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 March 31, 2008
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	19355
P.O. Box 4011	(Zip Code)
Frazer, Pennsylvania
(Address of Principal Executive Offices)

(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 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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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 May 1, 2008
Common Stock, par value $.01	67,743,407 Shares

TABLE OF CONTENTS

Cautionary Note Regarding Forward-Looking Statements			ii
PART I — FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
		Consolidated Balance Sheets — March 31, 2008 and December 31, 2007	1
		Consolidated Statements of Operations — Three months ended March 31, 2008 and 2007	2
		Consolidated Statements of Stockholders’ Equity — March 31, 2008	3
		Consolidated Statements of Cash Flows — Three months ended March 31, 2008 and 2007	4
		Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.	Controls and Procedures		25
PART II — OTHER INFORMATION			25
Item 1.	Legal Proceedings		25
Item 1A.	Risk Factors		25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 5.	Other Information		37
Item 6.	Exhibits		39
SIGNATURES			40

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 and are not statements of historical fact. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as “anticipate,” “will,” “estimate,” “expect,” “project,” “intend,” “should,” “plan,” “believe,” “hope,” and other words and terms of similar meaning in connection with any discussion of, among other things, future operating or financial performance, strategic initiatives and business strategies, regulatory or competitive environments, our intellectual property and product development. In particular, these forward-looking statements include, among others, statements about:

·our dependence on sales of PROVIGIL® (modafinil) Tablets [C-IV] 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), TREANDA® (bendamustine hydrochloride) and VIVITROL® (naltrexone for extended-release injectable suspension);

·any potential approval of our product candidates, including with respect to any expanded indications for NUVIGIL® (armodafinil) Tablets [C-IV] , FENTORA and/or TREANDA;

·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;

·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 or any similar matters;

·our ongoing litigation matters, including litigation stemming from the settlement of the PROVIGIL patent litigation;

·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 any additional future indications for FENTORA, NUVIGIL and TREANDA, 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;

·the timing and unpredictability of regulatory approvals;

ii

·unanticipated cash requirements to support current operations, expand our business or incur capital expenditures;

·the inability to adequately protect our key intellectual property rights;

·the loss of key management or scientific personnel;

·the activities of our competitors in the industry;

·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 investigations by the Connecticut and Massachusetts Attorneys General, our settlements of the PROVIGIL patent litigation 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)

	March 31,			December 31,
	2008			2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	855,846		$	818,669
Investments	—			7,596
Receivables, net	295,035			276,776
Inventory, net	117,726			99,098
Deferred tax assets, net	150,456			176,619
Other current assets	41,828			43,267
Total current assets	1,460,891			1,422,025
PROPERTY AND EQUIPMENT, net	509,933			500,396
GOODWILL	486,865			476,515
INTANGIBLE ASSETS, net	822,342			817,828
DEFERRED TAX ASSETS, net	172,162			141,752
OTHER ASSETS	155,227			147,753
	$	3,607,420		$	3,506,269
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	1,037,163		$	1,237,169
Accounts payable	94,547			91,437
Accrued expenses	665,746			677,184
Total current liabilities	1,797,456			2,005,790
LONG-TERM DEBT	203,317			3,788
DEFERRED TAX LIABILITIES, net	75,860			56,540
OTHER LIABILITIES	143,020			138,084
Total liabilities	2,219,653			2,204,202
COMMITMENTS AND CONTINGENCIES	—			—
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, 2,500,000 shares issued, and none outstanding	—			—
Common stock, $0.01 par value, 400,000,000 and 200,000,000 shares authorized, 70,079,912 and 69,956,790 shares issued, and 67,726,932 and 67,604,187 shares outstanding	701			700
Additional paid-in capital	1,951,294			1,934,965
Treasury stock, at cost, 2,352,980 and 2,352,603 shares	(158,197		)	(158,173		)
Accumulated deficit	(585,277		)	(624,128		)
Accumulated other comprehensive income	179,246			148,703
Total stockholders’ equity	1,387,767			1,302,067
	$	3,607,420		$	3,506,269

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

1

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three months ended March 31,
	2008			2007
REVENUES:
Sales	$	433,897		$	423,879
Other revenues	9,322			13,155
	443,219			437,034
COSTS AND EXPENSES:
Cost of sales	89,916			86,546
Research and development	81,435			83,958
Selling, general and administrative	198,984			152,454
Restructuring charges	3,911			—
Acquired in-process research and development	10,000			—
	384,246			322,958
INCOME FROM OPERATIONS	58,973			114,076
OTHER INCOME (EXPENSE):
Interest income	6,601			6,576
Interest expense	(8,994		)	(4,595		)
Other income, net	5,315			2,756
	2,922			4,737
INCOME BEFORE INCOME TAXES	61,895			118,813
INCOME TAX EXPENSE	23,044			43,628
NET INCOME	$	38,851		$	75,185
BASIC INCOME PER COMMON SHARE	$	0.57		$	1.14
DILUTED INCOME PER COMMON SHARE	$	0.52		$	0.99
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING	67,665			65,806
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING— ASSUMING DILUTION	74,286			75,835

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, 2008				$	1,302,067		69,956,790	$	700	$	1,934,965		2,352,603	$	(158,173	)	$	(624,128	)	$	148,703
Net income	$	38,851		38,851													38,851
Foreign currency translation gain	30,572
Prior service costs and gains on retirement-related plans	(29		)
Other comprehensive income	30,543			30,543																30,543
Comprehensive income	$	69,394
Issuance of common stock upon conversion of convertible notes				—			149	—
Stock options exercised				5,277			121,723	1		5,276
Tax benefit from equity compensation				234						234
Stock-based compensation expense				10,950			1,250	—		10,950
Treasury stock acquired				(24		)							377	(24		)
Other				(131		)				(131		)
BALANCE, MARCH 31, 2008				$	1,387,767		70,079,912	$	701	$	1,951,294		2,352,980	$	(158,197	)	$	(585,277	)	$	179,246

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

3

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three months ended
	March 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	38,851		$	75,185
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense	6,141			11,629
Shortfall tax benefits from stock-based compensation	—			(83		)
Depreciation and amortization	41,577			30,592
Amortization of debt issuance costs	60			60
Stock-based compensation expense	10,950			11,699
Loss on disposals of property and equipment	252			—
Changes in operating assets and liabilities:
Receivables	(11,126		)	(36,850		)
Inventory	(9,567		)	(14,585		)
Other assets	(7,961		)	(12,523		)
Accounts payable, accrued expenses and deferred revenues	(18,572		)	(9,160		)
Other liabilities	13,639			2,584
Net cash provided by operating activities	64,244			58,548
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(18,295		)	(21,384		)
Acquisition of intangible assets	(25,046		)	—
Sales and maturities of available-for-sale investments	7,596			18,023
Purchases of available-for-sale investments	—			(4,786		)
Net cash used for investing activities	(35,745		)	(8,147		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock options	5,277			17,479
Windfall tax benefits from stock-based compensation	234			1,431
Acquisition of treasury stock	(24		)	(128		)
Payments on and retirements of long-term debt	(1,029		)	(953		)
Net cash provided by financing activities	4,458			17,829
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	4,220			2,688
NET INCREASE IN CASH AND CASH EQUIVALENTS	37,177			70,918
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	818,669			496,512
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	855,846		$	567,430

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

4

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, which includes audited financial statements as of December 31, 2007 and 2006 and for each of the three years in the period ended December 31, 2007. 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.

Recent Accounting Pronouncements

In September 2006, the FASB issued 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.  In February 2008, the FASB issued two final staff positions (“FSP”) amending SFAS 157.  FSP SFAS 157-1 amends SFAS 157 to exclude SFAS No. 13, Accounting for Leases and its related interpretive accounting pronouncements that address leasing transactions.   FSP SFAS 157-2 delays the effective date of SFAS 157 until fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.  We adopted SFAS 157 on January 1, 2008, except for the items covered by FSP SFAS 157-2.

SFAS 157 establishes a three-tier fair value hierarchy, which prioritize the inputs used in measuring fair value as follows:

·Level 1: Observable inputs such as quoted prices in active markets for identical assets and liabilities;

·Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

·Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Our available-for-sale securities are reported at fair value on our consolidated balance sheet based on quoted prices in active markets for identical assets (Level 1).

In November 2007, the EITF reached a final consensus on EITF Issue No. 07-1, “Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property” (“EITF 07-1”).  EITF 07-1 defines collaborative arrangements and establishes accounting and financial statement disclosure requirements for such arrangements.  EITF 07-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years.  Adoption is on a retrospective basis to all prior periods presented for all collaborative arrangements existing as of the effective date.  We are currently evaluating the impact of EITF 07-1 adoption on our consolidated financial statements.

                In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”).  SFAS 141(R) will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, IPR&D and restructuring costs. In addition, under SFAS 141(R), changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense.  SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted. The effect of SFAS 141(R) on our consolidated financial statements will be dependent on the nature and terms of any business combinations that occur after its effective date.

5

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”).  SFAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008.  We do not expect the adoption of SFAS 160 to have a significant impact on our consolidated financial statements unless a future transaction results in a noncontrolling interest in a subsidiary.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”).  The new standard is intended to help investors better understand how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements.  The new standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged.  We do not expect the adoption of SFAS 161 to have a significant impact on our consolidated financial statements as we do not currently have any derivatives within the scope of SFAS 161.

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”).  FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. The FSP is intended to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other U.S. generally accepted accounting principles.  The new standard is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008.  We are currently evaluating the impact of FSP FAS 142-3 adoption on our consolidated financial statements.

2.  RESTRUCTURING

On January 15, 2008, we announced a restructuring plan under which we intend to (i) transition manufacturing activities at our CIMA LABS INC. (“CIMA”) in Eden Prairie, Minnesota, to our recently expanded manufacturing facility in Salt Lake City, Utah, and (ii) consolidate at CIMA’s Brooklyn Park, Minnesota, facility certain drug delivery research and development activities currently performed in Salt Lake City. The transition of manufacturing activities and the closure of the Eden Prairie facility are expected to be completed within two to three years.  The consolidation of drug delivery research and development activities at Brooklyn Park is expected to be completed in 2008.  The plan is intended to increase efficiencies in manufacturing and research and development activities, reduce our cost structure and enhance competitiveness.

As a result of this plan, we will incur certain costs associated with exit or disposal activities.  As part of the plan, we estimate that approximately 90 jobs will be eliminated in total, with approximately 170 net jobs eliminated at CIMA and approximately 80 net jobs added in Salt Lake City.

The total estimated pre-tax costs of the plan are as follows:

Severance costs	$	14-16 million
Manufacturing and personnel transfer costs	$	7- 8 million
Total	$	21-24 million

The estimated pre-tax costs of the plan are expected to be recognized in 2008 through 2011 and are included in the United States segment.  In addition to the costs described above, we expect to recognize pre-tax, non-cash charges of approximately $18 million to $22 million associated with accelerated depreciation of plant and equipment at the Eden Prairie facility.

Total charges related to the restructuring plan recognized in the consolidated statement of operations and included in the United States segment are as follows:

6

	March 31, 2008
Severance costs	$	3,808
Manufacturing and personnel transfer costs	103
Total restructuring charges	$	3,911

Summary of charges and spending related to the restructuring plan:

Restructuring reserves as of January 1, 2008	$	—
Expenses	3,911
Payments	109
Restructuring reserves as of March 31, 2008	$	3,802

3.  STOCK-BASED COMPENSATION

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

	Three months ended March 31,
	2008		2007
Stock option expense	$	6,050	$	7,359
Restricted stock unit expense	4,900		4,340
Total stock-based compensation*	$	10,950	$	11,699
Total stock-based compensation expense after-tax	$	6,873	$	7,405

* 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.

4.  ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE

For the three months ended March 31, 2008, we recorded acquired in-process research and development expense of $10.0 million related to our license of technology in the field of oncology, not yet approved by the FDA.

5.  INVENTORY, NET

Inventory, net consisted of the following:

	March 31, 2008
	Commercial		Pre-approval		Total
Raw materials	$	28,711	$	—	$	28,711
Work-in-process	36,720		—		36,720
Finished goods	52,295		—		52,295
Total inventory, net	$	117,726	$	—	$	117,726
Inventory, net included in other assets	$	125,855	$	—	$	125,855

	December 31, 2007
	Commercial		Pre-approval		Total
Raw materials	$	28,395	$	—	$	28,395
Work-in-process	24,053		367		24,420
Finished goods	46,283		—		46,283
Total inventory, net	$	98,731	$	367	$	99,098
Inventory, net included in other assets	$	119,978	$	—	$	119,978

7

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.  At December 31, 2007, we had $0.4 million of capitalized inventory costs related to TREANDA included in inventory.  In March 2008, we secured final FDA approval of TREANDA, which was launched in the United States in April 2008.

In June 2007, we secured final FDA approval of NUVIGIL.  However, as we do not presently intend to launch NUVIGIL commercially until around 2010, we have included net NUVIGIL inventory balances of $125.9 million and $120.0 million at March 31, 2008 and December 31, 2007, respectively, in other assets, rather than inventory.

6.  GOODWILL

Goodwill consisted of the following:

	United States		Europe			Total
December 31, 2007	$	266,393	$	210,122		$	476,515
Release of pre-acquisition tax valuation allowance	—		(416		)	(416		)
Foreign currency translation adjustment	—		10,766			10,766
March 31, 2008	$	266,393	$	220,472		$	486,865

7.  INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

		March 31, 2008						December 31, 2007
	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	$	41,250	$	57,750	$	99,000	$	39,600	$	59,400
DURASOLV technology	14 years	70,000		17,652		52,348		70,000		16,435		53,565
ACTIQ marketing rights	10-12 years	83,454		48,046		35,408		83,454		46,183		37,271
GABITRIL product rights	9-15 years	107,441		56,605		50,836		107,215		54,636		52,579
TRISENOX product rights	8-13 years	113,884		25,041		88,843		113,836		22,749		91,087
VIVITROL product rights	15 years	110,000		14,667		95,333		110,000		12,833		97,167
AMRIX product rights	5 years	99,303		10,856		88,447		99,257		6,204		93,053
MYOCET trademark	20 years	195,971		22,048		173,923		194,653		19,465		175,188
Other product rights	5-20 years	305,907		126,453		179,454		269,956		111,438		158,518
		$	1,184,960	$	362,618	$	822,342	$	1,147,371	$	329,543	$	817,828

Intangible assets are amortized over their estimated useful economic life using the straight line method. Amortization expense was $26.2 million and $21.0 million for the three months ended March 31, 2008 and 2007, respectively.

8.  LONG-TERM DEBT

Long-term debt consisted of the following:

8

	March 31,			December 31,
	2008			2007
2.0% convertible senior subordinated notes due June 1, 2015	$	820,000		$	820,000
Zero Coupon convertible subordinated notes first putable June 2008	213,812			213,564
Zero Coupon convertible subordinated notes first putable June 2010	199,919			199,806
Mortgage and building improvement loans	1,952			2,165
Capital lease obligations	2,561			2,841
Other	2,236			2,581
Total debt	1,240,480			1,240,957
Less current portion	(1,037,163		)	(1,237,169		)
Total long-term debt	$	203,317		$	3,788

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 or $67.80 with respect to the 2.0% convertible senior subordinated notes due June 1, 2015 (the “2.0% Notes”) or the 2010 Zero Coupon Notes, respectively at the balance sheet date. At March 31, 2008, our stock price was $64.40, and, therefore, the 2.0% 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 2008 Zero Coupon Notes are considered to be current liabilities based on their June 15, 2008 put date.  At December 31, 2007, our stock price was $71.76, and, therefore, all of our convertible notes are presented in the current portion of long-term debt on our consolidated balance sheet.

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.

9.  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 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 period of marketing 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 license to market and sell a generic version of PROVIGIL in the United States, effective in April 2012, subject to applicable regulatory considerations. Under the agreements, the licenses could become effective prior to April 2012 only if a generic version of PROVIGIL is sold in the United States prior to this date.

We also received rights to certain modafinil-related intellectual property developed by each party and in exchange for these rights, 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 have agreed to 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.

We filed each of the settlements with both the U.S. Federal Trade Commission (the “FTC”) and the Antitrust Division of the DOJ as required by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Modernization Act”). The FTC conducted an investigation of each of the PROVIGIL settlements and, in February 2008, filed suit against us in U.S. District Court for the District of Columbia challenging the validity of the settlements and

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related agreements entered into by us with each of Teva, Mylan, Ranbaxy and Barr.  We filed a motion to transfer the case to the U.S. District Court for the Eastern District of Pennsylvania, which was granted in April 2008.  The complaint alleges a violation of Section 5(a) of the Federal Trade Commission Act and seeks to permanently enjoin us from maintaining or enforcing these agreements and from engaging in similar conduct in the future.  We believe the FTC complaint is without merit and we have filed a motion to dismiss the case.  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.

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 PROVIGIL settlements violate the antitrust laws of the United States and, in some cases, certain state laws.  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 and those motions are still pending.

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. In late 2006, we filed a motion to dismiss the Apotex case, which is pending.  Separately, in April 2008, the Federal Court of Canada has dismissed our application to prevent regulatory approval of Apotex’s generic modafinil tablets in Canada.  If Apotex ultimately launches its generic modafinil tablets in Canada, we intend to initiate a patent infringement lawsuit against Apotex at that time. We believe that the private antitrust complaints described in the preceding paragraph and the Apotex antitrust 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 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.

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 was focused on our sales and promotional practices with respect to ACTIQ, GABITRIL and PROVIGIL.  Under this agreement, we expect to pay $425.0 million, plus interest, as part of a comprehensive settlement of all Federal and related state Medicaid claims.  In addition, we 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 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 and FENTORA.  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

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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 late 2007, we were served with a series of putative class action complaints filed on behalf of entities that claim to have purchased ACTIQ for uses outside of the product’s approved label in non-cancer patients.  The complaints allege violations of various state consumer protection laws, as well as the violation of the common law of unjust enrichment, and seek 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 complaints are without merit, and we intend to vigorously defend ourselves in these matters and in any similar actions that may be filed in the future.

In March 2007 and March 2008, we received letters 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 letters request information concerning our sales, marketing and research practices for ACTIQ and FENTORA, among other things.  We are cooperating with these requests and are continuing to provide documents and other information to the Committee.

Derivative Suit

In January 2008, a purported stockholder of the company filed a derivative suit on behalf of Cephalon in the U.S. District Court for the District of Delaware naming each member of our Board of Directors as defendants.  The suit alleges, among other things, that the defendants failed to exercise reasonable and prudent supervision over the management practices and controls of Cephalon, including with respect to the marketing and sale of ACTIQ, and in failing to do so, violated their fiduciary duties to the stockholders.  The complaint seeks an unspecified amount of money damages, disgorgement of all compensation and other equitable relief.  We believe the plaintiff’s allegations in this matter are without merit and we intend to vigorously defend ourselves in this matter.

DURASOLV

In the third quarter of 2007, the U.S. Patent and Trademark Office (“PTO”) notified us that, on re-examination, it has rejected the claims in the two U.S. patents for our DURASOLV ODT technology.  We have filed or intend to file notices of appeal of the PTO’s decisions.  While we intend to vigorously defend these patents, these efforts, ultimately, may not be successful.  The invalidity of the DURASOLV patents could have a material adverse impact on revenues from our drug delivery business.

Other Matters

In late April 2008, we received a Paragraph IV certification letter relating to an ANDA submitted to the FDA by Watson Laboratories, Inc., requesting approval to market and sell a generic equivalent of FENTORA.  Watson alleges that our U.S. Patent Numbers 6,200,604 and 6,974,590 covering FENTORA are invalid, unenforceable and/or will not be infringed by Watson’s manufacture, use or sale of the product described in its ANDA.  We currently are reviewing the certification and, by statute, have 45 days to initiate a patent infringement lawsuit against Watson.  Such a lawsuit would automatically prevent the FDA from approving the Watson ANDA until the earlier of a district court decision or 30 months from our receipt of the letter.

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.

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10.  COMPREHENSIVE INCOME

The components of total comprehensive income are as follows:

	Three months ended March 31,
	2008			2007
Net income	$	38,851		$	75,185
Foreign currency translation gains	30,572			5,842
Prior service costs and gains on retirement-related plans, net of tax	(29		)	19
Unrealized investment gains	—			8
Other comprehensive gain	30,543			5,869
Comprehensive income	$	69,394		$	81,054

11.  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:

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, 2007 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.

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

	Three months ended March 31,
	2008		2007
Average market price per share of Cephalon stock	$	64.57	$	71.20
Shares included in diluted EPS calculation:
2.0% Notes	4,859		6,042
New Zero Coupon Notes	723		1,319
Warrants related to 2.0% Notes	—		908
Warrants related to New Zero Coupon Notes	—		—
Total (Treasury Stock Method)	5,582		8,269
Other (“If-Converted” Method)	6		6
Total	5,588		8,275

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

	Three months ended March 31,
	2008		2007
Basic income per common share computation:
Numerator:
Net income used for basic income per common share	$	38,851	$	75,185
Denominator:
Weighted average shares used for basic income per common share	67,665		65,806
Basic income per common share	$	0.57	$	1.14
Diluted income per common share computation:
Numerator:
Net income used for diluted income per common share	$	38,851	$	75,185
Denominator:
Weighted average shares used for basic income per common share	67,665		65,806
Effect of dilutive securities:
Convertible subordinated notes and warrants	5,588		8,275
Employee stock options and restricted stock units	1,033		1,754
Weighted average shares used for diluted income per common share	74,286		75,835
Diluted income per common share	$	0.52	$	0.99

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

	Three months ended March 31,
	2008	2007
Weighted average shares excluded:
Convertible subordinated notes and warrants	26,819	25,913
Employee stock options and restricted stock units	3,361	2,237
	30,180	28,150

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12.  SEGMENT AND SUBSIDIARY INFORMATION

Revenues for the three months ended March 31:

	2008									2007
	United States			Europe			Total			United States			Europe			Total
Sales:
PROVIGIL	$	198,469		$	14,766		$	213,235		$	188,727		$	12,562		$	201,289
GABITRIL	11,131			2,293			13,424			13,884			2,336			16,220
CNS	209,600			17,059			226,659			202,611			14,898			217,509
ACTIQ	37,517			12,203			49,720			57,157			8,571			65,728
Generic OTFC	27,318			—			27,318			34,020			—			34,020
FENTORA	38,933			—			38,933			31,690			—			31,690
AMRIX	9,768			—			9,768			—			—			—
Pain	113,536			12,203			125,739			122,867			8,571			131,438
Oncology	5,188			22,270			27,458			3,991			19,290			23,281
Other	13,527			40,514			54,041			13,181			38,470			51,651
Total Sales	341,851			92,046			433,897			342,650			81,229			423,879
Other Revenues	8,663			659			9,322			12,073			1,082			13,155
Total External Revenues	350,514			92,705			443,219			354,723			82,311			437,034
Inter-Segment Revenues	2,895			7,940			10,835			7,806			13,407			21,213
Elimination of Inter-Segment Revenues	(2,895		)	(7,940		)	(10,835		)	(7,806		)	(13,407		)	(21,213		)
Total Revenues	$	350,514		$	92,705		$	443,219		$	354,723		$	82,311		$	437,034

Income (loss) before income taxes for the three months ended March 31:

	2008		2007
United States	$	59,748	$	117,360
Europe	2,147		1,453
Total	$	61,895	$	118,813

Total assets:

	March 31, 2008		December 31, 2007
United States	$	2,589,521	$	2,541,211
Europe	1,017,899		965,058
Total	$	3,607,420	$	3,506,269

13.  INCOME TAXES

The Internal Revenue Service (“IRS”) currently is examining Cephalon, Inc.’s 2003, 2004 and 2005 federal income tax returns and we have recently extended the statute of limitations related to these years to June 30, 2009.  We also remain open for examination by the IRS for 2006 and 2007.  Cephalon France and Zeneus Pharma S.a.r.l. are under examination by the French Tax Authorities for 2004 and 2005, and 2003 and 2004, respectively.  Cephalon Pharma Gmbh, in Germany, is under examination for 2000 to 2004.  Cephalon Pharma S.L., in Spain, is under examination for 2003.  Our filings in the United Kingdom remain open to examination for 2006 and 2007.  In other significant foreign jurisdictions, the tax years that remain open for potential examination range from 2000 to 2007.  We do not believe at this time that the results of these examinations will have a material impact on the financial statements.

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 2003 to 2005 IRS examinations remains subject to

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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.

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, as well as our Annual Report on Form 10-K for the year ended December 31, 2007.

EXECUTIVE SUMMARY

Cephalon, Inc. 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 eight 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 690-person U.S. field sales and sales management teams by area.  In Europe, we have a sales and marketing organization numbering approximately 400 persons that supports our presence in nearly 20 European countries, including France, the United Kingdom, Germany, Italy and Spain.

Our most significant product is PROVIGIL® (modafinil) Tablets [C-IV], which comprised 49% of our total consolidated net sales for the three months ended March 31, 2008, of which 93% was in the U.S. market.  For the three months ended March 31, 2008, consolidated net sales of PROVIGIL increased 6% over the three months ended March 31, 2007.  PROVIGIL is indicated for the treatment of excessive sleepiness associated with narcolepsy, obstructive sleep apnea/hypopnea syndrome and shift work sleep disorder.  We co-promote PROVIGIL in the United States with our partner, Takeda Pharmaceuticals North America, Inc.  Together with our CNS field sales team, we now have approximately 900 persons focused on detailing PROVIGIL in the United States.  In June 2007, we secured final U.S. Food and Drug Administration (the “FDA”) approval of NUVIGIL® (armodafinil) Tablets [C-IV] for the same indications as PROVIGIL.  NUVIGIL is a single-isomer formulation of modafinil, the active ingredient in PROVIGIL.  The product 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.  We currently intend to launch NUVIGIL around 2010.

Our two next most significant products are FENTORA® (fentanyl buccal tablet) [C-II] and ACTIQ® (oral transmucosal fentanyl citrate) [C-II] (including our generic version of ACTIQ (“generic OTFC”)).  Together, these products comprise 27% of our total consolidated net sales for the three months ended March 31, 2008, of which 89% was in the U.S. market.   In October 2006, we launched in the United States FENTORA, our next-generation proprietary pain product.  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.  In April 2008, we received marketing authorization from the European Commission for EFFENTORA™ for the same indication as FENTORA.  This authorization allows us to market EFFENTORA in the 27 member states of the European Union, as well as Iceland and Norway.  We have focused our clinical strategy for FENTORA on studying the product in opioid-tolerant patients with breakthrough pain associated with chronic pain conditions, such as neuropathic pain and back pain.  In November 2007, we submitted a supplemental new drug application (“sNDA”) to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid tolerant patients with chronic pain conditions.  The FDA held an Advisory Committee meeting on May 6, 2008 to discuss the FENTORA sNDA.  At that meeting, the Advisory Committee voted not to recommend approval of an expanded label for FENTORA for the management of breakthrough pain in opioid-tolerant patients with chronic pain conditions.  While the FDA is not bound by the advisory committee’s recommendation, the FDA takes the advisory committee’s advice into consideration when reviewing sNDA applications.  The FDA has set September 13, 2008 as the action date for its review of this sNDA.  With respect to ACTIQ, its sales have been meaningfully eroded by the launch of FENTORA and by generic OTFC products sold since September 2006 by Barr Laboratories, Inc. and by us through our sales agent, Watson Pharmaceuticals, Inc.; we expect this erosion will continue during 2008.

In August 2007, we acquired the North American rights to AMRIX® (cyclobenzaprine hydrochloride extended-release capsules).  The FDA approved AMRIX for sale in the United States in February 2007 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 commenced a full U.S. launch in November 2007.  In February 2008, we entered into an agreement with a contract sales organization to add 120 sales representatives to our field sales team detailing AMRIX.

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In March 2008, we received FDA approval of TREANDA® (bendamustine hydrochloride) for the treatment of patients with chronic lymphocytic leukemia (“CLL”) and we launched the product in April 2008.  The FDA has granted an orphan drug designation to TREANDA for the CLL indication.  In December 2007, we submitted a new drug application (“NDA”) to the FDA requesting approval of TREANDA for patients with indolent B-cell non-Hodgkin’s lymphoma (“NHL”) who have progressed during or following treatment with rituximab or a rituximab-containing regimen.  The FDA has accepted this NDA and set an action date of October 31, 2008 for the filing.

We have significant discovery research programs focused on developing therapeutics to treat neurological disorders and cancers. Our technology principally focuses on an understanding of kinases and proteases and the role they play in cellular integrity, survival and proliferation. We have coupled this knowledge with a library of novel, potent, small, orally-active synthetic molecules that inhibit the activities of specific kinases.  We also work with our collaborative partners to provide a more diverse therapeutic breadth and depth to our research efforts.

As a biopharmaceutical company, our future success is highly dependent on obtaining and maintaining patent protection or regulatory exclusivity for our products and technology. We intend to vigorously defend the validity, and prevent infringement, of our patents. The loss of patent protection or regulatory exclusivity on any of our existing products, whether by third-party challenge, invalidation, circumvention, license or 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. As part of these separate settlements, we agreed to grant to each of these parties a non-exclusive royalty-bearing license to market and sell a generic version of PROVIGIL in the United States, effective in April 2012. In February 2008, the U.S. Federal Trade Commission (“FTC”) filed suit against us in U.S. District Court for the District of Columbia challenging the validity of the settlement and related agreements.  We filed a motion to transfer the case to the U.S. District Court for the Eastern District of Pennsylvania, which was granted in April 2008.  For more information concerning these settlements, see Note 9 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Also, in late April 2008, we received a Paragraph IV certification letter relating to an ANDA submitted to the FDA by Watson Laboratories, Inc., requesting approval to market and sell a generic equivalent of FENTORA.  Watson alleges that our U.S. Patent Numbers 6,200,604 and 6,974,590 covering FENTORA are invalid, unenforceable and/or will not be infringed by Watson’s manufacture, use or sale of the product described in its ANDA.  We currently are reviewing the certification and, by statute, have 45 days to initiate a patent infringement lawsuit against Watson.  Such a lawsuit would automatically prevent the FDA from approving the Watson ANDA until the earlier of a district court decision or 30 months from our receipt of the letter.

Our activities and operations are subject to significant government regulations and oversight. 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 (the “DOJ”) with respect to the USAO investigation that began in September 2004.  The investigation was focused on our sales and promotional practices with respect to ACTIQ, GABITRIL® (tiagabine hydrochloride) and PROVIGIL.  Under this agreement, we expect to pay $425.0 million, plus interest, as part of a comprehensive settlement of all Federal and related state Medicaid claims.  In addition, we 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 addition, 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 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 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.

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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.

RESULTS OF OPERATIONS

(In thousands)

Three months ended March 31, 2008 compared to three months ended March 31, 2007:

	Three months ended March 31,
	2008						2007						% Increase (Decrease)
	United States		Europe		Total		United States		Europe		Total		United States		Europe		Total
Sales:
PROVIGIL	$	198,469	$	14,766	$	213,235	$	188,727	$	12,562	$	201,289	5	%	18	%	6	%
GABITRIL	11,131		2,293		13,424		13,884		2,336		16,220		(20	)%	(2	)%	(17	)%
CNS	209,600		17,059		226,659		202,611		14,898		217,509		3	%	15	%	4	%
ACTIQ	37,517		12,203		49,720		57,157		8,571		65,728		(34	)%	42	%	(24	)%
Generic OTFC	27,318		—		27,318		34,020		—		34,020		(20	)%	—	%	(20	)%
FENTORA	38,933		—		38,933		31,690		—		31,690		23	%	—	%	23	%
AMRIX	9,768		—		9,768		—		—		—		100	%	—		100	%
Pain	113,536		12.203		125,739		122,867		8,571		131,438		(8	)%	42	%	(4	)%
Oncology	5,188		22,270		27,458		3,991		19,290		23,281		30	%	15	%	18	%
Other	13,527		40,514		54,041		13,181		38,470		51,651		3	%	5	%	5	%
Total Sales	341,851		92,046		433,897		342,650		81,229		423,879		—	%	13	%	2	%
Other Revenues	8,663		659		9,322		12,073		1,082		13,155		(28	)%	(39	)%	(29	)%
Total Revenues	$	350,514	$	92,705	$	443,219	$	354,723	$	82,311	$	437,034	(1	)%	13	%	1	%

Sales—In the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which accounted for 63% of our total consolidated gross sales for the three months ended March 31, 2008. 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 March 31, 2008, 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 March 31, 2008 we believe that our generic OTFC inventory held at wholesalers and retailers is approximately three months.

For the three months ended March 31, 2008, 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 March 31, 2008, total sales increased by 2% over the prior year. The other key factors that contributed to the increase in sales are summarized by product as follows:

·In CNS, sales of PROVIGIL increased 6 percent. Sales of PROVIGIL in the U.S. increased by 5%, despite a decline in U.S. prescriptions for PROVIGIL of 3%, according to IMS Health. For the three months ended

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March 31, 2008, sales of PROVIGIL also were impacted by domestic price increases of 14% in March 2008, resulting in an average price increase of 2% period to period.  European sales of PROVIGIL increased 18% due primarily to the favorable effect of exchange rate changes and moderate increases in unit sales.

·In Pain, sales decreased 4 percent. Sales of ACTIQ in the United States were impacted by a domestic price increase of 17% in February 2008, resulting in an average price increase of 8.5% period to period. This price impact was offset by a 58% 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 March 31, 2008,  sales of our own generic OTFC and shipments of our generic OTFC to Barr decreased 20%, resulting from a 10% decrease in U.S. prescriptions, according to IMS Health, and an average 2% decrease in sales prices to our generic OTFC customers.  Sales of FENTORA increased 23%, due to an increase in tablets dispensed of 12% and domestic price increases of 8.5% in February 2008, resulting in an average price increase of 4% period to period.  Sales of ACTIQ in Europe increased 42% due to increases in unit sales and the favorable effect of exchange rate changes.

·In Oncology, sales increased 18 percent. Sales of our European oncology products increased 15%, due primarily to the favorable effect of exchange rate changes and moderate increases in unit sales.

Other Revenues—The decrease of 29% from period to period is primarily due to lower 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 March 31,
	2008			2007			Change			% Change
Gross sales	$	487,746		$	476,049		$	11,697		2	%
Product sales allowances:
Prompt payment discounts	7,948			7,823			125			2	%
Wholesaler discounts	2			5,207			(5,205		)	(100	)%
Returns	6,091			7,857			(1,766		)	(22	)%
Coupons	6,199			4,283			1,916			45	%
Medicaid discounts	9,182			8,675			507			6	%
Managed care and governmental contracts	24,427			18,325			6,102			33	%
	53,849			52,170			1,679
Net sales	$	433,897		$	423,879		$	10,018		2	%
Product sales allowances as a percentage of gross sales	11.0		%	11.0		%

Prompt payment discounts increased for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 due to the increase in sales. Wholesaler discounts decreased period over period as no discounts were required for the first quarter of 2008 as a result of price increases.  Returns decreased 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.  Coupons increased period over period as a result of the increase in coupon redemption activity for FENTORA.

Medicaid discounts increased slightly for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 due to the increase in the reimbursement rate for ACTIQ and generic OTFC as a result of the application of the provisions of the Deficit Reduction Act of 2005 effective October 1, 2007.  Managed care and governmental contracts increased for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 due to additional rebates for certain managed care and governmental programs, particularly with respect to sales of PROVIGIL and ACTIQ. In addition, we recognized a reserve for amounts payable to the U.S. Department of Defense (“DoD”) under the new Tricare program effective January 28, 2008.  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, managed care and governmental contracts sales.

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	Three months ended March 31,
	2008		2007		Change			% Change
Costs and expenses:
Cost of sales	$	89,916	$	86,546	$	3,370		4	%
Research and development	81,435		83,958		(2,523		)	(3	)%
Selling, general and administrative	198,984		152,454		46,530			31	%
Restructuring charges	3,911		—		3,911			100	%
Acquired in-process research and development	10,000		—		10,000			100	%
	$	384,246	$	322,958	$	61,288		19	%

Cost of Sales—The cost of sales was 20.7% of net sales for the three months ended March 31, 2008 and 20.4% of net sales for the three months ended March 31, 2007.  For the three months ended March 31, 2008 and 2007, we recognized $26.2 million and $21.0 million of amortization expense included in cost of sales, respectively.  We recorded accelerated depreciation charges of $1.7 million in the first quarter of 2008 related to restructuring and a charge of $3.5 million in the first quarter of 2007 for the termination of a materials supply agreement.

Research and Development Expenses—Research and development expenses decreased $2.5 million, or 3%, for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007. This decrease is primarily attributable to lower expenses associated with the timing of clinical activity in 2008 as compared to 2007.  For the three months ended March 31, 2008 and 2007, we recognized $5.0 million and $5.3 million of depreciation expense included in research and development expenses, respectively.

Selling, General and Administrative Expenses—Selling, general and administrative expenses increased $46.5 million, or 31% for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007, primarily due to the cessation of the reimbursement of losses from Alkermes related to the promotion of VIVITROL of $18.2 million, and increased selling and marketing spending, primarily on the promotion of PROVIGIL and AMRIX.  For the three months ended March 31, 2008 and 2007, we recognized $4.5 million and $3.4 million of depreciation expense included in selling, general and administrative expenses, respectively.

Acquired in-process research and development—For the three months ended March 31, 2008, we recorded acquired in-process research and development of $10.0 million related to our license of technology in the field of oncology.

Restructuring charges—For the three months ended March 31, 2008, we recorded $3.9 million related to our restructuring plan to consolidate certain manufacturing and research and development activities within our U.S. locations.  These charges primarily consist of severance payments and accruals for employees who have or are expected to be terminated as a result of this restructuring plan.

	Three months ended March 31,
	2008			2007			Change			% Change
Other income (expense):
Interest income	$	6,601		$	6,576		$	25		—	%
Interest expense	(8,994		)	(4,595		)	(4,399		)	96	%
Other income, net	5,315			2,756			2,559			93	%
	$	2,922		$	4,737		$	(1,815	)	(38	)%

Other Income (Expense)—Other income (expense) decreased $1.8 million, or 38%, for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007. The increase was attributable to the following factors:

·a $4.4 million increase in interest expense, primarily due to the recognition of $3.8 million of estimated accrued interest related to the agreement in principal with the U.S. Attorney’s Office.

·a $2.6 million increase in other income, net, primarily due to fluctuations in foreign currency gains and losses in the comparable periods.

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	Three months ended March 31,
	2008		2007		Change			% Change
Income tax expense	$	23,044	$	43,628	$	(20,584	)	(47	)%

Income Taxes—For the three months ended March 31, 2008, we recognized $23.0 million of income tax expense on income before income taxes of $61.9 million, resulting in an overall effective tax rate of 37.2 percent. This compared to income tax expense for the three months ended March 31, 2007 of $43.6 million on income before income taxes of $118.8 million, resulting in an effective tax rate of 36.7 percent.

LIQUIDITY AND CAPITAL RESOURCES

(In thousands)

Cash, cash equivalents and investments at March 31, 2008 were $855.8 million, representing 24% of total assets, compared to $826.3 million, representing 24% of total assets at December 31, 2007.

Our working capital deficit, which is calculated as current assets less current liabilities, was $336.6 million at March 31, 2008 compared to $583.8 million at December 31, 2007.  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 March 31, 2008 and December 31, 2007, $1,033.8 million and $1,233.7 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:

	Three months ended March 31,
	2008			2007
Net cash provided by operating activities	$	64,244		$	58,548
Net cash used for investing activities	(35,745		)	(8,147		)
Net cash provided by financing activities	4,458			17,829
Effect of exchange rate changes on cash and cash equivalents	4,220			2,688
Net increase in cash and cash equivalents	$	37,177		$	70,918

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.  Included within cash used for operating activities in 2008 is the payment of $10.0 million related to an agreement to in-license certain technology in the field of oncology.

Net Cash Used for Investing Activities

Cash used in investing activities primarily relates to acquisitions of business, technologies, products and product rights and funds used for capital expenditures in property and equipment.

For the three months ended March 31, 2008 and 2007, we made capital expenditures of $18.3 million and $21.4 million, respectively. Significant expenditure include the expansion and improvement of our facilities and our worldwide implementation of SAP®.  A payment of $25 million initiated in March 2008 upon FDA approval of TREANDA was capitalized as an intangible asset and will be amortized over the useful life of the product.  These uses of cash were partially offset by cash provided from sales and maturities of our investment portfolio. As of March 31, 2008, all available-for-sale instruments in our investment portfolio have been sold or have matured and the corresponding proceeds have been transferred into liquid cash equivalents with original maturities of three months or less from the date of purchase.

Net Cash Provided by Financing Activities

Financing activities for the periods presented above primarily relate to proceeds from stock option exercises and payments on long-term debt.

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Proceeds from exercises of stock options were $5.3 million and $17.5 million for the three months ended March 31, 2008 and 2007, respectively. These proceeds were offset by payments on debt of $1 million in each period presented.

Outlook

We expect to use our cash, cash equivalents and investments for working capital and general corporate purposes, including the payment, as early as the second or third quarter of 2008, of the $425.0 million settlement, plus interest, with the U.S. Attorney’s Office, acquisition of businesses, products, product rights, or technologies, the settlement of outstanding litigation or the resolution, if any, of the ongoing investigations by the Connecticut and Massachusetts Attorneys 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 up to $213.2 million of our 2008 Zero Coupon Convertible Notes. However, we expect that sales of our currently marketed products should allow us to continue to generate positive cash flow from operations 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 other revenues and interest income, we 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 and Product Candidates

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 until at least 2012.  During 2007 and continuing in the first quarter of 2008, we experienced a moderation in prescription growth of PROVIGIL.  We have undertaken a number of initiatives, including changes to our sales force and the initiation of direct-to-consumer print and web-based advertising designed to stimulate moderate volume growth of prescriptions.  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 within its current indication and to secure FDA approval of a broader labeled indication for the product outside of breakthrough cancer pain.  On May 6, 2008, a Joint Advisory Committee to the FDA voted not to recommend approval of an expanded label for FENTORA for the management of breakthrough pain in opioid-tolerant patients with chronic pain conditions.  While the FDA is not bound by the advisory committee’s recommendation, the FDA takes the advisory committee’s advice into consideration when reviewing sNDA applications.  Continued growth of FENTORA sales also will depend on the strength of the patent covering the product, particularly in light of the ANDA filed by Watson.  Sales of our other pain product, ACTIQ, have been meaningfully eroded by the launch of FENTORA and by generic competition since September 2006 and we expect this erosion will continue during 2008. 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.

Our future growth also depends, in part, on our ability to achieve commercial success with AMRIX and TREANDA in CLL, which we launched in October 2007 and April 2008, respectively, and to secure FDA approval in 2008 of TREANDA for the treatment of patients with indolent B-cell NHL who have progressed during or following treatment with rituximab or a rituximab-containing regimen.

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. 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 as a first-line treatment for NHL and for the treatment of multiple myeloma; 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 associated with jet lag

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disorder, traumatic brain injury, remitted major depressive disorder, adjunctive treatment to atypical anti-psychotics in schizophrenia patients, 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 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, Pennsylvania.  We also expect to begin in 2008 a capital expenditure project related to the transfer of manufacturing activities from our facility in Eden Prairie, Minnesota to our facility in Salt Lake City Utah; we expect this transfer to be completed by 2010 or 2011.  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.

Indebtedness

We have significant indebtedness outstanding, consisting principally of indebtedness on convertible subordinated notes. The following table summarizes the principal terms of our most significant convertible subordinated notes outstanding as of March 31, 2008:

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 11 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, 2007.

As of March 31, 2008, our stock price was $64.40, and therefore only the 2.0% Notes were convertible as of March 31, 2008.  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 these 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.

The 2.0% Notes have been classified as current liabilities on our consolidated balance sheet as of March 31, 2008.  In addition, our Zero Coupon Notes first putable June 15, 2008 are considered to be current liabilities based on the June 15, 2008 put date of these Notes.  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 our 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 the 2010 Zero Coupon Notes, if the restricted conversion prices were met, would present significant amounts of such notes for conversion

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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 March 31, 2008 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 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 an accounting principles generally accepted in the United States of America (“U.S. GAAP”) perspective, Statement of Financial Accounting Standards (“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.

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;

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·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.

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, 2007 in the “Critical Accounting Policies and Estimates” section and the “Recent Accounting Pronouncements” section.

Product Sales Allowances—We record product sales net of the following significant categories of product sales allowances, each of which is described in more detail included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007: 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 three months ended March 31, 2008:

(In thousands)	Prompt  Payment  Discounts			Wholesaler  Discounts			Returns*			Coupons			Medicaid  Discounts			Managed  Care &  Governmental  Contracts			Total
Balance at January 1, 2008	$	(3,082	)	$	(6,449	)	$	(25,335	)	$	(7,253	)	$	(19,883	)	$	(24,264	)	$	(86,266	)
Provision:
Current period	(7,948		)	(4		)	(6,091		)	(6,306		)	(9,159		)	(24,835		)	(54,343		)
Prior periods	—			2			—			107			(23		)	408			494
Total	(7,948		)	(2		)	(6,091		)	(6,199		)	(9,182		)	(24,427		)	(53,849		)
Actual:
Current period	4,850			—			—			—			—			6,411			11,261
Prior periods	3,082			6,447			5,090			6,235			7,694			12,775			41,323
Total	7,932			6,447			5,090			6,235			7,694			19,186			52,584
Balance at March 31, 2008	$	(3,098	)	$	(4	)	$	(26,336	)	$	(7,217	)	$	(21,371	)	$	(29,505	)	$	(87,531	)

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

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to foreign currency exchange risk related to our operations in European subsidiaries that have transactions, assets, and liabilities denominated in foreign currencies that are translated into U.S. dollars for consolidated financial reporting purposes. Historically, we have not hedged any of these foreign currency exchange risks. For the three months ended March 31, 2008, 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 $9.3 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

During the first quarter of 2008, we expanded our SAP® implementation for U.S. operations to include modules in the areas of procurement, supply chain and logistics and sales.  Our management believes that the implementation of this system will improve and enhance our internal control over financial reporting.  There have been no other changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The information required by this Item is incorporated by reference to Note 9 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 three months ended March 31, 2008, approximately 18% 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

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the United States and we expect this erosion will continue during 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, dosage 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;

· the extent to which the products are studied in clinical trials in the future and the results of any such studies;

·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.

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 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 approvals of new product candidates such as TREANDA for NHL or of expanded indications of our existing products such as FENTORA and NUVIGIL.  On May 6, 2008, a Joint Advisory Committee to the FDA voted not to recommend approval of an expanded label for FENTORA for the management of breakthrough pain in opioid-tolerant patients with chronic pain conditions.  While the FDA is not bound by the advisory committee’s recommendation, the FDA takes the advisory committee’s advice into consideration when reviewing sNDA applications.  There can be no assurance that our applications to market these and other product candidates will be submitted or reviewed in a timely manner or that the FDA will approve the product candidates on the basis of the data contained in the applications.  Even if approval is granted to market a product candidate, there can be no assurance that we will be able to successfully commercialize the product in the marketplace or achieve a profitable level of sales.

We may not be able to maintain adequate protection for our intellectual property or market exclusivity for our key products and, therefore, competitors may develop competing products, which could result in a decrease in sales and market share, cause us to reduce prices to compete successfully and limit our commercial success.

We place considerable importance on obtaining patent protection for new technologies, products and processes. To that end, we file applications for patents covering the compositions or uses of our drug candidates or our proprietary processes. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions. Accordingly, the patents and patent applications relating to our products, product candidates and technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technology. Patent disputes in our industry are frequent and can preclude commercialization of products. If we ultimately engage in and lose any such disputes, we could be subject to competition or significant liabilities, we could be required to enter into third party licenses or we could be required to cease using the technology or product in dispute. In addition, even if such licenses are available, the terms of any license requested by a third party could be unacceptable to us.

PROVIGIL / NUVIGIL

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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 Form I polymorph of armodafinil and its use 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 period of marketing 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 license to market and sell a generic version of PROVIGIL in the United States, effective in April 2012, subject to applicable regulatory considerations. Under the agreements, the licenses could become effective prior to April 2012 only if a generic version of PROVIGIL is sold in the United States prior to this date.

We filed each of the settlements with both the FTC and the Antitrust Division of the DOJ as required by the Medicare Modernization Act. The FTC conducted an investigation of each of the PROVIGIL settlements and, in February 2008, filed suit against us in U.S. District Court for the District of Columbia challenging the validity of the settlements and related agreements entered into by us with each of Teva, Mylan, Ranbaxy and Barr.  We filed a motion to transfer the case to the U.S. District Court for the Eastern District of Pennsylvania, which was granted in April 2008.  The complaint alleges a violation of Section 5(a) of the Federal Trade Commission Act and seeks to permanently enjoin us from maintaining or enforcing these agreements and from engaging in similar conduct in the future.  We believe the FTC complaint is without merit and have filed a motion to dismiss the case.  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.

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 PROVIGIL settlements 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. In late 2006, we filed a motion to dismiss the Apotex case, which is pending. Separately, in April 2008, the Federal Court of Canada has dismissed our application to prevent regulatory approval of Apotex’s generic modafinil tablets in Canada.  If Apotex ultimately

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launches its generic modafinil tablets in Canada, we intend to initiate a patent infringement lawsuit against Apotex at that time.  We believe that the private antitrust complaints described in the preceding paragraph and the Apotex antitrust 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.

DURASOLV

In the third quarter of 2007, the PTO notified us that, on re-examination, it has rejected the claims in the two U.S. patents for our DURASOLV ODT technology.  We have filed or intend to file notices of appeal of the PTO’s decisions.  While we intend to vigorously defend these patents, these efforts, ultimately, may not be successful.  The invalidity of the DURASOLV patents could have a material adverse impact on revenues from our drug delivery business.

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.

FENTORA

In late April 2008, we received a Paragraph IV certification letter relating to an ANDA submitted to the FDA by Watson Laboratories, Inc., requesting approval to market and sell a generic equivalent of FENTORA.  Watson alleges that our U.S. Patent Numbers 6,200,604 and 6,974,590 covering FENTORA are invalid, unenforceable and/or will not be infringed by Watson’s manufacture, use or sale of the product described in its ANDA.  We currently are reviewing the certification and, by statute, have 45 days to initiate a patent infringement lawsuit against Watson.  Such a lawsuit would automatically prevent the FDA from approving the Watson ANDA until the earlier of a district court decision or 30 months from our receipt of the letter.

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.

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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, 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 USAO in Philadelphia and the DOJ with respect to the USAO investigation that began in September 2004.  The investigation was focused on our sales and promotional practices with respect to ACTIQ, GABITRIL and PROVIGIL.  Under this agreement, we expect to pay $425.0 million, plus interest, as part of a comprehensive settlement of all Federal and related state Medicaid claims.  In addition, we 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 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 late 2007, we were served with a series of putative class action complaints filed on behalf of entities that claim to have purchased ACTIQ for use outside of the product’s approved label.  The complaints allege violations of various state consumer protection laws, as well as the violation of the common law of unjust enrichment, and seek 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 complaints are without merit, and we intend to vigorously defend ourselves in these matters and in any similar actions that may be filed in the future.

In March 2007 and March 2008, we received letters 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 letters request information concerning our sales, marketing and research practices for ACTIQ and FENTORA, among other things.  We are cooperating with these requests 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 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 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 that is the active ingredient in FENTORA or 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 September 2007, we issued a letter to healthcare

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professionalstoclarifytheappropriatepatientselection,designandadministrationforFENTORA,followingreportsofseriousadverseeventsinconnectionwiththeuseoftheproduct.Likewise,inFebruary2005,workingwiththeFDA,weupdatedourprescribinginformationforGABITRILtoincludeaboldedwarningdescribingtheriskofnewonsetseizuresinpatientswithoutepilepsy.Inaddition,inpatientswhotakemultiplemedications,druginteractionscouldoccur thatcanbedifficulttopredict.Additionally,incidentsofproduct < /font>misuse,productdiversionortheftmayoccur,particularlywithrespecttoproductssuchasFENTORA,ACTIQ,genericOTFCandPROVIGIL,whichcontaincontrolledsubstances.

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 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 and significant self-insurance retentions 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;

·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 March 31, 2008. As a result, certain of our convertible notes have been classified as current liabilities on our consolidated balance sheet at March 31, 2008. 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,

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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.

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 are focusing 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 may negatively impact our product sales and profitability.

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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, 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 AMRIX, we face significant competition from SKELAXIN®, FLEXERIL® and other inexpensive generic forms of muscle relaxants.  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.

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 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 have consummated or 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. In connection with an acquisition, we must estimate the value of the transaction by making certain assumptions about, among other things, likelihood of regulatory approval for unapproved products and the market potential for marketed products and/or product candidates. Ultimately, our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of a transaction.

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

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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, 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, 2007 through May 1, 2008 our common stock traded at a high price of $84.83 and a low price of $56.20. Negative announcements, including, among others:

·adverse regulatory decisions;

·disappointing clinical trial results;

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·legal challenges, disputes and/or other adverse developments impacting 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 and to 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 other things:

·any material weakness in our internal controls over financial reporting exists; or

·we fail to remediate assessed deficiencies.

During 2008, we have expanded our SAP® implementation for U.S. operations to include modules in the areas of procurement, supply chain and logistics and sales.  This expansion required 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 express an opinion on the effectiveness of our internal control over financial reporting, 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 three months ended March 31, 2008, 20.9% of our revenues were denominated in currencies other than the U.S. dollar. We translate revenues earned and expenses incurred into U.S. dollars at the average exchange rate applicable during the relevant period. A weakening of the U.S. dollar would, therefore, increase both our revenues and expenses. Fluctuations in the rate of exchange between the U.S. dollar and the euro and other currencies may affect period-to-period comparisons of our operating results. Historically, we have not hedged our exposure to these fluctuations in exchange rates.

Our customer base is highly concentrated.

Our principal customers are wholesale drug distributors. These customers comprise a significant part of the distribution network for pharmaceutical products in the United States. Three large wholesale distributors, Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, control a significant share of this network. These three wholesaler customers, in the aggregate, accounted for 63% of our total consolidated gross sales for the three months ended March 31, 2008. 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.

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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 those matters specifically described in Note 9 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q as well as numerous other litigation matters. 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 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

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management, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Period	Total Number of Shares of Common Stock Purchased(1)	Average Price Paid Per Share(2)		Total Number of Shares of Common Stock Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Common Stock that May Yet Be Purchased Under the Plans or Programs
January 1-31, 2008	—	$	—	—	$	—
February 1-29, 2008	377	65.20		—	—
March 1-31, 2008	—	—		—	—
Total	377	$	65.20	—	$	—

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

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

ITEM 5.  OTHER INFORMATION

Computation of Ratios of Earnings to Fixed Charges

	Year Ended													Three months  ended
	December 31,													March 31,
	2003		2004			2005			2006		2007			2008
Determination of earnings:
Pre-tax income (loss) from continuing operations	$	130,314	$	(28,184	)	$	(245,118	)	$	238,254	$	(68,419	)	$	61,895
Add:
Amortization of interest capitalized in current or prior periods	—		—			—			52		98			52
Fixed charges	31,191		25,623			30,985			28,171		28,960			11,709
Total earnings	$	161,505	$	(2,561	)	$	(214,133	)	$	266,477	$	(39,361	)	$	73,656
Fixed charges:
Interest expense and amortization of debt discount and premium on all indebtedness	28,905		22,186			25,235			18,922		19,833			8,994
Appropriate portion of rentals	2,286		3,437			5,750			9,249		9,127			2,715
Fixed charges	31,191		25,623			30,985			28,171		28,960			11,709
Capitalized interest	—		—			1,044			1,766		768			77
Total fixed charges	$	31,191	$	25,623		$	32,029		$	29,937	$	29,728		$	11,786
Ratio of earnings to fixed charges(1)	5.18		—			—			8.90		—			6.25
Deficiency of earnings to fixed charges	—		28,184			246,162			—		69,089			—

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(1)For the years ended December 31, 2004, 2005 and 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†	Advisory Services Agreement and Release, dated as of February 8, 2008, by and between Cephalon, Inc. and John E. Osborn, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 8, 2008.
10.2†	Cephalon,Inc.2008ManagementIncentiveCompensationPlan,filedasExhibit10.1to the Company’s Current Report on Form 8-K filed on February 1, 2008.
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.

†Compensation plans and arrangements for executive officers and others.

#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.

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SIGNATURES

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

	CEPHALON, INC.
	(Registrant)
May 7, 2008	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-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Frank Baldino, Jr., certify that:

1.I have reviewed this quarterly report on Form 10-Q of Cephalon, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:May 7, 2008

/s/ FRANK BALDINO, JR.

Frank Baldino, Jr., Ph.D.

Chairman and Chief Executive Officer

(Principal executive officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, J. Kevin Buchi, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Cephalon, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:May 7, 2008

/s/ J. KEVIN BUCHI

J. Kevin Buchi

Executive Vice President and Chief Financial Officer

(Principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cephalon, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Frank Baldino, Jr., Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, based on my knowledge, that:

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

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

/s/ FRANK BALDINO, JR.

Frank Baldino, Jr., Ph.D.

Chairman and Chief Executive Officer

May 7, 2008

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cephalon, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2008 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

May 7, 2008