8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of report (Date of earliest event reported)  February 8, 2007

Cephalon, Inc.

(Exact Name of Registrant as Specified in Charter)

Delaware	0-19119	23-2484489
(State or Other Jurisdiction	(Commission	(IRS Employer
of Incorporation)	File Number)	Identification No.)
41 Moores Rd.
Frazer, Pennsylvania		19355
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code  (610) 344-0200

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

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

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

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

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

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

Item 1.01               Entry into a Material Definitive Agreement

(a)           On February 9, 2007, Cephalon, Inc. (the “Company” or “Registrant”) amended (the “Amendment”) its Second Amended and Restated Rights Agreement (the “Agreement”) to appoint American Stock Transfer & Trust Company (“AmStock”) as successor rights agent under the Agreement following the removal of StockTrans, Inc. as rights agent.  The Amendment also reduced the required amount of combined capital and surplus for a successor rights agent to at least $20,000,000 at the time of appointment.  The foregoing is a summary of the material terms of the Amendment and does not purport to be complete.  This Amendment is attached hereto as Exhibit 10.1 and incorporated herein by reference.

There are no material relationships between AmStock and Cephalon or any of the Cephalon’s affiliates, directors or officers (or any associate of any such director or officer), other than by virtue of the Amendment and AmStock’s status as the transfer agent for the Company’s common stock.

(b)           On February 8, 2007, the independent members of the Board of Directors (the “Board”) the Registrant, upon the recommendation of the Stock Option and Compensation Committee, adopted the 2007 Management Incentive Compensation Program (the “MICP”) for the Company’s executive officers appointed by the Board and key employees.  Under the MICP, the Company’s executive officers shall be entitled to earn cash bonus compensation (an “Award”) based upon the achievement of certain pre-established performance goals for 2007 outlined in the MICP (the “Performance Goals”) for each executive officer.

The Performance Goals for 2007 consist of both financial and operational goals.  Financial goals are based on equally weighted targets for total product sales and pro forma net income in 2007.  Operational goals are focused on three areas: clinical, manufacturing and technical operations, and research and development.  Within these areas, the operational goals include, among other things, progressing or completing specified clinical trials in the U.S. and Europe, providing manufacturing support for new and existing products and products in clinical development and advancing the Company’s research and development plan by continuing pre-clinical development of specified compounds.

At the end of each fiscal year, the Compensation Committee is responsible for assessing the performance of each executive officer against the established Performance Goals and determining the level of awards, if any, under the MICP.  The Compensation Committee then presents its decisions to the independent members of the Board for ratification.  If a minimum MICP score is not achieved (85% for the CEO and 90% for the other executive officers), an executive officer will not be eligible to receive any award under the MICP.  An executive officer who achieves 100% of his or her Performance Goals will receive the “target” Award, which is 100% of 2007 base salary for the CEO and 50% of his or her 2007 base salary for the other executive officers.  The achievement of a higher or lower percentage of an executive officer’s Performance Goals will impact any Awards under the MICP, which can range from 15% to 300% of the “target” Award for the CEO and 15% to 220% of the “target” Award for the other executive officers.

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The following table summarizes the components of the MICP for 2007.

	Chief Executive Officer	Other Executive Officers
Financial Goals	·   Total product sales target (30%)	·   Total product sales target (15%)
	·   Pro forma net income target (30%)	·   Pro forma net income target (15%)
Operational Goals	Performance goals in the areas of clinical (20%), manufacturing and technical operations (10%) and R&D (10%)	Objectives are specific to each individual executive officer and his or her areas of responsibility (70%)
MICP “Score”	·   Weighted average minimum MICP score of 85 of the above listed components required for CEO to be eligible for an MICP award ·   For each MICP point below 100, target bonus percentage of 100% is decreased by approximately 7% (e.g., MICP score of 98 yields a bonus payout of 87% of base salary) ·   For each MICP point above 100, target bonus percentage is increased by an average of approximately 14% for MICP scores from 101 to 111. For example, an MICP score of 102 yields a bonus payout of 128% of base salary. At an MICP score of 112, the maximum bonus will be earned.	·   Weighted average minimum MICP score of 90 of the above listed components required for an executive officer to be eligible for an MICP award ·   For each MICP point above or below 100, target bonus percentage of 100% is increased or decreased by 3.5%, respectively (e.g., MICP score of 98 yields a bonus payout of 43% of base salary). At an MICP score of 120, the maximum bonus will be earned.
Target MICP Bonus	100% of 2007 base salary	50% of 2007 base salary
MICP Award Percentage	Could range from 0% (for an MICP score below 85) to 300% of base salary (at maximum performance)	Could range from 0% (for an MICP score below 90) to 110% of an NEO’s base salary (at maximum performance)
MICP Award Dollar Value	Could range from $0 (for an MICP score below 85) to $3,390,100 (for maximum performance).	Individual awards could range from $0 (for an MICP score below 90) to approximately $612,150 (for maximum performance).

The MICP for 2007 is attached hereto as Exhibit 10.2 and incorporated herein by reference.

Item 5.02Departure of Directors or Principal Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

(a)           On February 7, 2007, the Compensation Committee determined the recommended annual cash bonus awards to be made to executive officers of the Registrant for fiscal year 2006 as determined pursuant to the Company’s MICP for 2006.  These award recommendations were presented to and approved by the independent members of the Board on February 8, 2007.  The awards were approved subject to the finalization of financial results for the year ended December 31, 2006, which were released on February 12, 2007.

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The awards earned in 2006, which will be paid in late February 2007, are as follows:

Name:	Cash Bonus
Frank Baldino, Jr., Ph.D.	$	1,772,500
J. Kevin Buchi	$	380,800
Peter E. Grebow, Ph.D.	$	325,500
John E. Osborn	$	296,700
Robert P. Roche, Jr.	$	404,300
Lesley Russell, MB.Ch.B., MRCP.	$	101,400
Carl A. Savini	$	306,600
Jeffry L. Vaught, Ph.D.	$	365,000

(b)           With respect to the MICP for 2007, the information required by this Item 5.02 is incorporated by reference to the information contained in Item 1.01(b) above.

Item 9.01               Financial Statements and Exhibits

(d)           Exhibits.

Exhibit No.	Description of Document
10.1	Agreement of Appointment and Joinder and Amendment No. 1 dated February 9, 2007 to the Second Amended and Restated Rights Agreement dated October 27, 2003.
10.2	Cephalon, Inc. 2007 Management Incentive Compensation Plan.

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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 hereunto duly authorized.

	CEPHALON, INC.
Date: February 12, 2007	By:	/s/ J. Kevin Buchi
		J. Kevin Buchi
		Executive Vice President & Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description of Document
10.1	Agreement of Appointment and Joinder and Amendment No. 1 dated February 9, 2007 to the Second Amended and Restated Rights Agreement dated October 27, 2003
10.2	Cephalon, Inc. 2007 Management Incentive Compensation Plan

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EX-10.1

Exhibit 10.1

AGREEMENT OF APPOINTMENT AND JOINDER AND

AMENDMENT NO. 1 TO THE

SECOND AMENDED AND RESTATED RIGHTS AGREEMENT

This Agreement of Appointment and Joinder and Amendment No. 1 to the Amended and Restated Rights Agreement dated as of October 27, 2003, by and between Cephalon, Inc., a Delaware corporation with offices at 41 Moores Road, Frazer, PA 19355 (the “Company”), and StockTrans, Inc. (“StockTrans”), as the same may be amended from time to time (the “Rights Agreement”), is entered into as of February 9, 2007 by and between the Company and American Stock Transfer & Trust Company, a New York banking corporation with offices at 59 Maiden Lane, New York, NY 10038 (“AST”).

Capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in the Rights Agreement.

WHEREAS, pursuant to Section 21 of the Rights Agreement, the Company has removed the Rights Agent, effective as of the close of business on February 9, 2007; and

WHEREAS, the Company is required by the terms of the Rights Agreement to appoint a successor Rights Agent, and desires to appoint AST as successor Rights Agent; and

WHEREAS, AST wishes to serve as successor Rights Agent; and

NOW, THEREFORE, intending to be legally bound, and in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and AST hereby agree as follows:

1.Appointment of Successor Rights Agent. The Company hereby appoints AST as successor Rights Agent under the Rights Agreement effective February 9, 2007.

2.Joinder to Rights Agreement. AST hereby accepts such appointment and agrees to serve as Rights Agent under the Rights Agreement effective September 1, 2006, and to be bound by the terms of the Rights Agreement as if it was an original signatory to such agreement. All references to the Rights Agent contained in the Rights Agreement shall mean AST; likewise, all referenced to StockTrans contained in the Rights Agreement shall mean AST.

3.Amendment to Section 21 of the Rights Agreement.  Section 21 of the Rights Agreement is hereby amended to provide that any successor Rights Agent shall, at the time of its appointment as Rights Agent, have a combined capital and surplus of at least $20,000,000, instead of $50,000,000 as currently provided. The fifth (5th) sentence of Section 21 of the Rights Agreement shall now read as follows:

“Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the

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United States or the laws of any state of the United States or the District of Columbia, in good standing, having an office in the Commonwealth of Pennsylvania or the State of New York, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $20 million.”

4.Amendment to Section 26 of the Rights Agreement. All references to StockTrans contained in Section 26 of the Rights Agreement are hereby deleted in their entirety and replaced with the following:

American Stock Transfer & Trust Company

59 Maiden Lane

New York, New York 10038

Attention: Corporate Trust Department

With a copy to:

American Stock Transfer & Trust Company

59 Maiden Lane

New York, New York 10038

Attention: General Counsel

4.Except as expressly modified herein, the Rights Agreement shall remain in full force and effect.

5.This Agreement may be executed in one or more counterparts, each of which shall together constitute one and the same document.

[SIGNATURES ON FOLLOWING PAGE]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement of Appointment and Joinder and Amendment No. 1 to the Second Amended and Restated Rights Agreement as of the date first above written.

CEPHALON, INC.				AMERICAN STOCK TRANSFER & TRUST COMPANY
By:	/s/ J. Kevin Buchi			By:	/s/ Herb Lemmer
Name:			J. Kevin Buchi	Name:		Herb Lemmer
Title:		Exec. Vice President & CFO		Title:		General Counsel

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EX-10.2

Exhibit 10.2

CEPHALON, INC.

2007 MANAGEMENT INCENTIVE COMPENSATION PLAN

SECTION 1. PURPOSE. The purpose of the Cephalon, Inc. Management Incentive Compensation Plan (the “Plan”) is to provide Participants (as defined) employed by Cephalon, Inc. (the “Company”) and its affiliates with incentive compensation based upon the level of achievement of financial and other performance criteria. The Plan will enhance the ability of the Company and its affiliates to attract and retain individuals of exceptional managerial talent upon whom, in large measure, the sustained progress, growth and profitability of the Company depends.

SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below:

(a)  “AWARD” means a cash payment.

(b)  “BOARD” means the Board of Directors of the Company.

(c)  “COMMITTEE” means the Stock Option and Compensation Committee of the Board (or any successor committee).

(d)  “EXECUTIVE OFFICER” means an executive officer of the Company as appointed by the Board of Directors or other key employee.

(e)  “MEASUREMENT PERIOD” means a period of time selected by the Committee for which performance will be measured for purposes of Section 4.

(f)  “MAXIMUM AWARD” means the limitation on awards payable under this Plan in any year, which for the Chairman/Chief Executive Officer is 300% of his annual base salary and for any other Participant is 110% of the Participant’s annual base salary.

(g)  “PARTICIPANT” means any Executive Officer selected by the Committee to participate in the Plan.

(h)  “PERFORMANCE PERIOD” means a period of time selected by the Committee to which an Award relates.

(i)  “TARGET AWARD” means an Award level that may be paid if certain performance criteria are achieved.

(j)  “THRESHOLD PERFORMANCE” means a level of achievement of 85% of target performance for the Chairman/Chief Executive Officer and 90% of target performance for other Participants.

SECTION 3. ELIGIBILITY. Persons employed by the Company or any of its affiliates during a Performance Period in active service in a managerial or professional role for all or any part of the Performance Period are eligible to be Participants under the Plan for such Performance Period (whether or not so employed or living at the date an Award is made) and may be considered by the Committee for an Award. An employee is not rendered ineligible to be a Participant by reason of being a member of the Board.

SECTION 4. AWARDS-GENERAL.

(a) Target Awards.  The Committee will establish the Target Awards for Participants at the beginning of each Performance Period. For the Chairman/Chief Executive Officer, the Target Award shall be 100% of annual base salary; for Participants other than the Chairman/Chief Executive Officer, the Target Award shall be 50% of annual base salary.

(b) Performance Criteria; Award Levels.  The performance criteria utilized by the Committee for the Chairman/Chief Executive Officer may be based on individual performance, revenue, earnings per share, other Company and business unit financial objectives, operational efficiency measures, and other measurable objectives tied to the Company’s success or such other criteria as the Committee shall determine in its discretion. The Committee shall each year also determine specific levels of achievement of the established performance criteria that correspond to Threshold Performance, Target Award and Maximum Award.  Performance criteria for Participants (other than Chairman/Chief Executive Officer) will be established by management.  For the Performance Period fiscal year 2007, the performance criteria for the Chairman/Chief Executive Officer and the other Participants, and the relationship between achievement of such performance criteria and respective Award levels, are set out in the Schedules 1 and 2, respectively, to the Plan.

(c) Awards.  Awards will be made by the Committee following the end of each Performance Period. Awards shall be paid after the end of the Performance Period, except to the extent that a Participant has made an election to defer the receipt of such Award pursuant to the Company’s deferred compensation plan. The Award amount determined in accordance with Schedule 2 may be increased or decreased by the Committee, provided, however, than any Award may not exceed the applicable Maximum Award amount.

SECTION 5. OTHER CONDITIONS.

(a) No person shall have any claim to an Award under the Plan and there is no obligation for uniformity of treatment of Participants under the Plan. Awards under the Plan may not be assigned or alienated.

(b) Neither the Plan nor any action taken hereunder shall be construed as giving to any Participant the right to be retained in the employ of the Company or any affiliate.

(c) The Company or any affiliate shall have the right to deduct from any Award to be paid under the Plan any federal, state or local taxes required by law to be withheld with respect to such payment.

(d) Awards under the Plan will not be included in base compensation or covered compensation under the retirement programs of the company for purposes of determining pensions, retirement and death related benefits.

SECTION 6. DESIGNATION OF BENEFICIARIES. A Participant may, if the Committee permits, designate a beneficiary or beneficiaries to receive all or part of the Award which may be made to the Participant, or may be payable, after such Participant’s death. A designation of beneficiary shall be made in accordance with procedures specified by the Company and may be replaced by a new designation or may be revoked by the Participant at any time. In case of the Participant’s death, an Award with respect to which a designation of beneficiary has been made (to the extent it is valid and enforceable under applicable law) shall be paid to the designated beneficiary or beneficiaries. Any Award granted or payable to a Participant who is deceased and not subject to such a designation shall be distributed to the Participant’s estate. If there shall be any question as to the legal right of any beneficiary to receive an Award under the Plan, the amount in question may be paid to the estate of the Participant, in which event the Company or its affiliates shall have no further liability to anyone with respect to such amount.

SECTION 7. PLAN ADMINISTRATION.

(a) The Committee shall have full discretionary power to administer and interpret the Plan and to establish rules for its administration (including the power to delegate authority to others to act for and on behalf of the Committee) subject to such resolutions, not inconsistent with the Plan, as may be adopted by the Board. In making any determinations under or referred to in the Plan, the Committee (and its delegates, if any) shall be entitled to rely on opinions, reports, analysis or statements of employees of the Company and its affiliates and of counsel, public accountants and other professional or expert persons.

(b) The Plan shall be governed by the laws of the State of Delaware and applicable Federal law.

SECTION 8. MODIFICATION OR TERMINATION OF PLAN. The Board may modify or terminate the Plan at any time, effective at such date as the Board may determine.