABIDE BY THESE REGULATIONS.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]

IN WITNESS WHEREOF, Owner and Lessee caused the signatures of their authorized representatives to be affixed below on the day and year first above written.

OWNER:
CEPHALON, INC.
/s/ Carl A. Savini
Name:	Carl A. Savini
Title:	Executive Vice President & Chief Administrative Officer
LESSEE:
/s/ Frank Baldino, Jr.
Frank Baldino, Jr., Ph.D.

EXHIBIT A

CEPHALON, INC.

Aircraft Subject to Amended and Restated Time Sharing Agreement

Each of the undersigned is a party to the Amended and Restated Time Sharing Agreement dated March 27, 2006, by and between Cephalon, Inc. (“Cephalon” or “Owner”), and Frank Baldino, Jr., Ph.D. (“Lessee”) (collectively the “Parties”), and agrees that from and after the date below, until this Exhibit A shall be superseded and replaced through agreement of the Parties or the Amended and Restated Time Sharing Agreement shall be terminated pursuant to its terms, the Aircraft described below shall constitute the “Aircraft” described in and subject to the terms of the Time Sharing Agreement.

2001 Bombardier Challenger CL-600-2B16

Manufacturer’s Serial Number 5488

FAA Registration Number N8570

Engine Model: General Electric CF34-3B; Serial Numbers: 872952 and 872953

Dated: March 27, 2006

OWNER:

CEPHALON, INC.

/s/ Carl A. Savini

By: Carl A. Savini

Its: Executive Vice President & Chief Administrative Officer

LESSEE:

Frank Baldino, Jr., Ph.D.

/s/ Frank Baldino, Jr.

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(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:May 10, 2006

/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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(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:May 10, 2006

/s/ J. KEVIN BUCHI

J. Kevin Buchi

Executive 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 period ended March 31, 2006 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

May 10, 2006

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 period ended March 31, 2006 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

Executive Vice President and Chief Financial Officer

May 10, 2006