10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
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	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
41 Moores Road
P.O. Box 4011
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 x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x 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 x

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

Class	Outstanding as of November 1, 2007
Common Stock, par value $.01	67,051,500 Shares

TABLE OF CONTENTS

Cautionary Note Regarding Forward-Looking Statements			ii
PART I – FINANCIAL INFORMATION
	Item 1.	Consolidated Financial Statements
		Consolidated Balance Sheets – September 30, 2007 and December 31, 2006	1
		Consolidated Statements of Operations – Three and nine months ended September 30, 2007 and 2006	2
		Consolidated Statement of Stockholders’ Equity – Nine months ended September 30, 2007	3
		Consolidated Statements of Cash Flows – Nine months ended September 30, 2007 and 2006	4
		Notes to Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
	Item 4.	Controls and Procedures	34
PART II – OTHER INFORMATION
	Item 1.	Legal Proceedings	35
	Item 1A.	Risk Factors	35
	Item 5.	Other Information	47
	Item 6.	Exhibits	48
SIGNATURES			49

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 or incorporated herein by reference constitute our expectations or forecasts of future events as of the date this report was filed with the Securities and Exchange Commission (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) [C-IV] in the United States and the market prospects and future marketing efforts for PROVIGIL, FENTORA® (fentanyl buccal tablet) [C-II], AMRIX™ (cyclobenzaprine hydrochloride extended-release capsules) and VIVITROL® (naltrexone for extended-release injectable suspension);

•any potential approval of our product candidates, including with respect to TREANDA® (bendamustine HCl);

•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;

•the terms of the agreement in principle with the U.S. Attorney’s Office and the finalization of the settlement and corporate integrity agreements;

•the ongoing investigation by and discussions with the Office of the Connecticut Attorney General and the ultimate resolution or settlement of this matter;

•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 the marketplace, particularly with respect to our recently launched products;

•our ability to obtain regulatory approvals to sell our product candidates, including TREANDA and any additional future indications for FENTORA, and to launch such products or indications 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;

ii

•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 continued erosion of ACTIQ® (oral transmucosal fentanyl citrate) [C-II] sales to generic competitors;

•regulatory, legal or other setbacks with respect to the agreement in principle with the U.S. Attorney’s Office, the proposed settlement and corporate integrity agreements related thereto, the ongoing investigation by the Office of the Connecticut Attorney General, our settlements of the PROVIGIL and ACTIQ patent litigations and the ongoing litigation related to such settlements;

•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.

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 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)

	September 30,			December 31,
	2007			2006
ASSETS
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
LIABILITIES AND STOCKHOLDERS’ EQUITY
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
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, 400,000,000 and 200,000,000 shares authorized, 69,266,904 and 67,853,389 shares issued, and 67,008,045 and 65,596,227 shares outstanding	693			678
Additional paid-in capital	1,899,761			1,780,749
Treasury stock, at cost, 2,258,859 and 2,257,162 shares outstanding	(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

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						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

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, 2007				$	1,309,460		67,853,389		$	678	$	1,780,749	2,257,162	$	(151,068	)	$	(425,256	)	$	104,357
Net loss	$	(235,886	)	(235,886		)											(235,886		)
Foreign currency translation gain	39,155
Prior service costs and gains on retirement-related plans	59
Change in unrealized investment gains and losses	30
Other comprehensive income	39,244			39,244																39,244
Comprehensive loss	$	(196,642	)
Adoption of SFAS 158, net of tax				1,259																1,259
Adoption of FIN 48				(7,168		)											(7,168		)
Stock options exercised				74,375			1,411,710		15		74,360
Tax benefit from equity compensation				9,712							9,712
Stock-based compensation expense				34,940			1,850		—		34,940
Treasury stock acquired				(128		)							1,697	(128		)
Other				—			(45	)	—
BALANCE, SEPTEMBER 30, 2007				$	1,225,808		69,266,904		$	693	$	1,899,761	2,258,859	$	(151,196	)	$	(668,310	)	$	144,860

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)

	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 maturities of available-for-sale investments	28,212			244,165
Purchases of available-for-sale investments	(71,398		)	(1,505		)
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

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 share and 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 including normal and recurring accruals that are 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, for the year ended December 31, 2006. 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 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. 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.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted the provisions of FIN 48 on January 1, 2007. See Note 12 herein.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 157 to have a significant impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 allows companies to choose, at specific election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 159 to have a significant impact on our consolidated financial statements.

In June 2007, the Emerging Issues Task Force (“EITF”) reached a final consensus on EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 is effective for fiscal years beginning after December 15, 2007. EITF 07-3 requires non-refundable advance payments for future research and development activities to be capitalized until the goods have been

5

delivered or related services have been performed. Adoption is on a prospective basis and could impact the timing of expense recognition for agreements entered into after December 31, 2007. We do not expect the adoption of EITF 07-3 to have a significant impact on our consolidated financial statements.

2. ACQUISITION

In August 2007, we acquired the North American rights to AMRIX™ (cyclobenzaprine hydrochloride extended-release capsules) from E. Claiborne Robins Company, Inc., a privately-held company d/b/a ECR Pharmaceuticals (“ECR”). We made an initial payment of $100.1 million cash to ECR upon the closing of the acquisition, $0.9 million and $99.2 million of which was capitalized as inventory and an intangible asset, respectively. ECR also could receive up to an additional $255 million in milestone payments that are contingent on attainment of certain agreed-upon sales levels of AMRIX. Two dosage strengths of AMRIX (15 mg and 30 mg) were approved in February 2007 by the U.S. Food and Drug Administration (the “FDA”) for short-term use as an adjunct to rest and physical therapy for relief of muscle spasm associated with acute, painful musculoskeletal conditions.  We made the product available in the United States in October 2007 and will commence a full U.S. launch in November 2007.

3. STOCK-BASED COMPENSATION

Total stock-based compensation expense recognized in the consolidated statement of operations is as follows:

	Three months ended				Nine months ended
	September 30,				September 30,
	2007		2006		2007		2006
Stock option expense	$	6,393	$	6,736	$	22,570	$	23,933
Restricted stock unit expense	3,920		3,022		12,370		8,503
Total stock-based compensation expense*	$	10,313	$	9,758	$	34,940	$	32,436
Total stock-based compensation expense after-tax	$	6,528	$	6,177	$	22,117	$	20,532

* For each period presented, total stock-based compensation expense was recognized equally between research and development and selling, general and administrative expenses based on the employees’ compensation allocation between these line items.

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:

	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
Risk free interest rate	4.65		%	4.90		%	4.59		%	4.98		%
Expected term (years)	6.25			6.25			5.46			5.74
Expected volatility	34.9		%	48.7		%	33.4		%	51.3		%
Expected dividend yield	—		%	—		%	—		%	—		%
Estimated fair value per option granted	$	34.09		$	35.51		$	30.91		$	33.22

On May 17, 2007, the Cephalon, Inc. 2004 Equity Compensation Plan (the “2004 Plan”) was amended, following approval by Cephalon stockholders, to increase by 1,000,000 shares the total number of shares of Common Stock authorized for issuance under the 2004 Plan, from 11,450,000 shares to 12,450,000 shares. This amendment also provides that no more than 400,000 shares of Common Stock may be issued pursuant to restricted stock unit awards granted under the 2004 Plan after May 16, 2007.

6

Stock Options

The following tables summarize the aggregate option activity for the nine months ended September 30:

	2007
	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value
Outstanding, January 1,	7,694,298		$	54.90
Granted	110,400		79.05
Exercised	(1,411,710	)	52.72
Forfeited	(148,150	)	57.48
Expired	(11,224	)	64.31
Outstanding, September 30,	6,233,614		$	55.78	6.1	$	108,377
Vested options at end of period	3,909,601		$	54.02	4.9	$	74,906

	2006
	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value
Outstanding, January 1,	9,955,904		$	50.84
Granted	148,300		61.90
Exercised	(2,400,227	)	46.88
Forfeited	(246,125	)	50.01
Expired	(32,699	)	49.80
Outstanding, September 30,	7,425,153		$	52.33	6.4	$	83,738
Vested options at end of period	4,520,567		$	53.96	5.4	$	48,812

As of September 30, 2007, there was $27.9 million of total unrecognized compensation cost related to outstanding options that is expected to be recognized over a weighted-average period of 1.4 years. For the nine months ended September 30, 2007 and 2006, we received net proceeds of $74.4 million and $112.8 million, respectively, from the exercise of stock options.

The intrinsic value of stock options exercised during the nine months ended September 30, 2007 and 2006 was $36.1 million and $65.8 million, respectively. The estimated fair value of shares that vested during the nine months ended September 30, 2007 and 2006 was $4.9 million and $5.8 million, respectively.

Restricted Stock Units

The following tables summarize the restricted stock units activity for the nine months ended September 30:

	2007
	Shares			Weighted Average Fair Value
Nonvested, January 1,	709,900			$	59.49
Granted	—			—
Vested	(1,850		)	71.77
Forfeited	(28,275		)	60.65
Nonvested, September 30,	679,775			$	59.41
Intrinsic Value as of September 30,	$	49,664

7

	2006
	Shares			Weighted Average Fair Value
Nonvested, January 1,	624,575			$	49.52
Granted	5,000			70.50
Vested	—			—
Forfeited	(55,775		)	49.47
Nonvested, September 30,	573,800			$	49.71
Intrinsic Value as of September 30,	$	35,432

As of September 30, 2007, there was $17.1 million of total unrecognized compensation cost related to nonvested restricted stock units that is expected to be recognized over a weighted-average period of 1.4 years.

4. INVENTORY, NET

Inventory, net consisted of the following:

	September 30, 2007
	Commercial			Pre-approval			Total
Raw materials	$	28,074		$	—		$	28,074
Work-in-process	19,535			—			19,535
Finished goods	45,790			—			45,790
Total inventory, net	$	93,399		$	—		$	93,399
Inventory included in other assets	$		117,185	$		—	$		117,185

	December 31, 2006
	Commercial		Pre-approval		Total
Raw materials	$	23,761	$	—	$	23,761
Work-in-process	15,915		—		15,915
Finished goods	45,563		—		45,563
Total inventory, net	$	85,239	$	—	$	85,239
Inventory included in other assets	$	—	$	89,061	$	89,061

We have capitalized 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. In June 2007, we secured final FDA approval of NUVIGIL for the treatment of excessive sleepiness associated with narcolepsy, obstructive sleep apnea/hypopnea syndrome (“OSA/HS”) and shift work sleep disorder (“SWSD”). However, as we do not presently intend to launch NUVIGIL commercially until around 2010, we have included net NUVIGIL inventory balances of $117.2 million and $89.1 million at September 30, 2007 and December 31, 2006, respectively, in other assets, rather than inventory. Based on the expiration dates and our current estimates of sales demand for NUVIGIL, no additional reserve related to NUVIGIL is required at this time.

5. GOODWILL

Goodwill consisted of the following:

	United States			Europe		Total
December 31, 2006	$	267,904		$	199,263	$	467,167
Release of pre-acquisition tax valuation allowance	(1,019		)	—		(1,019		)
Foreign currency translation adjustment	—			10,457		10,457
September 30, 2007	$	266,885		$	209,720	$	476,605

We completed our annual test of impairment of goodwill as of July 1, 2007 and concluded that goodwill was not impaired.

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6. INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

		September 30, 2007						December 31, 2006
	Estimated Useful Lives	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Modafinil developed technology	15 years	$	99,000	$	37,950	$	61,050	$	99,000	$	33,000	$	66,000
DURASOLV technology	14 years	70,000		15,217		54,783		70,000		11,565		58,435
ACTIQ marketing rights	10-12 years	75,465		44,319		31,146		75,465		39,010		36,455
GABITRIL product rights	9-15 years	107,164		52,779		54,385		106,232		46,826		59,406
TRISENOX product rights	8-13 years	113,964		20,510		93,454		113,752		13,634		100,118
VIVITROL product rights	15 years	110,000		11,000		99,000		110,000		5,500		104,500
AMRIX product rights	5 years	99,152		1,549		97,603		—		—		—
MYOCET trademark	20 years	198,145		17,339		180,806		192,367		9,618		182,749
Other product rights	5-20 years	269,180		102,152		167,028		259,054		73,680		185,374
		$	1,142,070	$	302,815	$	839,255	$	1,025,870	$	232,833	$	793,037

Intangible assets are amortized over their estimated useful economic life using the straight line method. Amortization expense was $22.3 million and $20.8 million for the three months ended September 30, 2007 and 2006, respectively, and $64.2 million and $60.8 million for the nine months ended September 30, 2007 and 2006, respectively.

7. LONG-TERM DEBT

Long-term debt consisted of the following:

	September 30,			December 31,
	2007			2006
2.0% convertible senior subordinated notes due June 1, 2015	$	820,000		$	820,000
Zero Coupon convertible subordinated notes first putable June 2008 (Old)	264			263
Zero Coupon convertible subordinated notes first putable June 2010 (Old)	94			94
Zero Coupon convertible subordinated notes first putable June 2008 (New)	213,529			213,417
Zero Coupon convertible subordinated notes first putable June 2010 (New)	199,783			199,716
Mortgage and building improvement loans	2,373			8,291
Capital lease obligations	3,248			3,787
Other	2,367			2,736
Total debt	1,241,658			1,248,304
Less current portion	(1,237,285		)	(1,023,312		)
Total long-term debt	$	4,373		$	224,992

Our convertible notes will be classified as current liabilities and presented in current portion of long-term debt on our consolidated balance sheet if our stock price is above the restricted conversion prices of $56.04, $71.40 or $67.80 with respect to the 2.0% Notes, the 2008 Zero Coupon Notes (Old and New) or the 2010 Zero Coupon Notes (Old and New), respectively at the balance sheet date. At December 31, 2006, our stock price was $70.41, and, therefore, our 2.0% Notes and Zero Coupon Notes first putable June 15, 2010 are considered to be current liabilities and are presented in current portion of long-term debt on our consolidated balance sheet. At September 30, 2007, our stock price was $73.06, and, therefore, all of our convertible notes are considered to be current liabilities and are presented in current portion of long-term debt on our consolidated balance sheet. In addition, our Zero Coupon Notes first putable June 15, 2008 are considered to be current liabilities based on maturity.

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.

In November 2002, in connection with our planned relocation to a new corporate headquarters, the Pennsylvania Industrial Development Board (“PIDA”) authorized the forgiveness of the outstanding principal balance of $5.3 million due on a loan granted by PIDA in 1995, subject to certain contingencies. At a meeting held in September 2007, the PIDA Board

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determined to forgive the outstanding principal balance of the loan. As such, we recognized a $5.3 million gain on extinguishment of debt in the third quarter of 2007.

8. LEGAL PROCEEDINGS

PROVIGIL Patent Litigation and Settlements

In March 2003, we filed a patent infringement lawsuit against four companies—Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals, Inc., Ranbaxy Laboratories Limited and Barr Laboratories, Inc.—based upon the abbreviated new drug applications (“ANDA”) 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® (modafinil) [C-IV] 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 early 2005, we also filed a patent infringement lawsuit against Carlsbad Technology, Inc. based upon the Paragraph IV ANDA related to modafinil that Carlsbad filed with the FDA.

In late 2005 and early 2006, we entered into settlement agreements with each of Teva, Mylan, Ranbaxy and Barr; in August 2006, we entered into a settlement agreement with Carlsbad and its development partner, Watson Pharmaceuticals, Inc., which we understand has the right to commercialize the Carlsbad product if approved by the FDA. As part of these separate settlements, we agreed to grant to each of these parties 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, subject to applicable regulatory considerations. An earlier entry may occur based upon the entry of a generic version of PROVIGIL.

We also 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 and Teva collectively totaling up to $136.0 million, 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 that began in 2006, with the aggregate payments over this period totaling approximately $82.6 million.

Each of the settlements has been filed with both the U.S. Federal Trade Commission (the “FTC”) and the Antitrust Division of the U.S. Department of Justice (the “DOJ”) as required by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Modernization Act”). The FTC is conducting an investigation of each of the PROVIGIL settlements and has issued a subpoena and requested documents and other information from us. We are cooperating fully with the FTC and its ongoing investigation, and expect to continue to cooperate. The FTC could determine to challenge in an administrative or judicial proceeding any or all of the settlements if it believes that the agreements violate the antitrust laws, although we believe that such a challenge would take years to resolve. We expect that the Commissioners of the FTC will formally decide in the near future whether or not to bring such an action against us.

We also are aware of numerous private antitrust complaints filed in the 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 and, in some cases, certain state laws. All but one of these actions have been consolidated into a complaint on behalf of a class of direct purchasers of PROVIGIL and a separate complaint on behalf of a class of consumers and other indirect purchasers of PROVIGIL. A separate complaint filed by an indirect purchaser of PROVIGIL was filed in September 2007. The plaintiffs in all of these actions are seeking monetary damages and/or equitable relief. We moved to dismiss the class action complaints in November 2006.

Separately, in June 2006, Apotex, Inc., a subsequent ANDA filer seeking FDA approval of a generic form of modafinil, filed suit against us also in the U.S. District Court for the Eastern District of Pennsylvania alleging similar violations of antitrust laws and state law. Apotex asserts that the PROVIGIL settlement agreements improperly prevent it from obtaining FDA approval of its ANDA, and seeks monetary and equitable remedies. Apotex also seeks a declaratory judgment that the ‘516 Patent is invalid, unenforceable and/or not infringed by its proposed generic. We filed a motion to dismiss the Apotex case in late September 2006. We believe that the complaints described in the preceding paragraph and the Apotex complaint 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 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 as of the filing date of this report, although Apotex has filed suit against us, as described above.

ACTIQ Patent Litigation and Settlement

In early 2006, we settled 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 (“generic OTFC”). Under the settlement, we granted to Barr an exclusive royalty bearing right to market and sell generic OTFC in the United States. The settlement with Barr related to ACTIQ® (oral transmucosal fentanyl citrate) [C-II] has been filed with both the FTC and 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.

U.S. Attorney’s Office and Connecticut Attorney General Investigations and Related Matters

In early November 2007, we announced that we had reached an agreement in principle with the U.S. Attorney’s Office (“USAO”) in Philadelphia and the DOJ with respect to the USAO investigation that began in September 2004. The investigation has focused on our sales and promotional practices with respect to ACTIQ, GABITRIL® (tiagabine hydrochloride) and PROVIGIL. Under this agreement, we now expect to pay $425.0 million as part of a comprehensive settlement of all Federal and related state Medicaid claims. During the third quarter of 2007, we increased our existing reserve by $369.0 million to $425.0 million in contemplation of this payment. In addition, the Company will agree to a single federal misdemeanor violation of the Federal 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 described above are subject to negotiation and the execution of the final settlement and corporate integrity agreements. There can be no assurance that the settlement will be finalized on the terms outlined above.

In September 2004, we announced that we had received a voluntary request for information from the Office of the Connecticut Attorney General that also appears to be focused on our sales and promotional practices with respect to ACTIQ, GABITRIL and PROVIGIL. We are cooperating with this Office, are providing documents and other information in response to these and additional requests and are engaged in ongoing discussions with them. In late October 2007, we also received a civil demand for information from the Office of the Massachusetts Attorney General that is focused on sales and promotional practices with respect to ACTIQ, FENTORA® (fentanyl buccal tablet) [C-II] and certain of our other products. We intend to cooperate with this request as well. Both of these matters may involve civil penalties and/or fines. The payment of any settlement or judgment amount and/or fines could have a material adverse effect on our financial position, liquidity and results of operations. Furthermore, it is reasonably likely that we will face future additional requests for information from other state attorneys general focused on historical sales and promotional practices for our U.S. products. If civil penalties and/or fines were to result from such investigations, it could materially and adversely effect our financial position, liquidity and results of operations.

In November 2007, we were served with a putative class action complaint filed on behalf of entities that claim to have purchased ACTIQ for use in non-cancer patients. The complaint alleges violations of various state consumer protection laws, as well as the violation of the common law of unjust enrichment, and seeks an unspecified amount of money in actual, punitive and/or treble damages, with interest, and/or disgorgement of profits. We believe the allegations in the complaint are without merit, and we intend to vigorously defend ourselves in this matter and in any similar actions that may be filed in the future.

In March 2007, we received a letter requesting information related to ACTIQ and FENTORA from Congressman Henry A. Waxman in his capacity as Chairman of the House Committee on Oversight and Government Reform. The letter cites two articles concerning ACTIQ published in The Wall Street Journal in November 2006 and requests information concerning our sales and marketing practices for ACTIQ and FENTORA, among other things. We are cooperating with this request and are continuing to provide documents and other information to the Committee.

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Other Matters

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

9. COMPREHENSIVE INCOME (LOSS)

The components of total comprehensive income (loss) are as follows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
Net income (loss)	$	(306,763	)	$	95,741		$	(235,886	)	$	149,725
Foreign currency translation gains	21,681			13,209			39,155			47,635
Prior service costs and gains on retirement-related plans	14			—			59			—
Change in unrealized investment gains and losses	36			(159		)	30			871
Other comprehensive income	21,731			13,050			39,244			48,506
Comprehensive income (loss)	$	(285,032	)	$	108,791		$	(196,642	)	$	198,231

10. EARNINGS PER SHARE (“EPS”)

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 number of common shares outstanding and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period. Common stock equivalents are measured under the treasury stock method or “if converted” method, as follows:

Treasury Stock Method:

Employee stock options

Restricted stock units

Zero Coupon Convertible Notes issued in December 2004 (the “New Zero Coupon Notes”)

2.0% Notes

Warrants

“If-Converted” Method:

2.5% Notes (outstanding through December 2006)

Zero Coupon Convertible Notes issued in June 2003 (the “Old Zero Coupon Notes”)

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” (“EITF 90-19”); 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 (assuming the average market price is above the applicable conversion prices of the 2.0% and New Zero Coupon Notes), and include that number in the total diluted shares figure for the period.

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. SFAS No. 128, “Earnings Per Share” (“SFAS 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 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, 2006 had been $75.00, $85.00 or $95.00, the shares from the warrants to be included in diluted EPS would have been 2.1 million, 5.0 million and 7.3 million shares, respectively. The total number of shares that could potentially be included under the warrants is 26.8 million.

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The number of shares included in the diluted EPS calculation for the convertible subordinated notes and warrants is as follows:

	Three months ended					Nine months ended
	September 30,					September 30,
(In thousands, except per share data)	2007*		2006			2007*		2006
Average market price per share of Cephalon stock	$	74.80	$	60.29		$	75.15	$	64.30
Shares included in diluted EPS calculation:
2.0% Notes	—		4,440			—		5,392
New Zero Coupon Notes	—		500			—		1,276
Warrants related to 2.0% Notes	—		—		†	—		—		†
Warrants related to New Zero Coupon Notes	—		—		†	—		—		†
Total (Treasury Stock Method)	—		4,940			—		6,668
Other (“If-Converted” Method)	—		130			—		130
Total	—		5,070			—		6,798

* Since there was a net loss for the three and nine months ended September 30, 2007, there is no impact from these notes or warrants on the number of diluted shares included in the diluted EPS calculation.

† No shares are included because the average market price per share of our common stock did not exceed the warrant strike prices of the 2.0% Notes or New Zero Coupon Notes.

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

	Three months ended					Nine months ended
	September 30,					September 30,
(In thousands, except per share data)	2007			2006		2007			2006
Basic income (loss) per common share computation:
Numerator:
Net income (loss) used for basic income (loss) per common share	$	(306,763	)	$	95,741	$	(235,886	)	$	149,725
Denominator:
Weighted average shares used for basic income (loss) per common share	66,931			60,762		66,398			60,415
Basic income (loss) per common share	$	(4.58	)	$	1.58	$	(3.55	)	$	2.48
Diluted income (loss) per common share computation:
Numerator:
Net income (loss) used for basic income (loss) per common share	$	(306,763	)	$	95,741	$	(235,886	)	$	149,725
Interest on convertible notes (net of tax)	—			40		—			121
Net income (loss) used for diluted income (loss) per common share	$	(306,763	)	$	95,781	$	(235,886	)	$	149,846
Denominator:
Weighted average shares used for basic income (loss) per common share	66,931			60,762		66,398			60,415
Effect of dilutive securities:
Convertible subordinated notes and warrants	—			5,070		—			6,798
Employee stock options and restricted stock units	—			1,240		—			1,708
Weighted average shares used for diluted income (loss) per common share	66,931			67,072		66,398			68,921
Diluted income (loss) per common share	$	(4.58	)	$	1.43	$	(3.55	)	$	2.17

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

	Three months ended		Nine months ended
	September 30,		September 30,
(In thousands)	2007	2006	2007	2006
Weighted average shares excluded:
Convertible subordinated notes and warrants	35,020	32,640	35,096	32,640
Employee stock options and restricted stock units	2,934	2,513	3,028	2,343
	37,954	35,153	38,124	34,983

11. SEGMENT INFORMATION

Revenues by segment for the three months ended September 30:

	2007									2006
	United States			Europe			Total			United States			Europe			Total
Sales:
PROVIGIL	$	202,202		$	14,904		$	217,106		$	193,462		$	11,081		$	204,543
GABITRIL	12,952			881			13,833			14,604			723			15,327
Central Nervous System (“CNS”) disorders	215,154			15,785			230,939			208,066			11,804			219,870
ACTIQ	45,946			10,007			55,953			179,651			7,585			187,236
Generic OTFC	32,689			—			32,689			—			—			—
FENTORA	33,193			—			33,193			—			—			—
Pain	111,828			10,007			121,835			179,651			7,585			187,236
Other	19,291			56,664			75,955			13,292			50,115			63,407
Total Sales	346,273			82,456			428,729			401,009			69,504			470,513
Other Revenues	8,823			869			9,692			9,189			2,631			11,820
Total External Revenues	355,096			83,325			438,421			410,198			72,135			482,333
Inter-Segment Revenues	1,356			13,051			14,407			3,233			28,176			31,409
Elimination of Inter-Segment Revenues	(1,356		)	(13,051		)	(14,407		)	(3,233		)	(28,176		)	(31,409		)
Total Revenues	$	355,096		$	83,325		$	438,421		$	410,198		$	72,135		$	482,333

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Revenues by segment for the nine months ended September 30:

	2007									2006
	United States			Europe			Total			United States			Europe			Total
Sales:
PROVIGIL	$	593,394		$	39,171		$	632,565		$	500,941		$	29,219		$	530,160
GABITRIL	39,814			6,268			46,082			42,166			3,510			45,676
CNS	633,208			45,439			678,647			543,107			32,729			575,836
ACTIQ	157,097			28,638			185,735			457,679			19,213			476,892
Generic OTFC	97,562			—			97,562			—			—			—
FENTORA	101,224			—			101,224			—			—			—
Pain	355,883			28,638			384,521			457,679			19,213			476,892
Other	53,867			170,767			224,634			41,661			152,436			194,097
Total Sales	1,042,958			244,844			1,287,802			1,042,447			204,378			1,246,825
Other Revenues	32,315			2,550			34,865			26,510			6,052			32,562
Total External Revenues	1,075,273			247,394			1,322,667			1,068,957			210,430			1,279,387
Inter-Segment Revenues	15,702			51,222			66,924			12,073			76,370			88,443
Elimination of Inter-Segment Revenues	(15,702		)	(51,222		)	(66,924		)	(12,073		)	(76,370		)	(88,443		)
Total Revenues	$	1,075,273		$	247,394		$	1,322,667		$	1,068,957		$	210,430		$	1,279,387

Income (loss) before income taxes by segment:

	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
United States	$	(279,352	)	$	160,358		$	(125,375	)	$	280,907
Europe	(2,448		)	(5,540		)	(7,898		)	(39,615		)
Total	$	(281,800	)	$	154,818		$	(133,273	)	$	241,292

Total assets by segment:

	September 30,		December 31,
	2007		2006
United States	$	2,280,574	$	2,075,530
Europe	1,118,130		969,967
Total	$	3,398,704	$	3,045,497

12. INCOME TAXES

In July 2006, the FASB issued FIN 48 which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, a company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006.

We adopted the provisions of FIN 48 on January 1, 2007. As a result of the adoption of FIN 48, we recognized a $33.9 million increase in the liability for unrecognized tax benefits. This increase in liability resulted in a decrease to the January 1, 2007 retained earnings balance in the amount of $7.2 million and a net reduction in deferred tax liabilities of $18.5 million. The amount of unrecognized tax benefits at January 1, 2007 is $50.6 million of which $20.1 million would impact our effective tax rate, if recognized.

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The impact to net income of accrued interest and penalties related to uncertain tax positions is not significant.

For the nine months ended September 30, 2007, we recorded reserves totaling $425.0 million related to the potential resolution of the U.S. Attorney’s investigation discussed in Note 8. At this time, we have not recognized a tax benefit for the settlement reserve due to the uncertainty associated with the tax treatment of any potential settlement.

The Internal Revenue Service (“IRS”) currently is examining Cephalon, Inc.’s 2004 federal income tax return and we remain open for examination by the IRS for the years 2003 through 2006. Based on the current status of the ongoing examination by the IRS, which could include formal legal proceedings, at this time it is not possible to estimate the outcome of the examination and the impact, if any, to our uncertain tax positions. All U.S. federal income tax returns of Anesta Corp. and CIMA LABS, which were acquired by Cephalon, are closed through 1994 and 1992, respectively. For Salmedix, Inc., the years 2000 through 2005 are open due to limitations on the use of the net operating loss carry forwards. In France, we are under examination for the period 2004 and 2005, while Zeneus France is under examination for 1999 to 2004. In Germany, we are under examination for the period 2000 to 2004. In other foreign jurisdictions, the tax years that remain open for potential examination range from 1999 to 2006.

In the regular course of business, various state and local tax authorities also conduct examinations of our state and local income tax returns. Depending on the state, state income tax returns are generally subject to examination for a period of three to five years after filing. The state impact of any federal changes from the 2004 examination remains subject to examination by various states for a period of up to one year after formal notification to the states. We currently have several state income tax returns in the process of examination.

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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 encourage you to read this MD&A in conjunction with our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2006 and the “Risk Factors” contained in Part II, Item 1A of this Quarterly Report on Form 10-Q.

EXECUTIVE SUMMARY

Cephalon is an international biopharmaceutical company dedicated to the discovery, development and marketing of innovative products to treat human diseases. We currently focus our efforts in four core therapeutic areas: central nervous system (“CNS”) disorders, pain, oncology and addiction. In addition to conducting an active research and development program, we market seven proprietary products in the United States and numerous products in various countries throughout Europe. Consistent with our core therapeutic areas, we have aligned our approximately 740-person U.S. field sales and sales management teams by area. In Europe, we have a sales and marketing organization numbering approximately 410 persons that supports our presence in nearly 20 European countries, including France, the United Kingdom, Germany, Italy and Spain.

In early November 2007, we announced that we had reached an agreement in principle with the U.S. Attorney’s Office (“USAO”) in Philadelphia and the U.S. Department of Justice with respect to the USAO investigation that began in September 2004. The investigation has focused on our sales and promotional practices with respect to ACTIQ® (oral transmucosal fentanyl citrate) [C-II], GABITRIL® (tiagabine hydrochloride) and PROVIGIL. Under this agreement, we now expect to pay $425.0 million as part of a comprehensive settlement of all Federal and related state Medicaid claims. During the third quarter of 2007, we increased our existing reserve by $369.0 million to $425.0 million in contemplation of this payment. In addition, the Company will agree to a single federal misdemeanor violation of the Federal Food, Drug and Cosmetic Act and enter into a corporate integrity agreement with the Office of Inspector General of the U.S. Department of Health and Human Services. The terms described above are subject to negotiation and the execution of the final settlement and corporate integrity agreements. There can be no assurance that the settlement will be finalized on the terms outlined above.

Our most significant product is PROVIGIL, which comprised 49% of our total consolidated net sales for the nine months ended September 30, 2007, of which 94% was in the U.S. market. For the nine months ended September 30, 2007, consolidated net sales of PROVIGIL increased 19% over the nine months ended September 30, 2006. Under our co-promotion agreement with Takeda Pharmaceuticals North America, Inc., 500 Takeda sales representatives began promoting PROVIGIL in the second position to primary care physicians and other appropriate health care professionals in the United States beginning July 1, 2006. Effective January 1, 2007, an additional 250 Takeda sales representatives were added, all of whom are detailing PROVIGIL in the first position. Together with our CNS field sales and sales management teams, we now have nearly 1,200 persons focused on detailing PROVIGIL in the United States.

Our second most significant product is ACTIQ (including our generic version of ACTIQ (“generic OTFC”)), which comprised 22% of our total consolidated net sales for the nine months ended September 30, 2007, of which 90% was in the U.S. market. In late September 2006, Barr Laboratories, Inc. entered the U.S. market with generic OTFC pursuant to our license and supply agreement. As a result, ACTIQ sales have been meaningfully eroded by generic OTFC products sold by Barr and by us through our sales agent, Watson Pharmaceuticals, Inc., and we expect this erosion will continue during the remainder of 2007. In addition, under our license and supply agreement with Barr, we are obligated to sell generic OTFC to Barr for its resale in the United States. While we currently have available fentanyl quota to produce ACTIQ and generic OTFC, in the future we could face shortages of quota that could negatively impact our ability to supply product to Barr or to produce ACTIQ or our generic OTFC product. If we are unable to provide product to Barr, it is possible that either Barr or the U.S. Federal Trade Commission (the “FTC”) could claim that this failure is a breach of our agreements with these parties.

In August 2007, we acquired the North American rights to AMRIX™ (cyclobenzaprine hydrochloride extended-release capsules) from E. Claiborne Robins Company, Inc., a privately-held company d/b/a ECR Pharmaceuticals (“ECR”). We made an initial payment of $100.1 million cash to ECR upon the closing of the acquisition, $0.9 million and $99.2 million of which was capitalized as inventory and an intangible asset, respectively. ECR also could receive up to an additional $255 million in milestone payments that are contingent on attainment of certain agreed-upon sales levels of AMRIX. Two dosage strengths of AMRIX (15 mg and 30 mg) were approved in February 2007 by the U.S. Food and Drug

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Administration (the “FDA”) for short-term use as an adjunct to rest and physical therapy for relief of muscle spasm associated with acute, painful musculoskeletal conditions.  We made the product available in the United States in October 2007 and will commence a full U.S. launch in November 2007.

In June 2007, we secured final FDA approval of NUVIGIL for the treatment of excessive sleepiness associated with narcolepsy, obstructive sleep apnea/hypopnea syndrome (“OSA/HS”) and shift work sleep disorder (“SWSD”). NUVIGIL is a single-isomer formulation of modafinil, the active ingredient in PROVIGIL. NUVIGIL is protected by a composition of matter patent that will expire on December 18, 2023 and covers a novel polymorphic form of armodafinil, the active pharmaceutical ingredient in NUVIGIL. The final NUVIGIL labeling includes a bolded warning section that characterizes the potential occurrence of serious skin rash and hypersensitivity in patients taking modafinil and armodafinil. In September 2007, we finalized revisions to the label for PROVIGIL that make the NUVIGIL and PROVIGIL labels consistent.

In late September 2006, we received FDA approval of our next-generation proprietary pain product, FENTORA® (fentanyl buccal tablet) [C-II], and launched the product in the United States in early October 2006. FENTORA is indicated for the management of breakthrough pain in patients with cancer who are already receiving and are tolerant to opioid therapy for their underlying persistent cancer pain. We are focusing our longer-term clinical strategy on developing FENTORA for opioid-tolerant patients with breakthrough pain associated with other conditions, including neuropathic pain and back pain. In October 2006, January 2007 and August 2007, we announced positive data from three Phase 3 clinical trials of FENTORA. We plan to submit a sNDA to the FDA in November 2007 that will seek to expand the labeled indications for FENTORA beyond breakthrough pain in opioid-tolerant patients with cancer.

In September 2007, we submitted a new drug application (“NDA”) to the FDA requesting approval of TREANDA® (bendamustine HCl) for the treatment of patients with chronic lymphocytic leukemia. The FDA has accepted this NDA and has granted an orphan drug designation to TREANDA for this indication. In October 2007, we announced positive results from a Phase 3 clinical trial of TREANDA in patients with indolent non-Hodgkin’s lymphoma. We anticipate filing an NDA with FDA for this indication by the end of 2007.

In April 2006, the FDA approved VIVITROL, and we launched the product in June 2006. VIVITROL is indicated for the treatment of 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, Inc. 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. While we have made steady progress in increasing sales and physician awareness of this product, we have determined to reduce the level of our sales and marketing expenses for this product, including a reduction in the number of sales representative promoting the product, to what we believe is an appropriate spending level for this product.

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, could materially impact our results of operations. In late 2005 and early 2006, we entered into settlement agreements with each of Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc., Ranbaxy Laboratories Limited and Barr Laboratories, Inc. For more information concerning these settlements and the August 2006 settlement with Carlsbad Technology, Inc., see Note 8 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our activities and operations are subject to significant government regulations and oversight. In September 2004, we announced that we had received a voluntary request for information from the Office of the Connecticut Attorney General that appears to be focused on our sales and promotional practices with respect to ACTIQ, GABITRIL and PROVIGIL. We are cooperating with this Office, are providing documents and other information in response to these and additional requests and are engaged in ongoing discussions with them. In late October 2007, we also received a civil demand for information from the Office of the Massachusetts Attorney General that is focused on sales and promotional practices with respect to ACTIQ, FENTORA and certain of our other products. We intend to cooperate with this request as well. Both of these matters may involve civil penalties and/or fines. The payment of any settlement or judgment amount and/or fines could have a material adverse effect on our financial position, liquidity and results of operations. Furthermore, it is reasonably likely that we will face future additional requests for information from other state attorneys general focused on historical sales and promotional

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practices for our U.S. products. If civil or other penalties or fines were to result from such investigations, it could materially and adversely effect our financial position, liquidity and results of operations. For more information concerning related legal matters, see Note 8 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We have significant levels of indebtedness outstanding, nearly all of which consists of convertible notes. Under the terms of the indentures governing nearly all of our 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 7 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Note 10 to our Consolidated Financial Statements included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. 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 September 30, 2007, 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 the filing date of this report before the fair value of the convertible notes would be less than the value of the common stock shares underlying the notes. 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 under the current terms. 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, and to successfully develop or acquire and commercialize new product candidates.

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RESULTS OF OPERATIONS

(In thousands)

Three months ended September 30, 2007 compared to three months ended September 30, 2006:

	Three months ended
	September 30,
	2007						2006						% Increase (Decrease)
	United States		Europe		Total		United States		Europe		Total		United States		Europe		Total
Sales:
PROVIGIL	$	202,202	$	14,904	$	217,106	$	193,462	$	11,081	$	204,543	5	%	35	%	6	%
GABITRIL	12,952		881		13,833		14,604		723		15,327		(11	)%	22	%	(10	)%
CNS	215,154		15,785		230,939		208,066		11,804		219,870		3	%	34	%	5	%
ACTIQ	45,946		10,007		55,953		179,651		7,585		187,236		(74	)%	32	%	(70	)%
Generic OTFC	32,689		—		32,689		—		—		—		100	%	—	%	100	%
FENTORA	33,193		—		33,193		—		—		—		100	%	—	%	100	%
Pain	111,828		10,007		121,835		179,651		7,585		187,236		(38	)%	32	%	(35	)%
Other	19,291		56,664		75,955		13,292		50,115		63,407		45	%	13	%	20	%
Total Sales	346,273		82,456		428,729		401,009		69,504		470,513		(14	)%	19	%	(9	)%
Other Revenues	8,823		869		9,692		9,189		2,631		11,820		(4	)%	(67	)%	(18	)%
Total Revenues	$	355,096	$	83,325	$	438,421	$	410,198	$	72,135	$	482,333	(13	)%	16	%	(9	)%

Sales—In the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which accounted for 65% and 66% of our total consolidated gross sales for the three and nine months ended September 30, 2007, respectively. 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.

We have distribution 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 September 30, 2007, we received information from substantially all of our U.S. wholesaler customers about the levels of inventory they held for our U.S. branded products. Based on this information, which we have not independently verified, we believe that total inventory held at these wholesalers is approximately two to three weeks supply of our U.S. branded products at our current sales levels. At September 30, 2007, we believe that inventory held at wholesalers and retailers of our generic OTFC product, launched in October 2006, is approximately three to four months supply.

For the three months ended September 30, 2007, sales were impacted by changes in the product sales allowances deducted from gross sales as described further below and by changes in the relative levels of the number of units of inventory held at wholesalers and retailers. For the three months ended September 30, 2007, total sales decreased 9% as compared to the three months ended September 30, 2006. The other key factors that contributed to the changes in sales are summarized by product as follows:

•In CNS, sales of PROVIGIL increased 6 percent. Demand for PROVIGIL increased as evidenced by an increase in U.S. prescriptions for PROVIGIL of 7%, according to IMS Health. For the three months ended September 30, 2007, sales of PROVIGIL also were impacted by domestic price increases of 5% from period to period.

•In Pain, sales decreased 35 percent. Sales of ACTIQ were impacted by an increase in domestic prices of 36% from period to period, offset by an 86% decrease in U.S. prescriptions, according to IMS Health, resulting from the introduction of generic competition to ACTIQ in October 2006. For the three months ended September 30, 2007, we recognized $32.7 million of revenue related to sales of our own generic OTFC and shipments of our generic OTFC to Barr and $33.2 million of revenue related to sales of FENTORA. During the remainder of 2007, we expect overall sales of our Pain products to decrease compared to the same period in 2006 and the first three

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quarters of 2007 based on a continued shift in market share from ACTIQ to generic OTFC, partially offset by the sales of FENTORA.

•Other sales, which consist primarily of sales of other products and certain third party products, increased 20 percent. The increase is attributable to an increase of $6.5 million in sales of our European products, primarily driven by sales in France and sales of oncology products in Europe.

Other Revenues—The decrease of 18% from period to period is primarily due to a decrease in revenues from our collaborators including royalties, milestone payments and fees.

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:

	Three months ended
	September 30,
	2007			2006			Change			% Change
Gross sales	$	479,065		$	492,385		$	(13,320	)	(3	)%
Product sales allowances:
Prompt payment discounts	7,781			8,007			(226		)	(3	)%
Wholesaler discounts	5,373			437			4,936			1,130	%
Returns	(2,598		)	4,407			(7,005		)	(159	)%
Coupons	8,713			5,887			2,826			48	%
Medicaid discounts	10,648			8,828			1,820			21	%
Medicare Part D discounts	482			226			256			113	%
Managed care and governmental contracts	19,937			(5,920		)	25,857			437	%
	50,336			21,872			28,464
Net sales	$	428,729		$	470,513		$	(41,784	)	(9	)%
Product sales allowances as a percentage of gross sales	10.5		%	4.4		%

Prompt payment discounts, generally granted at 2% of sales, decreased for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 due to lower sales revenue during the quarter. Wholesaler discounts increased $4.9 million period over period because cumulative price increases as of September 30, 2006 produced wholesaler credits that partially offset the wholesaler discounts that would have been recorded for the same period. Returns decreased both as a result of our historical returns experience, particularly related to our CNS products, that is used in the calculation of our returns reserve requirements, and based on current retail pipeline data. Coupons increased for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 as a result of the distribution of coupons for FENTORA, which was launched in October 2006, offset by the elimination and expiration of ACTIQ coupons on September 30, 2006.

Medicaid discounts increased for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 due to increases in our pipeline accruals. Managed care and governmental contracts increased for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 due to additional rebates for certain managed care and governmental programs, particularly with respect to sales of our generic OTFC product. In addition, we recognized a reduction in the managed care and governmental contracts allowance of $13.3 million in the third quarter of 2006, representing amounts paid to the U.S. Department of Defense (“DoD”) under the Tricare program from October 2004 through June 30, 2006. In October 2006, the DoD announced that it would reimburse all companies that had voluntarily made such payments under the Tricare program due to the U.S. Court of Appeals September 2006 ruling. In the future, we expect product sales allowances as a percentage of gross sales to trend upward due to the impact of potential future price increases on Medicaid discounts and potential increases related to Medicaid, Medicare Part D, managed care and governmental contracts sales.

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	Three months ended
	September 30,
	2007		2006		Change			% Change
Costs and expenses:
Cost of sales	$	82,258	$	83,160	$	(902	)	(1	)%
Research and development	93,527		86,439		7,088			8	%
Selling, general and administrative	186,456		161,108		25,348			16	%
Settlement reserve	369,000		—		369,000			100	%
	$	731,241	$	330,707	$	400,534		121	%

Cost of Sales—The cost of sales was 19.2% of net sales for the three months ended September 30, 2007 and 17.7% of net sales for the three months ended September 30, 2006. This increase is primarily due to an increase in production costs as a percentage of sales as a result of the construction and upgrade of facilities in the U.S. for our Pain products during late 2006 and early 2007 and the mix of product margins of our corresponding product sales, in particular the shift in market share from ACTIQ to generic OTFC for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. Amortization expense included in cost of sales was $22.3 million for the three months ended September 30, 2007 as compared to $20.8 million for the three months ended September 30, 2006.

Research and Development Expenses—Research and development expenses increased $7.1 million, or 8%, for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. This increase is primarily attributable to the recognition of a $15.0 million milestone payment related to our NDA filing for TREANDA, partially offset by lower expenses associated with reduced levels of clinical activity in 2007 as compared to 2006.

Selling, General and Administrative Expenses—Selling, general and administrative expenses increased $25.3 million, or 16%, for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 primarily due to the cessation of the reimbursement of expenses from Alkermes related to the promotion of VIVITROL of $8.7 million, increased sales and marketing spending on oncology products and expenses incurred under our agreements with Takeda and Watson.

Settlement Reserve—During the third quarter of 2007, we increased our existing settlement reserve by $369.0 million related to the terms of the agreement in principle reached with the U.S. Attorney’s Office. See Note 8 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

	Three months ended
	September 30,
	2007			2006			Change			% Change
Other income (expense):
Interest income	$	8,868		$	7,046		$	1,822		26	%
Interest expense	(5,660		)	(4,749		)	(911		)	(19	)%
Gain on extinguishment of debt	5,319			—			5,319			100	%
Other income (expense), net	2,493			895			1,598			179	%
	$	11,020		$	3,192		$	7,828		245	%

Other Income (Expense)—Other income (expense) increased $7.8 million for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. The increase was attributable to the following factors:

•an increase in interest income for the three months ended September 30, 2007 due to higher average investment balances; and

•a $5.3 million gain on extinguishment of debt related to the Pennsylvania Industrial Development Board (“PIDA”) loan forgiveness in the third quarter of 2007.

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	Three months ended
	September 30,
	2007		2006		Change			% Change
Income tax expense	$	24,963	$	59,077	$	(34,114	)	(58	)%

Income Taxes—For the three months ended September 30, 2007, we recognized $25.0 million of income tax expense on loss before income taxes of $281.8 million, as we have not yet recognized a tax benefit for the $369.0 million increase in our settlement reserve recorded in the third quarter of 2007 due to the uncertainty associated with the tax treatment of any potential settlement. This compared to income tax expense for the three months ended September 30, 2006 of $59.1 million on income before income taxes of $154.8 million, resulting in an effective tax rate of 38.2 percent.

Nine months ended September 30, 2007 compared to nine months ended September 30, 2006:

	Nine months ended
	September 30,
	2007						2006						% Increase (Decrease)
	United States		Europe		Total		United States		Europe		Total		United States		Europe		Total
Sales:
PROVIGIL	$	593,394	$	39,171	$	632,565	$	500,941	$	29,219	$	530,160	18	%	34	%	19	%
GABITRIL	39,814		6,268		46,082		42,166		3,510		45,676		(6	)%	79	%	1	%
CNS	633,208		45,439		678,647		543,107		32,729		575,836		17	%	39	%	18	%
ACTIQ	157,097		28,638		185,735		457,679		19,213		476,892		(66	)%	49	%	(61	)%
Generic OTFC	97,562		—		97,562		—		—		—		100	%	—	%	100	%
FENTORA	101,224		—		101,224		—		—		—		100	%	—	%	100	%
Pain	355,883		28,638		384,521		457,679		19,213		476,892		(22	)%	49	%	(19	)%
Other	53,867		170,767		224,634		41,661		152,436		194,097		29	%	12	%	16	%
Total Sales	1,042,958		244,844		1,287,802		1,042,447		204,378		1,246,825		—	%	20	%	3	%
Other Revenues	32,315		2,550		34,865		26,510		6,052		32,562		22	%	(58	)%	7	%
Total Revenues	$	1,075,273	$	247,394	$	1,322,667	$	1,068,957	$	210,430	$	1,279,387	1	%	18	%	3	%

Sales—For the nine months ended September 30, 2007, sales were impacted by changes in the product sales allowances deducted from gross sales as described further below and by changes in the relative levels of the number of units of inventory held at wholesalers and retailers. For the nine months ended September 30, 2007, total sales increased 3% as compared to the nine months ended September 30, 2006. The other key factors that contributed to the changes in sales are summarized by product as follows:

•In CNS, sales of PROVIGIL increased 19 percent. Demand for PROVIGIL increased as evidenced by an increase in U.S. prescriptions for PROVIGIL of 11%, according to IMS Health. For the nine months ended September 30, 2007, sales of PROVIGIL also were impacted by domestic price increases of 6% from period to period.

•In Pain, sales decreased 19 percent. Sales of ACTIQ were impacted by an increase in domestic prices of 58% from period to period, offset by an 82% decrease in U.S. prescriptions, according to IMS Health, resulting from the introduction of generic competition to ACTIQ in October 2006. For the nine months ended September 30, 2007, we recognized $97.6 million of revenue related to sales of our own generic OTFC and shipments of our generic OTFC to Barr and $101.2 million of revenue related to sales of FENTORA. During the remainder of 2007, we expect overall sales of our Pain products to decrease compared to the same period in 2006 and the first three quarters of 2007 based on a continued shift in market share from ACTIQ to generic OTFC, partially offset by the sales of FENTORA.

•Other sales, which consist primarily of sales of other products and certain third party products, increased 16 percent. The increase is attributable to an increase of $18.3 million in sales of our European products, primarily driven by sales in France and sales of oncology products in Europe. In addition, other sales in the U.S. increased $12.2 million, primarily driven by increases in sales of VIVITROL and TRISENOX.

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Other Revenues—The increase of 7% from period to period is primarily due to an increase in revenues from our collaborators including royalties, milestone payments and fees.

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:

	Nine months ended
	September 30,
	2007			2006			Change			% Change
Gross sales	$	1,444,003		$	1,356,371		$	87,632		6	%
Product sales allowances:
Prompt payment discounts	23,639			23,226			413			2	%
Wholesaler discounts	15,723			2,629			13,094			498	%
Returns	9,258			14,517			(5,259		)	(36	)%
Coupons	19,895			21,365			(1,470		)	(7	)%
Medicaid discounts	29,277			32,711			(3,434		)	(10	)%
Medicare Part D discounts	1,039			1,468			(429		)	(29	)%
Managed care and governmental contracts	57,370			13,630			43,740			321	%
	156,201			109,546			46,655
Net sales	$	1,287,802		$	1,246,825		$	40,977		3	%
Product sales allowances as a percentage of gross sales	10.8		%	8.1		%

Prompt payment discounts, generally granted at 2% of sales, increased for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 due to the increase in sales revenue. Wholesaler discounts increased $13.1 million period over period because cumulative price increases as of September 30, 2006 produced wholesaler credits that partially offset the wholesaler discounts that would have been recorded for the same period. Returns decreased both as a result of our historical returns experience, particularly related to our CNS products, that is used in the calculation of our returns reserve requirements, and based on current retail pipeline data. Coupons decreased for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 as a result of the elimination and expiration of ACTIQ coupons on September 30, 2006, offset by the distribution of coupons for FENTORA, which was launched in October 2006.

Medicaid discounts decreased for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 due to the lower sales and Medicaid utilization of our Pain products, especially branded ACTIQ. Managed care and governmental contracts increased for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 due to additional rebates for certain managed care and governmental programs, particularly with respect to sales of our generic OTFC product. We recognized a reduction in the managed care and governmental contracts allowance of $13.3 million in the third quarter of 2006, representing amounts paid to the DoD under the Tricare program from October 2004 through June 30, 2006. In October 2006, the DoD announced that it would reimburse all companies that had voluntarily made such payments under the Tricare program due to the U.S. Court of Appeals September 2006 ruling. In the future, we expect product sales allowances as a percentage of gross sales to trend upward due to the impact of potential future price increases on Medicaid discounts and potential increases related to Medicaid, Medicare Part D, managed care and governmental contracts sales.

	Nine months ended
	September 30,
	2007		2006		Change			% Change
Costs and expenses:
Cost of sales	$	251,970	$	250,613	$	1,357		1	%
Research and development	274,078		294,899		(20,821		)	(7	)%
Selling, general and administrative	527,962		470,158		57,804			12	%
Settlement reserve	425,000		—		425,000			100	%
Impairment charge	—		12,417		(12,417		)	(100	)%
	$	1,479,010	$	1,028,087	$	450,923		44	%

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Cost of Sales—The cost of sales was 19.6% of net sales for the nine months ended September 30, 2007 and 20.1% of net sales for the nine months ended September 30, 2006. This decrease is primarily due to lower royalty expenses for ACTIQ resulting from the decline in the royalty rate upon the expiration of the ACTIQ patents in September 2006, the favorable mix of product margins for certain of our product sales for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006, the net effect of price increases on our three major U.S. products and an $8.6 million inventory reserve related to SPARLON recorded in the second quarter of 2006. The decrease was partially offset by a charge of $3.5 million in the first quarter of 2007 for the termination of a materials supply agreement and a decrease in product margin for our Pain products resulting from the shift in market share from ACTIQ to generic OTFC. Amortization expense included in cost of sales was $64.2 million for the nine months ended September 30, 2007 as compared to $60.8 million for the nine months ended September 30, 2006.

Research and Development Expenses—Research and development expenses decreased $20.8 million, or 7%, for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. For the nine months ended September 30, 2007 and 2006, we recognized $26.5 million and $45.0 million in up-front payments related to rights acquired to certain development stage products, respectively. We also recognized a $15.0 million milestone payment related to our NDA filing for TREANDA in the third quarter of 2007. This decrease is also attributable to lower expenses associated with reduced levels of clinical activity in 2007 as compared to 2006.

Selling, General and Administrative Expenses—Selling, general and administrative expenses increased $57.8 million, or 12%, for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 primarily due to the cessation of the reimbursement of expenses from Alkermes related to the promotion of VIVITROL of $21.6 million, increased sales and marketing spending on oncology products and expenses incurred under our agreements with Takeda and Watson, offset by $6.0 million of one-time payments made for the nine months ended September 30, 2006 in connection with PROVIGIL settlement agreements.

Settlement Reserve—For the nine months ended September 30, 2007, we recorded a settlement reserve of $425.0 million related to the terms of the agreement in principle reached with the U.S. Attorney’s Office. See Note 8 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Impairment Charge—In June 2006, we announced that data from our Phase 3 clinical program evaluating GABITRIL for the treatment of GAD did not reach statistical significance on the primary study endpoints. As a result, we performed a test of impairment on the carrying value of our investment in GABITRIL product rights and recorded an impairment charge of $12.4 million in the second quarter of 2006 related to our European rights.

	Nine months ended
	September 30,
	2007			2006			Change			% Change
Other income (expense):
Interest income	$	23,485		$	16,736		$	6,749		40	%
Interest expense	(15,272		)	(13,523		)	(1,749		)	(13	)%
Write-off of deferred debt issuance costs	—			(13,105		)	13,105			100	%
Gain on extinguishment of debt	5,319			—			5,319			100	%
Gain on sale of investment	5,791			—			5,791			100	%
Other income (expense), net	3,747			(116		)	3,863			3,330	%
	$	23,070		$	(10,008	)	$	33,078		331	%

Other Income (Expense)—Other income (expense) increased $33.1 million for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. The increase was attributable to the following factors:

•an increase in interest income for the nine months ended September 30, 2007 due to higher investment returns and higher average investment balances;

•a $13.1 million write-off in the first quarter of 2006 of deferred debt issuance costs related to our Zero Coupon Notes;

•a $5.3 million gain on extinguishment of debt related to the PIDA loan forgiveness in the third quarter of 2007;

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•a $5.8 million gain on the sale of an investment in a privately-held company in the second quarter of 2007; and

•a $3.9 million increase in other income (expense), net primarily due to fluctuations in foreign currency gains and losses in the comparable periods.

	Nine months ended
	September 30,
	2007		2006		Change		% Change
Income tax expense	$	102,613	$	91,567	$	11,046	12	%

Income Taxes—For the nine months ended September 30, 2007, we recognized $102.6 million of income tax expense on loss before income taxes of $133.3 million, as we have not yet recognized a tax benefit for the $425.0 million settlement reserve recorded as of September 30, 2007 due to the uncertainty associated with the tax treatment of any potential settlement. This compared to income tax expense for the nine months ended September 30, 2006 of $91.6 million on income before income taxes of $241.3 million, resulting in an effective tax rate of 37.9 percent.

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LIQUIDITY AND CAPITAL RESOURCES

(In thousands, except per share data)

Cash, cash equivalents and investments at September 30, 2007 were $731.1 million, representing 22% of total assets, compared to $521.7 million, representing 17% of total assets at December 31, 2006.

Our working capital deficit, which is calculated as current assets less current liabilities, was $631.7 million at September 30, 2007 compared to $268.6 million at December 31, 2006. Certain of our convertible subordinated notes contain conversion terms that will impact whether these notes are classified as current or long-term liabilities and consequently affect our working capital position. At September 30, 2007 and December 31, 2006, $1,233.7 million and $1,019.8 million, respectively, of our convertible subordinated notes were convertible into cash and shares of common stock and were therefore classified as current liabilities on our consolidated balance sheets.

The change in cash and cash equivalents is as follows:

	Nine months ended
	September 30,
	2007			2006
Net cash provided by operating activities	$	274,321		$	251,190
Net cash provided by (used for) investing activities	(200,934		)	30,538
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

Net Cash Provided by Operating Activities

Cash provided by operating activities is primarily driven by income from sales of our products offset by the timing of receipts and payments in the ordinary course of business. The net loss for the nine months ended September 30, 2007 was offset by changes in accounts payable and accrued expenses resulting from the agreement in principle with the U.S. Attorney’s Office for which $425.0 million has been accrued but not yet paid. See Note 8 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Net Cash Provided by (Used for) Investing Activities

Cash used in investing activities primarily relates to acquisitions of business, technologies, products and product rights and funds invested in our administrative and manufacturing facilities to accommodate our growth. These uses of cash are offset by sales, maturities or purchases of investments associated with our portfolio of available for sale investments.

In August 2007, in association with the acquisition of the North America rights to AMRIX from E. Claiborne Robins Company Inc., we paid $99.2 million for an intangible asset. In addition to other miscellaneous intangible assets acquired during the nine months ended September 30, 2006, in April 2006 we paid $110.0 million to Alkermes following FDA approval of VIVITROL.

In June 2007, we received cash proceeds of $12.3 million on the sale of an investment in a privately-held company. For the nine months ended September 30, 2007 and 2006, we made capital expenditures of $70.9 million and $97.1 million, respectively, which included expenditures associated with our ongoing expansion and improvements of our research and development facilities in France and West Chester, Pennsylvania and other infrastructure improvements such as the SAP® implementation.

Net Cash Provided by Financing Activities

Cash provided by financing activities primarily relates to proceeds and payments on long-term debt and employee stock option activity.

For the nine months ended September 30, 2007 and 2006, proceeds from stock option exercises were $74.4 million and $112.8 million, respectively. The corresponding incremental windfall tax benefits from stock-based compensation for those same periods were $9.9 million and $21.9 million, respectively.

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Contractual Obligations

During the fourth quarter of 2007, we expect to pay the former Salmedix shareholders a $15.0 million milestone payment following the FDA’s acceptance of our NDA filing for TREANDA. Upon FDA approval of TREANDA, we will become obligated to pay the former Salmedix shareholders an additional $25.0 million milestone payment. There have been no other material changes to the table presented in our Annual Report on Form 10-K for the year ended December 31, 2006. The table excludes our liability for net unrecognized tax benefits, which totaled $42.9 million as of January 1, 2007 and $44.7 million as of September 30, 2007, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.

Outlook

We expect to use our cash, cash equivalents and investments for working capital and general corporate purposes, including the expected payment of the $425.0 million settlement with the U.S. Attorney’s Office, acquisition of businesses, products, product rights, or technologies, the settlement of outstanding litigation or the resolution of the ongoing investigation by the Office of the Connecticut Attorney General described above, the payment of contractual obligations, including scheduled interest payments on our convertible notes and regulatory or sales milestones that may become due, and/or the purchase, redemption or retirement of our convertible notes, including the likely repayment in June 2008 of $213.2 million of our 2008 Zero Coupon Convertible Notes. However, 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 continue to generate positive cash flow from operations during the remainder of 2007 and in 2008. At this time, we cannot accurately predict the effect of certain developments on the rate of sales growth in 2009 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 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 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 8 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Finally, growth of our modafinil-based product sales in the future may depend in part on our ability to successfully launch NUVIGIL around 2010.

The growth of our pain franchise depends in large part on our ability to successfully market FENTORA, which we launched in the United States in October 2006. Sales of our other pain product, ACTIQ, have been meaningfully eroded by the entry of generic competition in late September 2006 and we expect this erosion will continue during the remainder of 2007. In addition, sales of our own generic OTFC could be significantly impacted by the entrance into the market of additional generic OTFC products, which could occur at any time.

For VIVITROL, our ability to achieve commercial success with this product in the future will be impacted by our success in building 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. During the first few months of launch, we focused our efforts on establishing the logistical platform to effectively deliver the product to patients. In 2007, we have focused more of our sales and marketing efforts on driving product demand by educating physicians about VIVITROL’s benefits. While we have made steady progress in increasing sales and physician awareness of this product, we have determined to reduce the level of our sales and marketing expenses for this product, including a reduction in the number of sales representative promoting the product, to what we believe is an appropriate spending level for this product.

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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. During the remainder of 2007 and in 2008, we expect to continue to incur significant levels of research and development expenditures. We also expect to continue or begin a number of significant clinical programs including, among others: possible studies of TREANDA for the treatment of small cell lung cancer and mantle cell lymphoma; a Phase 3 program evaluating CEP-701 for the treatment of acute myelogenous leukemia and other possible studies in patients with myeloproliferative disorder; and clinical programs with NUVIGIL focused on excessive sleepiness, fatigue and cognition in diseases such as Parkinson’s disease, cancer, schizophrenia and bi-polar depression. We may seek to mitigate the risk in, and expense of, our research and development programs by entering into 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

During the remainder of 2007 and in 2008, we expect to continue to incur significant expenditures associated with manufacturing, selling and marketing our products. We expect to continue in-process capital expenditure projects at our research and development facilities in France and West Chester. The aggregate amount of our sales and marketing expenses in 2008 is expected to be higher than that incurred in 2007, primarily as a result of higher expenses associated with our promotional efforts related to PROVIGIL and AMRIX and launch expenses associated with TREANDA, assuming FDA approval.

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 September 30, 2007:

Security	Outstanding		Conversion Price			Redemption Rights and Obligations
	(in millions)
2.0% Convertible Senior Subordinated Notes due June 2015 (the “2.0% Notes”)	$	820.0	$	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”)	$	213.2	$	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”)	$	199.5	$	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 10 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, 2006.

All of our notes are convertible as of September 30, 2007 and, 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.

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As of September 30, 2007, all of our notes are convertible because the closing price of our common stock on that date was higher than the restricted conversion prices of these notes. As a result, such notes have been classified as current liabilities on our consolidated balance sheet as of September 30, 2007. In addition, our Zero Coupon Notes first putable June 15, 2008 are considered to be current liabilities based on maturity. See Note 10 of our Consolidated Financial Statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2006 for summary of our convertible debt, note hedge and call warrant. As of November 1, 2007, 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 the filing date of this report 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 the Zero Coupon Notes will present significant amounts of such notes for conversion under the current terms. 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 September 30, 2007 are $16.4 million, payable semi-annually on June 1 and December 1. 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 Emerging Issues Task Force (“EITF”) Issue No. 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion” (“EITF 90-19”); 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, “Earnings Per Share” (“SFAS 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 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.

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	5,710	—	5,710	(5,710	)	—
$	75.00	8,239	2,137	10,376	(8,239	)	2,137
$	85.00	10,173	5,041	15,214	(10,173	)	5,041
$	95.00	11,699	7,334	19,033	(11,699	)	7,334
$	105.00	12,935	9,189	22,124	(12,935	)	9,189

(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.

The Financial Accounting Standards Board (“FASB”) recently published proposed Staff Position (“FSP”) No. APB 14-a, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).”  The proposed FSP would be applicable to substantially all of our convertible debt. If the proposed FSP is finalized in its current form, convertible debt would be bifurcated into its respective debt and equity components. The debt component would be recorded at the fair market value of the debt assuming there were no equity conversion features. The

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difference between the debt proceeds and the fair value of the debt component would be recorded as an increase to equity and recognized as interest expense over the expected life of the debt. If adopted, the proposed guidance would be effective for fiscal years beginning after December 15, 2007 and would have a significant impact on our 2008 consolidated financial statements and also would require restating all prior periods presented to reflect the revised accounting treatment retrospectively.

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 launches;

•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

(In thousands)

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, 2006 in the “Critical Accounting Policies and Estimates” 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 included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006: prompt payment discounts, wholesaler discounts, returns, coupons, Medicaid discounts, Medicare Part D discounts and managed care and governmental contracts. Calculating each of these items involves significant estimates and judgments and requires us to use information from external sources. In certain of the product sales allowance categories, we have calculated the impact of changes in our estimates, which we believe represent reasonably likely changes to these estimates based on historical data adjusted for certain unusual items such as changes in government contract rules.

The following table summarizes activity in each of the above categories for the year ended December 31, 2006 and the nine months ended September 30, 2007:

	Prompt Payment Discounts			Wholesaler Discounts			Returns*			Coupons			Medicaid Discounts			Medicare Part D Discounts			Managed Care & Governmental Contracts			Total
Balance at January 1, 2006	$	(1,917	)	$	(2,728	)	$	(22,598	)	$	(4,695	)	$	(33,454	)	$	—		$	(6,566	)	$	(71,958	)
Provision:
Current period	(32,384		)	(2,939		)	(24,735		)	(26,169		)	(45,990		)	(2,217		)	(43,712		)	(178,146		)
Prior periods	—			—			—			(684		)	723			—			7,443			7,482
Total	(32,384		)	(2,939		)	(24,735		)	(26,853		)	(45,267		)	(2,217		)	(36,269		)**	(170,664		)
Actual:
Current period	28,836			2,629			—			21,508			19,588			545			25,889			98,995
Prior periods	1,917			2,728			18,490			5,378			32,731			—			(877		)	60,367
Total	30,753			5,357			18,490			26,886			52,319			545			25,012		**	159,362
Balance at December 31, 2006	$	(3,548	)	$	(310	)	$	(28,843	)	$	(4,662	)	$	(26,402	)	$	(1,672	)	$	(17,823	)	$	(83,260	)
Provision:
Current period	(23,644		)	(15,723		)	(11,935		)	(20,067		)	(29,430		)	(1,488		)	(57,130		)	(159,417		)
Prior periods	5			—			2,677			172			153			449			(240		)	3,216
Total	(23,639		)	(15,723		)	(9,258		)	(19,895		)	(29,277		)	(1,039		)	(57,370		)	(156,201		)
Actual:
Current period	20,330			10,350			—			11,840			12,276			177			35,944			90,917
Prior periods	3,543			310			12,701			4,489			25,805			929			18,065			65,842
Total	23,873			10,660			12,701			16,329			38,081			1,106			54,009			156,759
Balance at September 30, 2007	$	(3,314	)	$	(5,373	)	$	(25,400	)	$	(8,228	)	$	(17,598	)	$	(1,605	)	$	(21,184	)	$	(82,702	)

*	Given our return goods policy, we assume that all returns in a current year relate to prior period sales.
**	Includes $13.3 million related to the DoD Tricare program of which $5.5 million related to the current period and $7.8 million related to prior periods.

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Inventories– The following is in addition to, and should be read in conjunction with, the inventories critical accounting policy included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006.

We expense pre-approval inventory unless we believe it is probable that the inventory will be saleable. We have capitalized 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. With respect to capitalization of unapproved product candidates, we seek to produce inventory in preparation for the launch of the product and in amounts sufficient to support forecasted initial market demand. Typically, capitalization of this inventory does not begin until the product candidate is considered to have a high probability of regulatory approval. This may occur when either the product candidate is in Phase 3 clinical trials or when it is a new formulation or dosage strength of a presently approved product for which we believe there is a high probability of receiving FDA approval. If we are aware of any specific risks or contingencies that are likely to impact the expected regulatory approval process or if there are any specific issues identified during the research process relating to safety, efficacy, manufacturing, marketing or labeling of the product candidate, we would not capitalize the related inventory.

When manufacturing and capitalizing inventory costs of product candidates and at each subsequent balance sheet date, we consider both the expiration dates of the inventory and anticipated future sales once approved. Since expiration dates are impacted by the stage of completion, we seek to avoid product expiration issues by managing the levels of inventory at each stage to optimize the shelf life of the inventory relative to anticipated market demand following launch.

Once we have determined to capitalize inventory for a product candidate that is not yet approved, we will monitor, on a quarterly basis, the status of this candidate within the regulatory approval process. We could be required to expense previously capitalized costs related to pre-approval inventory upon a change in our judgment of future commercial use and net realizable value, due to a denial or delay of approval by regulatory bodies, a delay in the timeline for commercialization or other potential factors.

On a quarterly basis, we evaluate all inventory, including inventory capitalized for which regulatory approval has not yet been obtained, to determine if any lower of cost or market adjustment is required. As it relates to pre-approval inventory, we consider several factors including expected timing of FDA approval, projected sales volume and estimated selling price. Projected sales volume is based on several factors including market research, sales of similar products and competition in the market. Estimated sales price is based on the price of existing products sold for the same indications and expected market demand.

Income Taxes— The following is in addition to, and should be read in conjunction with, the income taxes critical accounting policy included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006.

In July 2006, the FASB issued FIN 48 which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, a company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted the provisions of FIN 48 on January 1, 2007. See Note 12 herein.

The recognition and measurement of certain tax benefits includes estimates and judgments by management and inherently includes subjectivity. Changes in estimates may create volatility in our effective tax rate in future periods due to settlements with various tax authorities (either favorable or unfavorable), the expiration of the statute of limitations on some tax positions and obtaining new information about particular tax positions that may cause management to change its estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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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 nine months ended September 30, 2007, 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 $24.7 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.

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

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. 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

There have been no 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 Note 8 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 revenue is derived from our two largest products, and our future success will depend on the continued growth and acceptance of PROVIGIL and the growth of FENTORA.

For the nine months ended September 30, 2007, 22% and 49% of our total consolidated net sales were derived from sales of ACTIQ (including our generic OTFC product) and PROVIGIL, respectively. In September 2006, Barr entered the market with generic OTFC. Since that time, we have experienced meaningful erosion of branded ACTIQ sales in the United States and we expect this erosion will continue during the remainder of 2007 and into 2008. In addition, sales of our own generic OTFC product could be significantly impacted by the entrance into the market of additional generic OTFC products, which could occur at any time. To counter the impact from existing and potential generic competition, we will need FENTORA, our next-generation pain product launched in October 2006, to achieve projected levels of growth. In September 2007, we issued a letter to healthcare professionals to clarify the appropriate patient selection, design and administration for FENTORA, following reports of serious adverse events in connection with the use of the product. With respect to PROVIGIL, we cannot be certain that it will continue to be accepted in its market. Specifically, the following factors, among others, could affect the level of market acceptance of these products:

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

•the level and effectiveness of our sales and marketing efforts and, with respect to PROVIGIL, those of Takeda;

•any unfavorable publicity regarding these or similar products;

•the price of the products relative to other competing drugs or treatments, including the impact of the availability of generic OTFC products on market acceptance of FENTORA;

•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, including, for example, the impact of recent changes to the PROVIGIL label resulting from the approved NUVIGIL label.

Any adverse developments with respect to the sale or use of PROVIGIL or FENTORA 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 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

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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 / NUVIGIL

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 of PROVIGIL. With respect to NUVIGIL, we successfully obtained issuance of a U.S. patent in November 2006 claiming the Form I polymorph of armodafinil, the active drug substance in NUVIGIL. This patent is currently set to expire in 2023. Foreign patent applications directed to the use of the Form I polymorph of armodafinil in treating sleep disorders are pending in Europe and elsewhere. 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 our modafinil-based products would significantly and negatively impact future 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 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. 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 early 2005, we also filed a patent infringement lawsuit against Carlsbad Technology, Inc. based upon the Paragraph IV ANDA related to modafinil that Carlsbad filed with the FDA.

In late 2005 and early 2006, we entered into settlement agreements with each of Teva, Mylan, Ranbaxy and Barr. In August 2006, we entered into a settlement agreement with Carlsbad and its development partner, Watson Pharmaceuticals, Inc., which we understand has the right to commercialize the Carlsbad modafinil product if approved by the FDA. As part of these separate settlements, we agreed to grant to each of these parties 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, subject to applicable regulatory considerations. An earlier entry may occur based upon the entry of a generic version of PROVIGIL. Each of these settlements has been filed with both the FTC and the Antitrust Division of the U.S. Department of Justice (the “DOJ”) as required by the Medicare Modernization Act. The FTC is conducting an investigation of each of the PROVIGIL settlements and has issued a subpoena and requested documents and other information from us. We are cooperating fully with the FTC and its ongoing investigation, and expect to continue to cooperate. The FTC could determine to challenge in an administrative or judicial proceeding any or all of the settlements if it believes that the agreements violate the antitrust laws, although we believe that such a challenge would take years to resolve. We expect that the Commissioners of the FTC will formally decide in the near future whether or not to bring such an action against us.

We also are aware of numerous private antitrust complaints filed in the 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 and, in some cases, certain state laws. All but one of these actions have been consolidated into a complaint on behalf of a class of direct purchasers of PROVIGIL and a separate complaint on behalf of a class of consumers and other indirect purchasers of PROVIGIL. A separate complaint filed by an indirect purchaser of PROVIGIL was filed in September 2007. The plaintiffs in all of these actions are seeking monetary damages and/or equitable relief. We moved to dismiss the class action complaints in November 2006.

Separately, in June 2006, Apotex, Inc., a subsequent ANDA filer seeking FDA approval of a generic form of

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modafinil, filed suit against us also in the U.S. District Court for the Eastern District of Pennsylvania alleging similar violations of antitrust laws and state law. Apotex asserts that the PROVIGIL settlement agreements improperly prevent it from obtaining FDA approval of its ANDA, and seeks monetary and equitable remedies. Apotex also seeks a declaratory judgment that our U.S. Patent No. RE37,516 (the “‘516 Patent”) covering PROVIGIL is invalid, unenforceable and/or not infringed by its proposed generic. We filed a motion to dismiss the Apotex case in late September 2006. We believe that the complaints described in the preceding paragraph and the Apotex complaint 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.

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 as of the filing date of this report, although Apotex has filed suit against us, as described above.

ACTIQ

With respect to ACTIQ, the U.S. patents covering the currently marketed compressed powder pharmaceutical composition and methods for administering fentanyl via this composition expired on September 5, 2006. Corresponding patents in foreign countries are set to expire between 2009 and 2010. Our patent protection with respect to the ACTIQ formulation we sold prior to June 2003 expired in May 2005.

Under two separate agreements with Barr, we licensed to Barr our U.S. rights to any intellectual property related to ACTIQ. The rights we granted to Barr became effective on September 5, 2006 and Barr entered the market with generic OTFC on September 27, 2006. As a result, ACTIQ sales have been meaningfully eroded and we expect this erosion will continue during the remainder of 2007 and into 2008. Moreover, sales of our own generic OTFC could be significantly impacted by the entrance into the market of additional generic OTFC products, which could occur at any time.

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;

•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.

Over the past few years, a significant number of pharmaceutical and biotechnology companies have been the target of inquiries and investigations by various federal and state regulatory, investigative, prosecutorial and administrative entities,

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including the DOJ and various U.S. Attorney’s Offices, the Office of Inspector General of the Department of Health and Human Services, the FDA, the FTC and various state Attorneys General offices. These investigations have alleged violations of various federal and state laws and regulations, including claims asserting antitrust violations, violations of the Food, Drug and Cosmetic Act, the False Claims Act, the Prescription Drug Marketing Act, anti-kickback laws, and other alleged violations in connection with off-label promotion of products, pricing and Medicare and/or Medicaid reimbursement.

Because of the broad scope and complexity of these laws and regulations, the high degree of prosecutorial resources and attention being devoted to the sales practices of pharmaceutical companies by law enforcement authorities, and the risk of potential exclusion from federal government reimbursement programs, numerous companies have determined that it is highly advisable that they enter into settlement agreements in these matters, particularly those brought by federal authorities. Companies that have chosen to settle these alleged violations have typically paid multi-million dollar fines to the government and agreed to abide by corporate integrity agreements.

In early November 2007, we announced that we had reached an agreement in principle with the U.S. Attorney’s Office (“USAO”) in Philadelphia and the DOJ with respect to the USAO investigation that began in September 2004. The investigation has focused on our sales and promotional practices with respect to ACTIQ, GABITRIL® (tiagabine hydrochloride) and PROVIGIL. Under this agreement, we now expect to pay $425.0 million as part of a comprehensive settlement of all Federal and related state Medicaid claims. During the third quarter of 2007, we increased our existing reserve by $369.0 million to $425.0 million in contemplation of this payment. In addition, the Company will agree to a single federal misdemeanor violation of the Federal Food, Drug and Cosmetic Act and enter into a corporate integrity agreement with the Office of Inspector General of the U.S. Department of Health and Human Services. The terms described above are subject to negotiation and the execution of the final settlement and corporate integrity agreements. There can be no assurance that the settlement will be finalized on the terms outlined above.

In September 2004, we announced that we had received a voluntary request for information from the Office of the Connecticut Attorney General that also appears to be focused on our sales and promotional practices with respect to ACTIQ, GABITRIL and PROVIGIL. We are cooperating with this Office, are providing documents and other information in response to these and additional requests and are engaged in ongoing discussions with them. In late October 2007, we also received a civil demand for information from the Office of the Massachusetts Attorney General that is focused on sales and promotional practices with respect to ACTIQ, FENTORA and certain of our other products. We intend to cooperate with this request. Both of these matters may involve civil penalties and/or fines. The payment of any settlement or judgment amount and/or fines could have a material adverse effect on our financial position, liquidity and results of operations. Furthermore, it is reasonably likely that we will face future additional requests for information from other state attorneys general focused on historical sales and promotional practices for our U.S. products. If civil penalties and/or fines were to result from such investigations, it could materially and adversely effect our financial position, liquidity and results of operations.

In November 2007, we were served with a putative class action complaint filed on behalf of entities that claim to have purchased ACTIQ for use in non-cancer patients. The complaint alleges violations of various state consumer protection laws, as well as the violation of the common law of unjust enrichment, and seeks an unspecified amount of money in actual, punitive and/or treble damages, with interest, and/or disgorgement of profits. We believe the allegations in the complaint are without merit, and we intend to vigorously defend ourselves in this matter and in any similar actions that may be filed in the future.

In March 2007, we received a letter requesting information related to ACTIQ and FENTORA from Congressman Henry A. Waxman in his capacity as Chairman of the House Committee on Oversight and Government Reform. The letter cites two articles concerning ACTIQ published in The Wall Street Journal in November 2006 and requests information concerning our sales and marketing practices for ACTIQ and FENTORA, among other things. We are cooperating with this request and are continuing to provide documents and other information to the Committee.

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

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medical authority. The approval process is highly uncertain and requires substantial time, effort and financial resources. Ultimately, we may never obtain approval in a timely manner, or at all. Without these required approvals, our ability to substantially grow revenues in the future could be adversely affected.

In addition, because PROVIGIL, NUVIGIL, FENTORA, ACTIQ and generic OTFC contain active ingredients that are controlled substances, we are subject to regulation by the U.S. Drug Enforcement Administration (“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 analogous foreign authorities 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 current Good Manufacturing Practice (“cGMP”) regulations.

We also must comply with all applicable regulatory requirements of the DEA and analogous foreign authorities for certain of our products that contain controlled substances. The DEA also has authority to grant or deny requests for quota of controlled substances such as the fentanyl citrate that is the active ingredient in ACTIQ and generic OTFC. Under our license and supply agreement with Barr, we are obligated to sell generic OTFC to Barr for its resale in the United States. While we currently have available fentanyl quota to produce ACTIQ and generic OTFC, in the future we could face shortages of quota that could negatively impact our ability to supply product to Barr or to produce ACTIQ or our generic OTFC product. If we are unable to provide product to Barr, it is possible that either Barr or the FTC could claim that such a failure would constitute a breach of our agreements with these parties.

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 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. The process of changing or adding a manufacturer or changing a formulation requires prior FDA and/or analogous foreign 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.

As our products are used commercially, unintended side effects, adverse reactions or incidents of misuse may occur that could result in additional regulatory controls, changes to product labeling, 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 commercial use as of the filing date of this report. For example, in June 2007, the FDA approved our new drug application

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for NUVIGIL. The NUVIGIL label includes a bolded warning section that characterizes the potential occurrence of serious skin rash and hypersensitivity in patients taking modafinil and armodafinil; in September 2007, we finalized revisions to the PROVIGIL label to make the PROVIGIL and NUVIGIL labels consistent. In September 2007, we issued a letter to healthcare professionals to clarify the appropriate patient selection, design and administration for FENTORA, following reports of serious adverse events in connection with the use of the product. Likewise, 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 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 FENTORA, ACTIQ, generic OTFC 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, FENTORA and ACTIQ have 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 may be unsuccessful in our efforts to obtain regulatory approval for new products or for new formulations of 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 product candidates. There can be no assurance that our applications to market our product candidates will be submitted or reviewed in a timely manner or that our applications will be approved by the FDA on the basis of the data contained in the applications. Should approval be granted to market a product candidate, there can be no assurance that we will be able to successfully commercialize the product or achieve a profitable level of sales.

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;

•collaboration revenues;

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•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.

All of our convertible notes outstanding contain restricted conversion prices that are either below or close to our stock price as of September 30, 2007. As a result, our convertible notes have been classified as current liabilities on our consolidated balance sheet at September 30, 2007. 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 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 have an agreement with Takeda under which it will co-promote PROVIGIL until mid-2009. If Takeda fails to meet its obligations under the co-promotion agreement, is ineffective in its efforts, or  if we or they determine to terminate the agreement prior to the end of its term, the growth of PROVIGIL sales could be impacted.

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.

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 FONZYLANE, FONLIPOL and OLMIFON, which could impact revenues from our French operations.

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In the United States, there have been, and we expect there will continue to be, various proposals to implement similar controls. The commercial success of our products could be limited if federal or state governments adopt any such proposals. In addition, in the United States and elsewhere, sales of pharmaceutical products depend in part on the availability of reimbursement to the consumer from third party payers, such as government and private insurance plans. These third party payers 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.

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

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

The conditions that our products treat, and some of the other disorders for which we are conducting additional studies, are currently treated with many drugs, several of which have been available for a number of years or are available in inexpensive generic forms. With respect to PROVIGIL, and, when launched, 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. With respect to FENTORA, 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 FENTORA in the market for breakthrough cancer pain in opioid-tolerant patients. It also is possible that the existence of generic OTFC could negatively impact the growth of FENTORA. With respect to ACTIQ, generic competition from Barr has meaningfully eroded branded ACTIQ sales and impacted sales of our own generic OTFC through Watson. Our generic sales also could be significantly impacted by the entrance into the market of additional generic OTFC products, which could occur at any time. With respect to VIVITROL, we face competition from CAMPRAL® and oral naltrexone. 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, such as VESANOID® by Roche in combination with chemotherapy. With respect to AMRIX, we face significant competition from SKELAXIN®, FLEXERIL® and other inexpensive generic forms of muscle relaxants.

For all of our products, we need to demonstrate to physicians, patients and third party payers that the cost of our products is reasonable and appropriate in the light of their safety and efficacy, the price of competing products and the related health care benefits to the patient.

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

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

42

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 of Zeneus, Salmedix and TRISENOX and the license and collaboration agreement with Alkermes in 2005, 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. 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, and 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 generally takes 12 years or 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 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,

43

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, 2006 through November 1, 2007 our common stock traded at a high price of $84.83 and a low price of $51.58. 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.

During 2008, we expect to expand our SAP® implementation to include additional capabilities. This expansion will require changes to certain aspects of our existing system of internal controls over financial reporting. Due to the number of controls to be examined, both with respect to this phase of the implementation and our other internal controls over financial reporting, the complexity of our processes, 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 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 nine months ended September 30, 2007, 19% 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

44

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 66% of our total consolidated gross sales for the nine months ended September 30, 2007. 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 8 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.

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

45

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 5. OTHER INFORMATION

(In thousands)

Computation of Ratios of Earnings to Fixed Charges

	Year ended												Nine months  ended
	December 31,												September 30,
	2002		2003		2004			2005			2006		2007
Determination of earnings:
Pre-tax income (loss) from continuing operations	$	62,433	$	130,314	$	(28,184	)	$	(245,118	)	$	238,254	$	(133,273	)
Add:
Amortization of interest capitalized in current or prior periods	—		—		—			—			52		74
Fixed charges	39,648		31,191		25,623			30,985			28,171		21,922
Total earnings	$	102,081	$	161,505	$	(2,561	)	$	(214,133	)	$	266,477	$	(111,277	)
Fixed charges:
Interest expense and amortization of debt discount and premium on all indebtedness	38,215		28,905		22,186			25,235			18,922		15,272
Appropriate portion of rentals	1,433		2,286		3,437			5,750			9,249		6,650
Fixed charges	39,648		31,191		25,623			30,985			28,171		21,922
Capitalized interest	—		—		—			1,044			1,766		580
Total fixed charges	$	39,648	$	31,191	$	25,623		$	32,029		$	29,937	$	22,502
Ratio of earnings to fixed charges(1)	2.57		5.18		—			—			8.90		—
Deficiency of earnings to fixed charges	—		—		28,184			246,162			—		133,779

(1)For the years ended December 31, 2004 and 2005 and the nine months ended September 30, 2007, no ratios are provided because earnings were insufficient to cover fixed charges.

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ITEM 6. EXHIBITS

Exhibit No.	Description
10.1*	Asset Purchase Agreement by and between Anesta AG and E. Claiborne Robins Company, Inc., dated as of August 23, 2007. (1)
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)
November 8, 2007	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

ASSET PURCHASE AGREEMENT

BY AND
BETWEEN

ANESTA AG,
as Buyer

and

E. CLAIBORNE ROBINS COMPANY, INC.,
as Seller

August 23, 2007

TABLE OF CONTENTS

		Page
	ARTICLE I.     DEFINITIONS
Section 1.01	DEFINED TERMS	6
Section 1.02	CONSTRUCTION OF CERTAIN TERMS AND PHRASES	13
	ARTICLE II.     SALE AND ASSIGNMENT OF THE PURCHASED ASSETS
Section 2.01	SALE AND ASSIGNMENT OF THE PURCHASED ASSETS	14
Section 2.02	EXCLUDED ASSETS	14
	ARTICLE III.     ASSUMPTION OF ASSUMED LIABILITIES; EXCLUDED LIABILITIES
Section 3.01	ASSUMPTION OF ASSUMED LIABILITIES	15
Section 3.02	EXCLUDED LIABILITIES	15
	ARTICLE IV.     PURCHASE PRICE AND PAYMENT
Section 4.01	BASE PURCHASE PRICE	16
Section 4.02	ADDITIONAL CONSIDERATION	16
Section 4.03	ALLOCATION OF PURCHASE PRICE	18
Section 4.04	PAYMENT OF SALES, USE AND OTHER TAXES	19
	ARTICLE V.     CLOSING
Section 5.01	TIME AND PLACE	19
Section 5.02	DELIVERIES AT CLOSING	19
	ARTICLE VI.     REPRESENTATIONS AND WARRANTIES OF SELLER
Section 6.01	ORGANIZATION	21
Section 6.02	AUTHORITY OF SELLER	21
Section 6.03	NON-CONTRAVENTION	22
Section 6.04	CONSENTS AND APPROVALS	22
Section 6.05	PRODUCT CONTRACTS	23
Section 6.06	INTELLECTUAL PROPERTY RIGHTS	23
Section 6.07	LITIGATION	24
Section 6.08	COMPLIANCE WITH LAW	25
Section 6.09	INVENTORY; SALES OF THE PRODUCT	25
Section 6.10	REGULATORY MATTERS	25
Section 6.11	TITLE; SUFFICIENCY OF ASSETS	27
Section 6.12	BROKERS	28

Section 6.13	ENVIRONMENTAL MATTERS	28
Section 6.14	TAXES	28
Section 6.15	SUPPLIERS	29
Section 6.16	INSURANCE	29
Section 6.17	DISCLOSURE	29
	ARTICLE VII.     REPRESENTATIONS AND WARRANTIES OF BUYER
Section 7.01	CORPORATE ORGANIZATION	30
Section 7.02	AUTHORITY OF BUYER	30
Section 7.03	NON-CONTRAVENTION	31
Section 7.04	CONSENTS AND APPROVALS	31
Section 7.05	LITIGATION	31
Section 7.06	BROKERS	32
Section 7.07	FINANCIAL CAPABILITY	32
Section 7.08	NON-COMPETITION	32
	ARTICLE VIII.     COVENANTS OF THE PARTIES
Section 8.01	MAINTENANCE OF BUSINESS PRIOR TO CLOSING	32
Section 8.02	COMMERCIALLY REASONABLE EFFORTS	33
Section 8.03	PRESERVE ACCURACY OF REPRESENTATIONS AND WARRANTIES; NOTIFICATION OF CERTAIN MATTERS	33
Section 8.04	ACCESS	34
Section 8.05	PUBLIC ANNOUNCEMENTS	35
Section 8.06	BULK SALES	35
Section 8.07	SELLER’S EMPLOYEES	35
Section 8.08	CORPORATE NAMES	35
Section 8.09	RECEIPT OF CERTAIN AMOUNTS	36
Section 8.10	REGULATORY MATTERS	36
Section 8.11	FURTHER ASSURANCES	36
Section 8.12	REGULATORY TRANSITION BY SELLER	36
Section 8.13	TAXES	37
Section 8.14	COVENANT NOT TO COMPETE OR SOLICIT BUSINESS	38
Section 8.15	ACQUISITION PROPOSALS	39
	ARTICLE IX.     CONDITIONS TO THE OBLIGATIONS OF SELLER
Section 9.01	REPRESENTATIONS, WARRANTIES AND COVENANTS	39
Section 9.02	NO ACTIONS OR PROCEEDINGS	39
Section 9.03	CONSENTS	39
	ARTICLE X.     CONDITIONS TO THE OBLIGATIONS OF BUYER
Section 10.01	REPRESENTATIONS, WARRANTIES AND COVENANTS	40

**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.

3

Section 10.02	NO MATERIAL ADVERSE EFFECT	40
Section 10.03	NO ACTIONS OR PROCEEDINGS	40
Section 10.04	CONSENTS	40
	ARTICLE XI.     INDEMNIFICATION
Section 11.01	SURVIVAL OF REPRESENTATIONS, WARRANTIES, ETC.	40
Section 11.02	INDEMNIFICATION	41
Section 11.03	LIMITATIONS	43
Section 11.04	REMEDIES EXCLUSIVE	44
Section 11.05	SET-OFF	44
Section 11.06	ADJUSTMENT TO PURCHASE PRICE	44
Section 11.07	TAX MATTERS	45
	ARTICLE XII.     TERMINATION AND ABANDONMENT
Section 12.01	METHODS OF TERMINATION	45
Section 12.02	PROCEDURE UPON TERMINATION	45
	ARTICLE XIII.     MISCELLANEOUS
Section 13.01	CONFIDENTIALITY	46
Section 13.02	NOTICES	46
Section 13.03	ENTIRE AGREEMENT	48
Section 13.04	WAIVER	48
Section 13.05	AMENDMENT	48
Section 13.06	THIRD PARTY BENEFICIARIES	48
Section 13.07	ASSIGNMENT; BINDING EFFECT	48
Section 13.08	HEADINGS	49
Section 13.09	SEVERABILITY	49
Section 13.10	GOVERNING LAW	49
Section 13.11	VENUE	49
Section 13.12	EXPENSES; ATTORNEY’S FEES	50
Section 13.13	COUNTERPARTS	50

**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.

4

Exhibits

Exhibit A                Form of Assignment and Assumption 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.

5

ASSET PURCHASE AGREEMENT

This Asset Purchase Agreement (this “Agreement”) is made and entered into as of August 23, 2007, by and between ANESTA AG, a company organized under the laws of Switzerland (“Buyer”), and E. CLAIBORNE ROBINS COMPANY, INC., a Virginia corporation d/b/a “ECR Pharmaceuticals” (“Seller”).

RECITALS

WHEREAS, Seller is engaged in the business of developing, manufacturing (or having manufactured), marketing, in-licensing, selling and distributing the Product (as defined below) in the Territory (the “Business”).

WHEREAS, subject to the terms and conditions of this Agreement, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, substantially all of Seller’s assets and properties, tangible and intangible, associated with the Business and the Product.

WHEREAS, concurrently with the execution and delivery of this Agreement, Parent is executing and delivering to Seller a guarantee of all of the obligations of Buyer hereunder.

AGREEMENT

NOW, THEREFORE, in consideration of the premises and the mutual covenants and promises contained herein, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties agree as follows:

ARTICLE I.     DEFINITIONS

Section 1.01           DEFINED TERMS.

As used in this Agreement, the following defined terms have the meanings described below:

(a)           “Action or Proceeding” means any claim, action, charge, complaint, suit, proceeding, arbitration, Order, inquiry, hearing, assessment with respect to fines or penalties, or litigation (whether civil, criminal, administrative, investigative or informal) commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental or Regulatory Authority.

(b)           “Affiliate” means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person. “Control” and, with correlative meanings, the terms “controlled by” and “under common control with” means the power to direct or cause the direction 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.

6

management or policies of a Person, whether through the ownership of voting securities or by contract, resolution or regulation.

(c)           “Agreement” has the meaning set forth in the Preamble hereto.

(d)           “Allocation” has the meaning set forth in Section 4.03(a).

(e)           “Allocation Statement” has the meaning set forth in Section 4.03(a).

(f)            “Assets and Properties” and “Assets or Properties” of any Person means all assets and properties of any kind, nature, character and description (whether real, personal or mixed, whether tangible or intangible and wherever situated), including the goodwill related thereto, operated, owned or leased by such Person, including cash, cash equivalents, accounts and notes receivable, chattel paper, documents, instruments, general intangibles, real estate, equipment, inventory, goods and Intellectual Property.

(g)           “Assignment and Assumption Agreement” means the Assignment and Assumption Agreement in the form of Exhibit A attached hereto.

(h)           “Assumed Liabilities” means (i) all Liabilities and obligations of Seller under or pursuant to the Product Contracts to be performed following the Closing, except to the extent such Liabilities and obligations, but for the breach or default by Seller, would have been paid, performed or otherwise discharged on or prior to the Closing Date or to the extent the same arise out of such breach or default and (ii) all Liabilities in respect of Taxes other than Taxes for which Seller is liable pursuant to Sections 4.04 and 8.13.

(i)            “Base Purchase Price” has the meaning set forth in Section 4.01.

(j)            “Books and Records” means all files, documents, instruments, papers, books and records (scientific or financial) of Seller to the extent relating to the Purchased Assets, the Product or Business (other than Marketing Materials), including any pricing lists, customer lists (to the extent owned by Seller), vendor lists, financial data, regulatory information or files (including adverse event reports and annual regulatory reports), litigation, adverse claims or demands, investigation information or files, Trademark registration certificates, Trademark renewal certificates, and other documentation relating to Intellectual Property, the Product or the Regulatory Approvals, but excluding any such items specifically prepared by Seller for the negotiation of this Agreement.

(k)           “Business” has the meaning set forth in the recitals to this Agreement.

(l)            “Business Day” means a day other than Saturday, Sunday or any day on which banks located in New York City or Switzerland are authorized or obligated by Law to be closed.

(m)          “Buyer” has the meaning set forth in the preamble 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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(n)           “Buyer Ancillary Agreements” means all agreements, instruments and documents being or to be executed and delivered by Buyer under this Agreement or in connection herewith.

(o)           “Buyer Disclosure Schedule” has the meaning set forth in the preamble of Article VII to this Agreement.

(p)           “Buyer Governmental Consents” has the meaning set forth in Section 7.04.

(q)           “Buyer Group Member” has the meaning set forth in Section 11.02(a).

(r)            “Change of Control” means a transaction which results in:  (a) the voting securities of Parent immediately prior to such transaction ceasing to represent at least fifty percent (50%) of the combined voting power of Parent or the Successor Entity to Parent immediately after such transaction; (b) any third party (other than a trustee or other fiduciary holding securities under an employee benefit plan and other than any Affiliate of Buyer) becoming the beneficial owner of fifty percent (50%) or more of the combined voting power of the outstanding securities of Parent or Buyer; or (c) a sale or other disposition to a third party (other than any Affiliate of Buyer) of all or substantially all of the assets or business of Parent or Buyer.

(s)           “Closing” has the meaning set forth in Section 5.01.

(t)            “Closing Date” means the date that the Closing actually occurs as provided in Section 5.01.

(u)           “Commercially Reasonable Efforts” has the meaning set forth in Section 4.02(c).

(v)           “Code” means the Internal Revenue Code of 1986.

(w)          “Contaminant” has the meaning set forth in Section 6.13(b).

(x)            “Contract” means any and all commitments, contracts, purchase orders, leases, licenses, sublicenses, notes, instruments or other agreements, undertakings or arrangements of any nature, whether written or oral.

(y)           “Copyrights” means United States and non-U.S. copyrights (as defined in 17 U.S.C. § 901), whether registered or unregistered, and pending applications to register the same.

(z)            “Corporate Names” has the meaning set forth in Section 8.08(a).

(aa)         “Damages” has the meaning set forth in Section 11.02(a).

(bb)         “Encumbrance” means any mortgage, pledge, assessment, security interest, deed of trust, easement, encroachment, lease, lien, adverse claim, defect of title, levy, charge, preference, priority, right of first refusal, covenant or other encumbrance or restriction of any

**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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kind, or any conditional sale or title retention agreement or other agreement to give any of the foregoing in the future.

(cc)         “Environmental Law” has the meaning set forth in Section 6.13(b).

(dd)         “Eurand” means Eurand, Inc. (formerly doing business as Eurand America, Inc.), a Nevada corporation.

(ee)         “Eurand Agreement” means that certain Development, License and Contract Manufacturing Agreement dated July 3, 2000 between Seller and Eurand, as amended by Amendment No. 1 dated June 15, 2007, the Eurand Amendment and three addenda dated March 11, 2003, July 18, 2003 and August 6, 2003, respectively.

(ff)           “Eurand Amendment” means Amendment No. 2 to the Eurand Agreement, dated August 23, 2007, between Seller and Eurand.

(gg)         “Eurand Intellectual Property” means the Intellectual Property rights of Eurand related to the Product, the Business or the Purchased Assets, as such rights are described in, identified in or established under the Eurand Agreement (as amended by the Eurand Amendment).

(hh)         “Excluded Assets” has the meaning set forth in Section 2.02.

(ii)           “Excluded Liabilities” has the meaning set forth in Section 3.02.

(jj)           “Expiration Date” means the date two years after the Closing Date.

(kk)         “FDA” means the United States Food and Drug Administration.

(ll)           “FDCA” shall mean the Federal Food, Drug and Cosmetic Act.

(mm)       “Governmental or Regulatory Authority” means any court, tribunal, arbitrator, arbitration panel or authority, authority, agency, commission, official or other instrumentality of the United States or other country, or any supra-national organization, state, county, city or other political subdivision or any self-regulatory organization.

(nn)         “Indemnification Claim Notice” has the meaning set forth in Section 11.02(c).

(oo)         “Indemnified Party” has the meaning set forth in Section 11.02(c).

(pp)         “Indemnifying Party” has the meaning set forth in Section 11.02(c)

(qq)         “Intellectual Property” means any and all of the following intellectual property rights: (i) Know-How; (ii) Patents; (iii) Copyrights; (iv) internet domain names; and (v) Trademarks.

**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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(rr)           “Inventory” means all inventory of Product packaged in commercial bottles or physician sample units and all work-in-process (including all inventory of Product in bulk lots) owned by Seller, whether held at a location or facility of Seller (or any other Person on behalf of Seller) or in transit to or from Seller (or any such other Person).

(ss)         “Know-How” means, to the extent relating to the Product, the Purchased Assets or the Business, all Product specifications, technical knowledge, expertise, skill, practice, procedures, formulae, trade secrets, inventions, confidential information, analytical methodology, processes, methods, preclinical, clinical, stability and other data and results, market studies, customer lists, supplier lists, mailing lists, business plans and other proprietary information, and all other experience and know-how, in each case in tangible form, whether or not patentable.

(tt)           “Knowledge” with respect to Seller means the actual knowledge of the Persons listed in Section 1.01(tt) of the Seller Disclosure Schedule, after due inquiry.

(uu)         “Law” means any law, statute, code, treaty, order, ordinance, rule, regulation or other requirement promulgated or enacted by any Governmental or Regulatory Authority.

(vv)         “Liability” means any liability, debt or obligation (whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, and due or to become due).

(ww)       “Marketing Materials” means (i) all market research, marketing plans, media plans, advertising, marketing-related clinical study results, form letters and medical queries, sales training materials, customer lists and information with respect to sales of Product (including doctors and pharmacists), promotional and marketing books and owned by Seller and used in connection with the marketing and promotion of the Product; and (ii) those items of advertising and promotional materials and literature owned by Seller as of the Closing and used in connection with the advertising and promotion of the Product, provided that “Marketing Materials” shall exclude the labeling of the Product, which shall be deemed part of the Regulatory Approvals.

(xx)          “Material Adverse Effect” means an effect or condition that individually or in the aggregate is materially adverse to:  (i) the Purchased Assets; (ii) the results of operations, business, operations, condition (financial or otherwise) or prospects of the Business; or (iii) Seller’s ability to consummate the transactions contemplated hereby.

(yy)         “Net Sales” means the aggregate amount invoiced on account of sales of the Product by Buyer or any of its Affiliates or their sublicensees to a third party in the Territory (but not including sales between Buyer and its Affiliates where the Product is intended for resale) less the following reductions relating to such sales: (a) trade, quantity and cash discounts or rebates, which are not already reflected in the amount invoiced; (b) any adjustments or allowances on account of price adjustments, billing errors, rejected goods, damaged goods and returns; (c) credits, volume rebates, charge-back and prime vendor rebates, fees, reimbursements or similar

**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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payments granted or given to wholesalers and other distributors, buying groups, health care insurance carriers, pharmacy benefit management companies, health maintenance organizations or other institutions or health care organizations, which are not already reflected in the amount invoiced; (d) any tax, tariff, customs duty, excise or other duty or other governmental charge (other than a tax on income) levied on the sale, transportation or delivery of the Product and borne by the seller thereof, itemized on the applicable invoice and remitted to the applicable taxing authority; (e) payments or rebates paid in connection with sales of the Product to any governmental or regulatory authority in respect of any state or federal Medicare, Medicaid or similar programs, which are not already reflected in the amount invoiced; and (f) any invoiced charge for freight, insurance or other transportation costs charged to the customer.  For purposes of this definition, the Product shall be considered “sold” and “reductions” allowed when so recorded in Parent’s consolidated and consolidating financial statements prepared in accordance with generally accepted accounting principles.

(zz)          “Net Sales Milestone” has the meaning set forth in Section 4.02(a).

(aaa)       “Net Sales Milestone Payment” has the meaning set forth in Section 4.02(a).

(bbb)      “Net Sales Milestone Termination Date” means the date that is the later to occur of (i) twelve (12) years from the Closing Date and (ii) the date of the first commercial sale of a generic version of the Product in the Territory.

(ccc)       “Open Territories List” has the meaning set forth in Section 8.07.

(ddd)      “Order” means any writ, judgment, decree, injunction, award or similar order of any Governmental or Regulatory Authority, including any award in an arbitration proceeding (in each such case whether preliminary or final).

(eee)       “Ordinary Course of Business” means such action that is in the ordinary course of the Business and consistent with the past practices of the Business.

(fff)         “Parent” means Cephalon, Inc., a Delaware corporation.

(ggg)      “Patents” means United States and non-U.S. patents, provisional patent applications, patent applications, continuations, continuations-in-part, divisions and reissues.

(hhh)      “Permits” has the meaning set forth in Section 6.10(a).

(iii)          “Permitted Encumbrance” means (i) any Encumbrance for Taxes not yet due or delinquent or for those Taxes being contested in good faith by appropriate proceedings for which adequate reserves have been established and (ii) any Encumbrance or imperfection of title on property that does not adversely affect title to, detract from the value of or impair the existing use of, the property affected by such Encumbrance or imperfection.

**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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(jjj)          “Person” means any natural person, corporation, general partnership, limited partnership, limited liability company, joint venture, proprietorship, other business organization or entity, trust, union, association or Governmental or Regulatory Authority.

(kkk)       “Product” means cyclobenzaprine hydrochloride extended-release capsules (currently being marketed with the trade name AMRIX), as approved by the FDA and described in the New Drug Application for the Product identified in Section 6.10(a) of the Seller Disclosure Schedule.

(lll)          “Product Contract” has the meaning set forth in Section 6.05(a).

(mmm)    “Purchased Assets” means, subject to Section 2.02, all of the Assets and Properties of Seller used primarily in connection with the Product or the Business, including all right, title and interest of Seller in, to and under:  (i) the Intellectual Property owned by or licensed to Seller, to the extent used in connection with or pertaining to the Purchased Assets, the Product or the Business, including all rights in domain names used primarily in connection with the Business; (ii) the Eurand Agreement; (iii) all of the other Product Contracts; (iv) the Marketing Materials; (v) the Books and Records; (vi) the Regulatory Approvals and the other Permits; (vii) the Product; (viii) the Inventory; and (ix) all telephone, telex and telephone facsimile numbers and other directory listings utilized by Seller primarily in connection with the Business. The Purchased Assets do not include any fixed assets.

(nnn)      “Registered Intellectual Property” means all of the following Intellectual Property registered or filed in the Territory owned by or licensed to Seller, to the extent used in connection with or pertaining to the Purchased Assets, the Product or the Business:  (i) the Trademarks listed in Section 6.06(a) of the Seller Disclosure Schedule; (ii) the Internet domain names listed in Section 6.06(a) of the Seller Disclosure Schedule; (iii) the Patents listed in Section 6.06(a) of the Seller Disclosure Schedule; and (iv) the Copyrights listed in Section 6.06(a) of the Seller Disclosure Schedule.

(ooo)      “Regulatory Approvals” means, with respect to the Product, the New Drug Application for the Product identified in Section 6.10(a) of the Seller Disclosure Schedule, all supplements thereto and the official regulatory files and data in Seller’s possession as of the Closing relating thereto.

(ppp)      “Required Seller Third Party Consents” has the meaning set forth in Section 6.04(b).

(qqq)      “Release” has the meaning set forth in Section 6.13(b).

(rrr)         “Seller” has the meaning set forth in the Preamble to this Agreement.

(sss)       “Seller Ancillary Agreements” means all agreements, instruments and documents being or to be executed and delivered by Seller under this Agreement or in connection herewith.

**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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(ttt)         “Seller Disclosure Schedule” has the meaning set forth in the preamble to Article VI of this Agreement.

(uuu)      “Seller Governmental Consents” has the meaning set forth in Section 6.04(a).

(vvv)      “Seller Group Member” has the meaning set forth in Section 11.02(b).

(www)    “Seller Property” has the meaning set forth in Section 6.13(b).

(xxx)        “Straddle Period” means any taxable year or period beginning on or before and ending after the Closing Date.

(yyy)      “Successor Entity” means a successor entity to Buyer following a Change of Control.

(zzz)        “Tax” means all of the following tax in connection with the operations of the Business or the transactions contemplated hereby: (i) any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, excise, severance, stamp, occupation, employment, payroll, production, withholding, value added, premium, property, environmental or windfall profit tax, or any other tax, custom, duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, addition to tax or additional amount imposed by any Governmental or Regulatory Authority; (ii) any Liability for the payment of any amounts of the type described in (i) above as a result of being a member of any affiliated, consolidated, combined, unitary or other group for any Taxable period; and (iii) any Liability for the payment of any amounts of the type described in (i) or (ii) above as a result of any express or implied obligation to indemnify any other person.

(aaaa)     “Tax Return” means any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including any information return, claim for refund, amended return or declaration of estimated Tax.

(bbbb)    “Territory” means the United States of America, including its territories and possessions, Canada and Mexico.

(cccc)     “Third Party Claim” has the meaning set forth in Section 11.02(d).

(dddd)    “Trademarks” means United States, state and non-U.S. trademarks, service marks, trade names, designs, logos, slogans and general intangibles of like nature, whether registered or unregistered, and pending registrations and applications to register the foregoing, together with all goodwill of the Business associated with the foregoing.

Section 1.02           CONSTRUCTION OF CERTAIN TERMS AND PHRASES.

Unless the context of this Agreement otherwise requires: (a) words of any gender include each other gender; (b) words using the singular or plural number also include the plural 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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singular number, respectively; (c) the terms “hereof,” “herein,” “hereby” and derivative or similar words refer to this entire Agreement; (d) the terms “Article” or “Section” refer to the specified Article or Section of this Agreement; (e) the term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or”; and (f) the term “including” or “includes” means “including without limitation” or “includes without limitation.”  The Seller Disclosure Schedule, Buyer Disclosure Schedule and Exhibits referred to herein shall be construed with and as an integral part of this Agreement to the same extent as if they were set forth verbatim herein. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified.

ARTICLE II.     SALE AND ASSIGNMENT OF THE PURCHASED ASSETS

Section 2.01           SALE AND ASSIGNMENT OF THE PURCHASED ASSETS.

(a)           Subject to the terms and conditions of this Agreement, on the Closing Date, pursuant to the Assignment and Assumption Agreement, Seller shall sell, transfer, convey, assign and deliver to Buyer, free and clear from all Encumbrances other than Permitted Encumbrances, and Buyer shall purchase, acquire and accept from Seller all of Seller’s right, title and interest, as of the Closing, in and to the Purchased Assets.

(b)           Buyer acknowledges and agrees that the Eurand Agreement (i) contains a restriction on the right of Seller to manufacture, market or sell the Product outside of the Territory and (ii) does not provide any rights to manufacture, market, sell, distribute or otherwise exploit the Product outside of the Territory.

(c)           Notwithstanding anything contained in this Agreement to the contrary, (i) from and after the Closing Seller shall retain all of its right, title and interest in and to the Excluded Assets; and (ii) Seller may retain an archival copy of all Product Contracts, Books and Records, Marketing Materials and other documents or materials included in the Purchased Assets (but Seller shall not use any such archival copy for any other purposes than as an archive and shall maintain the confidentiality of such materials pursuant to Section 13.01).

Section 2.02           EXCLUDED ASSETS. Notwithstanding the provisions of Section 2.01, the Purchased Assets shall not include the following (herein referred to as the “Excluded Assets”):

(a)           except to the extent provided in Section 8.08, the Corporate Names;

(b)           Seller’s rights, claims or causes of action against third parties relating to the Assets and Properties, business or operations of Seller which might arise in connection with the discharge by Seller of the Excluded Liabilities;

(c)           all contracts of insurance;

**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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(d)           all corporate minute books and stock transfer books and the corporate seal of Seller;

(e)           all machinery, equipment, vehicles, furniture or other personal property;

(f)            all Assets and Properties relating to any employee benefit plan, program or arrangement of Seller;

(g)           all fixed assets;

(h)           all refunds of any Tax for which Seller is liable pursuant to Section 8.13;

(i)            any and all claims that Seller has or may have against Eurand under the Eurand Agreement with respect to, or arising out of, actions taken, events occurring or circumstances arising prior to the Closing Date; and

(j)            any other Assets and Properties of Seller not used in connection with the Product or the Business.

ARTICLE III.     ASSUMPTION OF ASSUMED LIABILITIES; EXCLUDED LIABILITIES.

Section 3.01           ASSUMPTION OF ASSUMED LIABILITIES.

Subject to the terms and conditions of this Agreement, on the Closing Date, Buyer shall deliver to Seller the Assignment and Assumption Agreement pursuant to which Buyer shall assume and agree to satisfy, perform, pay and discharge all of the Assumed Liabilities.

Section 3.02           EXCLUDED LIABILITIES.

Buyer shall not assume or be obligated to satisfy, pay, perform or otherwise discharge any Liability or obligation of Seller not expressly assumed by Buyer pursuant to the Assignment and Assumption Agreement (all such Liabilities and obligations not being assumed being herein called the “Excluded Liabilities”) and, notwithstanding anything to the contrary in Section 3.01, none of the following shall be Assumed Liabilities for purposes of this Agreement:

(a)           any Liabilities in respect of Taxes for which Seller is liable pursuant to Section 8.13;

(b)           any payables and other Liabilities or obligations of Seller to any of Seller’s Affiliates;

(c)           any costs and expenses incurred by Seller incident to its negotiation and preparation of this Agreement and its performance and compliance with the agreements and conditions contained herein;

(d)           any Liabilities or obligations in respect of any Excluded Assets;

**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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(e)           any Liabilities in respect of the lawsuits, claims, suits, proceedings or investigations set forth in Section 6.07 of the Seller Disclosure Schedule;

(f)            any product liability or claims for injury to person or property, regardless of when made or asserted, relating to any Product manufactured, marketed, sold or licensed by or on behalf of Seller prior to the Closing Date, but only if such liability or claim involves or relates to the inaccuracy or breach of any representation or warranty made by Seller in this Agreement; or

(g)           any recalls on or after the Closing Date mandated by any Governmental or Regulatory Authority of any Product manufactured, marketed, sold or licensed by or on behalf of Seller prior to the Closing Date, but only if such recall involves or relates to the inaccuracy or breach of any representation or warranty made by Seller in this Agreement.

ARTICLE IV.     PURCHASE PRICE AND PAYMENT

Subject to the terms and conditions set forth herein, the purchase price for the Purchased Assets shall be paid by Buyer in accordance with Sections 4.01 and 4.02.

Section 4.01           BASE PURCHASE PRICE.

As consideration for the Purchased Assets, Buyer shall, subject to the satisfaction or waiver of the conditions set forth in Article X, deliver or cause to be delivered to Seller at the Closing the sum of $100,122,000 (the “Base Purchase Price”) in immediately available funds by wire transfer into an account designated by Seller in writing at least two (2) Business Days prior to the Closing Date.

Section 4.02           ADDITIONAL CONSIDERATION.

(a)           In addition to the Base Purchase Price, upon the attainment by Buyer of the Net Sales milestones of the Product in the Territory set forth below (each a “Net Sales Milestone” and collectively the “Net Sales Milestones”), Buyer shall pay to Seller the respective amounts set forth below (each a “Net Sales Milestone Payment” and collectively the “Net Sales Milestone Payments”):

(i)            [**] if cumulative Net Sales of the Product in the Territory after the Closing Date and prior to the Net Sales Milestone Termination Date equal [**];

(ii)           [**] (not to exceed [**] in the aggregate) for each additional [**] of cumulative Net Sales of the Product in the Territory after the Closing Date and prior to the Net Sales Milestone Termination Date in excess of [**];

(iii)          [**] (not to exceed [**] in the aggregate) for each additional [**] of cumulative Net Sales of the Product in the Territory after the Closing Date and prior to the Net Sales Milestone Termination Date in excess of [**]; 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.

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(iv)          [**] (not to exceed [**] in the aggregate) for each additional [**] of cumulative Net Sales of the Product in the Territory after the Closing Date and prior to the Net Sales Milestone Termination Date in excess of [**].

No additional payments will be due and payable by Buyer to Seller following the attainment of cumulative Net Sales of the Product in the Territory after the Closing Date and prior to the Net Sales Milestone Termination Date in excess of [**].

(b)           The Net Sales Milestone Payments, if any, shall be payable within sixty (60) days of the end of the calendar quarter in which the relevant Net Sales Milestone is achieved by wire transfer of immediately available funds to an account designated by Seller in writing within two (2) Business Days after Seller becomes entitled to receive such payment. Upon at least thirty (30) days prior written notice to Buyer, Seller and its agents shall have the right to inspect and audit Buyer’s books and records related to Net Sales of the Product and the calculation of any such payments due and payable to Seller for the five (5) year period prior to the end of the last fiscal quarter of Buyer ending prior to the date of commencement of such audit during Buyer’s normal business hours; provided, that Seller shall not inspect and audit such books and records more than once during any calendar year. The costs of any such audit shall be borne by Seller, unless the audit reveals an underpayment of [**] or more of the amount actually due, in which case, Buyer shall reimburse Seller for any and all reasonable costs associated with the audit.

(c)           From and after the Closing until the Net Sales Milestone Termination Date, Buyer hereby agrees to use, or to cause its Affiliates to use, Commercially Reasonable Efforts with respect to the marketing and sale of the Product. If at any time between the Closing Date and the Net Sales Milestone Termination Date the business strategy of (i) Buyer or Parent or (ii) following a Change of Control, any Successor Entity changes such that Buyer or its Affiliates or such Successor Entity fails to use Commercially Reasonable Efforts with respect to the marketing and sale of the Product, then Seller shall be entitled to receive an amount equal to [**], which amount shall be paid within sixty (60) days of Seller becoming entitled thereto by wire transfer of immediately available funds to the account designated by Seller in writing within two (2) Business Days after Seller becomes entitled to receive such payment. As used in this Section 4.02(c), “Commercially Reasonable Efforts” means, with respect to any Person, the efforts and resources that would be used (including the promptness in which such efforts and resources would be applied) by such Person consistent with its normal business practices, which in no event shall be less than the level of efforts and resources standard in the pharmaceutical industry for a company similar in size and scope to such Person, with respect to a product at a similar stage in its development or product life taking into account efficacy, safety, commercial value, the competitiveness of alternative products of third parties that are in the marketplace or under development, and the Patent and other proprietary position of such product. Notwithstanding anything herein to the contrary, the “Commercially Reasonable Efforts” to be used by Buyer under this Section 4.02(c) shall not be less than those efforts Parent would be obligated to take under this Section 4.02(c) if Parent had executed and delivered this Agreement as Buyer.

**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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(d)           With respect to each calendar quarter from and after the Closing until the Net Sales Milestone Termination Date, Buyer shall deliver to Seller, within fifty (50) days after the end of such calendar quarter (other than the fourth quarter) and within seventy (70) days after the end of the fourth calendar quarter of each year, a report, certified by an officer of Buyer and setting forth in reasonable detail a calculation of the Net Sales for such calendar quarter.

(e)           From and after the Closing Date until the Net Sales Milestone Termination Date, Buyer shall not consummate a transaction involving a sale or other transfer of all or substantially all of the Purchased Assets that does not constitute a Change of Control transaction without the prior written consent of Seller, which consent may not be unreasonably withheld.

(f)            The provisions of this Section 4.02 shall survive until the Net Sales Milestone Termination Date, except that the right of Seller to conduct an audit of Buyer’s books and records pursuant to Section 4.02(b) shall continue for a period of five (5) years after the Net Sales Milestone Termination Date and the obligation of Buyer pursuant to Section 4.02(d) shall continue until a report relating to the quarter in which the Net Sales Milestone Termination Date occurs has been delivered.

(g)           Buyer and Seller each agrees that the Net Sales Milestone Payments, if any, are part of the purchase price for the Purchased Assets for Tax purposes, and each agrees to treat the same as such as required by applicable Tax law.

Section 4.03           ALLOCATION OF PURCHASE PRICE.

(a)           As promptly as reasonably practical, but in no event later than sixty (60) days after the Closing Date, Seller shall deliver to Buyer a schedule (the “Allocation Statement”) reflecting the allocation of the Base Purchase Price among the Purchased Assets in a manner that is consistent with the allocation methodology provided by Section 1060 of the Code and the Treasury regulations promulgated thereunder (the “Allocation”). Within thirty (30) days following the receipt by Buyer of the Allocation Statement, Buyer shall review the Allocation. If the Allocation Statement is not objected to by Buyer (by written notice to Seller) by the expiration of such thirty (30) day period, it shall be deemed agreed upon by the parties and shall be deemed conclusive for purposes of the Allocation.

(b)           Except to the extent required to comply with audit determinations of any tax authority with jurisdiction over a party, Buyer and Seller shall report the transactions contemplated by this Agreement for all required federal income tax and all other tax purposes in a manner consistent with the Allocation. Buyer and Seller shall not take any position in any Tax Return or Tax proceeding that is inconsistent with the Allocation without the consent of the other party; provided, however, that nothing contained herein shall prevent Buyer or Seller from settling in good faith any proposed deficiency or adjustment by any Governmental or Regulatory Authority based upon, or arising out of, the Allocation, and none of the parties shall be required to litigate before any court, any proposed deficiency or adjustment by any Governmental or Regulatory Authority challenging the Allocation.

**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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Section 4.04           PAYMENT OF SALES, USE AND OTHER TAXES.

Seller shall be solely liable for and pay all sales, use, transfer, value added and other related Taxes, if any, arising out of the sale by Seller of the Business and the Purchased Assets to Buyer pursuant to this Agreement. Buyer agrees to timely sign and deliver such certificates or forms as may be necessary or appropriate to establish an exemption from (or otherwise reduce), or file Tax Returns with respect to, such Taxes.

ARTICLE V.     CLOSING

Section 5.01           TIME AND PLACE.

Unless this Agreement is earlier terminated pursuant to Article XII, upon the terms and subject to the conditions of this Agreement, the Closing of the transactions contemplated by this Agreement, including the purchase and sale of the Purchased Assets and the assumption of the Assumed Liabilities (the “Closing”), shall take place on the third Business Day after the conditions set forth in Articles IX and X have been satisfied or waived at the offices of Cantor Arkema, P.C., 1111 E. Main Street, 16^th Floor, Richmond, VA, unless another time or place shall be agreed to by the parties.

Section 5.02           DELIVERIES AT CLOSING.

(a)           Closing Deliveries by Seller. Subject to the satisfaction or waiver of the conditions set forth in Article IX, at the Closing, Seller shall deliver or cause to be delivered to Buyer:

(i)            a copy of Seller’s Articles of Incorporation certified as of a recent date by the Secretary of the Commonwealth of the Commonwealth of Virginia;

(ii)           a certificate of good standing of Seller issued as of a recent date by the Secretary of the Commonwealth of the Commonwealth of Virginia;

(iii)          a certificate dated the Closing Date and executed by the secretary or an assistant secretary of Seller, in form and substance reasonably satisfactory to Buyer, as to:  (i) no amendments to the Articles of Incorporation of Seller since a specified date; (ii) the by-laws of Seller; (iii) the resolutions of the Board of Directors of Seller authorizing the execution, delivery and performance of this Agreement and each of the Seller Ancillary Agreements; and (iv) the incumbency and signatures of the officers of Seller executing this Agreement and each of the Seller Ancillary Agreements;

(iv)          physical possession of the Purchased Assets, including:  (A) the Inventory (which shall be delivered at the respective locations listed in Section 6.09(c) of the Seller Disclosure Schedule); (B) the Regulatory Approvals; (C) the Marketing Materials; and (D) the Books and Records, and appropriate documents of transfer related thereto in form and substance reasonably acceptable to Seller and Buyer;

**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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(v)           the Assignment and Assumption Agreement, duly executed by Seller;

(vi)          an assignment of the Intellectual Property included in the Purchased Assets in form and substance reasonably acceptable to Seller and Buyer;

(vii)         copies of all Seller Governmental Consents and Required Seller Third Party Consents, including the consent of Eurand relating to the Eurand Agreement;

(viii)        the certificates of Seller contemplated by Sections 10.01 and 10.02, duly executed by an authorized officer of Seller;

(ix)           the Eurand Amendment, duly executed by each of Seller and Eurand; and

(x)            such other bills of sale, assignments and other instruments of transfer or conveyance as Buyer may reasonably request or as may be otherwise necessary to evidence and effect the sale, assignment, transfer, conveyance and delivery of the Purchased Assets to Buyer.

In addition to the above deliveries, Seller shall take all steps and actions as Buyer may reasonably request or as may otherwise be necessary to put Buyer in actual possession or control of the Purchased Assets.

(b)           Closing Deliveries by Buyer. Subject to the satisfaction or waiver of the conditions set forth in Article X, at the Closing, Buyer will deliver or cause to be delivered to Seller:

(i)            the Base Purchase Price pursuant to Section 4.01;

(ii)           a copy of Buyer’s articles of incorporation certified as of a recent date by the register of commerce of the canton of Zug, Switzerland;

(iii)          an extract from the register of commerce of the canton of Zug, Switzerland as of a recent date relating to Buyer;

(iv)          a certificate dated the Closing Date and executed by the Chairman of Buyer, in form and substance reasonably satisfactory to Seller, as to:  (i) no amendments to the articles of incorporation of Buyer since a specified date; and (ii) the incumbency and signatures of the officers of Buyer executing this Agreement and each of the Buyer Ancillary Agreements;

(v)           copies of all Buyer Governmental Consents;

(vi)          the Assignment and Assumption Agreement, duly executed by Buyer; and

(vii)         the certificate of Buyer contemplated by Section 9.01, duly executed by an authorized officer of Buyer.

**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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ARTICLE VI.     REPRESENTATIONS AND WARRANTIES OF SELLER

As an inducement to Buyer to enter into this Agreement and to consummate the transactions contemplated hereby, Seller represents and warrants to Buyer, subject to such exceptions as are specifically disclosed in the disclosure schedule (referencing the specific Section(s) hereof being qualified) supplied by Seller to Buyer and dated as of the date hereof (the “Seller Disclosure Schedule”), which Seller Disclosure Schedule shall be deemed to be representations and warranties of Seller as if made herein, as follows:

Section 6.01           ORGANIZATION.

(a)           Seller is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Virginia and has all requisite power and authority to own or lease its assets and carry on the Business as currently conducted by it. Seller is duly authorized to conduct its business and is in good standing in each jurisdiction where such qualification is required, except for any jurisdiction where failure to so qualify would not have a Material Adverse Effect.

(b)           Seller is its own sole “ultimate parent entity” (as defined in 16 C.F.R. § 801.1(a)(3). The “person” (as defined in 16 C.F.R. § 801.1(a)(1)) of which Seller is the “ultimate parent entity” (as defined in 16 C.F.R. § 801.1(a)(3))—i.e., the “person” consisting of Seller and all entities that Seller controls directly or indirectly, does not have “total assets” (as defined in 16 C.F.R. § 801.11) as of June 30, 2007, the date of the most recent balance sheet of Seller, or “annual net sales” (as defined in 16 C.F.R. § 801.11) for the year ended December 31, 2006 of $12.0 million or more.

Section 6.02           AUTHORITY OF SELLER.

Seller has all necessary power and authority and has taken all actions necessary to enter into this Agreement and the Seller Ancillary Agreements and to carry out the transactions contemplated hereby and thereby. Seller has taken all action required by Law, its Bylaws, Articles of Incorporation or otherwise to be taken by it to duly and validly authorize the execution and delivery by Seller of this Agreement and the Seller Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby, and no other corporate proceedings on the part of Seller or its shareholders is necessary to consummate the transactions contemplated hereby or thereby. This Agreement has been duly and validly authorized, executed and delivered by Seller and, when executed and delivered by Buyer, will constitute a legal, valid and binding obligation of Seller enforceable against it in accordance with its terms, and each of the Seller Ancillary Agreements has been duly authorized by Seller and upon execution and delivery by Seller will constitute a legal, valid and binding obligation of Seller enforceable against it in accordance with its terms, in each case except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and (b) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies.

**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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Section 6.03           NON-CONTRAVENTION.

The execution and delivery by Seller of this Agreement and the Seller Ancillary Agreements do not, and the performance by it of its obligations under this Agreement and the Seller Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby will not (with or without notice or lapse of time or both):

(a)           contravene, conflict with or result in a violation or breach of, or the creation of any Encumbrance upon any of the Purchased Assets under, any of the terms, conditions or provisions of the Bylaws, Articles of Incorporation or other organizational documents of Seller or any material Contract to which Seller is a party or any of its Assets and Properties is subject or by which Seller is bound;

(b)           assuming the receipt or making of all Seller Governmental Consents, contravene, conflict with or result in a violation or breach of, or the creation of any Encumbrance (other than any Permitted Encumbrance) upon any of the Purchased Assets under, any term or provision of (i) any Law applicable to Seller, the Business, the Product or the Purchased Assets or (ii) any Order to which Seller, the Business, the Product or the Purchased Assets is subject or by which Seller is bound; or

(c)           assuming the receipt of all Required Seller Third Party Consents, contravene, conflict with or result in a violation or breach or default (or an event which, with notice or lapse of time or both, would constitute a breach or default) under, or the creation of any Encumbrance (other than any Permitted Encumbrance) upon any of the Purchased Assets under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, any Product Contract or any material Contract to which Seller is a party or any of its Assets and Properties is subject or by which Seller is bound.

Section 6.04           CONSENTS AND APPROVALS.

(a)           Section 6.04(a) of the Seller Disclosure Schedule sets forth a complete and accurate list of all consents, waivers, approvals, Orders or authorizations of, or registrations, declarations or filings with, any Governmental or Regulatory Authority that are required to be obtained or made by Seller in connection with the execution and delivery by Seller of this Agreement and the Seller Ancillary Agreements or the performance of its obligations hereunder and thereunder (collectively, the “Seller Governmental Consents”).

(b)           Section 6.04(b) of the Seller Disclosure Schedule sets forth a complete and accurate list of all consents, waivers, approvals, or authorizations of, or notices to, any third party (other than a Governmental or Regulatory Authority) that are required to be obtained or made by Seller under any Product Contract or otherwise in connection with the execution and delivery by Seller of this Agreement and the Seller Ancillary Agreements or the performance of its obligations hereunder and thereunder, including the consent of Eurand under the Eurand Agreement (collectively, the “Required Seller Third Party Consents”).

**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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Section 6.05           PRODUCT CONTRACTS.

(a)           Section 6.05(a) of the Seller Disclosure Schedule sets forth a complete and correct list of each Contract to which Seller or any of its Affiliates is a party that:  (i) relates to the manufacture, marketing, sale, licensing or distribution of the Product;(ii) relates to the acquisition, sale, licensing in or out, assignment or use of Intellectual Property included in the Purchased Assets; (iii) relates to the purchase or disposition of assets, or the provision of services, to or by the Business; (iv) relates to the sale or distribution of the Product to any Governmental or Regulatory Authority or any other Person; (v) limits or restricts where Seller may conduct the Business or the Product may be sold, or grants any preferential rights to purchase or license the Purchased Assets; or (vi) is not otherwise described in clauses (i) – (v) above but is material to the conduct of the Business as currently conducted or as planned to be conducted in the future, or was not entered into by Seller in the Ordinary Course of Business (collectively, the “Product Contracts”). Seller has made available to Buyer complete and correct copies (including any schedules, annexes, exhibits or amendments) of all Contracts identified in Section 6.05(a) of the Seller Disclosure Schedule.

(b)           Except for the Contracts set forth in Section 6.05(b) of the Seller Disclosure Schedule, the Product Contracts are the only Contracts material to the conduct of the Business by Seller or its Affiliates. Each of the Product Contracts is in full force and effect and constitutes a legal, valid and binding agreement, enforceable in accordance with its terms, of Seller and each other party thereto and may be transferred to Buyer pursuant to this Agreement and will continue in full force and effect immediately after the Closing, in each case without breaching the terms thereof or resulting in the forfeiture or impairment of any rights thereunder and without the consent, approval or act of, or the making of any filing with, any other party. Seller has performed in all material respects all of its required obligations under, and is not, and is not alleged to be, in violation or breach of or default under, in any material respect, any such Contract, nor is there or is there alleged to be any basis for termination of any Product Contract. To the Knowledge of Seller, the other parties to the Product Contracts are not in violation or breach of or default under any such Contract. No condition or state of facts exists which, with or without notice or lapse of time or both, would constitute a violation, breach or default by Seller or, to the Knowledge of Seller, any third party under any Product Contract. Seller has not received any notice alleging any actual or possible violation or breach of, or default under, any Product Contract.

Section 6.06           INTELLECTUAL PROPERTY RIGHTS.

(a)           Section 6.06(a) of the Seller Disclosure Schedule sets forth a complete and correct list of all Registered Intellectual Property. Except as set forth in Section 6.06(a) of the Seller Disclosure Schedule, and except with respect to the rights of Eurand with respect to the Eurand Intellectual Property, Seller owns all right, title and interest in and to, or has a worldwide, royalty-free, perpetual, sublicenseable license, sublicense or other permission to use, all of the Registered Intellectual Property, free and clear of all Encumbrances except Permitted Encumbrances. To the Knowledge of Seller, with respect to any registrations required with respect to any items that are part of the Eurand Intellectual Property, all necessary registration,

**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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maintenance and renewal fees due in connection with such Registered Intellectual Property have been paid and all necessary documents and certificates in connection with such Registered Intellectual Property have been filed with the relevant Copyright, Trademark, other Governmental or Regulatory Authorities or domain name registrar for the purposes of registering and maintaining such Registered Intellectual Property. Except as set forth in Section 6.06(a) of the Seller Disclosure Schedule:  (i) none of the Intellectual Property included in the Purchased Assets has been cancelled or abandoned; (ii) to the Knowledge of Seller, none of the Eurand Intellectual Property has been cancelled or abandoned; and (iii) Seller has the sole and exclusive right to bring actions for infringement, misappropriation, dilution, violation or unauthorized use of the Intellectual Property included in the Purchased Assets, and to the Knowledge of Seller, there is no basis for any such action.

(b)           To the Knowledge of Seller, (i) Seller owns all right, title and interest or other permission to use all of the Intellectual Property included in the Purchased Assets, free and clear of all Encumbrances except Permitted Encumbrances, and (ii) Eurand owns all right, title and interest or other permission to use all of the Eurand Intellectual Property, free and clear of all Encumbrances except Permitted Encumbrances.

(c)           Seller has not received any notice from any Person, or has Knowledge, that the operation of the Business as currently conducted, or the Product, may or does infringe or may or does misappropriate the Intellectual Property rights of any third party. No claim of invalidity of any Intellectual Property included in the Purchased Assets has been made by any other Person.

(d)           All Trademarks owned by Seller and included in the Registered Intellectual Property are the subject of current registrations, and have been continuously used as specified in such registrations. Except for the rights of Eurand under the Eurand Intellectual Property, there are no third-party rights in Seller’s current or pending Trademark registrations relating to the Product. Seller has no Knowledge of any prior use, infringement, piracy or counterfeiting of such Trademarks, any superior rights by any third party in such Trademarks, or any adverse claims pertaining to such Trademarks.

(e)           To the Knowledge of Seller, there is no Intellectual Property, other than the Intellectual Property included in the Purchased Assets, necessary to conduct the Business as currently conducted or currently planned to be conducted.

(f)            There has been no unauthorized disclosure or use by employees, consultants, officers, shareholders and agents of Seller of Know-How included in the Purchased Assets.

Section 6.07           LITIGATION.

There are no Actions or Proceedings pending to which Seller is a party, or to the Knowledge of Seller, to which Eurand is a party, or, to the Knowledge of Seller, threatened or reasonably anticipated, nor to the Knowledge of Seller is there any basis for any of the same, against, relating to, affecting or arising in connection with:  (a) the Purchased Assets or the Business; (b) this Agreement; (c) the transactions contemplated by this Agreement; or (d) 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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Product. Neither Seller nor any of its Assets and Properties is subject to any Order, nor, to the Knowledge of Seller, are any such Orders threatened to be imposed by any Governmental or Regulatory Authority.

Section 6.08           COMPLIANCE WITH LAW.

Seller has operated and is operating the Business in compliance in all material respects with all Laws and Orders applicable to Seller, the Business, the Product or the Purchased Assets, and Seller is not in violation of any such Laws or Orders in any material respect.

Section 6.09           INVENTORY; SALES OF THE PRODUCT.

(a)           All of the Product included in the Inventory:  (i) is in good, merchantable and useable condition; (ii) is, in the case of finished goods, saleable in the Ordinary Course of Business or for distribution as physician samples and, in the case of all other Product included in the Inventory, is of a quality and quantity useable in the Ordinary Course of Business; and (iii) was produced or manufactured in accordance with the specifications for the Product as set forth in the applicable Regulatory Approval and in compliance in all material respects with applicable Law.

(b)           Commercially bottled Product included in the Inventory will have at least 42 months of shelf-life remaining as of the Closing, and physician sample Product will have at least 30 months of shelf-life remaining as of Closing.

(c)           Section 6.09(c) of the Seller Disclosure Schedule contains a list and description of all Product included in the Inventory as of the date hereof and the Closing Date, including lot numbers, shelf life and type and location thereof.

(d)           None of Seller, any of its Affiliates or any Person acting on behalf of Seller or any of its Affiliates has sold or distributed the Product to any Person, including physicians.

Section 6.10           REGULATORY MATTERS.

(a)           Seller owns, holds or possesses all permits, licenses, franchises, privileges, approvals and other authorizations from any Governmental or Regulatory Authority which are necessary to entitle it to own or lease, operate and use the Purchased Assets and to carry on and conduct the Business as currently conducted or planned to be conducted by it (collectively, the “Permits”). Section 6.10(a) of the Seller Disclosure Schedule sets forth a list and brief description of each Permit. Seller is not in violation of or default in any material respect under any Permit. Seller has fulfilled and performed in all material respects its obligations under each Permit, and, to the Knowledge of Seller, no event has occurred or condition or state of facts exists which constitutes or, after notice or lapse of time or both, would constitute a breach of or default under any such Permit or which permits or, after notice or lapse of time or both, would permit revocation or termination of any such Permit. To the Knowledge of Sellers, no notice of cancellation, of default or of any dispute concerning any Permit, or of any event, condition 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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state of facts described in the preceding sentence, has been received by Seller. Each of the Permits is valid, subsisting and in full force and effect and may be assigned and transferred to Buyer in accordance with this Agreement and will continue in full force and effect immediately after the Closing, in each case without (x) the occurrence of any breach, default or forfeiture of rights thereunder, or (y) the consent, approval or act of, or the making of any filing with, and Governmental or Regulatory Authority.

(b)           Complete and correct copies of each submission of Seller to the FDA with respect to the Product, and all amendments and supplements thereto, including all related pre-clinical and clinical data, have heretofore been provided to Buyer by Seller. Complete and correct copies of all correspondence received by Seller from the FDA with respect to the Product and Seller’s responses thereto have heretofore been provided to Buyer by Seller. Complete and correct copies of all complaint information, adverse event information and safety information relating to the Product and the Regulatory Approvals have heretofore been provided to Buyer.

(c)           The Product has been and is being manufactured, distributed and marketed in compliance with all applicable requirements under the FDCA and any similar Law, including those relating to investigational use, premarket approval, good manufacturing practices, labeling, advertising, record keeping, and the filing of adverse event reports and compliance with other postmarketing obligations. Seller has not received any formal or informal notice or other communication from the FDA or any other Governmental or Regulatory Authority, including a warning or untitled letter, (i) contesting the premarket approval, approved labeling, or promotion (including advertising, promotional labeling and sampling) of, the Product or (ii) otherwise alleging any violation or appearance of any violation of any Law by Seller relating to the Product.

(d)           The Product has not been recalled, withdrawn, suspended or discontinued by Seller in the Territory (whether voluntarily or otherwise) since January 1, 2007. No proceedings in the Territory (whether completed or pending) seeking the recall, withdrawal, suspension or seizure of the Product or premarket approvals or marketing authorizations are pending, or to the Knowledge of Seller, threatened, against Seller, nor have any such proceedings been pending at any time since January 1, 2007.

(e)           Seller has been and is in substantial compliance with 21 U.S.C. sec. 355 and applicable FDA implementing regulations, including 21 C.F.R. Parts 312 or 314, and similar Laws and all terms and conditions of the applicable new drug application and investigational new drug exemption submission under section 505(i) of the FDCA. Seller and its officers, employees or agents have included in the application for the Product, where required, the certification described in 21 U.S.C. sec. 335a(k)(1) or any similar Law, and such certification and such list was in each case true and accurate when made and remained true and accurate in all material respects thereafter. In addition, Seller is in compliance in all material respects with all applicable registration and listing requirements set forth in 21 U.S.C. sec. 360 and 21 C.F.R. Part 207 and all similar Laws with respect to the Product.

**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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(f)            Each article of the Product manufactured and/or distributed by Seller (including Product in Inventory) is not adulterated within the meaning of 21 U.S.C. sec. 351 (or similar Law) or misbranded within the meaning of 21 U.S.C. sec. 352 (or similar Law), and is not in violation of 21 U.S.C. sec. 355 (or similar Law).

(g)           Neither Seller nor any of its officers, employees or agents has with respect to the Product made an untrue statement of a material fact or fraudulent statement to the FDA or other Governmental or Regulatory Authority, failed to disclose a material fact required to be disclosed to the FDA or any other Governmental or Regulatory Authority, or committed an act, made a statement, or failed to make a statement that, at the time such disclosure was made, could reasonably be expected to provide a basis for the FDA or any other Governmental or Regulatory Authority to invoke its policy respecting “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities” set forth in 56 Fed. Reg. 46191 (September 10, 1991) or any similar policy and, to the Knowledge of Seller, neither Seller nor any of its officers, employees or agents is the subject, officially or otherwise, of any pending or threatened investigation by any Governmental or Regulatory Authority under such policy or under the Federal Anti-Kickback Statute or the Civil False Claims Act or any regulations promulgated thereunder. Neither Seller nor any of its officers, employees or agents has been convicted of any crime or engaged in any conduct with respect to the Product for which debarment is mandated by 21 U.S.C. sec. 335a(a) or any similar Law or authorized by 21 U.S.C. sec. 335a(b) or any similar Law.

(h)           To the Knowledge of Seller, all pre-clinical and clinical investigations conducted or sponsored by it with respect to the Product have been and are being conducted in compliance with all recommendations of the FDA and all applicable Laws, including those with respect to good laboratory practices, investigational new drug requirements, good clinical practice requirements (including informed consent and institutional review boards designed to ensure the protection of the rights and welfare of human subjects), and federal and state laws restricting the use and disclosure of individually identifiable health information.

(i)            To the Knowledge of Seller, no Governmental or Regulatory Authority is considering issuing any “talk paper” or other public statement, pursuant to 21 U.S.C. sec. 375 or otherwise, questioning the safety, effectiveness or risk-benefit ratio of the Product, and no Governmental or Regulatory Authority is considering requesting or directing that the approved labeling for the Product be revised to include additional or strengthened warning or other risk information.

Section 6.11           TITLE; SUFFICIENCY OF ASSETS.

(a)           Seller has good and marketable title to all of the Purchased Assets, free and clear of any Encumbrance, other than Permitted Encumbrances. Upon delivery to Buyer of the Assignment and Assumption Agreement and other instruments of transfer contemplated by Section 5.02(a), Seller will thereby transfer to Buyer good and marketable title to all of the Purchased Assets, free and clear of all Encumbrances, other than Permitted Encumbrances.

**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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(b)           Except as set forth in Section 6.11(b) of the Seller Disclosure Schedule, the Purchased Assets collectively include all the assets used in the Business and all of the assets necessary to conduct the Business as currently conducted or planned to be conducted.

Section 6.12           BROKERS.

Seller has not retained any broker, finder, investment banker or financial advisor in connection with the transactions contemplated hereunder. Buyer has no, and will have no, obligation to pay any brokers, finders, investment bankers, financial advisors or similar fees in connection with this Agreement or the transactions contemplated hereby by reason of any action taken by or on behalf of Seller.

Section 6.13           ENVIRONMENTAL MATTERS.

(a)           The operations of the Business comply in all material respects with all applicable Environmental Laws and, to the Knowledge of the Sellers, no circumstances or conditions exist that may prevent or interfere with such compliance in the future. Seller is not subject to any Action or Order alleging or addressing a violation of or Liability under any Environmental Law. The Business is not required to have any Permits under Environmental Laws. No Contaminant has been generated, transported, used, disposed, stored or treated by Seller in connection with the Business, and there has been no Release of any Contaminant by Seller in connection with the Business.

(b)           For purposes of this Agreement:

(i)            “Contaminant” shall mean any waste, pollutant, hazardous or toxic substance or waste, petroleum, petroleum-based substance or waste, special waste, or any constituent of any such substance or waste;

(ii)           “Environmental Law” means all Laws derived from or relating to all non-U.S., federal, state and local laws or regulations relating to or addressing the environment, health or safety; and

(iii)          “Release” means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration of a Contaminant into the indoor or outdoor environment or into or out of any Seller Property, including the movement of Contaminants through or in the air, soil, surface water, groundwater or Seller Property.

(iv)          “Seller Property” means any real or personal property, plan, building, facility, structure, underground storage tank, equipment or unit, or other asset owned, leased or operated by Seller.

Section 6.14           TAXES.

(a)           Except as set forth in Section 6.14 of the Seller Disclosure Schedule:  (i) Seller has, in respect of the Business and the Purchased Assets, filed all Tax Returns which are required

**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 be filed and has paid all Taxes which have become due pursuant to such Tax Returns or pursuant to any assessment which has become payable; (ii) all such Tax Returns are complete and accurate and disclose all Taxes required to be paid in respect of the Business and the Purchased Assets; (iii) Seller is not currently the beneficiary of any extension of time within which to file any Tax Return required to be filed in respect of the Business and the Purchased Assets; (iv) there is no action, suit, investigation, audit, claim or assessment pending or proposed or threatened with respect to Taxes required to be paid in respect of the Business and the Purchased Assets, and, to the Knowledge of Seller, no basis exists therefor; (v) Seller has not waived or been requested to waive any statute of limitations with respect to Taxes required to be paid in respect of the Business and the Purchased Assets which waiver is currently in effect; and (vi) all monies required to be withheld by Seller (including from employees of the Business for income Taxes and social security and other payroll Taxes) have been collected or withheld, and either paid to the relevant Government or Regulatory Authorities, set aside in accounts for such purpose, or accrued, reserved against and entered upon the books of the Business.

(b)           No transaction contemplated by this Agreement is subject to withholding under Section 1445 of the Code and no sales Taxes, use Taxes, real estate transfer Taxes or other similar Taxes will be imposed on the transfer of the Purchased Assets or the assumption of the Assumed Liabilities pursuant to this Agreement.

Section 6.15           SUPPLIERS.

Section 6.15 of the Seller Disclosure Schedule sets forth a list of each material supplier of Seller with respect to the Business. Copies of the forms of purchase order for the Product and other supplies and sales contracts for the Product, if any, used by Seller have been previously delivered by Seller to Buyer. Except as set forth in Section 6.15 of the Seller Disclosure Schedule, there exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship of Seller with any supplier or group of suppliers material to the operations of the Business, and there exists no present or future condition or state of facts or circumstances involving suppliers which Seller can now reasonably foresee would have a Material Adverse Effect or prevent the conduct of the Business after the consummation of the transactions contemplated by this Agreement in essentially the same manner in which it has heretofore been conducted.

Section 6.16           INSURANCE.

Seller has provided to Buyer true and complete copies of all policies of insurance maintained by Seller with respect to the Purchased Assets or the Business, or true and complete summaries of the material terms of such insurance policies. All such policies are in full force and effect and Seller has complied in all material respects with the provisions of such policies.

Section 6.17           DISCLOSURE.

None of the representations or warranties of Seller contained herein, none of the information contained in the Seller Disclosure Schedule, and none of the other information 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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documents furnished to Buyer or any of its representatives by Seller or its representatives pursuant to the terms of this Agreement, is false or misleading in any material respect or omits to state a fact herein or therein necessary to make the statements herein or therein not misleading in any material respect. There is no fact which adversely affects or in the future is likely to adversely affect the Purchased Assets or the Business in any material respect which has not been set forth or referred to in this Agreement or the Seller Disclosure Schedule.

ARTICLE VII.     REPRESENTATIONS AND WARRANTIES OF BUYER

As an inducement to Seller to enter into this Agreement and to consummate the transactions contemplated hereby, Buyer represents and warrants to Seller, subject to such exceptions as are specifically disclosed in the disclosure schedule (referencing the specific Section(s) hereof being qualified) supplied by Buyer to Seller and dated as of the date hereof (the “Buyer Disclosure Schedule”), which Buyer Disclosure Schedule shall be deemed to be representations and warranties of Buyer as if made herein, as follows:

Section 7.01           CORPORATE ORGANIZATION.

Buyer is a company duly organized and validly existing under the laws of Switzerland and has all requisite power and authority to own its assets and carry on its business as currently conducted by it. Buyer is duly authorized to conduct its business and is in good standing in each jurisdiction where such qualification is required, except for any jurisdiction where failure to so qualify would not have a material adverse effect on Buyer’s ability to perform its obligations hereunder.

Section 7.02           AUTHORITY OF BUYER.

Buyer has all necessary power and authority and has taken all actions necessary to enter into this Agreement and the Buyer Ancillary Agreements and to carry out the transactions contemplated hereby and thereby. Buyer has taken all action required by Law, its articles of incorporation or otherwise to be taken by it to duly and validly authorize the execution and delivery by Buyer of this Agreement and the Buyer Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby, and no other corporate proceedings on the part of Buyer are necessary to consummate the transactions contemplated hereby or thereby. This Agreement has been duly and validly authorized, executed and delivered by Buyer and, when executed and delivered by Seller, will constitute a legal, valid and binding obligation of Buyer enforceable against it in accordance with its terms, and each of the Buyer Ancillary Agreements has been duly authorized by Buyer and upon execution and delivery by Seller will constitute a legal, valid and binding obligation of Buyer enforceable against it in accordance with its terms, in each case except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally; and (b) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies.

**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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Section 7.03           NON-CONTRAVENTION.

The execution and delivery by Buyer of this Agreement and the Buyer Ancillary Agreements do not, and the performance by it of its obligations under this Agreement and the Buyer Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby will not (with or without notice or lapse of time or both):

(a)           contravene, conflict with or result in a violation or breach of, or the creation of any Encumbrance upon any of the Assets and Properties of Buyer under, any of the terms, conditions or provisions of the articles of incorporation or other organizational documents of Buyer;

(b)           assuming the receipt or making of all Buyer Governmental Consents, contravene, conflict with or result in a violation or breach of any term or provision of, or the creation of any Encumbrance (other than any Permitted Encumbrance) upon any of the Assets and Properties of Buyer under, (i) any Law applicable to Buyer or (ii) any Order to which Buyer is subject or by which Buyer is bound; or

(c)           conflict with or result in a breach or default (or an event which, with notice or lapse of time or both, would constitute a breach or default) under, or the creation of any Encumbrance (other than any Permitted Encumbrance) upon any of the Assets and Properties of Buyer under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, any material Contract to which Buyer is a party, any of its Assets and Properties is subject or Buyer is bound.

Section 7.04           CONSENTS AND APPROVALS.

Section 7.04 of the Buyer Disclosure Schedule sets forth a complete and accurate list of all consents, waivers, approvals, Orders or authorizations of, or registrations, declarations or filings with, any Governmental or Regulatory Authority that are required to be obtained or made by Buyer in connection with the execution and delivery by Buyer of this Agreement and the Buyer Ancillary Agreements or the performance of its obligations hereunder and thereunder (collectively, the “Buyer Governmental Consents”).

Section 7.05           LITIGATION.

There are no Actions or Proceedings pending to which Buyer is a party or, to the knowledge of Buyer, threatened or anticipated, against, relating to, affecting or arising in connection with (a) this Agreement or (b) the transactions contemplated by this Agreement. Buyer is not subject to any Order that could reasonably be expected to materially impair or delay the ability of Buyer to perform its obligations hereunder.

**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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Section 7.06           BROKERS.

Buyer has not retained any broker, finder, investment banker or financial advisor in connection with the transactions contemplated hereunder. Seller has no, and will have no, obligation to pay any brokers, finders, investment bankers, financial advisors or similar fees in connection with this Agreement or the transactions contemplated hereby by reason of any action taken by or on behalf of Buyer.

Section 7.07           FINANCIAL CAPABILITY.

Buyer has, or will have on the Closing Date, sufficient funds available to pay the Base Purchase Price on the Closing Date.

Section 7.08           NON-COMPETITION.

Neither Buyer nor Parent currently manufactures, distributes, markets or sells any product that competes directly with the Product in the Territory in any material respects. Neither Buyer nor Parent is a party to any non-competition or similar agreement that restricts in any material respect Buyer’s or Parent’s right or ability to sell or market the Product in the Territory as contemplated hereby.

ARTICLE VIII.     COVENANTS OF THE PARTIES

Section 8.01           MAINTENANCE OF BUSINESS PRIOR TO CLOSING.

(a)           From the date of this Agreement to the Closing Date, Seller shall operate and carry on the Business only in the Ordinary Course of Business and substantially as presently operated. Consistent with the foregoing, Seller shall keep and maintain the Purchased Assets in good operating condition and repair and shall use its best efforts consistent with good business practice to maintain its business organization intact and to preserve the goodwill of the suppliers, contractors, licensors, employees, customers, distributors and others having business relations with Seller.

(b)           Notwithstanding Section 8.01(a), except as expressly contemplated by this Agreement or except with the express written approval of Buyer, Seller shall not:

(i)            make any change in the Business or the operations of Seller with respect to the Business;

(ii)           enter into any Contract which would have been required to be set forth in Section 6.05(a) of the Seller Disclosure Schedule if in effect on the date hereof or otherwise relating to the Business or the Purchased Assets or amend any Product Contract;

(iii)          enter into or amend any Contract (A) giving any third party any right, title or interest in, to or under the Business, the Product, the Regulatory Approvals or the Purchased

**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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Assets or (B) creating any Encumbrance on any of the foregoing other than Permitted Encumbrances;

(iv)          sell, lease (as lessor), transfer or otherwise dispose of (including any transfers by Seller to any of its Affiliates), or mortgage or pledge, or impose or suffer to be imposed any Encumbrance on, any of the Purchased Assets, including any Product in Inventory; or

(v)           allow the levels of raw materials, supplies, work-in-process, finished goods or other materials included in the Inventory to vary in any material respect from the levels maintained in the Business on the date hereof.

Section 8.02           COMMERCIALLY REASONABLE EFFORTS.

(a)           Seller will use commercially reasonable efforts to obtain, before the Closing Date, the Required Seller Third Party Consents, in form and substance reasonably satisfactory to Buyer; provided that neither Seller nor Buyer shall have any obligation to offer or pay any consideration in order to obtain any such consents or approvals; and provided further, that Seller shall not make any agreement or understanding affecting the Purchased Assets or the Business as a condition for obtaining any such Required Seller Third Party Consents except with the prior written consent of Buyer. During the period prior to the Closing Date, Buyer shall act diligently and reasonably to cooperate with Seller in attempting to obtain the Required Seller Third Party Consents.

(b)           During the period prior to the Closing Date, Seller and Buyer shall use their respective commercially reasonable efforts, and shall cooperate with each other, in attempting to obtain any consents and approvals of any Governmental or Regulatory Authority required to be obtained by them in order to assign or transfer any Permits to Buyer, to permit the consummation of the transactions contemplated by this Agreement, or to otherwise satisfy the conditions set forth in Section 10.04; provided that Seller shall not make any agreement or understanding affecting the Purchased Assets or the Business as a condition for obtaining any such consents or approvals except with the prior written consent of Buyer.

Section 8.03           PRESERVE ACCURACY OF REPRESENTATIONS AND WARRANTIES; NOTIFICATION OF CERTAIN MATTERS.

(a)           From the date of this Agreement to the Closing Date, each party hereto shall refrain from taking any action which would render any representation or warranty contained in Article VI or VII inaccurate as of the Closing Date. Each party shall promptly notify the other of any action, suit or proceeding that shall be instituted or threatened against such party to restrain, prohibit or otherwise challenge the legality of any transaction contemplated by this Agreement.

(b)           From the date of this Agreement to the Closing Date, Seller will notify Buyer of (i) any Material Adverse Effect, (ii) any lawsuit, claim, proceeding or investigation that is threatened, brought, asserted or commenced against Seller which would have been listed 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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Section 6.07 of the Seller Disclosure Schedule if such lawsuit, claim, proceeding or investigation had arisen prior to the date hereof, (iii) any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement and (iv) any material default under any Product Contract or event which, with notice or lapse of time or both, would become such a default on or prior to the Closing Date.

Section 8.04           ACCESS.

(a)           From the date hereof until the Closing, Seller shall permit Buyer and its representatives to have access, during regular business hours and upon reasonable advance notice, to the assets of the Business that will be Purchased Assets and to the offices, properties, employees and business and financial records of Seller as Buyer shall reasonably require in order to enable Buyer or its representatives to verify the accuracy of the representations and warranties contained in this Agreement, to verify that the covenants of Seller contained in this Agreement have been complied with and to determine whether the conditions set forth in Article X have been satisfied. Buyer acknowledges and agrees that all such access, and requests therefor, shall be coordinated through Davis Caskey, Vice President of Seller. Seller shall instruct its employees, counsel and financial advisors to cooperate with Buyer in its investigation of the Business; it being understood that Buyer shall reimburse Seller promptly for reasonable and necessary out of pocket expenses incurred by Seller in complying with any such request by or on behalf of Buyer (other than the fees and costs of Seller’s attorneys). No investigation made by Buyer or its representatives hereunder shall affect the representations and warranties of Seller hereunder.

(b)           (i)  Buyer shall, for a period seven years after the Closing, keep and maintain all Books and Records and other documents obtained from Seller on the Closing Date and make personnel of Buyer or its Affiliates available to Seller or its representatives to the extent reasonably be required by Seller in connection with matters relating to or affected by the operations of the Business prior to the Closing Date, it being understood that Seller shall reimburse Buyer promptly for its reasonable and necessary out of pocket expenses incurred in complying with any such request by or on behalf of Seller (other than the fees and costs of Buyer’s attorneys). For a period of seven years after the Closing Date, upon the request of Seller, Buyer shall grant to Seller and its representatives reasonable access, during regular business hours and upon reasonable advance notice, to inspect and (at Seller’s expense) copy the Books and Records and other documents obtained from Seller in Buyer’s possession, to the extent relating to or affected by the operations of the Business prior to the Closing Date.

(ii)           Seller shall, for a period of seven years after the Closing, keep and maintain all Books and Records and other documents retained by Seller on the Closing Date and make personnel of Seller or its Affiliates available to Buyer or its representatives to the extent such access is reasonably required by Buyer, it being understood that Buyer shall reimburse Seller promptly for its reasonable and necessary out of pocket expenses incurred in complying with any such request by or on behalf of Buyer (other than the fees and costs of Buyer’s attorneys). For a period of seven years after the Closing Date, upon the request of Buyer, Seller

**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 grant to Buyer and its representatives reasonable access, during regular business hours and upon reasonable advance notice, to inspect and (at Buyer’s expense) copy the Books and Records and other documents retained by Seller with respect to the Business.

Section 8.05           PUBLIC ANNOUNCEMENTS.

Neither Buyer nor Seller shall, without the approval of the other, make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that any such party shall be so obligated by law or the rules of any stock exchange, in which case the other party shall be advised and the parties shall use their best efforts to cause a mutually agreeable release or announcement to be issued; provided, that the foregoing shall not preclude communications or disclosures necessary to implement the provisions of this Agreement or to comply with disclosure obligations under United States generally accepted accounting principles or the rules and regulations of the Securities and Exchange Commission.

Section 8.06           BULK SALES.

Buyer and Seller waive compliance with all bulk sales Laws applicable to the transactions contemplated by this Agreement.

Section 8.07           SELLER’S EMPLOYEES

At the Closing, Buyer shall deliver to Seller a list of open sales territories for which Parent is currently interviewing sales representatives (the “Open Territories List”). Buyer hereby agrees to (or cause Parent to) interview in good faith, within three months following Closing, those members of Seller’s sales force as identified by Seller with responsibility for sales in the territories identified in the Open Territories List. Each of the parties hereto agrees that Buyer and Parent shall not have any obligation to hire any members of Seller’s sales force and may hire or decline to hire any such individual in its sole discretion. [**]. Notwithstanding the foregoing, Buyer shall not have any Liability with respect to or responsibility for any such severance program implemented by Seller or any Liability or obligation of Seller with respect to any of its current or former employees.

Section 8.08           CORPORATE NAMES.

(a)           Except as set forth in this Section 8.08, following the Closing, Buyer shall not have any rights by virtue of this Agreement or any of the transactions or agreements contemplated hereby to any names or Trademarks relating to Seller other than those included in the Intellectual Property that is part of the Purchased Assets (the “Corporate Names”).

(b)           Buyer may use in connection with its operation of the Business (i) for up to twelve (12) months following the Closing, packaging included in Inventory that bears any of the Corporate Names; and (ii) for up to six (6) months following the Closing, Marketing Materials that were transferred to Buyer as Purchased Assets that bear any of the Corporate Names.

**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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Section 8.09           RECEIPT OF CERTAIN AMOUNTS.

From and after the Closing Date, Seller shall remit promptly to Buyer any payments or other sums received by Seller after the Closing Date that relate to any sales or shipments made by Buyer after the Closing Date and Seller shall use reasonable efforts to transmit to Buyer all written inquiries or orders, and to refer to Buyer all oral inquiries or orders, relating to the Business (to the extent relating to operations thereof following the Closing) that are received by Seller following the Closing Date.

Section 8.10           REGULATORY MATTERS.

From and after the transfer by Seller to Buyer of each Regulatory Approval pursuant to the terms hereof, Seller promptly shall notify Buyer if Seller receives a complaint or a report of an adverse drug experience in respect of a Product sold pursuant to such Regulatory Approval.  In addition, Seller shall cooperate with Buyer’s reasonable requests and use commercially reasonable efforts to assist Buyer in connection with the investigation of and response to any complaint or adverse drug experience related to the Product sold by Seller.

Section 8.11           FURTHER ASSURANCES.

On and after the Closing, Seller shall from time to time, at the request of Buyer, execute and deliver, or cause to be executed and delivered, to Buyer such other instruments of conveyance and transfer and take such other actions as Buyer may reasonably request or as may be otherwise necessary to more effectively consummate the transactions contemplated hereby and to vest in Buyer good and marketable title to the Purchased Assets (including assistance in the collection or reduction to possession of any of the Purchased Assets), and, in the case of licenses, certificates, approvals, authorizations, agreements, contracts, leases, easements and other commitments included in the Purchased Assets (a) which cannot be transferred or assigned effectively without the consent of third parties which consent has not been obtained prior to the Closing, to cooperate with Buyer at its request in endeavoring to obtain such consent promptly, and if any such consent is unobtainable, to use its commercially reasonable efforts to secure to Buyer the benefits thereof in some other manner, or (b) which are otherwise not transferable or assignable, to use its commercially reasonable efforts jointly with Buyer to secure to Buyer the benefits thereof in some other manner (including the exercise of the rights of Seller thereunder); provided, however, that nothing herein shall relieve Seller of its obligations under Section 8.02.  Notwithstanding anything in this Agreement to the contrary, this Agreement shall not constitute an agreement to assign any license, certificate, approval, authorization, agreement, contract, lease, easement or other commitment included in the Purchased Assets if an attempted assignment thereof without the consent of a third party thereto would constitute a breach thereof

Section 8.12           REGULATORY TRANSITION BY SELLER.

During a transitional period of up to 180 days following the Closing (or such sooner period as Buyer completes arrangements for transfer of such regulatory activities), Seller shall, upon the reasonable request of Buyer, assist Buyer in the maintenance of the Regulatory

**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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Approvals of the Product and carry out the other regulatory compliance activities required to be carried out under the Regulatory Approvals (to the extent that such activities have not then been taken over by Buyer) in a manner and intensity of effort consistent with the regulatory procedures of Seller during the calendar year 2006 and 2007 to date, and in accordance with all legal requirements. Buyer shall make all filings with, and take all other actions required by, applicable Governmental or Regulatory Authorities that are necessary to permit Seller to perform its obligations under this Section 8.12.

Section 8.13           TAXES.

(a)           From and after the Closing, Seller shall be liable for and pay, and pursuant to Article XI shall indemnify, reimburse, defend and hold harmless each Buyer Group Member from and against any and all Damages incurred in connection with, arising out of, resulting from or incident to, Taxes applicable to the Business, the Purchased Assets and the Assumed Liabilities, in each case attributable to taxable years or periods ending on or prior to the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period ending on and including the Closing Date.  For purposes of this Section 8.13, any Straddle Period shall be treated on a “closing of the books” basis as two partial periods, one ending at the close of the Closing Date and the other beginning on the day after the Closing Date, except that Taxes (such as property Taxes) imposed on a periodic basis shall be allocated on a daily basis.

(b)           From and after the Closing, Seller shall provide reimbursement for any Tax paid by Buyer all or a portion of which is the responsibility of Seller in accordance with the terms of this Section 8.13 without regard to the indemnification limitations set forth in Section 11.03.  Not later than 30 days prior to the payment of any such Tax, Buyer shall give notice to Seller of the Tax payable and the portion which is the liability of Seller, although failure to do so will not relieve Seller from its liability hereunder.

(c)           From and after the Closing, each of Seller and Buyer shall (and cause their respective Affiliates to):  (i) assist the other party in preparing any Tax Returns which such other party is responsible for preparing and filing; (ii) cooperate fully in preparing for any audits of, or disputes with any Governmental or Regulatory Authority regarding, any Tax Returns required to be filed in respect of the Business or the Purchased Assets; (iii) make available to the other and to any Governmental or Regulatory Authority as reasonably requested all information, records, and documents relating to Taxes required to be paid in respect of the Business or the Purchased Assets; (iv) provide timely notice to the other in writing of any pending or threatened Tax audits or assessments relating to Taxes required to be paid in respect of the Business or the Purchased Assets for taxable periods for which the other may have a liability under this Section 8.13 or as a matter of law; and (v) furnish the other with copies of all correspondence received from any Governmental or Regulatory Authority in connection with any Tax audit or information request with respect to any such taxable period.

(d)           Notwithstanding anything to the contrary in this Agreement, the obligations of the parties set forth in this Section 8.13 shall be unconditional and absolute and shall remain in effect without limitation as to 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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Section 8.14           COVENANT NOT TO COMPETE OR SOLICIT BUSINESS.

(a)           In furtherance of the sale of the Purchased Assets and the Business to Buyer hereunder by virtue of the transactions contemplated hereby and more effectively to protect the value and goodwill of the Purchased Assets and the Business so sold, Seller covenants and agrees that, for a period ending on the third anniversary of the Closing Date, neither Seller nor any of its Affiliates will:

(i)            directly or indirectly (whether as principal, agent, independent contractor, partner or otherwise) own, manage, operate, control, participate in, perform services for, sell materials to, or otherwise carry on, a business similar to or competitive with the Business as conducted at the Closing Date (including developing, marketing, licensing, selling or distributing any extended release cyclobenzaprine product) anywhere in the Territory (it being understood by the parties hereto that the Business is not limited to any particular region of the Territory and that the Business may be engaged in effectively from any location in the Territory); or

(ii)           induce or attempt to persuade any distributor, agent, supplier or customer of the Business to terminate such distributor, agency or business relationship in order to enter into any such relationship on behalf of any other business organization in competition with the Business;

provided, however, that nothing set forth in this Section 8.14 shall prohibit Seller or its Affiliates from owning not in excess of 5% in the aggregate of any class of capital stock of any corporation if such stock is publicly traded and listed on any national or regional stock exchange.  Seller also covenants and agrees that from and after the Closing Date it will not, nor will it permit any of its Affiliates to, divulge or make use of any trade secrets or other confidential information of the Business other than to disclose such secrets and information to Buyer or its Affiliates.

(b)           If Seller or any Affiliate of Seller violates any of its obligations under this Section 8.14, Buyer may proceed against it in law or in equity for such damages or other relief as a court may deem appropriate.  Seller acknowledges that a violation of this Section 8.14 may cause Buyer irreparable harm which may not be adequately compensated for by money damages.  Seller therefore agrees that in the event of any actual or threatened violation of this Section 8.14, Buyer shall be entitled, in addition to other remedies that it may have, to a temporary restraining order and to preliminary and final injunctive relief against Seller or such Affiliate of Seller to prevent any violations of this Section 8.14, without the necessity of posting a bond.  The prevailing party in any action commenced under this Section 8.14 shall also be entitled to receive reasonable attorneys’ fees and court costs.  It is the intent and understanding of each party hereto that if, in any action before any court or agency legally empowered to enforce this Section 8.14, any term, restriction, covenant or promise in this Section 8.14 is found to be unreasonable and for that reason unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency.

**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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Section 8.15           ACQUISITION PROPOSALS.

Seller will not, and will not authorize or permit any officer, director or employee of Seller or any Affiliate of Seller or authorize any investment banker, attorney, accountant or other representative retained by Seller or any Affiliate of Seller to, directly or indirectly, solicit or encourage, or furnish information with respect to any portion of the Purchased Assets or the Business or engage in any discussions with any Person in connection with, any proposal for the acquisition of any portion of the Purchased Assets or the Business, other than as contemplated by this Agreement.  Seller will promptly cease or cause to be terminated any existing activities or discussions with any Person (other than Buyer) with respect to any of the foregoing and will promptly request the return of any confidential information provided to any Person in connection with a prospective acquisition of the Purchased Assets or the Business.

ARTICLE IX.    CONDITIONS TO THE OBLIGATIONS OF SELLER

The obligation of Seller to effect the transactions contemplated hereby is subject to the satisfaction (or waiver by Seller), at or before the Closing, of each of the following conditions:

Section 9.01           REPRESENTATIONS, WARRANTIES AND COVENANTS.

All representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as if made on and as of the Closing Date (other than any representations and warranties which contain any materiality qualification, which representations and warranties, to the extent so qualified, shall be true and correct in all respects), except for such representations and warranties as are made as of another date, which shall have been true and correct in all material respects or true and correct in all respects, as applicable, as of such specified date, and Buyer shall have performed all agreements and covenants required by this Agreement to be performed by it prior to or on the Closing Date; and there shall have been delivered to Seller a certificate to such effect, dated the Closing Date, executed by a duly authorized officer of Buyer.

Section 9.02           NO ACTIONS OR PROCEEDINGS.

No Actions or Proceedings that restrain, prohibit or question the validity or legality of the transactions contemplated hereby shall have been instituted or threatened and not settled or otherwise terminated.

Section 9.03           CONSENTS.

All Seller Governmental Consents and Buyer Governmental Consents shall have been obtained or made, as the case may be.

ARTICLE X.    CONDITIONS TO THE OBLIGATIONS OF BUYER

The obligation of Buyer to effect the transactions contemplated hereby is subject to the satisfaction (or waiver by Buyer), at or before the Closing, of each of the following conditions:

**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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Section 10.01         REPRESENTATIONS, WARRANTIES AND COVENANTS.

All representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as if made on and as of the Closing Date (other than any representations and warranties which contain any materiality or “Material Adverse Effect” qualification, which representations and warranties, to the extent so qualified, shall be true and correct in all respects), except for such representations and warranties as are made as of another date, which shall have been true and correct in all material respects or true and correct in all respects, as applicable, as of such specified date, and Seller shall have performed all agreements and covenants required by this Agreement to be performed by it prior to or on the Closing Date; and there shall have been delivered to Buyer a certificate to such effect, dated the Closing Date, executed by a duly authorized officer of Seller.

Section 10.02         NO MATERIAL ADVERSE EFFECT.

Between the date hereof and the Closing Date, there shall have been (a) no Material Adverse Effect and (b) no material adverse federal or state legislative or regulatory change affecting the Business or the Product, and there shall have been delivered to Buyer a certificate to such effect, dated the Closing Date, executed by a duly authorized officer of Seller.

Section 10.03         NO ACTIONS OR PROCEEDINGS.

No Actions or Proceedings that restrain, prohibit or question the validity or legality of the transactions contemplated hereby shall have been instituted or threatened and not settled or otherwise terminated.

Section 10.04         CONSENTS.

All Seller Governmental Consents, Required Seller Third Party Consents and Buyer Governmental Consents shall have been obtained or made, as the case may be.

ARTICLE XI.    INDEMNIFICATION

Section 11.01         SURVIVAL OF REPRESENTATIONS, WARRANTIES, ETC.

The representations and warranties of Seller and Buyer contained in this Agreement, and all claims with respect thereto, shall survive the Closing and remain in full force and effect until the Expiration Date; provided that the representations and warranties contained in Sections 6.01, 6.02, 6.03, 6.11(a), 6.12, 7.01, 7.02, 7.03 and 7.06, and all claims with respect thereto, shall survive the Closing indefinitely.  Except with respect to Section 8.14, which shall terminate one (1) year after the termination of the non-competition period set forth therein, the covenants and agreements of Seller and Buyer contained in this Agreement, and all claims with respect thereto, shall survive the Closing indefinitely.  Notwithstanding the foregoing, if notice of any claim for indemnification pursuant to Section 11.02(a)(ii) or 11.02(b)(ii) shall have been given prior to the time the representation or warranty with respect to such claim would otherwise terminate 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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accordance with this Section 11.01, then such indemnification claim shall survive until such time as such claim is finally resolved and the Indemnifying Party (as defined herein) shall have reimbursed the Indemnified Party for all Damages in accordance with this Article XI.

Section 11.02         INDEMNIFICATION.

(a)           By Seller. Subject to Section 11.03, from and after the Closing, Seller shall indemnify, reimburse, defend and hold harmless Buyer, its Affiliates, and their respective officers, directors, employees, agents, successors and assigns (“Buyer Group Members”) from and against any and all costs, losses, Liabilities, damages, lawsuits, deficiencies, fines, penalties, judgments, claims and expenses (including reasonable expenses of investigation and reasonable fees and disbursements of attorneys) (collectively, the “Damages”), incurred in connection with, arising out of, resulting from or incident to (i) any breach of, or failure to comply with, any covenant or agreement of Seller herein; (ii) the inaccuracy or breach of any representation or warranty made by Seller in this Agreement or in any Seller Ancillary Agreement; (iii) the Excluded Liabilities; (iv) any failure by Seller to obtain any Required Seller Third Party Consent; or (v) any failure by Seller to comply with any applicable bulk sales law, except that this clause (v) shall not affect the obligation of Buyer to pay and discharge the Assumed Liabilities.

(b)           By Buyer. Subject to Section 11.03, from and after the Closing, Buyer shall indemnify, defend and hold harmless Seller, its Affiliates and their respective officers, directors, employees, agents, successors and assigns (“Seller Group Members”) from and against any and all Damages incurred in connection with, arising out of, resulting from or incident to (i) any breach of, or failure to comply with, any covenant or agreement of Buyer herein (other than the covenants and agreements of Buyer set forth in Section 4.02, as to which the provisions of such Section shall apply exclusively with respect to any claims relating thereto); (ii) the inaccuracy or breach of any representation or warranty made by Buyer in this Agreement or in any Buyer Ancillary Agreement; (iii) the failure of Buyer to assume, pay, perform and discharge any Assumed Liabilities; or (iv) any Third Party Claim relating to Buyer’s operation of the Business, use of the Purchased Assets or sale of the Product, in each case following Closing (unless such Third Party Claim relates to or arises from matters with respect to which Buyer Group Members are entitled to indemnification pursuant to Section 11.02(a) (including any breach by Seller of any representation, warranty, covenant or agreement set forth herein).

(c)           Procedures.  (i)  The Buyer Group Member or Seller Group Member seeking indemnification hereunder (the “Indemnified Party”) shall give the party obligated to provide indemnification hereunder (the “Indemnifying Party”) written notice (an “Indemnification Claim Notice”) of any Damages or discovery of fact upon which such Indemnified Party intends to base a request for indemnification under Section 11.02(a) or Section11.02(b), as applicable.  The failure to give such notice shall not relieve the Indemnifying Party of its obligations hereunder except to the extent it shall have been prejudiced by such failure.  Each Indemnification Claim Notice must contain a reasonable description of the claim and the nature and amount of such Damages (to the extent that the nature and amount of such Damages are known at such 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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The Indemnified Party shall furnish promptly to the Indemnifying Party copies of all papers and official documents received in respect of any Damages.

(ii)           After the giving of any Indemnification Claim Notice pursuant hereto, the amount of indemnification to which an Indemnified Party shall be entitled under this Article XI shall be determined:  (A) by the written agreement between the Indemnified Party and the Indemnifying Party; (B) by a final judgment or decree of any court of competent jurisdiction; or (C) by any other means to which the Indemnified Party and the Indemnifying Party shall agree.  The judgment or decree of a court shall be deemed final when the time for appeal, if any, shall have expired and no appeal shall have been taken or when all appeals taken shall have been finally determined.  The Indemnified Party shall have the burden of proof in establishing the amount of Damages suffered by it.

(d)           Third Party Claims.  (i)  Subject to Section 11.02(d)(ii), the Indemnified Party shall have the right to conduct and control, through counsel of its choosing, the defense, compromise or settlement of any claim of any third party against such Indemnified Party that is subject to indemnification as provided for in Section 11.02(a) or Section 11.02(b) (a “Third Party Claim”), and in any such case the Indemnifying Party shall cooperate in connection therewith and shall furnish such records, information and testimony and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested by the Indemnified Party in connection therewith; provided, that:

(A)          the Indemnifying Party may participate, through counsel chosen by it and at its own expense, in the defense of any such Third Party Claim as to which the Indemnified Party has so elected to conduct and control the defense thereof; and

(B)           the Indemnified Party shall not, without the written consent of the Indemnifying Party (which written consent shall not be unreasonably withheld), pay, compromise or settle any such Third Party Claim, except that no such consent shall be required if, following a written request from the Indemnified Party, the Indemnifying Party shall fail, within 14 days after the making of such request, to acknowledge and agree in writing that, if such Third Party Claim shall be adversely determined, such Indemnifying Party has an obligation to provide indemnification hereunder to such Indemnified Party.

Notwithstanding the foregoing, the Indemnified Party shall have the right to pay, settle or compromise any such Third Party Claim without such consent, provided, that in such event the Indemnified Party shall waive any right to indemnity therefor hereunder unless such consent is unreasonably withheld.

(ii)           If any Third Party Claim against any Indemnified Party is solely for money damages or, where Seller is the Indemnifying Party, will have no continuing effect in any material respect on the Business or the Purchased Assets, then the Indemnifying Party shall have the right to conduct and control, through counsel of its choosing, the defense, compromise 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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settlement of any such Third Party Claim as to which indemnification will be sought by an Indemnified Party from an Indemnifying Party hereunder if the Indemnifying Party has acknowledged and agreed in writing that, if the same is adversely determined, the Indemnifying Party has an obligation to provide indemnification to the Indemnified Party in respect thereof, and in any such case the Indemnified Party shall cooperate in connection therewith and shall furnish such records, information and testimony and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested by the Indemnifying Party in connection therewith; provided, that the Indemnified Party may participate, through counsel chosen by it and at its own expense, in the defense of any such Third Party Claim as to which the Indemnifying Party has so elected to conduct and control the defense thereof.  Notwithstanding the foregoing, the Indemnified Party shall have the right to pay, settle or compromise any such Third Party Claim, provided, that in such event the Indemnified Party shall waive any right to indemnity therefor hereunder unless the Indemnified Party shall have sought the consent of the Indemnifying Party to such payment, settlement or compromise and such consent was unreasonably withheld, in which event no claim for indemnity therefor hereunder shall be waived.

Section 11.03         LIMITATIONS.

(a)           (i)  Notwithstanding Section 11.02(a), Seller will not be required to indemnify Buyer pursuant to clause (ii) of Section 11.02(a) for Damages that exceed a maximum aggregate liability of $17,500,000; provided, that such limitation shall not apply to the Damages in connection with any indemnification claims arising out of a breach of Seller’s representations and warranties in Sections 6.01, 6.02, 6.03, 6.11(a) and 6.12.

(ii)           Notwithstanding Section 11.02(b), Buyer will not be required to indemnify Seller pursuant to clause (ii) of Section 11.02(b) for Damages that exceed a maximum aggregate liability of $17,500,000; provided, that such limitation shall not apply to the Damages in connection with any indemnification claims arising out of a breach of Buyer’s representations and warranties in Sections 7.01, 7.02, 7.03 and 7.06.

(b)           The amount of any Damages under Section 11.02(a) or Section 11.02(b), as the case may be, shall be reduced by the net amount of any insurance proceeds paid to the Indemnified Party relating to such claim, after upward adjustment for any insurance proceeds repayment obligations owed as a result of receipt of such indemnification and any increase in premiums resulting from the payment of such insurance proceeds.

(c)           THE INDEMNIFICATION OBLIGATIONS OF THE PARTIES HERETO SHALL NOT EXTEND TO SPECIAL, EXEMPLARY, CONSEQUENTIAL OR PUNITIVE DAMAGES, EXCEPT TO THE EXTENT SUCH DAMAGES RESULT FROM A THIRD PARTY CLAIM; PROVIDED, HOWEVER, THIS EXCLUSION IS NOT INTENDED TO, NOR SHALL, EXCLUDE ACTUAL OR COMPENSATORY DAMAGES OF THE AFFECTED PARTY, INCLUDING SUCH DAMAGES RESULTING FROM A THIRD PARTY CLAIM.

**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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Section 11.04         REMEDIES EXCLUSIVE.

Except with respect to claims based on fraud, claims for equitable relief, remedies that cannot be waived as a matter of law and injunctive and provisional relief (including specific performance), from and after the Closing, the remedies set forth in this Article XI shall be exclusive and in lieu of any other remedies that may be available to the parties pursuant to any statutory or common law with respect to any Damages of any kind or nature incurred directly or indirectly resulting from or arising out of any breach of this Agreement (including alleged breaches or inaccuracies of any representation, warranty or covenant or for any alleged misrepresentation) or the transactions contemplated hereby.  Nothing herein is intended to, nor shall be construed to, affect, have an interpretative effect on, modify or terminate any other contract between either party hereto or its Affiliates or any rights or obligations under any such contracts.

Section 11.05         SET-OFF.

Buyer shall have the right, exercisable by delivery of written notice to Seller, (a) to set off against, and reduce the amount otherwise payable in respect of, any Net Sales Milestone Payment otherwise payable to Seller any Damages to which a Buyer Group Member is entitled to be reimbursed as determined pursuant to Section 11.02(c)(ii) and (b) to deposit into an escrow account with an escrow agent mutually agreed upon by Buyer and Seller all or such portion of any Net Sales Milestone Payment otherwise payable to Seller in an amount equal to the amount of any Damages for which any Buyer Group Member has delivered an Indemnification Claim Notice pursuant to Section 11.02(c)(i) and with respect to which the amount of Damages that the Buyer Group Member is entitled to be reimbursed has not yet been determined pursuant to Section 11.02(c)(ii), which escrowed amount shall be disbursed to the Buyer Group Member and/or Seller, as appropriate, once the amount of Damages that the Buyer Group Member is entitled to be reimbursed has been determined pursuant to Section 11.02(c)(ii).  If any Damages for which any Buyer Group Member is entitled to be indemnified pursuant to this Article XI are not satisfied by set-off against the Net Sales Milestone Payments, such indemnification payment shall be made by Seller in cash.

Section 11.06         ADJUSTMENT TO PURCHASE PRICE.

Buyer and Seller each agrees to report each indemnification payment hereunder as an adjustment to the purchase price being paid for the Purchased Assets for federal income Tax purposes unless the Indemnified Party determines in good faith that such reporting position is incorrect (it being understood that if any reporting position is later disallowed in any administrative or court proceedings, the Indemnifying Party shall indemnify the Indemnified Party for the effects of such disallowance, and it being further understood that the obligations under this parenthetical clause shall remain in effect without limitation as to 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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Section 11.07         TAX MATTERS.

Notwithstanding anything to the contrary in this Agreement, if there shall be any conflicts between the provisions of this Article XI and Section 8.13, the provisions of Section 8.13 shall govern all matters relating to Taxes.

ARTICLE XII.    TERMINATION AND ABANDONMENT

Section 12.01         METHODS OF TERMINATION.

Anything contained in this Agreement to the contrary notwithstanding, this Agreement may be terminated and the transactions contemplated herein may be terminated and/or abandoned at any time prior to the Closing:

(a)           by mutual written agreement of Seller and Buyer;

(b)           by either Seller or Buyer if the Closing shall not have occurred by August 31, 2007; provided, however, that the right to terminate this Agreement under this Section 12.01(b) shall not be available to any party if such party’s action or failure to act shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date and such action or failure to act constitutes a breach of this Agreement;

(c)           by either Seller or Buyer, if a Governmental or Regulatory Authority shall have enacted, issued, promulgated, enforced or entered any Law or Order which is then in effect and has the effect of making the transactions contemplated hereby illegal or otherwise prohibiting consummation of the transactions contemplated hereby, which Law or Order is final and non-appealable; or

(d)           by either Seller or Buyer in the event of the material breach by the other party of any of the other party’s agreements, representations or warranties contained herein that remains uncured for a period of 15 days after written notice and demand for cure thereof by the non-breaching party, unless such breach is not capable of cure in which event the non-breaching party may terminate immediately.

Section 12.02         PROCEDURE UPON TERMINATION.

In the event of termination and abandonment under Section 12.01 hereof, written notice thereof shall forthwith be given to the other party and the transactions contemplated by this Agreement shall be terminated and abandoned, without further action by the parties hereto.  If the transactions contemplated by this Agreement are terminated and/or abandoned as provided herein:

(a)           All confidential information received by any party hereto with respect to the business of any other party or its Affiliates shall be treated in accordance with Section 13.01; 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.

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(b)           No party hereto and none of their respective directors, officers, stockholders, Affiliates or controlling Persons shall have any further liability or obligation to any other party to this Agreement except as stated in subparagraphs (a) and (b) of this Section 12.02, except that (i) nothing in this Section 12.02 shall prejudice any rights, claims, or causes of action that may have accrued hereunder or with respect hereto prior to the date of such termination, (ii) nothing herein shall relieve any party from liability for its willful breach of this Agreement and (ii) the provisions of Article XIII shall survive any termination of this Agreement.

ARTICLE XIII.    MISCELLANEOUS

Section 13.01         CONFIDENTIALITY.

Each party agrees that it will treat in confidence all documents, materials and other information which it shall have obtained regarding the other party during the course of the negotiations leading to the consummation of the transactions contemplated hereby (whether obtained before or after the date of this Agreement), the investigation provided for herein and the preparation of this Agreement and other related documents, and, if the transactions contemplated hereby are not consummated, each party will return to the other party or destroy all copies of nonpublic documents and materials which have been furnished in connection therewith.  Such documents, materials and information shall not be communicated to any third party (other than, in the case of Buyer, to its counsel, accountants or financial advisors, and in the case of Seller, to its counsel or accountants).  No other party shall use any confidential information in any manner whatsoever except solely for the purpose of evaluating the proposed purchase and sale of the Purchased Assets; provided, however, that after the Closing Buyer may use or disclose any confidential information included in the Purchased Assets or otherwise reasonably related to the Business or the Purchased Assets.  The obligation of each party to treat such documents, materials and other information in confidence shall not apply to any information which (i) is or becomes available to such party from a source other than the other party, (ii) is or becomes available to the public other than as a result of disclosure by such party or its agents, (iii) is required to be disclosed under applicable law or judicial process, but only to the extent it must be disclosed, or (iv) such party reasonably deems necessary to disclose to obtain any of the consents or approvals contemplated hereby.

Section 13.02         NOTICES.

All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally against written receipt or by facsimile transmission with answer back confirmation or mailed (postage prepaid by certified or registered mail, return receipt requested) or delivered by nationally recognized overnight courier that maintains records of delivery to the parties at the following addresses or facsimile numbers:

If to Buyer to:

Anesta AG
Baarerstrasse 23

**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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CH – 6300 Zug
Switzerland
Telephone:  ++41-41-729 80 60
Facsimile:  ++41-41-729 80 66

With copies to:

Cephalon, Inc.
41 Moores Road
P.O. Box 4011
Frazer, Pennsylvania 19355
Attention:  General Counsel
Telephone:  (610) 344-0200
Facsimile:  (610) 344-0065

and

Sidley Austin LLP
One South Dearborn Street
Chicago, Illinois 60603
Attention: Pran Jha
Telephone:  (312) 853-7000
Facsimile:  (312) 853-7036

If to Seller to:

E. Claiborne Robins Company, Inc.
3969 Deep Rock Road
P.O. Box 71600
Richmond, Virginia 23233
Attn:  E. Claiborne Robins, Jr.
Telephone:  (804) 527-1950
Facsimile:  (804) 527-1959

With copies to:

Cantor Arkema, P.C.
1111 E. Main Street
P.O. Box 561
Richmond, Virginia 23219
Attn:  Grant S. Grayson
Telephone:  (804) 644-1400
Facsimile:  (804) 225-8706

**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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All such notices, requests and other communications will (a) if delivered personally to the address as provided in this Section, be deemed given upon receipt, (b) if delivered by facsimile to the facsimile number as provided in this Section, be deemed given upon receipt by the sender of the answer back confirmation, (c) if delivered by mail in the manner described above to the address as provided in this Section, be deemed given three (3) Business Days after it is sent and (d) if delivered by overnight courier to the address provided in this Section, be deemed given one (1) Business Day after it is sent upon receipt (in each case regardless of whether such notice, request or other communication is received by any other Person to whom a copy of such notice, request or other communication is to be delivered pursuant to this Section). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other parties hereto in accordance with the terms of this Section.

Section 13.03         ENTIRE AGREEMENT.

This Agreement (and all Exhibits and Schedules attached hereto and all other documents delivered in connection herewith) supersedes all prior discussions and agreements among the parties with respect to the subject matter hereof and contains the sole and entire agreement among the parties hereto with respect to the subject matter hereof.

Section 13.04         WAIVER.

Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by any party hereto of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. All remedies, either under this Agreement or by law or otherwise afforded, will be cumulative and not alternative.

Section 13.05         AMENDMENT.

This Agreement may be amended, supplemented or modified only by a written instrument duly executed by each party hereto.

Section 13.06         THIRD PARTY BENEFICIARIES.

The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns and it is not the intention of the parties to confer third-party beneficiary rights upon any other Person.

Section 13.07         ASSIGNMENT; BINDING EFFECT.

Prior to the Closing, neither this Agreement nor any right, interest or obligation hereunder may be assigned by either party hereto without the prior written consent of the other

**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.

48

party hereto, and any attempt to do so will be void, except that the rights of Buyer hereunder may be assigned, in whole or in part, prior to the Closing, without the consent of Seller, to Parent or to any corporation or limited liability company all of the outstanding capital stock or membership interests of which are owned or controlled by Buyer, provided that Buyer shall not be released from any of its obligations hereunder by reason of such assignment.  Following the Closing, either party may assign any of its rights hereunder, but no such assignment shall relieve it of its obligations hereunder.  This Agreement is binding upon, inures to the benefit of and is enforceable by the parties hereto and their respective successors and permitted assigns.

Section 13.08         HEADINGS.

The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof.

Section 13.09         SEVERABILITY.

Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such invalid, illegal or unenforceable provision or provisions or any other provisions hereof, unless such a construction would be unreasonable.

Section 13.10         GOVERNING LAW.

THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED AND PERFORMED IN SUCH STATE, WITHOUT GIVING EFFECT TO CONFLICTS OF LAWS PRINCIPLES.

Section 13.11         VENUE.

Each party hereby irrevocably submits to the jurisdiction of, and agrees that any action arising out of this Agreement shall be brought in, (i) the United States District Court for the Southern District of New York or, if such federal jurisdiction is unavailable, the state courts in the Borough of Manhattan, City of New York, (ii) the United States District Court for the Eastern District of Pennsylvania or, if such federal jurisdiction is unavailable, the state courts in the County of Chester, Pennsylvania, or (iii) the United States District Court for the Eastern District of Virginia or, if such federal jurisdiction is unavailable, the state courts in the City of Richmond, Virginia, and each party hereby irrevocably waives any objection which such party may now or hereafter have to the laying of improper venue or forum non conveniens in any such jurisdiction.  Each party agrees that a judgment in any such action or proceeding may be enforced in other jurisdictions by suit on the judgment or in any manner provided by law.  Any

**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.

49

and all service of process and any other notice in any such suit, action or proceeding with respect to this Agreement shall be effective against a party if given as provided herein.

Section 13.12         EXPENSES; ATTORNEY’S FEES.

(a)           Except as otherwise provided in this Agreement, each party hereto shall pay its own expenses and costs incidental to the preparation of this Agreement and to the consummation of the transactions contemplated hereby.

(b)           In the event a Party brings an action to enforce any terms and provisions of this Agreement in a court of law or equity, the non-prevailing Party in such action shall pay all of the out-of-pocket costs incurred by the prevailing Party, including reasonable attorney’s fees.

Section 13.13         COUNTERPARTS.

This Agreement may be executed in any number of counterparts and by facsimile, each of which will be deemed an original, but all of which together will 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, this Agreement has been executed by the parties hereto all as of the date first above written.

ANESTA AG
By:		/s/ J. Kevin Buchi
Name:				J. Kevin Buchi
Title:			Chairman
E. CLAIBORNE ROBINS COMPANY, INC.
By:	/s/ E. Claiborne Robins, Jr.
Name:				E. Claiborne Robins, Jr.
Title:			President & CEO

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:      November 8, 2007

/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:      November 8, 2007

/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 September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Frank Baldino, Jr., Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, based on my knowledge, that:

(1)          The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)          The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ FRANK BALDINO, JR.

Frank Baldino, Jr., Ph.D.

Chairman and Chief Executive Officer

November 8, 2007

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 September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Kevin Buchi, Executive 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

November 8, 2007