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)       November 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 2.02      Results of Operations and Financial Condition.

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

On November 8, 2007, the Company issued a press release announcing certain financial results for the third quarter 2007, reiterating full year 2007 total sales guidance and increasing basic adjusted income per common share guidance and introducing sales, adjusted net income and basic adjusted income per share guidance for 2008. A copy of the press release is attached hereto as Exhibit 99.1 and incorporated herein by reference.

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

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

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

Item 9.01      Financial Statements and Exhibits.

(a)Financial Statements of Business Acquired.

None

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(b)Pro forma Financial Information.

None

(c)Exhibits.

Exhibit No.	Description of Document
99.1	Press Release dated November 8, 2007

3

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	CEPHALON, INC.
Date: November 8, 2007	By:	/s/ J. Kevin Buchi
		J. Kevin Buchi
		Executive Vice President & Chief Financial
		Officer

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EXHIBIT INDEX

Exhibit
Number	Description
99.1	Press Release dated November 8, 2007

EX-99.1

Exhibit 99.1

	News
	Contacts:
	Media:
	Sheryl Williams
	610.738.6493
	swilliam@cephalon.com
	Investors:
	Robert (Chip) Merritt
	610.738.6376
	cmerritt@cephalon.com

For immediate release

Cephalon Announces Strong Third Quarter Financial Results

Company Also Announces Agreement in Principle with U.S. Attorney’s Office;

Earnings Exceed Company Guidance;

Company Again Increases 2007 Earnings Guidance and

Introduces 2008 Guidance

Frazer, Pa. – November 8, 2007 – Cephalon, Inc. (Nasdaq: CEPH) today reported third quarter 2007 sales of $428.7 million, compared to adjusted sales of $457.2 million for the third quarter of 2006 and within the company’s previously issued guidance. Basic loss per common share for the third quarter of 2007 was $4.58. Excluding the settlement reserve increase, amortization expense and certain other items, basic adjusted income per common share during the quarter was $1.08, which compares to $1.71 for the third quarter of 2006 and exceeds the high end of the company’s guidance range of $0.85 to $0.95.

During the third quarter, central nervous system (CNS) franchise sales increased 9 percent to $230.9 million and the pain franchise reported strong sales of $121.8 million, a decrease of only 33 percent despite generic competition to ACTIQ^®. Sales of other products were $76.0 million, an increase of 20 percent over the same period last year.

The company also announced that it has reached an agreement in principle with the U.S. Attorney’s Office in Philadelphia and the U.S. Department of Justice with respect to the previously disclosed investigation of the company’s sales and marketing practices. The company expects to pay $425 million as part of a comprehensive settlement of Federal and related state Medicaid claims. The company has increased its existing financial reserves for this matter accordingly. In addition, the company will agree to a single misdemeanor violation of the

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

U.S. Food, Drug, and Cosmetic Act and will enter into a corporate integrity agreement with the Office of Inspector General of the U.S. Department of Health and Human Services. The terms of the settlement are subject to the final negotiation and execution of definitive agreements. The previously disclosed investigation by the Connecticut Attorney General is ongoing.

“We are pleased with the strong financial performance we delivered in the third quarter of 2007,” said Frank Baldino, Jr., Ph.D., Chairman and CEO. “We also are launching this month our latest product, AMRIX™, a once daily extended release muscle relaxant, and are excited about the continued development of our oncology business with TREANDA^®.”

Dr. Baldino continued, “We look forward to finalizing our settlement with the U.S. Attorney’s Office. We have always taken seriously our responsibility to conduct our business in accordance with both the letter and spirit of the law. Over the past few years, we have devoted substantial resources to continually enhancing our compliance program and have built a strong foundation for our ongoing compliance efforts.”

Based on the strong third quarter financial results announced today, the company is reiterating its guidance for 2007 total sales of $1.675 – $1.725 billion, and increasing its basic adjusted income per common share guidance from $4.40 – $4.50 per share to $4.45 – $4.55 per share.

Basic adjusted income per common share guidance for the full-year 2007 and 2008 is reconciled below and is subject to the assumptions set forth therein.

Cephalon is introducing 2008 sales guidance of $1.80 – $1.85 billion. This includes CNS franchise sales of $975 – $1,000 million, pain franchise sales of $500 – $525 million, which will include sales of AMRIX™ (cyclobenzaprine hydrochloride extended-release capsules), oncology franchise sales of $110 – $120 million, and other product sales of $190 – $205 million. SG&A and R&D guidance for 2008 are $710 – $730 million and $340 – $360 million, respectively.

The company also is introducing adjusted net income guidance for 2008 of $344 – $351 million and 2008 basic adjusted income per common share guidance of $5.10 – $5.20.

Cephalon’s management will discuss the company’s third quarter 2007 performance in a conference call with investors beginning at 5:00 p.m. U.S. EST on Thursday, November 8, 2007. To participate in the conference call, dial +1-913-981-5543 and refer to conference code number 6083046. Investors can listen to the call live by logging on to the company’s website at www.cephalon.com and clicking on “Investor Information,” then “Webcast.”  The conference call will be archived and available to investors for one week after the call.

About Cephalon, Inc.

Founded in 1987, Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and marketing of innovative products in four core therapeutic areas: central nervous system, pain, oncology and addiction. Cephalon has delivered

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a seven-year compound annual growth rate (CAGR) through 2006 greater than 75% and 2006 revenue of $1.760 billion.  A member of the Fortune 1000, Cephalon currently employs approximately 3,000 people in the United States and Europe. U.S. sites include the company’s headquarters in Frazer, Pennsylvania, and offices, laboratories or manufacturing facilities in West Chester, Pennsylvania, Salt Lake City, Utah, and suburban Minneapolis, Minnesota. Cephalon’s European headquarters are located in Maisons-Alfort, France.

The company’s proprietary products in the United States include: PROVIGIL^® (modafinil) Tablets [C-IV], FENTORA^® (fentanyl buccal tablet) [C-II], TRISENOX^® (arsenic trioxide), AMRIX, VIVITROL^® (naltrexone for extended-release injectable suspension), GABITRIL^® (tiagabine hydrochloride), and ACTIQ^® (oral transmucosal fentanyl citrate) [C-II]. The company also markets numerous products internationally. Full prescribing information on its U.S. products is available at http://www.cephalon.com or by calling 1-800-896-5855.

In addition to historical facts or statements of current condition, this press release may contain forward-looking statements. Forward-looking statements provide Cephalon’s current expectations or forecasts of future events. These may include statements regarding anticipated scientific progress on its research programs; development of potential pharmaceutical products; interpretation of clinical results; prospects for regulatory approval, including with respect to TREANDA; manufacturing development and capabilities; market prospects for its products, including with respect to AMRIX; sales, adjusted net income and basic adjusted income per common share guidance for 2007 and 2008; and other statements regarding matters that are not historical facts, including the Company’s position and expected performance in 2007 and 2008, the final resolution or outcome of the ongoing investigations by the U.S. Attorney’s Office and the Office of the Connecticut Attorney General and the final amount of any settlement and/or fines related thereto, and the relative strength of the foundation for the Company’s ongoing compliance efforts. You may identify some of these forward-looking statements by the use of words in the statements such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” or other words and terms of similar meaning. Cephalon’s performance and financial results could differ materially from those reflected in these forward-looking statements due to general financial, economic, regulatory and political conditions affecting the biotechnology and pharmaceutical industries as well as more specific risks and uncertainties facing Cephalon such as those set forth in its reports on Form 8-K, 10-Q and 10-K filed with the U.S. Securities and Exchange Commission. Given these risks and uncertainties, any or all of these forward-looking statements may prove to be incorrect. Therefore, you should not rely on any such factors or forward-looking statements. Furthermore, Cephalon does not intend to update publicly any forward-looking statement, except as required by law. The Private Securities Litigation Reform Act of 1995 permits this discussion.

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

# # #

3

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
REVENUES:
Sales	$	428,729		$	470,513		$	1,287,802		$	1,246,825
Other revenues	9,692			11,820			34,865			32,562
	438,421			482,333			1,322,667			1,279,387
COSTS AND EXPENSES:
Cost of sales	82,258			83,160			251,970			250,613
Research and development	93,527			86,439			274,078			294,899
Selling, general and administrative	186,456			161,108			527,962			470,158
Settlement reserve	369,000			—			425,000			—
Impairment charge	—			—			—			12,417
	731,241			330,707			1,479,010			1,028,087
INCOME (LOSS) FROM OPERATIONS	(292,820		)	151,626			(156,343		)	251,300
OTHER INCOME (EXPENSE):
Interest income	8,868			7,046			23,485			16,736
Interest expense	(5,660		)	(4,749		)	(15,272		)	(13,523		)
Write-off of deferred debt issuance costs	—			—			—			(13,105		)
Gain on extinguishment of debt	5,319			—			5,319			—
Gain on sale of investment	—			—			5,791			—
Other income (expense), net	2,493			895			3,747			(116		)
	11,020			3,192			23,070			(10,008		)
INCOME (LOSS) BEFORE INCOME TAXES	(281,800		)	154,818			(133,273		)	241,292
INCOME TAX EXPENSE	24,963			59,077			102,613			91,567
NET INCOME (LOSS)	$	(306,763	)	$	95,741		$	(235,886	)	$	149,725
BASIC INCOME (LOSS) PER COMMON SHARE	$	(4.58	)	$	1.58		$	(3.55	)	$	2.48
DILUTED INCOME (LOSS) PER COMMON SHARE	$	(4.58	)	$	1.43		$	(3.55	)	$	2.17
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING	66,931			60,762			66,398			60,415
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION	66,931			67,072			66,398			68,921

Certain reclassifications of prior year amounts have been made to conform to the current year presentation. Amounts reported in prior periods as amortization are included now as a component of cost of sales; amounts previously reported as depreciation (other than depreciation related to facilities used in the production of commercial inventory and previously included in cost of sales) are included as a component of research and development or selling, general and administrative, as appropriate.

CEPHALON, INC. AND SUBSIDIARIES

Reconciliation of GAAP Net Income (Loss) to Adjusted Net Income

(Unaudited)

	Three Months Ended
	September 30,
	2007			2006
GAAP NET INCOME (LOSS)	$	(306,763	)	$	95,741
Sales adjustments	—			(13,273		)(6)
Cost of sales adjustments	22,255		(1)	20,804		(1)
Research and development adjustments	15,000		(2)	—		(8)
Selling, general and administrative adjustments	—			2,000		(7)(8)
Settlement reserve	369,000		(3)	—
Gain on extinguishment of debt	(5,319		)(4)	—
Income taxes	(21,693		)(5)	(1,278		)(5)(8)
	379,243			8,253
ADJUSTED NET INCOME	$	72,480		$	103,994
BASIC ADJUSTED INCOME PER COMMON SHARE	$	1.08		$	1.71
DILUTED ADJUSTED INCOME PER COMMON SHARE	$	0.92		$	1.55
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING	66,931			60,762
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION	79,030			67,072

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

(1)	To exclude the on-going amortization of acquired intangible assets.
(2)	To exclude the recognition of a milestone related to the FDA’s acceptance of our NDA filing for TREANDA® (bendamustine HCl).
(3)	To exclude the additional reserve established for the agreement in principle reached with the U.S. Attorney’s Office in Philadelphia.
(4)	To exclude the forgiveness of a mortgage loan by the Pennsylvania Industrial Development Board (“PIDA”).
(5)	To reflect the tax effect of pre-tax adjustments at the applicable tax rates and certain other tax adjustments primarily related to changes in valuation allowances and other changes in tax assets and liabilities.
(6)	To exclude the U.S. Department of Defense (“DoD”) Tricare program reversal as a result of the U.S. Court of Appeals September 2006 ruling.
(7)	To exclude charges associated with the settlement of the PROVIGIL patent litigation.
(8)	Amounts shown no longer exclude the impact of Financial Accounting Standards Board Statement No. 123(R) “Share Based Payment” (“SFAS 123(R)”). The earnings press release issued on November 2, 2006 reflected adjustments of $3.4 million in each of Research and development and Selling, general and administrative expenses and $2.8 million in Income tax expense related to SFAS 123(R).

CEPHALON, INC. AND SUBSIDIARIES

Reconciliation of GAAP Net Income (Loss) to Adjusted Net Income

(Unaudited)

	Nine Months Ended September 30,
	2007			2006
GAAP NET INCOME (LOSS)	$	(235,886	)	$	149,725
Sales adjustments	—			(13,273		)(7)
Cost of sales adjustments	64,236		(1)	69,375		(1)
Research and development adjustments	41,500		(2)	45,000		(2)(11)
Selling, general and administrative adjustments	—			9,987		(8)(11)
Settlement reserve	425,000		(3)	—
Impairment charge	—			12,417		(9)
Write-off of deferred debt issuance costs	—			13,105		(10)
Gain on extinguishment of debt	(5,319		)(4)	—
Gain on sale of investment	(5,791		)(5)	—
Income taxes	(40,459		)(6)	(44,060		)(6)(11)
	479,167			92,551
ADJUSTED NET INCOME	$	243,281		$	242,276
BASIC ADJUSTED INCOME PER COMMON SHARE	$	3.66		$	4.01
DILUTED ADJUSTED INCOME PER COMMON SHARE	$	3.09		$	3.52
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING	66,398			60,415
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION	78,814			68,921

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

(1)	In 2007, to exclude the on-going amortization of acquired intangible assets. In 2006, to exclude the reserve for SPARLON capitalized inventory costs ($8.6 million) and the on-going amortization of acquired intangible assets ($60.8 million).
(2)	In 2007, to exclude charges related to payments for several research and development collaborations ($26.5 million) and the recognition of a milestone related to the FDA’s acceptance of our NDA filing for TREANDA ($15.0 million). In 2006, to exclude charges related to payments for several research and development collaborations.
(3)	To exclude the reserve established for the agreement in principle reached with the U.S. Attorney’s Office in Philadelphia.
(4)	To exclude the forgiveness of a mortgage loan by the PIDA.
(5)	To exclude the pre-tax gain related to the sale of certain investments.
(6)	To reflect the tax effect of pre-tax adjustments at the applicable tax rates and certain other tax adjustments primarily related to changes in valuation allowances and other changes in tax assets and liabilities.
(7)	To exclude the DoD Tricare program reversal as a result of the U.S. Court of Appeals September 2006 ruling.
(8)	To exclude charges associated with the settlement of the PROVIGIL patent litigation ($6.0 million) and employee severance costs associated with the European integration and restructuring ($4.0 million).
(9)	To exclude charges related to the impairment of an intangible asset.
(10)	To exclude the write-off of deferred debt issuance costs related to the Zero Coupon convertible subordinated notes.
(11)	Amounts shown no longer exclude the impact of SFAS 123(R). The earnings press release issued on November 2, 2006 reflected adjustments of $11.6 million in each of Research and development and Selling, general and administrative expenses and $8.8 million in Income tax expense related to SFAS 123(R).

CEPHALON, INC. AND SUBSIDIARIES

“ADJUSTED” CONSOLIDATED SALES DETAIL  *

(In thousands)

(Unaudited)

	Three Months Ended												%
	September 30,												Increase
	2007						2006						(Decrease)
	United						United						United
	States		Europe		Total		States		Europe		Total		States		Europe		Total
Sales:
PROVIGIL	$	202,202	$	14,904	$	217,106	$	186,568	$	11,081	$	197,649	8	%	35	%	10	%
GABITRIL	12,952		881		13,833		13,729		723		14,452		(6	)%	22	%	(4	)%
CNS	215,154		15,785		230,939		200,297		11,804		212,101		7	%	34	%	9	%
ACTIQ	45,946		10,007		55,953		174,147		7,585		181,732		(74	)%	32	%	(69	)%
Generic OTFC	32,689		—		32,689		—		—		—		100	%	0	%	100	%
FENTORA	33,193		—		33,193		—		—		—		100	%	0	%	100	%
Pain	111,828		10,007		121,835		174,147		7,585		181,732		(36	)%	32	%	(33	)%
Other	19,291		56,664		75,955		13,292		50,115		63,407		45	%	13	%	20	%
	$	346,273	$	82,456	$	428,729	$	387,736	$	69,504	$	457,240	(11	)%	19	%	(6	)%

	Nine Months Ended												%
	September 30,												Increase
	2007						2006						(Decrease)
	United						United						United
	States		Europe		Total		States		Europe		Total		States		Europe		Total
Sales:
PROVIGIL	$	593,394	$	39,171	$	632,565	$	494,047	$	29,219	$	523,266	20	%	34	%	21	%
GABITRIL	39,814		6,268		46,082		41,291		3,510		44,801		(4	)%	79	%	3	%
CNS	633,208		45,439		678,647		535,338		32,729		568,067		18	%	39	%	19	%
ACTIQ	157,097		28,638		185,735		452,175		19,213		471,388		(65	)%	49	%	(61	)%
Generic OTFC	97,562		—		97,562		—		—		—		100	%	0	%	100	%
FENTORA	101,224		—		101,224		—		—		—		100	%	0	%	100	%
Pain	355,883		28,638		384,521		452,175		19,213		471,388		(21	)%	49	%	(18	)%
Other	53,867		170,767		224,634		41,661		152,436		194,097		29	%	12	%	16	%
	$	1,042,958	$	244,844	$	1,287,802	$	1,029,174	$	204,378	$	1,233,552	1	%	20	%	4	%

* For both the three and nine months ended September 30, 2006, amounts exclude the impact of the DoD Tricare program reversal of $13.3 million which reduced GAAP U.S. sales of PROVIGIL, GABITRIL and ACTIQ by $6.9 million, $0.9 million and $5.5 million, respectively.

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	September 30,			December 31,
	2007			2006
CURRENT ASSETS:
Cash and cash equivalents	$	661,982		$	496,512
Investments	69,101			25,212
Receivables, net	302,748			270,045
Inventory, net	93,399			85,239
Deferred tax assets, net	204,140			184,518
Other current assets	34,626			47,278
Total current assets	1,365,996			1,108,804
PROPERTY AND EQUIPMENT, net	481,508			453,010
GOODWILL	476,605			467,167
INTANGIBLE ASSETS, net	839,255			793,037
DEFERRED TAX ASSETS, net	103,284			118,192
OTHER ASSETS	132,056			105,287
	$	3,398,704		$	3,045,497
CURRENT LIABILITIES:
Current portion of long-term debt	$	1,237,285		$	1,023,312
Accounts payable	74,528			90,586
Accrued expenses	685,864			263,478
Total current liabilities	1,997,677			1,377,376
LONG-TERM DEBT	4,373			224,992
DEFERRED TAX LIABILITIES, net	66,864			72,491
OTHER LIABILITIES	103,982			61,178
Total liabilities	2,172,896			1,736,037
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value	693			678
Additional paid-in capital	1,899,761			1,780,749
Treasury stock, at cost	(151,196		)	(151,068		)
Accumulated deficit	(668,310		)	(425,256		)
Accumulated other comprehensive income	144,860			104,357
Total stockholders’ equity	1,225,808			1,309,460
	$	3,398,704		$	3,045,497

Certain reclassifications of prior year amounts have been made to conform to the current year presentation.  The NUVIGIL® (armodafinil) [C-IV] inventory balance of $89.1 million as of December 31, 2006 has been reclassified from inventory to other assets, as we do not presently intend to launch NUVIGIL commercially until around 2010.

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(235,886	)	$	149,725
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred income tax expense	8,750			64,112
Shortfall tax benefits from stock-based compensation	(222		)	—
Depreciation and amortization	101,206			94,828
Amortization of debt issuance costs	180			387
Write-off of debt issuance costs associated with convertible subordinated notes	—			13,105
Stock-based compensation expense	34,940			32,436
Gain on extinguishment of debt	(5,319		)	—
Gain on sale of investment	(5,791		)	—
Loss on disposals of property and equipment	2,873			2,368
Impairment charge	—			12,417
Changes in operating assets and liabilities:
Receivables	(26,218		)	(30,818		)
Inventory	(1,881		)	15,761
Other assets	(28,552		)	(43,731		)
Accounts payable and accrued expenses	380,776			(45,820		)
Other liabilities	49,465			(13,580		)
Net cash provided by operating activities	274,321			251,190
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(70,887		)	(97,122		)
Acquisition of intangible assets	(99,152		)	(115,000		)
Proceeds from sale of investment	12,291			—
Sales and (purchases) of available-for-sale investments, net	(43,186		)	242,660
Net cash provided by (used for) investing activities	(200,934		)	30,538
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock options	74,375			112,794
Windfall tax benefits from stock-based compensation	9,934			21,912
Acquisition of treasury stock	(128		)	(433		)
Payments on and retirements of long-term debt	(2,902		)	(2,528		)
Net cash provided by financing activities	81,279			131,745
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	10,804			11,830
NET INCREASE IN CASH AND CASH EQUIVALENTS	165,470			425,303
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	496,512			205,060
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	661,982		$	630,363

CEPHALON, INC. AND SUBSIDIARIES

Reconciliation of Projected GAAP Basic Income (Loss) per Common Share

to Basic Adjusted Income Per Common Share Guidance

(Unaudited)

	Twelve Months Ended							Twelve Months Ended
	December 31, 2007							December 31, 2008
Projected GAAP basic income (loss) per common share	$	(3.08	)	—	$	(2.98	)	$	4.13		—	$	4.23
Amortization of current intangibles	$	1.35		—	$	1.35		$	1.52		—	$	1.52
Research and development adjustments	$	0.62		—	$	0.62		$	—		—	$	—
Settlement reserve	$	6.38		—	$	6.38		$	—		—	$	—
Gain on extinguishment of debt	$	(0.08	)	—	$	(0.08	)	$	—		—	$	—
Gain on sale of investment	$	(0.09	)	—	$	(0.09	)	$	—		—	$	—
Tax effect of pre-tax adjustments at the applicable tax rates *	$	(0.65	)	—	$	(0.65	)	$	(0.55	)	—	$	(0.55	)
Basic adjusted income per common share guidance	$	4.45		—	$	4.55		$	5.10		—	$	5.20

* For the twelve months ended December 31, 2007, we have not yet recognized a tax benefit for the settlement reserve due to the uncertainty associated with the tax treatment of any potential settlement.

The company’s 2007 guidance is being issued based on certain assumptions including:

• Adjusted effective tax rate of approximately 36 to 37 percent; and

• Weighted average number of common shares outstanding of 66.6 million shares for the twelve months ended December 31, 2007.

The company’s 2008 guidance is being issued based on certain assumptions including:

• Entrance into the market of an additional generic version of ACTIQ by mid-2008;

• Approval of TREANDA and mid-2008 launch;

• Reduction of interest income by $20 million resulting from payment of the settlement with the U.S. Attorney’s Office;

• Adjusted effective tax rate of approximately 36 to 37 percent; and

• Weighted average number of common shares outstanding of 67.5 million shares for the twelve months ended December 31, 2008.