UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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
P.O. Box 4011
Frazer, Pennsylvania		19355
(Address of Principal Executive Offices)		(Zip Code)

(610) 344-0200
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports 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

(Do not check if a smaller reporting company)

Smaller reporting company o

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

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

Class		Outstanding as of October 31, 2008
Common Stock, par value $.01		68,445,603 Shares

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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), and TREANDA® (bendamustine hydrochloride);

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

· 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;

· our ability to comply fully with the terms of our settlement agreements (including the Corporate Integrity Agreement) with the U.S. Attorney’s Office (“USAO”), the Department of Justice (“DOJ”), the Office of the Inspector General of the Department of Health and Human Services (“OIG”) and other federal government entities, the Offices of the Connecticut and Massachusetts Attorneys General and the states;

· our ongoing litigation matters, including litigation stemming from the settlement of the PROVIGIL patent litigation and the FENTORA patent infringement lawsuits we have filed against Watson Laboratories, Inc. and Barr Laboratories, Inc.;

· 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 general economic conditions; 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 and NUVIGIL, 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;

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PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
REVENUES:
Sales	$	489,664		$	428,729		$	1,408,603		$	1,287,802
Other revenues	8,818			9,692			25,813			34,865
	498,482			438,421			1,434,416			1,322,667

COSTS AND EXPENSES:
Cost of sales	121,477			82,258			312,711			251,970
Research and development	88,325			93,527			250,169			274,078
Selling, general and administrative	222,948			186,456			631,832			527,962
Settlement reserve	7,450			369,000			7,450			425,000
Restructuring charges	1,497			—			6,973			—
Acquired in-process research and development	—			—			10,000			—
	441,697			731,241			1,219,135			1,479,010

INCOME (LOSS) FROM OPERATIONS	56,785			(292,820		)	215,281			(156,343		)

OTHER INCOME (EXPENSE):
Interest income	4,002			8,868			15,515			23,485
Interest expense	(8,831		)	(5,660		)	(25,697		)	(15,272		)
Gain on extinguishment of debt	—			5,319			—			5,319
Gain on sale of investment	—			—			—			5,791
Other income (expense), net	(2,284		)	2,493			1,488			3,747
	(7,113		)	11,020			(8,694		)	23,070

INCOME (LOSS) BEFORE INCOME TAXES	49,672			(281,800		)	206,587			(133,273		)

INCOME TAX EXPENSE (BENEFIT)	(62,371		)	24,963			(4,375		)	102,613

NET INCOME (LOSS)	$	112,043		$	(306,763	)	$	210,962		$	(235,886	)

BASIC INCOME (LOSS) PER COMMON SHARE	$	1.64		$	(4.58	)	$	3.11		$	(3.55	)

DILUTED INCOME (LOSS) PER COMMON SHARE	$	1.42		$	(4.58	)	$	2.79		$	(3.55	)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING	68,118			66,931			67,855			66,398

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – ASSUMING DILUTION	78,920			66,931			75,580			66,398

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

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CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	September 30,			December 31,
	2008			2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	846,595		$	818,669
Investments	—			7,596
Receivables, net	350,280			276,776
Inventory, net	115,814			99,098
Deferred tax assets, net	167,368			176,619
Other current assets	108,106			43,267
Total current assets	1,588,163			1,422,025

PROPERTY AND EQUIPMENT, net	501,575			500,396
GOODWILL	471,127			476,515
INTANGIBLE ASSETS, net	753,286			817,828
DEFERRED TAX ASSETS, net	171,865			141,752
OTHER ASSETS	169,589			147,753
	$	3,655,605		$	3,506,269

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	1,023,104		$	1,237,169
Accounts payable	81,323			91,437
Accrued expenses	723,728			677,184
Total current liabilities	1,828,155			2,005,790

LONG-TERM DEBT	2,729			3,788
DEFERRED TAX LIABILITIES, net	72,088			56,540
OTHER LIABILITIES	180,539			138,084
Total liabilities	2,083,511			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, 71,318,187 and 69,956,790 shares issued, and 68,440,453 and 67,604,187 shares outstanding	713			700
Additional paid-in capital	2,050,035			1,934,965
Treasury stock, at cost, 2,877,734 and 2,352,603 shares	(194,782		)	(158,173		)
Accumulated deficit	(413,166		)	(624,128		)
Accumulated other comprehensive income	129,294			148,703
Total stockholders’ equity	1,572,094			1,302,067
	$	3,655,605		$	3,506,269

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

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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	$	210,962		210,962												210,962
Foreign currency translation loss	(19,300		)
Prior service costs and gains on retirement-related plans	(101		)
Unrealized investment losses	(8		)
Other comprehensive loss	(19,409		)	(19,409		)													(19,409		)
Comprehensive income	$	191,553
Issuance of common stock upon conversion of convertible notes				235			528,296	5		230
Exercise of convertible note hedge associated with conversions of convertible notes				—						36,585		524,754	(36,585		)
Stock options exercised				37,185			831,851	8		37,177
Tax benefit from equity compensation				4,141						4,141
Stock-based compensation expense				32,543			1,250	—		32,543
Treasury stock acquired				(24		)						377	(24		)
Other				4,394						4,394
BALANCE, SEPTEMBER 30, 2008				$	1,572,094		71,318,187	$	713	$	2,050,035	2,877,734	$	(194,782	)	$	(413,166	)	$	129,294

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

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CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine months ended
	September 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	210,962		$	(235,886	)
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense (benefit)	(9,409		)	8,750
Shortfall tax benefits from stock-based compensation	(451		)	(222		)
Depreciation and amortization	128,772			101,206
Stock-based compensation expense	32,543			34,940
Gain on extinguishment of debt	—			(5,319		)
Gain on sale of investment	—			(5,791		)
Loss on disposals of property and equipment	2,740			2,873
Impairment charges	1,164			—
Other	(396		)	180
Changes in operating assets and liabilities:
Receivables	(74,258		)	(26,218		)
Inventory	(14,557		)	(1,881		)
Other assets	(99,008		)	(28,552		)
Accounts payable and accrued expenses	34,526			380,776
Other liabilities	70,149			49,465
Net cash provided by operating activities	282,777			274,321

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(55,689		)	(70,887		)
Acquisition of intangible assets	(25,575		)	(99,152		)
Investment in third party	(6,242		)	—
Proceeds from sale of investment in third party	—			12,291
Sales and maturities of available-for-sale investments	7,596			28,212
Purchases of available-for-sale investments	—			(71,398		)
Net cash used for investing activities	(79,910		)	(200,934		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock options	37,185			74,375
Windfall tax benefits from stock-based compensation	4,592			9,934
Acquisition of treasury stock	(24		)	(128		)
Payments on and retirements of long-term debt	(216,093		)	(2,902		)
Net cash provided by (used for) financing activities	(174,340		)	81,279

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(601		)	10,804

NET INCREASE IN CASH AND CASH EQUIVALENTS	27,926			165,470

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	818,669			496,512

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	846,595		$	661,982

Supplemental disclosures of cash flow information:
Non-cash investing and financing activities:
Acquisition of treasury stock associated with convertible note hedge	36,585			—
Conversion of convertible notes into common stock	235			—
Tax benefit from the purchase of convertible note hedge	4,525			—

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

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CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (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 Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. 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.

In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”). FSP FAS 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 was effective upon issuance, including for prior periods for which financial statements have not been issued. FSP FAS 157-3 did not impact our financial reporting as we do not hold any such assets.

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). As of September 30, 2008, we have no available-for-sale securities.

In November 2007, the Emerging Issues Task Force (“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. Cephalon’s current accounting policies are consistent with the accounting under EITF 07-1. Therefore, the accounting for our collaborations will not change. The implementation of EITF 07-1 will result in expanded disclosures for collaborations.

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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.

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.

In May 2008, the FASB issued FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion” (“FSP APB 14-1”). FSP APB 14-1 amends APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” requiring issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to initially record the convertible debt at a discount based on the entity’s nonconvertible debt borrowing rate and amortize the debt discount over the expected term of the debt facility. The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Adoption is on a retrospective basis for all prior periods presented. Upon adoption on January 1, 2009, based on our preliminary evaluation, our convertible debt liability will decrease by approximately $275 million (with a corresponding increase to equity, net of tax) and our 2009 interest expense for our convertible notes will increase by approximately $44 million.

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”) facility 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.

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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 have started to recognize pre-tax, non-cash accelerated depreciation of plant and equipment at the Eden Prairie facility, which we expect to total approximately $18 million to $22 million.

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

	Three months ended September 30, 2008		Nine months ended September 30, 2008
Severance costs	$	1,096	$	5,990
Manufacturing and personnel transfer costs	401		983
Total restructuring charges	$	1,497	$	6,973

Summary of charges and spending related to the restructuring plan:

Restructuring reserves as of January 1, 2008	$	—
Expenses	6,973
Payments	4,127
Restructuring reserves as of September 30, 2008	$	2,846

3. STOCK-BASED COMPENSATION

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

	Three months ended September 30,				Nine months ended September 30,
	2008		2007		2008		2007
Stock option expense	$	5,940	$	6,393	$	19,508	$	22,570
Restricted stock unit expense	4,710		3,920		13,035		12,370
Total stock-based compensation expense*	$	10,650	$	10,313	$	32,543	$	34,940
Total stock-based compensation expense after-tax	$	6,853	$	6,528	$	21,014	$	22,117

* Beginning with the third quarter of 2008, total stock-based compensation is allocated 4% to cost of sales, 38% to research and development and 58% to selling, general and administrative expenses based on the employees’ compensation allocation between these line items. During the first half of 2008 and in 2007, 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.

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4. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE

In the first quarter of 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 that is not yet approved by the U.S. Food and Drug Administration (the “FDA”).

5. INVENTORY, NET

Inventory, net consisted of the following:

	September 30, 2008
	Commercial		Pre-approval		Total
Raw materials	$	28,443	$	—	$	28,443
Work-in-process	39,378		—		39,378
Finished goods	47,993		—		47,993
Total inventory, net	$	115,814	$	—	$	115,814

Inventory, net included in other assets	$	128,857	$	—	$	128,857

	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

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. We intend to launch NUVIGIL commercially in the second half of 2009 and have included net NUVIGIL inventory balances of $128.9 million and $120.0 million at September 30, 2008 and December 31, 2007, respectively, in other assets, rather than inventory.

6. PROPERTY, PLANT and EQUIPMENT

On September 18, 2008, our subsidiary Cephalon France SAS informed the French Works Councils of its intention to search for a potential acquiror of the manufacturing facility at Mitry-Mory, France. We are considering the proposed divestiture due to a reduction of manufacturing activities at the Mitry-Mory manufacturing site. The proposed divestiture is subject to completion of a formal consultation process with the French Works Councils and employees representatives.

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based on the new estimated useful life. As of September 30, 2008, we had $43.3 million of net property and equipment related to the Mitry-Mory facility included on our balance sheet.

7. 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	—		(4,972		)	(4,972		)
September 30, 2008	$	266,393	$	204,734		$	471,127

We completed our annual test of impairment of goodwill as of July 1, 2008 and concluded that goodwill was not impaired.

8. INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

		September 30, 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	$	44,550	$	54,450	$	99,000	$	39,600	$	59,400
DURASOLV technology	14 years	70,000		20,087		49,913		70,000		16,435		53,565
ACTIQ marketing rights	10-12 years	83,454		51,773		31,681		83,454		46,183		37,271
GABITRIL product rights	9-15 years	107,254		60,108		47,146		107,215		54,636		52,579
TRISENOX product rights	8-13 years	113,370		29,385		83,985		113,836		22,749		91,087
VIVITROL product rights	15 years	110,000		18,333		91,667		110,000		12,833		97,167
AMRIX product rights	18 years	99,332		15,658		83,674		99,257		6,204		93,053
MYOCET trademark	20 years	181,933		25,017		156,916		194,653		19,465		175,188
Other product rights	5-20 years	293,275		139,421		153,854		269,956		111,438		158,518
		$	1,157,618	$	404,332	$	753,286	$	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 $24.0 million and $22.3 million for the three months ended September 30, 2008 and 2007, respectively, and $77.0 million and $64.2 million for the nine months ended September 30, 2008 and 2007, respectively. In June 2008, the U.S. Patent and Trademark Office issued a pharmaceutical formulation patent for AMRIX; this patent expires in February 2025. As a result of this issuance, in June 2008, we increased the estimated useful life of the AMRIX product rights from 5 to 18 years. In October 2008, we, together with our partner, Eurand NV, received two Paragraph IV certification letters relating to Abbreviated New Drug Applications submitted individually to the FDA by Mylan Pharmaceuticals, Inc. and Barr Laboratories, Inc., each requesting approval to market and sell a generic equivalent of AMRIX, as further described in Note 11. We do not believe that this has an effect on our useful life of AMRIX at this time.

9. TERMINATION OF CO-PROMOTION AGREEMENT

With respect to the marketing of PROVIGIL in the United States, on August 29, 2008, we terminated our co-promotion agreement with Takeda Pharmaceuticals North America, Inc. (“TPNA”) effective November 1, 2008. As a result of the termination, we will be required under the agreement to make payments to TPNA during the three years following the termination of the agreement (the “Sunset Payments”). The Sunset Payments will be calculated based on a percentage of royalties to TPNA during the final twelve months of the agreement. In September 2008, we recorded an accrual of $27.2 million representing the present value of the estimated Sunset Payments due to TPNA.

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10. LONG-TERM DEBT

Long-term debt consisted of the following:

	September 30,			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	—			213,564
Zero Coupon convertible subordinated notes first putable June 2010	199,866			199,806
Mortgage and building improvement loans	1,514			2,165
Capital lease obligations	2,664			2,841
Other	1,789			2,581
Total debt	1,025,833			1,240,957
Less current portion	(1,023,104		)	(1,237,169		)
Total long-term debt	$	2,729		$	3,788

During the second quarter of 2008, we delivered a notice of redemption to the holders of our Zero Coupon Notes first putable June 2008 (the “2008 Notes”). Prior to the redemption date, all but $0.1 million of aggregate principal amount of the 2008 Notes were converted. Holders who converted their 2008 Notes received from us an aggregate of $213.0 million in cash and 528,110 shares of our common stock, under the terms of the 2008 Notes. Concurrently with the conversion, we received from Credit Suisse First Boston (“CSFB”) 524,754 shares of our common stock in settlement of the convertible note hedge agreement associated with the 2008 Notes. The warrant held by CSFB and associated with the 2008 Notes expired without exercise. The $0.1 million of 2008 Notes that were not converted were redeemed by us for cash of $0.1 million.

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 Zero Coupon Notes first putable June 2010, respectively, at the balance sheet date. At September 30, 2008 and December 31, 2007, our stock price was $77.49 and $71.76, respectively. Therefore, all of our convertible notes are presented in the current portion of long-term debt on our consolidated balance sheet.

On August 15, 2008, we established a $200 million, three-year revolving credit facility with JP Morgan Chase Bank, N.A. and certain other lenders. The credit facility is available for letters of credit, working capital and general corporate purposes and is guaranteed by certain of our domestic subsidiaries. The credit agreement contains standard covenants, including but not limited to covenants related to total debt to Consolidated EBITDA (as defined in the credit agreement), senior debt to Consolidated EBITDA, interest expense coverage and limitations on capital expenditures, asset sales, mergers and acquisitions, indebtedness, liens, and transactions with affiliates. As of the date of this filing, we have not drawn any amounts under the credit facility.

In the event that a significant conversion of our convertible notes 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, accessing our credit facility, raising money in the capital markets and selling our note hedge instruments for cash.

11. 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.

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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 nine 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 U.S. Department of Justice (the “DOJ”) as required by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Modernization Act”). The FTC conducted an investigation of each of the PROVIGIL settlements and, in February 2008, filed suit against us in the 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 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 dismissed our application to prevent regulatory approval of Apotex’s generic modafinil tablets in Canada. We have learned that Apotex has launched its generic modafinil tablets in Canada, and we intend to initiate a patent infringement lawsuit against Apotex. 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, 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. In early August 2008, we received notice that Hikma Pharmaceuticals filed a Paragraph IV ANDA with the FDA in which it is seeking to market a generic form of PROVIGIL. We have not filed a patent infringement lawsuit against Hikma Pharmaceuticals as of the filing date of this report.

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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. On September 29, 2008, to finalize our previously announced agreement in principle, we entered into a settlement agreement (the “Settlement Agreement”) with the DOJ, the USAO, the Office of Inspector General of the Department of Health and Human Services (“OIG”), TRICARE Management Activity, the U.S. Office of Personnel Management (collectively, the “United States”) and the relators identified in the Settlement Agreement (the “Relators”) to settle the outstanding False Claims Act claims alleging off-label promotion of ACTIQ and PROVIGIL from January 1, 2001 through December 31, 2006 and GABITRIL from January 2, 2001 through February 18, 2005 (the “Claims”). As part of the Settlement Agreement we agreed to pay a total of $375 million (the “Payment”) plus interest of $11.3 million. We also agreed to pay the Relators’ attorneys’ fees. Pursuant to the Settlement Agreement, the United States and the Relators released us from all Claims and the United States agreed to refrain from seeking our exclusion from Medicare/Medicaid, the TRICARE Program or other federal health care programs. In connection with the Settlement Agreement, we pled guilty to one misdemeanor violation of the U.S. Food, Drug and Cosmetic Act and agreed to pay $50 million (in addition to the Payment), of which $40 million applied to a criminal fine and $10 million applied to satisfy the forfeiture obligation.

As part of the Settlement Agreement, we entered into a five-year Corporate Integrity Agreement (the “CIA”) with the OIG. The CIA provides criteria for establishing and maintaining compliance. We are also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed. We also agreed to enter into a State Settlement and Release Agreement (the “State Settlement Agreement”) with each of the 50 states and the District of Columbia. Upon entering into the State Settlement Agreement, a state will receive its portion of the Payment allocated for the compensatory state Medicaid payments and related interest amounts. Each state also agrees to refrain from seeking our exclusion from its Medicaid program.

On September 29, 2008, we also announced that we had entered into an Assurance of Voluntary Compliance (the “Connecticut Assurance”) with the Attorney General of the State of Connecticut and the Commissioner of Consumer Protection of the State of Connecticut (collectively, “Connecticut”) to settle Connecticut’s investigation of our promotion of ACTIQ, GABITRIL and PROVIGIL. Pursuant to the Connecticut Assurance, (i) we agreed to pay a total of $6.15 million to Connecticut, of which $3.8 million will fund Connecticut Department of Public Health cancer initiatives and $0.2 million will fund a state electronic prescription monitoring program; and (ii) Connecticut released us from any claim relating to the promotional practices that were the subject of Connecticut’s investigation. On the same date we also entered into an Assurance of Discontinuance (the “Massachusetts Settlement Agreement”) with the Attorney General of the Commonwealth of Massachusetts (“Massachusetts”) to settle Massachusetts’ investigation of our promotional practices with respect to fentanyl-based products. Pursuant to the Massachusetts Settlement Agreement, (i) we agreed to pay a total of $0.7 million to Massachusetts, of which $0.45 million will fund Massachusetts cancer initiatives and benefit consumers in Massachusetts; and (ii) Massachusetts released us from any claim relating to the promotional practices that were the subject of Massachusetts’ investigation.

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. In May 2007, the plaintiffs filed a consolidated and amended complaint that also allege violations of RICO and conspiracy to violate RICO. We believe the allegations in the complaint 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. 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 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.

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FENTORA Patent Litigation

In April 2008 and June 2008, we received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Watson Laboratories, Inc. and Barr, respectively, requesting approval to market and sell a generic equivalent of FENTORA. Both Watson and Barr allege 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 the manufacture, use or sale of the product described in their respective ANDAs. The 6,200,604 and 6,974,590 patents cover methods of use for FENTORA and do not expire until 2019. In June 2008 and July 2008, we and our wholly-owned subsidiary, CIMA LABS INC., filed lawsuits in U.S. District Court in Delaware against Watson and Barr for infringement of these patents. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays any FDA approval of each ANDA until the earlier of a district court judgment in favor of the ANDA holder or 30 months from the date of our receipt of the respective Paragraph IV certification letter. We intend to vigorously defend our intellectual property rights.

AMRIX

In October 2008, we, together with our partner, Eurand NV, received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Mylan and Barr, each requesting approval to market and sell a generic equivalent of AMRIX. Mylan alleges that Eurand’s U.S. Patent Number 7,387,793 covering AMRIX will not be infringed by its manufacture, use or sale of the product described in its ANDA and reserves its right to challenge the validity and/or unenforceability of the Eurand patent. Barr alleges that Eurand’s U.S. Patent Number 7,387,793 covering AMRIX is invalid, unenforceable and/or will not be infringed by its manufacture, use or sale of the product described in its ANDA. The 7,387,793 patent covers extended-release formulations containing cyclobenzaprine and does not expire until February 26, 2025. Eurand and Cephalon currently are reviewing the respective letters and, by statute, Eurand, as patent holder, has 45 days to initiate a patent infringement lawsuit against Mylan and/or Barr. Such a lawsuit would automatically prevent the FDA from approving the Mylan ANDA and/or the Barr ANDA, as the case may be, until the earlier of a district court decision or 30 months from our receipt of the applicable letter. Eurand and Cephalon have not filed a patent infringement lawsuit against either Mylan or Barr as of the filing date of this report. Working with Eurand, we intend to vigorously defend the AMRIX intellectual property rights.

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 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 an adverse impact on revenues from our drug delivery business.

Other Matters

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

12. COMPREHENSIVE INCOME

The components of total comprehensive income are as follows:

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	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
Net income (loss)	$	112,043		$	(306,763	)	$	210,962		$	(235,886	)
Foreign currency translation gains (losses)	(41,317		)	21,681			(19,300		)	39,155
Prior service costs and gains on retirement-related plans, net of tax	(36		)	14			(101		)	59
Unrealized investment gains (losses)	—			36			(8		)	30
Other comprehensive income (losses)	(41,353		)	21,731			(19,409		)	39,244
Comprehensive income (loss)	$	70,690		$	(285,032	)	$	191,553		$	(196,642	)

13. 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.

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2008		2007		2008		2007
Average market price per share of Cephalon stock	$	74.72	$	74.80	$	68.46	$	75.15

Shares included in diluted EPS calculation:
2.0% Notes	6,584		—		5,581		—
New Zero Coupon Notes	861		—		825		—
Warrants related to 2.0% Notes	1,793		—		155		—
Warrants related to New Zero Coupon Notes	125		—		—		—
Total (Treasury Stock Method)	9,363		—		6,561		—
Other (“If-Converted” Method)	2		—		5		—
Total	9,365		—		6,566		—

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 September 30,					Nine months ended September 30,
	2008		2007			2008		2007
Basic income (loss) per common share computation:
Numerator:
Net income (loss) used for basic income (loss) per common share	$	112,043	$	(306,763	)	$	210,962	$	(235,886	)
Denominator:
Weighted average shares used for basic income (loss) per common share	68,118		66,931			67,855		66,398

Basic income (loss) per common share	$	1.64	$	(4.58	)	$	3.11	$	(3.55	)

	Three months ended September 30,					Nine months ended September 30,
	2008		2007			2008		2007
Diluted income (loss) per common share computation:
Numerator:
Net income (loss) used for basic income (loss) per common share	$	112,043	$	(306,763	)	$	210,962	$	(235,886	)
Denominator:
Weighted average shares used for basic income (loss) per common share	68,118		66,931			67,855		66,398
Effect of dilutive securities:
Convertible subordinated notes and warrants	9,365		—			6,566		—
Employee stock options and restricted stock units	1,437		—			1,159		—
Weighted average shares used for diluted income (loss) per common share	78,920		66,931			75,580		66,398

Diluted income (loss) per common share	$	1.42	$	(4.58	)	$	2.79	$	(3.55	)

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:

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	Three months ended September 30,		Nine months ended September 30,
	2008	2007	2008	2007
Weighted average shares excluded:
Convertible subordinated notes and warrants	23,233	35,020	25,602	35,096
Employee stock options and restricted stock units	1,942	2,934	2,917	3,028
	25,175	37,954	28,519	38,124

14. SEGMENT AND SUBSIDIARY INFORMATION

Revenues for the three months ended September 30:

	2008									2007
	United States			Europe			Total			United States			Europe			Total
Sales:
PROVIGIL	$	241,366		$	17,793		$	259,159		$	202,202		$	14,904		$	217,106
GABITRIL	12,176			2,337			14,513			12,952			881			13,833
CNS	253,542			20,130			273,672			215,154			15,785			230,939

ACTIQ	21,392			14,401			35,793			45,946			10,007			55,953
Generic OTFC	19,569			—			19,569			32,689			—			32,689
FENTORA	41,330			—			41,330			33,193			—			33,193
AMRIX	20,512			—			20,512			—			—			—
Pain	102,803			14,401			117,204			111,828			10,007			121,835

TREANDA	24,551			—			24,551			—			—			—
Other Oncology	4,691			23,195			27,886			4,301			18,405			22,706
Oncology	29,242			23,195			52,437			4,301			18,405			22,706

Other	11,351			35,000			46,351			14,990			38,259			53,249
Total Sales	396,938			92,726			489,664			346,273			82,456			428,729
Other Revenues	8,471			347			8,818			8,823			869			9,692
Total External Revenues	405,409			93,073			498,482			355,096			83,325			438,421
Inter-Segment Revenues	3,697			6,609			10,306			1,356			13,051			14,407
Elimination of Inter-Segment Revenues	(3,697		)	(6,609		)	(10,306		)	(1,356		)	(13,051		)	(14,407		)
Total Revenues	$	405,409		$	93,073		$	498,482		$	355,096		$	83,325		$	438,421

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Revenues for the nine months ended September 30:

	2008									2007
	United States			Europe			Total			United States			Europe			Total
Sales:
PROVIGIL	$	658,777		$	48,428		$	707,205		$	593,394		$	39,171		$	632,565
GABITRIL	37,614			6,669			44,283			39,814			6,268			46,082
CNS	696,391			55,097			751,488			633,208			45,439			678,647

ACTIQ	96,960			40,734			137,694			157,097			28,638			185,735
Generic OTFC	75,845			—			75,845			97,562			—			97,562
FENTORA	116,637			—			116,637			101,224			—			101,224
AMRIX	47,399			—			47,399			—			—			—
Pain	336,841			40,734			377,575			355,883			28,638			384,521

TREANDA	38,932			—			38,932			—			—			—
Other Oncology	14,259			70,837			85,096			13,044			56,645			69,689
Oncology	53,191			70,837			124,028			13,044			56,645			69,689

Other	37,995			117,517			155,512			40,823			114,122			154,945
Total Sales	1,124,418			284,185			1,408,603			1,042,958			244,844			1,287,802
Other Revenues	24,377			1,436			25,813			32,315			2,550			34,865
Total External Revenues	1,148,795			285,621			1,434,416			1,075,273			247,394			1,322,667
Inter-Segment Revenues	14,364			20,421			34,785			15,702			51,222			66,924
Elimination of Inter-Segment Revenues	(14,364		)	(20,421		)	(34,785		)	(15,702		)	(51,222		)	(66,924		)
Total Revenues	$	1,148,795		$	285,621		$	1,434,416		$	1,075,273		$	247,394		$	1,322,667

Income (loss) before income taxes by segment:

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
United States	$	56,953		$	(279,352	)	$	217,645		$	(125,375	)
Europe	(7,281		)	(2,448		)	(11,058		)	(7,898		)
Total	$	49,672		$	(281,800	)	$	206,587		$	(133,273	)

Total assets:

	September 30, 2008		December 31, 2007*
United States	$	2,666,267	$	2,444,804
Europe	989,338		1,061,465
Total	$	3,655,605	$	3,506,269

* Certain reclassifications of prior year amounts have been made to conform to the current year presentation.

15. INCOME TAXES

The Internal Revenue Service (“IRS”) has completed its examination of Cephalon, Inc.’s 2003, 2004 and 2005 federal income tax returns and on October 2, 2008, we received a summary of all Income Tax Examination Changes from the IRS.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2007, as well as the “Risk Factors” contained in Part II, Item 1A of this Quarterly Report on Form 10-Q.

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 50% of our total consolidated net sales for the nine months ended September 30, 2008, of which 93% was in the U.S. market. For the nine months ended September 30, 2008, consolidated net sales of PROVIGIL increased 12% over the nine months ended September 30, 2007. PROVIGIL is indicated for the treatment of excessive sleepiness associated with narcolepsy, obstructive sleep apnea/hypopnea syndrome and shift work sleep disorder. With respect to the marketing of PROVIGIL in the United States, on August 29, 2008, we terminated our co-promotion agreement with Takeda Pharmaceuticals North America, Inc. (“TPNA”) effective November 1, 2008. We currently intend to supplement our existing sales teams with an additional 270 sales representatives who will begin promoting our products in the first quarter of 2009. We plan to accomplish this through a combination of new hires and/or use of a contract sales force. 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 in the second half of 2009.

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 23% of our total consolidated net sales for the nine months ended September 30, 2008, of which 88% 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 and expect to launch the product in certain countries in the first quarter of 2009. 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 the FENTORA sNDA. On September 15, 2008, we received a complete response letter, in which the FDA requested that we implement and demonstrate the effectiveness of proposed enhancements to the current FENTORA risk management program. In accordance with new FDA regulations, we anticipate receiving a second letter from the FDA requesting that the FENTORA Risk Minimization Action Plan (RiskMAP) be converted to incorporate the new standards for the Risk Evaluation and Mitigation Strategy (REMS) safety plan. To address the FDA’s requests, we plan to implement COVERS™, a first-of-its-kind initiative designed to minimize the potential risk of overdose from an opioid through appropriate patient selection. With respect to ACTIQ, its sales have been meaningfully eroded by the launch of FENTORA and by generic OTFC products sold since June 2006 by Barr Laboratories, Inc. and by us through our sales agent, Watson Pharmaceuticals, Inc. We expect this erosion will continue throughout the remainder of 2008.

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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 spasms 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. In June 2008, the U.S. Patent and Trademark Office issued a pharmaceutical formulation patent for AMRIX; this patent expires in February 2025.

In March 2008, we received FDA approval of TREANDA for the treatment of patients with chronic lymphocytic leukemia (“CLL”) and we launched the product in April 2008. In October 2008, we received FDA approval of TREANDA® (bendamustine hydrochloride) for treatment of patients with indolent B-cell non-Hodgkin’s lymphoma (“NHL”) who have progressed during or within six months of treatment with rituximab or a rituximab-containing regimen. The FDA has granted an orphan drug designation for the CLL indication for TRENDA.

On August 15, 2008, we established a $200 million, three-year revolving credit facility with JP Morgan Chase Bank, N.A. and certain other lenders. The credit facility is available for letters of credit, working capital and general corporate purposes and is guaranteed by certain of our domestic subsidiaries. The credit agreement contains standard covenants, including but not limited to covenants related to total debt to consolidated EBITDA (as defined in the credit agreement), senior debt to consolidated EBITDA, interest expense coverage and limitations on capital expenditures, asset sales, mergers and acquisitions, indebtedness, liens, and transactions with affiliates. As of the date of this filing, we have not drawn any amounts under the credit facility.

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 effort.

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.

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 Laboratories Inc. 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 11 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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RESTRUCTURING

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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.

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

INVENTORY

PROPERTY, PLANT and EQUIPMENT

As a result of this decision, we reevaluated the remaining carrying value and useful life of the Mitry-Mory assets and reduced the estimated useful life to approximately two years. During the quarter we have recorded pre-tax, non-cash charges associated with accelerated depreciation of plant and equipment of $3.2 million related to the proposed divestiture based on the new estimated useful life. As of September 30, 2008, we had $43.3 million of net property and equipment related to the Mitry-Mory facility included on our balance sheet.

TERMINATION OF CO-PROMOTION AGREEMENT

With respect to the marketing of PROVIGIL in the United States, on August 29, 2008, we terminated our co-promotion agreement with Takeda Pharmaceuticals North America, Inc. (“TPNA”) effective November 1, 2008. As a result of the termination, we will be required under the agreement to make payments to TPNA during the three years following the termination of the agreement (the “Sunset Payments”). The Sunset Payments will be calculated based on a percentage of royalties to TPNA during the final twelve months of the agreement. In September 2008, we recorded an accrual of $27.2 million, representing the present value of the estimated Sunset Payments due to TPNA.

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RESULTS OF OPERATIONS

(In thousands)

Three months ended September 30, 2008 compared to three months ended September 30, 2007:

	Three months ended
	September 30,
	2008						2007						% Increase (Decrease)
	United States		Europe		Total		United States		Europe		Total		United States		Europe		Total
Sales:
PROVIGIL	$	241,366	$	17,793	$	259,159	$	202,202	$	14,904	$	217,106	19	%	19	%	19	%
GABITRIL	12,176		2,337		14,513		12,952		881		13,833		(6	)	165		5
CNS	253,542		20,130		273,672		215,154		15,785		230,939		18		28		19

ACTIQ	21,392		14,401		35,793		45,946		10,007		55,953		(53	)	44		(36	)
Generic OTFC	19,569		—		19,569		32,689		—		32,689		(40	)	—		(40	)
FENTORA	41,330		—		41,330		33,193		—		33,193		25		—		25
AMRIX	20,512		—		20,512		—		—		—		—		—		—
Pain	102,803		14,401		117,204		111,828		10,007		121,835		(8	)	44		(4	)

TREANDA	24,551		—		24,551		—		—		—		—		—		—
Other Oncology	4,691		23,195		27,886		4,301		18,405		22,706		9		26		23
Oncology	29,242		23,195		52,437		4,301		18,405		22,706		580		26		131

Other	11,351		35,000		46,351		14,990		38,259		53,249		(24	)	(9	)	(13	)
Total Sales	396,938		92,726		489,664		346,273		82,456		428,729		15		12		14
Other Revenues	8,471		347		8,818		8,823		869		9,692		(4	)	(60	)	(9	)
Total Revenues	$	405,409	$	93,073	$	498,482	$	355,096	$	83,325	$	438,421	14	%	12	%	14	%

Sales—In the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which accounted for 65% of our total consolidated gross sales for the three months ended September 30, 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 September 30, 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, remaining near the low end of this range at quarter end. At September 30, 2008, we believe that our generic OTFC inventory held at wholesalers and retailers is approximately three months.

For the three months ended September 30, 2008, sales were impacted by price changes, changes in the product sales allowances deducted from gross sales as described further below and by changes in the relative levels of the number of units of inventory held at wholesalers and retailers. For the three months ended September 30, 2008, total sales increased by 14% over the prior year. The key factors that contributed to the increase in sales are summarized by product as follows:

· In CNS, sales of PROVIGIL increased 19%. Sales of PROVIGIL in the U.S. increased by 19% as a result of 2008 domestic price increases, resulting in an average price increase of 20% period over period, offset by a 1% decrease in U.S. prescriptions, according to IMS Health. European sales of PROVIGIL increased 19% due to both increases in unit sales and the favorable effect of exchange rates.

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· In Pain, sales decreased 4%. Sales of ACTIQ in the United States were impacted by domestic price increases in 2008, resulting in an average price increase of 25% period over period. This price impact was offset by a 47% decrease in U.S. prescriptions, according to IMS Health, resulting from the continued erosion of sales due to the impact of generic competition to ACTIQ and by an increase in returns activity, as described below. Sales of ACTIQ in Europe increased 44% due to increases in unit sales in France, Germany, UK and other areas, along with the favorable effect of exchange rates. Sales of FENTORA increased 25%, impacted by an average 16% domestic price increase, a decrease in coupon redemption activity, and an offsetting 21% decrease in prescriptions resulting from a challenging reimbursement environment and an overall decline in the rapid-onset fentanyl market.

· In Oncology, sales increased 131%, due primarily to the introduction of TREANDA in April 2008, while European oncology products increased 26%, due to an increase in unit sales of MYOCET® (liposomal doxorubicin) and favorable effect of exchange rate changes.

Other Revenues—The decrease of 9% 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
	September 30,
	2008			2007			Change			% Change
Gross sales	$	562,074		$	479,065		$	83,009		17	%
Product sales allowances:
Prompt payment discounts	9,378			7,781			1,597			21
Wholesaler discounts	(10		)	5,373			(5,383		)	(100	)
Returns	16,687			(2,598		)	19,285			(742	)
Coupons	5,194			8,713			(3,519		)	(40	)
Medicaid discounts	11,493			10,648			845			8
Managed care and governmental contracts	29,668			20,419			9,249			45
	72,410			50,336			22,074
Net sales	$	489,664		$	428,729		$	60,935		14	%
Product sales allowances as a percentage of gross sales	12.9		%	10.5		%

Prompt payment discounts, generally granted at 2% of sales, increased for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007 due to the increase in sales. Wholesaler discounts decreased period over period as the price increases made during the quarter ended September 30, 2008 produced wholesaler credits that completely offset the wholesaler discounts that would have been recorded for the period.

Returns increased substantially during the third quarter of 2008 as a result of heightened ACTIQ returns. Between March and July of 2006, we increased ACTIQ manufacturing levels to ensure sufficient supply as we switched manufacturing to FENTORA in anticipation of its launch and prepared for the transition of ACTIQ production to a new facility that opened in August 2006. The expiration of this product in the third quarter of 2008 has resulted in increased returns. We believe that the returns in the third quarter of 2008 are not indicative of future periods and therefore we have not adjusted our returns percentage as it relates to current ACTIQ sales. In the third quarter of 2007, returns were impacted by a decrease in historical returns experience for our CNS products and by our analysis of retail pipeline data. Coupons decreased period over period as a result of the decrease in coupon redemption activity for FENTORA.

Medicaid discounts increased at a rate lower than our increase in sales for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007 due to the decrease in utilization of pain products under Medicaid. Managed care and governmental contracts increased for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007 due to additional rebates for certain managed care and governmental programs, particularly with respect to sales of PROVIGIL and generic OTFC. In addition, during the three months ended September 30, 2008, we recognized a reserve of $4.6 million 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

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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.

	Three months ended
	September 30,
	2008		2007		Change			% Change
Costs and expenses:
Cost of sales	$	121,477	$	82,258	$	39,219		48	%
Research and development	88,325		93,527		(5,202		)	(6	)
Selling, general and administrative	222,948		186,456		36,492			20
Settlement reserve	7,450		369,000		(361,550		)	(98	)
Restructuring charges	1,497		—		1,497			—
	$	441,697	$	731,241	$	(289,544	)	(40	)%

Cost of Sales—The cost of sales was 24.8% of net sales for the three months ended September 30, 2008 and 19.2% of net sales for the three months ended September 30, 2007. This increase resulted from a reserve for excess modafinil purchase commitments of $26.0 million (5.3% of net sales), based on our third quarter analysis of estimated future requirements. In addition, we recorded accelerated depreciation charges within cost of sales in the third quarter of 2008 of $1.6 million (0.3% of net sales) related to the restructuring at our CIMA facility, and $2.9 million (0.6% of net sales) related to the proposed divestiture of our Mitry-Mory manufacturing site.

Research and Development Expenses—Research and development expenses decreased $5.2 million, or 6%, for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007. This decrease is primarily attributable to the recognition of a $15.0 million milestone payment related to our NDA filing for TREANDA in 2007, partially offset by an increase in clinical activity related to NUVIGIL. For the three months ended September 30, 2008 and 2007, we recognized $7.3 million and $5.3 million, respectively, of depreciation expense included in research and development expenses.

Selling, General and Administrative Expenses—Selling, general and administrative expenses increased $36.5 million, or 20%, for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007, primarily due to the recognition of $27.2 million of estimated Sunset Payments due to TPNA, and to increased selling and marketing spending on the promotion of PROVIGIL and AMRIX, offset by a decrease in promotional spending on FENTORA. For the three months ended September 30, 2008 and 2007, we recognized $5.3 million and $2.2 million, respectively, of depreciation expense included in selling, general and administrative expenses.

Settlement reserve — For the three months ended September 30, 2008, we recognized $7.4 million for the charges relating to the settlement of investigations by the states of Connecticut and Massachusetts, and for our estimate of attorneys’ fees for the Relators as part of the U.S. Attorney’s Office settlement. For the three months ended September 30, 2007, we increased the existing settlement reserve by $369.0 million related to the terms of the agreement in principle reached with the U.S. Attorney’s Office. See Note 11 to the Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Restructuring charges—For the three months ended September 30, 2008, we recorded $1.5 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
	September 30,
	2008			2007			Change			% Change
Other income (expense):
Interest income	$	4,002		$	8,868		$	(4,866	)	(55	)%
Interest expense	(8,831		)	(5,660		)	(3,171		)	56
Gain on extinguishment of debt	—			5,319			(5,319		)	(100	)
Other income (expense), net	(2,284		)	2,493			(4,777		)	(192	)
	$	(7,113	)	$	11,020		$	(18,133	)	(165	)%

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Nine months ended September 30, 2008 compared to nine months ended September 30, 2007:

	Nine months ended September 30,
	2008						2007						% Increase (Decrease)
	United States		Europe		Total		United States		Europe		Total		United States		Europe		Total
Sales:
PROVIGIL	$	658,777	$	48,428	$	707,205	$	593,394	$	39,171	$	632,565	11	%	24	%	12	%
GABITRIL	37,614		6,669		44,283		39,814		6,268		46,082		(6	)	6		(4	)
CNS	696,391		55,097		751,488		633,208		45,439		678,647		10		21		11

ACTIQ	96,960		40,734		137,694		157,097		28,638		185,735		(38	)	42		(26	)
Generic OTFC	75,845		—		75,845		97,562		—		97,562		(22	)	—		(22	)
FENTORA	116,637		—		116,637		101,224		—		101,224		15		—		15
AMRIX	47,399		—		47,399		—		—		—		—		—		—
Pain	336,841		40,734		377,575		355,883		28,638		384,521		(5	)	42		(2	)

TREANDA	38,932		—		38,932		—		—		—		—		—		—
Other Oncology	14,259		70,837		85,096		13,044		56,645		69,689		9		25		22
Oncology	53,191		70,837		124,028		13,044		56,645		69,689		308		25		78

Other	37,995		117,517		155,512		40,823		114,122		154,945		(7	)	3		0
Total Sales	1,124,418		284,185		1,408,603		1,042,958		244,844		1,287,802		8		16		9
Other Revenues	24,377		1,436		25,813		32,315		2,550		34,865		(25	)	(44	)	(26	)
Total Revenues	$	1,148,795	$	285,621	$	1,434,416	$	1,075,273	$	247,394	$	1,322,667	7	%	15	%	8	%

Sales—For the nine months ended September 30, 2008, sales were impacted by price changes, changes in the product sales allowances deducted from gross sales as described further below and by changes in the relative levels of the number of units of inventory held at wholesalers and retailers. For the nine months ended September 30, 2008, total sales increased by 9% over the prior year. The key factors that contributed to the increase in sales are summarized by product as follows:

· In CNS, sales of PROVIGIL increased 12 percent. Sales of PROVIGIL in the U.S. increased 11%, due to domestic price increases of approximately 14% in February and 12% in August, resulting in an average price increase of 12.5% from period to period, offset by a 1% decrease in U.S. prescriptions, according to IMS Health. European sales of PROVIGIL increased 24% due primarily to both increases in unit sales and to favorable effect of exchange rates.

· In Pain, sales decreased 2 percent. Sales of ACTIQ in the U.S. were impacted by increases in domestic prices of approximately 17% from period to period, offset by a 53% decrease in U.S. prescriptions, according to IMS Health, resulting from the continued erosion of sales due to the introduction of generic competition to ACTIQ and by an increase in returns activity, as described below. Sales of generic OTFC decreased 22% due to decreases in prices and to a 12% decrease in prescriptions according to IMS Health. Sales of FENTORA increased 15% due primarily to an average 10% domestic price increase period over period. AMRIX sales, which began in the fourth quarter of 2007, were $47.4 million. During the remainder of 2008, while we expect continued growth from AMRIX, we expect overall sales of our other Pain products to decrease compared to the same period in 2007 and the first half of 2008 based on a shift in market share from ACTIQ to generic OTFC.

· In Oncology, sales increased 78 percent. U.S. sales increased due to sales of TREANDA, which began in April 2008. Sales of our European oncology products increased 25%, due primarily to an increase in unit sales of MYOCET and favorable effect of exchange rates.

Other Revenues—The decrease of 26% from period to period is primarily due to a decrease in revenues from our collaborators including royalties, milestone payments and fees.

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

	Nine months ended September 30,
	2008			2007			Change			% Change
Gross sales	$	1,600,034		$	1,444,003		$	156,031		11	%
Product sales allowances:
Prompt payment discounts	26,176			23,639			2,537			11
Wholesaler discounts	5,910			15,723			(9,813		)	(62	)
Returns	26,842			9,258			17,584			190
Coupons	16,370			19,895			(3,525		)	(18	)
Medicaid discounts	29,314			29,277			37			0
Managed care and governmental contracts	86,819			58,409			28,410			49
	191,431			156,201			35,230
Net sales	$	1,408,603		$	1,287,802		$	120,801		9	%
Product sales allowances as a percentage of gross sales	12.0		%	10.8		%

Prompt payment discounts, generally granted at 2% of sales, increased for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 due to the increase in sales. Wholesaler discounts decreased period over period because price increases in 2008 produced wholesaler credits that partially offset the wholesaler discounts that would have been recorded for that same period.

Returns increased for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 as a result of heightened ACTIQ returns. Between March and July of 2006, we increased ACTIQ manufacturing levels to ensure sufficient supply as we switched manufacturing to FENTORA in anticipation of its launch and prepared for the transition of ACTIQ production to a new facility that opened in August 2006. The expiration of this product in the third quarter of 2008 has resulted in increased returns. We believe that the returns in the third quarter of 2008 are not indicative of future periods and therefore we have not adjusted our returns percentage as it relates to current ACTIQ sales. Coupons decreased period over period as a result of the decrease in coupon redemption activity for FENTORA.

Medicaid discounts remained constant for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 due to the lower Medicaid utilization of our Pain products. Managed care and governmental contracts increased for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 due to additional rebates for certain managed care and governmental programs, particularly with respect to sales of PROVIGIL and our generic OTFC product. In addition, we recognized a reserve of $12.2 million as of September 30, 2008 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, Medicare Part D, managed care and governmental contracts sales.

	Nine months ended September 30,
	2008		2007		Change			% Change
Costs and expenses:
Cost of sales	$	312,711	$	251,970	$	60,741		24	%
Research and development	250,169		274,078		(23,909		)	(9	)
Selling, general and administrative	631,832		527,962		103,870			20
Settlement reserve	7,450		425,000		(417,550		)	(98	)
Restructuring charge	6,973		—		6,973			—
Acquired in-process research and development	10,000		—		10,000			—
	$	1,219,135	$	1,479,010	$	(259,875	)	(18	)%

Cost of Sales—The cost of sales was 22.2% of net sales for the nine months ended September 30, 2008 and 19.6% of net sales for the nine months ended September 30, 2007. This increase resulted from a reserve for excess modafinil purchase commitments of $26.0 million (1.8% of net sales), based on our analysis of estimated future requirements, and an increase in amortization expense of $12.7 million (0.9% of net sales) due primarily to the amortization recognized for AMRIX and TREANDA products rights. In addition, we recorded accelerated depreciation charges within cost of sales for the nine

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months ended September 30, 2008 of $5.4 million (0.4% of net sales) related to restructuring at our CIMA facility, and $2.9 million (0.2% of net sales) related to the proposed divestiture of our Mitry-Mory manufacturing site. The increase was partially offset by a charge of $3.5 million (0.3% of net sales) in the first quarter of 2007 for the termination of a materials supply agreement.

Research and Development Expenses—Research and development expenses decreased $23.9 million, or 9%, for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007. For the nine months ended September 30, 2007, we recognized $26.5 million in up-front payments related to rights acquired to certain development stage products. This decrease is partially offset by an increase in clinical activity related to NUVIGIL. For the nine months ended September 30, 2008 and 2007, we recognized $17.4 million and $15.6 million, respectively, of depreciation expense included in research and development expenses.

Selling, General and Administrative Expenses—Selling, general and administrative expenses increased $103.9 million, or 20%, for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007. Other general and administrative expenses increased for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 due to the recognition of $27.2 million of estimated Sunset Payments due to TPNA, to increased selling expenses associated with PROVIGIL, AMRIX, and TREANDA, and to the cessation of the reimbursement of expenses from Alkermes related to the promotion of VIVITROL, offset by a decrease in promotional spending on FENTORA. For the nine months ended September 30, 2008 and 2007, we recognized $15.0 million and $9.0 million, respectively, of depreciation expense included in selling general and administrative expenses.

Settlement Reserve— For the nine months ended September 30, 2008, we recognized $7.4 million for the charges relating to the settlement of investigations by the states of Connecticut and Massachusetts, and for our estimate of attorneys’ fees for the Relators as part of the U.S. Attorney’s Office settlement. For the nine months ended September 30, 2007, we established a reserve of $425.0 million related to our estimate of the minimum liability stemming from the resolution of the investigations by the U.S. Attorney’s Office. This investigation was settled in September 2008. See Note 11 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Restructuring charges—For the nine months ended September 30, 2008, we recorded $7.0 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.

Acquired in-process research and development—For the nine months ended September 30, 2008, we recorded acquired in-process research and development of $10 million related to our license of technology in the field of oncology.

	Nine months ended September 30,
	2008			2007			Change			% Change
Other income (expense):
Interest income	$	15,515		$	23,485		$	(7,970	)	(34	)%
Interest expense	(25,697		)	(15,272		)	(10,425		)	68
Gain on extinguishment of debt	—			5,319			(5,319		)	(100	)
Gain on sale of investment	—			5,791			(5,791		)	(100	)
Other income (expense), net	1,488			3,747			(2,259		)	(60	)
	$	(8,694	)	$	23,070		$	(31,764	)	(138	)%

Other Income (Expense)—Other income (expense) decreased $31.8 million for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007. The decrease was attributable to the following factors:

· an $8.0 million decrease in interest income due to lower investment returns and offset by higher average investment balances;

· a $10.4 million increase in interest expense due to the recognition of $11.3 million of estimated accrued interest related to the agreement with the U.S. Attorney’s Office;

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

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

· a $2.3 million decrease in other income, net, primarily due to fluctuations in foreign currency gains and losses in the comparable periods.

	Nine months ended September 30,
	2008			2007		Change			% Change
Income tax expense	$	(4,375	)	$	102,613	$	(106,988	)	(104	)%

Income Taxes—For the nine months ended September 30, 2008 we recognized $4.4 million of income tax benefit on income before income taxes of $206.6 million, resulting in an overall effective tax rate of (2.1) percent. This includes a tax benefit of $84.5 million, of which $82.3 million related to the settlement with the U.S. Attorney’s Office, for which the related expense was recorded in 2007, and $2.2 million related to the settlements with Connecticut and Massachusetts, for which the related expense was recorded in the third quarter of 2008. The nine months ended September 30, 2008 also included an additional tax expense of $5.2 million return to provision adjustment for the 2007 federal tax returns timely filed in September 2008 and a release of $4.4 million in tax reserves for tax contingencies which were previously under audit by tax authorities. This compared to income tax expense for the nine months ended September 30, 2007 of $102.6 million on loss before income taxes of $133.3 million. During the second quarter of 2007, Cephalon did not recognize a tax benefit for the U.S. Attorney’s Office settlement reserve due to the uncertainty associated with the tax treatment of any potential settlement.

LIQUIDITY AND CAPITAL RESOURCES

(In thousands)

Cash, cash equivalents and investments at September 30, 2008 were $846.6 million, representing 23% of total assets, compared to $826.3 million, representing 24% of total assets at December 31, 2007. During the second quarter of 2008, we paid $213.1 million upon conversion or redemption of our 2008 Zero Coupon Convertible Notes.

Our working capital deficit, which is calculated as current assets less current liabilities, was $240.0 million at September 30, 2008 compared to $583.8 million at December 31, 2007. Our convertible notes contain conversion terms that will impact whether these notes are classified as current or long-term liabilities and consequently affect our working capital position. At September 30, 2008 and December 31, 2007, $1,020.0 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:

	Nine months ended
	September 30,
	2008			2007
Net cash provided by operating activities	$	282,777		$	274,321
Net cash used for investing activities	(79,910		)	(200,934		)
Net cash (used for) provided by financing activities	(174,340		)	81,279
Effect of exchange rate changes on cash and cash equivalents	(601		)	10,804
Net increase in cash and cash equivalents	$	27,926		$	165,470

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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. The net loss for the nine months ended September 30, 2007 was offset by a change in accounts payable and accrued expenses of $425.0 million related to the agreement with the U.S. Attorney’s Office.

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 nine months ended September 30, 2008 and 2007, we made capital expenditures of $55.7 million and $70.9 million, respectively. Significant expenditures include the expansion and improvement of our facilities and our worldwide implementation of SAP®. Cash used for intangible assets includes a payment of $25 million initiated in March 2008 upon FDA approval of TREANDA and $99.2 million paid in August 2007 in association with the acquisition of the North America rights to AMRIX from E. Claiborne Robins Company Inc. Investment in third party is an equity investment of $6.2 million in a privately-held pharmaceutical company paid during the second quarter of 2008. These uses of cash were partially offset by cash provided from sales and maturities of our investment portfolio. As of September 30, 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. Additionally, in June 2007, we received cash proceeds of $12.3 million on the sale of an investment in a privately-held company and recorded the related gain of $5.8 million in other income.

Net Cash (Used for) 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.

Proceeds from exercises of stock options were $37.2 million and $74.4 million for the nine months ended September 30, 2008 and 2007, respectively. The corresponding windfall tax benefits from stock-based compensation for those same periods were $4.6 million and $9.9 million, respectively. During the second quarter of 2008, we paid $213.1 million upon conversion or redemption of our 2008 Zero Coupon Convertible Notes.

Commitments and Contingencies

There have been no material changes to the Contractual Obligations Table, presented in our Annual Report on Form 10-K for the year ended December 31, 2007. The table excludes unrecognized tax benefits, which totaled $79.6 million as of January 1, 2008 and $85.9 million as of September 30, 2008. We also expect to timely settle any federal tax assessments as a result of certain tax audits. During the twelve months ending September 30, 2009, we expect to make $9.9 million cash tax payments related to unrecognized tax benefits recorded at September 30, 2008.

As of the filing date of this report, as discussed in Note 16 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, we paid a total of $423.1 million plus $11.3 million interest from cash and cash equivalents on hand in October 2008 relating to the USAO settlement. The remaining settlement payments of $1.9 million plus interest related to the USAO settlement are expected to be paid during the fourth quarter of 2008.

Outlook

We expect to use our cash, cash equivalents, credit facility and investments on working capital and general corporate purposes, the acquisition of businesses, products, product rights, or technologies, the settlement of outstanding litigation, 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. However, we expect that sales of our currently marketed products should allow us to continue to generate positive operating cash flow 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.

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As part of the U.S. Attorney’s Office settlement, in October 2008, we paid a total of $423.1 million plus $11.3 million interest, as set forth in Note 16 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. The remaining settlement payments of $1.9 million plus interest related to the USAO settlement are expected to be paid in the fourth quarter.

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 2008, we experienced a decline in prescription growth of PROVIGIL that was more than offset by price increases. Finally, growth of our modafinil-based product sales in the future may depend in part on our ability to successfully launch NUVIGIL in the second half of 2009.

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. 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 the FENTORA sNDA. On September 15, 2008, we received a complete response letter, in which the FDA requested that we implement and demonstrate the effectiveness of proposed enhancements to the current FENTORA risk management program. Even if we successfully implement and demonstrate the effectiveness of our risk management program, we do not know whether the FDA will approve our request for an expanded label for FENTORA. Growth of FENTORA sales also will depend on the strength of the patent covering the product, particularly in light of the ANDAs filed by Watson and Barr. 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 continued sales growth with AMRIX and TREANDA, which we launched in October 2007 and April 2008, respectively. Growth of AMRIX sales will depend in part on the strength of the patent covering the product, particularly in light of the ANDAs filed by Mylan and Barr.

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 and 2009, 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 disorder, traumatic brain injury, cancer related fatigue/tiredness, 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.

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Manufacturing, Selling and Marketing Efforts

During the fourth quarter of 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 continue in the fourth quarter of 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 and pre-launch expenses associated with NUVIGIL.

Over the past few years, we have been developing a manufacturing process for the active pharmaceutical ingredient in NUVIGIL that is more cost effective than our prior process of separating modafinil into armodafinil. As a result of our plan to manufacture armodafinil in the future using this new process and our decision to launch NUVIGIL in the second half of 2009, we assessed the potential impact of these items on certain of our existing agreements to purchase modafinil. Under these contracts, we have agreed to purchase minimum amounts of modafinil through 2012, with aggregate purchase commitments totaling $64.4 million as of September 30, 2008. Based on our third quarter assessment, we have recorded a reserve of $26.0 million for purchase commitments for modafinil raw materials not expected to be utilized. We also are initiating a search for a potential acquiror of our manufacturing facility in Mitry-Mory, France where we produce modafinil. As of September 30, 2008, we had $43.3 million of property and equipment related to the Mitry-Mory facility included on our balance sheet. The resolution of these assessments could have a negative impact on our results of operations in future periods.

Indebtedness

We have significant indebtedness outstanding, consisting principally of indebtedness on convertible subordinated notes. The following table summarizes the principal terms of our most significant convertible subordinated notes outstanding as of September 30, 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, 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 or $67.80 with respect to the 2.0% 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 September 30, 2008, our closing stock price was $77.49, and therefore, all of our notes were convertible as of September 30, 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.

All of our notes have been classified as current liabilities on our consolidated balance sheet as of September 30, 2008. 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 underlying the

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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 under the current terms. In the 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, accessing our credit facility, raising money in the capital markets or selling our note hedge instruments for cash.

The annual interest payments on our convertible notes outstanding as of September 30, 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 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 2010 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	5,406	—	5,406	(5,406	)	—
$	75.00	7,498	1,998	9,496	(7,498	)	1,998
$	85.00	9,097	4,496	13,593	(9,097	)	4,496
$	95.00	10,359	6,468	16,827	(10,359	)	6,468
$	105.00	11,381	8,065	19,446	(11,381	)	8,065

(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

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acquisitions and it may be necessary for us to access our $200 million credit facility or to issue stock or raise substantial additional funds in the future to complete future transactions. In addition, as a result of our acquisition efforts, we are likely to experience significant charges to earnings for merger and related expenses (whether or not our efforts are successful) that may include transaction costs, closure costs or acquired in-process research and development charges.

Other

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

·		cost of product sales;

·		achievement and timing of research and development milestones;

·		collaboration revenues;

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

·		marketing and other expenses;

·		manufacturing or supply disruptions;

·		unanticipated conversions of our convertible notes; 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.

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The following table summarizes activity in each of the above categories for the nine months ended September 30, 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	(26,176		)	(5,912		)	(12,888		)	(16,478		)	(29,165		)	(88,194		)	(178,813		)
Prior periods	—			2			(13,954		)	108			(149		)	1,375			(12,618		)
Total	(26,176		)	(5,910		)	(26,842		)	(16,370		)	(29,314		)	(86,819		)	(191,431		)

Actual:
Current period	22,325			5,885			—			10,459			5,625			47,665			91,959
Prior periods	3,082			6,447			22,505			7,144			19,545			22,892			81,615
Total	25,407			12,332			22,505			17,603			25,170			70,557			173,574
Balance at September 30, 2008	$	(3,851	)	$	(27	)	$	(29,672	)	$	(6,020	)	$	(24,027	)	$	(40,526	)	$	(104,123	)

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

Product Sales Allowances- Returns- Customers can return short-dated or expired product that meets the guidelines set forth in our return goods policy. Product shelf life from the date of manufacture for PROVIGIL is three years, GABITRIL is two to three years, depending on product strength, and ACTIQ, TREANDA, AMRIX and FENTORA are each two years. Returns are accepted from wholesalers and retail pharmacies. Wholesaler customers can return short-dated product with six months or less shelf life remaining and expired product within twelve months following the expiration date. Retail pharmacies are not permitted to return short-dated product but can return full or partial quantities of expired product only within twelve months following the expiration date. We base our estimates of product returns for each of our products on the percentage of returns that we have experienced historically. Notwithstanding this, we may adjust our estimate of product returns if we are aware of other factors that we believe could meaningfully impact our expected return percentages. These factors could include, among others, our estimates of inventory levels of our products in the distribution channel, known sales trends and existing or anticipated competitive market forces such as product entrants and/or pricing changes.

For the nine months ended September 30, 2008, we recorded a provision for returns at a weighted average rate of 1.7% of gross sales, which is 1.0% increase over our actual historical return percentages. Between March and July of 2006, we increased ACTIQ manufacturing levels to ensure sufficient supply as we switched manufacturing to FENTORA in anticipation of its launch and prepared for the transition of ACTIQ production to a new facility that opened in August 2006. The expiration of this product in the third quarter of 2008 has resulted in increased returns. We believe that the returns in the third quarter of 2008 are not indicative of future periods and therefore we have not adjusted our returns percentage as it relates to current ACTIQ sales. In the future, actual returns could exceed historical experience and our estimates of expected future returns activity because of several factors, including, among other things, wholesaler and retailer stocking patterns and/or competition. If the returns provision percentage were to increase by 1.0% of 2008 year-to-date gross sales from our proprietary products marketed in the U.S., then an additional provision of $12.6 million would result.

Valuation of Property and Equipment, Intangible Assets, Goodwill and Investments—Our property and equipment have been recorded at cost and are being depreciated on a straight-line basis over the estimated useful life of those assets.

We regularly assess our property and equipment, intangible assets, goodwill and other long lived assets to determine whether any impairment in these assets may exist and, if so, the extent of such impairment. To do this, in the case of goodwill, we estimate the fair value of each of our reporting units and compare it to the book value of their net assets. In the case of intangibles and other long lived assets, we assess whether triggering events have occurred and if so, we compare the estimated cash flows of the related asset group and compare it to the book value of the asset group. Calculating fair value as well as future cash flows requires that we make a number of critical legal, economic, market and business assumptions that reflect our best estimates as of the testing date. We believe the methods we use to determine these underlying assumptions and estimates are reasonable and reflective of common practice. Notwithstanding this, our assumptions and estimates may differ significantly

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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 September 30, 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 an equivalent increase in reported expenses. This sensitivity analysis of the effects of changes in foreign currency exchange rates does not assume any changes in the level of operations of our European subsidiaries.

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

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b) Change in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this Item is incorporated by reference to Note 11 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 three largest products, and our future success will depend on the continued acceptance of PROVIGIL and FENTORA, the growth of AMRIX and TREANDA and the ability to successfully launch NUVIGIL.

For the nine months ended September 30, 2008, approximately 50%, 15% and 8% of our total consolidated net sales were derived from sales of PROVIGIL, ACTIQ (including our generic OTFC product) and FENTORA, respectively. With respect to PROVIGIL, we cannot be certain that it will continue to be accepted in its market. In September 2006, Barr entered the market with generic OTFC. Since that time, we have experienced meaningful erosion of branded ACTIQ sales in the United States and we expect this erosion will continue during the remainder of 2008. In addition, sales of our own generic

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OTFC product could be significantly impacted by the entrance into the market of additional generic OTFC products, which could occur at any time. With respect to NUVIGIL, which we currently intend to launch in the second half of 2009, we cannot be sure that our sales and marketing efforts will be successful or that it will be accepted in the market.

To counter the impact from existing and potential generic competition, we will need FENTORA, our next-generation pain product launched in October 2006, to continue to be accepted in the market. 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. We also are working with FDA and expect to implement COVERS™, a new risk management program for FENTORA intended to ensure appropriate prescribing and use of this product. It is possible that this program could have a negative impact on FENTORA prescription growth. If FDA recommends that a similar program be applied to ACTIQ and generic OTFC, it is possible that prescriptions of these products also could be impacted.

For sales to grow over the next several years, we will need our two newest products, AMRIX and TREANDA, to achieve projected levels of growth. Specifically, the following factors, among others, could affect the level of market acceptance of these products, as well as PROVIGIL, FENTORA, and ACTIQ:

·		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;

·		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 these products 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 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. On September 15, 2008, we received a complete response letter, in which the FDA requested that we implement and demonstrate the effectiveness of proposed enhancements to the current FENTORA risk management program. We are continuing to work with FDA and expect to implement COVERS™, a new risk management program for FENTORA that is intended to ensure appropriate prescribing and use of this product and to provide a potential avenue for approval of the FENTORA sNDA. 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.

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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.

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.

PROVIGIL / NUVIGIL

The U.S. composition of matter patent for modafinil expired in 2001. We own U.S. and foreign patent rights that expire between 2014 and 2015 and cover pharmaceutical compositions and uses of modafinil, specifically, certain particle sizes of modafinil contained in the pharmaceutical composition of PROVIGIL. With respect to NUVIGIL, we successfully obtained issuance of a U.S. patent in November 2006 claiming the Form I polymorph of armodafinil, the active drug substance in NUVIGIL. This patent is currently set to expire in 2023. Foreign patent applications directed to the 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.

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

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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.

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. In early August 2008, we received notice that Hikma Pharmaceuticals filed a Paragraph IV ANDA with the FDA in which it is seeking to market a generic form of PROVIGIL. We have not filed a patent infringement lawsuit against Hikma Pharmaceuticals as of the filing date of this report.

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 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 an adverse impact on revenues from our drug delivery business.

FENTORA

In April 2008 and June 2008, we received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Watson Laboratories, Inc. and Barr Laboratories, Inc., respectively, requesting approval to market and sell a generic equivalent of FENTORA. Both Watson and Barr allege 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 the manufacture, use or sale of the product described in their respective ANDAs. The 6,200,604 and 6,974,590 patents cover methods of use for FENTORA and do not expire until 2019. In June 2008 and July 2008, we and our wholly-owned subsidiary, CIMA LABS INC., filed lawsuits in U.S. District Court in Delaware against Watson and Barr for infringement of these patents. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays any FDA approval of each ANDA until the earlier of a district court judgment in favor of the ANDA holder or 30 months from the date of our receipt of the respective Paragraph IV certification letter.

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AMRIX

In October 2008, we, together with our partner, Eurand NV, received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Mylan and Barr, each requesting approval to market and sell a generic equivalent of AMRIX. Mylan alleges that Eurand’s U.S. Patent Number 7,387,793 covering AMRIX will not be infringed by its manufacture, use or sale of the product described in its ANDA and reserves its right to challenge the validity and/or unenforceability of the Eurand patent. Barr alleges that Eurand’s U.S. Patent Number 7,387,793 covering AMRIX is invalid, unenforceable and/or will not be infringed by its manufacture, use or sale of the product described in its ANDA. The 7,387,793 patent covers extended-release formulations containing cyclobenzaprine and does not expire until February 26, 2025. Eurand and Cephalon currently are reviewing the respective letters and, by statute, Eurand, as patent holder, has 45 days to initiate a patent infringement lawsuit against Mylan and/or Barr. Such a lawsuit would automatically prevent the FDA from approving the Mylan ANDA and/or the Barr ANDA, as the case may be, until the earlier of a district court decision or 30 months from our receipt of the applicable letter. Eurand and Cephalon have not filed a patent infringement lawsuit against either Mylan or Barr as of the filing date of this report. While we, working with Eurand, intend to vigorously defend the AMRIX intellectual property rights, these efforts, ultimately, may not be successful.

Our activities and products are subject to significant government regulations and approvals, which are often costly and could result in adverse consequences to our business if we fail to comply.

We currently have a number of products that have been approved for sale in the United States, foreign countries or both. All of our approved products are subject to extensive continuing regulations relating to, among other things, testing, manufacturing, quality control, labeling, and promotion. The failure to comply with any rules and regulations of the FDA or any foreign medical authority, or the post-approval discovery of previously unknown problems relating to our products, could result in, among other things:

· fines, recalls or seizures of products;

· total or partial suspension of manufacturing or commercial activities;

· non-approval of product license applications;

· restrictions on our ability to enter into strategic relationships; and

· criminal prosecution.

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

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Although we have resolved the previously outstanding federal and state government investigations into our sales and promotional practices, we cannot rule out regulatory or other actions by governmental entities who are not party to the settlement agreements we have entered. We may also become subject to claims by private parties with respect to the alleged conduct which was the subject of our settlements with the federal and state governmental entities. In addition, while we intend to comply fully with the terms of the settlement agreements, the settlement agreements provide for sanctions and penalties for violations of specific provisions therein. We cannot predict when or if any such actions may occur or reasonably estimate the amount of any fines, penalties, or other payments or the possible effect of any non-monetary restrictions that might result from either settlement of, or an adverse outcome from, any such actions. Further, while we have initiated, and will initiate, compliance programs to prevent conduct similar to the alleged conduct subject to these agreements, we cannot provide complete assurance that conduct similar to the alleged conduct will not occur in the future, subjecting Cephalon to future claims and actions. Failure to comply with the terms of the CIA could result in, among other things, substantial civil penalties and/or our exclusion from government health care programs, which could materially reduce our sales and adversely affect our financial condition and results of operations.

It is both costly and time-consuming for us to comply with these inquiries and with the extensive regulations to which we are subject. Additionally, incidents of adverse drug reactions, unintended side effects or misuse relating to our products could result in additional regulatory controls or restrictions, or even lead to withdrawal of a product from the market.

With respect to our product candidates, we conduct research, preclinical testing and clinical trials, each of which requires us to comply with extensive government regulations. We cannot market these product candidates or these new indications in the United States or other countries without receiving approval from the FDA or the appropriate foreign medical authority. The approval process is highly uncertain and requires substantial time, effort and financial resources.

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Ultimately, we may never obtain approval in a timely manner, or at all. Without these required approvals, our ability to substantially grow revenues in the future could be adversely affected.

In addition, because PROVIGIL, NUVIGIL, FENTORA, ACTIQ and generic OTFC contain active ingredients that are controlled substances, we are subject to regulation by the U.S. Drug Enforcement Agency (“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. Depending on sales volumes and our ability to obtain additional quota from the DEA, we could face shortages of quota in the future 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 professionals to clarify the appropriate patient selection, design and administration for FENTORA, following reports of

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serious adverse events in connection with the use of the product. Likewise, in February 2005, working with the FDA, we updated our prescribing information for GABITRIL to include a bolded warning describing the risk of new onset seizures in patients without epilepsy. In addition, in patients who take multiple medications, drug interactions could occur that can be difficult to predict. Additionally, incidents of product misuse, product diversion or theft may occur, particularly with respect to products such as FENTORA, ACTIQ, generic OTFC and PROVIGIL, which contain controlled substances.

These events, among others, could result in adverse publicity that harms the commercial prospects of our products or lead to additional regulatory controls that could limit the circumstances under which the product is prescribed or even lead to the withdrawal of the product from the market. In particular, FENTORA and ACTIQ have been approved under regulations concerning drugs with certain safety profiles, under which the FDA has established special restrictions to ensure safe use. Any violation of these special restrictions could lead to the imposition of further restrictions or withdrawal of the product from the market.

We 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;

· unanticipated conversion of our convertible notes; and

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

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

All of our convertible notes outstanding contain restricted conversion prices that are either below or close to our stock price as of September 30, 2008. As a result, certain of our convertible notes have been classified as current liabilities on our consolidated balance sheet at September 30, 2008. Under the terms of the indentures governing the notes, we are

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obligated to repay in cash the aggregate principal balance of any such notes presented for conversion. As of the filing date of this report, we do not have available cash, cash equivalents and investments sufficient to repay all of the convertible notes, if presented. In addition, other than the restrictive covenants contained in our credit agreement, 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.

The restrictive covenants contained in our credit agreement may limit our activities.

With respect to our $200 million, three-year revolving credit facility, the credit agreement contains restrictive covenants which affect, and in many respects could limit or prohibit, among other things, our ability to:

· incur indebtedness;

· create liens;

· make investments or loans;

· engage in transactions with affiliates;

· pay dividends or make other distributions on, or redeem or repurchase, our capital stock;

· enter into various types of swap contracts or hedging agreements;

· make capital contributions;

· sell assets; or

· pursue mergers or acquisitions.

Failure to comply with the restrictive covenants in our credit agreement could preclude our ability to borrow or accelerate the repayment of any debt outstanding under the credit agreement. Additionally, as a result of these restrictive covenants, we may be at a disadvantage compared to our competitors that have greater operating and financing flexibility than we do.

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. 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.

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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.

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 TREANDA, we face competition from LEUKERAN®, CAMPATH® and the combination therapy of fludarabine, cyclophosphamide and rituximab. 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

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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 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

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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 October 31, 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;

· 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 controls 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 controls over financial reporting are effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls 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.

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A portion of our revenues and expenses is subject to exchange rate fluctuations in the normal course of business, which could adversely affect our reported results of operations.

Historically, a portion of our revenues and expenses has been earned and incurred, respectively, in currencies other than the U.S. dollar. For the nine months ended September 30, 2008, 20% 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 nine months ended September 30, 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.

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 11 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

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ITEM 5. OTHER INFORMATION

Computation of Ratios of Earnings to Fixed Charges

														Nine months ended
	Year Ended													September
	December 31,													30,
	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	)	$	206,587
Add:
Amortization of interest capitalized in current or prior periods	—		—			—			52		98			184
Fixed charges	31,191		25,623			30,985			28,171		28,960			33,046
Total earnings	$	161,505	$	(2,561	)	$	(214,133	)	$	266,477	$	(39,361	)	$	239,817

Fixed charges:
Interest expense and amortization of debt discount and premium on all indebtedness	28,905		22,186			25,235			18,922		19,833			25,697
Appropriate portion of rentals	2,286		3,437			5,750			9,249		9,127			7,349
Fixed charges	31,191		25,623			30,985			28,171		28,960			33,046

Capitalized interest	—		—			1,044			1,766		768			77

Total fixed charges	$	31,191	$	25,623		$	32,029		$	29,937	$	29,728		$	33,123

Ratio of earnings to fixed charges(1)	5.18		—			—			8.90		—			7.24

Deficiency of earnings to fixed charges	—		28,184			246,162			—		69,089			—

(1)

For the years ended December 31, 2004, 2005 and 2007, no ratios are provided because earnings were insufficient to cover fixed charges.

Cautionary Note Regarding Forward-Looking Statements		ii

PART I — FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements

	Consolidated Statements of Operations — Three and nine months ended September 30, 2008 and 2007	1

	Consolidated Balance Sheets — September 30, 2008 and December 31, 2007	2

	Consolidated Statements of Stockholders’ Equity — September 30, 2008	3

	Consolidated Statements of Cash Flows — Nine months ended September 30, 2008 and 2007	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

PART II — OTHER INFORMATION		38

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 5.	Other Information	52

Item 6.	Exhibits	53

SIGNATURES		54

Exhibit No.		Description
10.1		Credit Agreement dated as of August 15, 2008 among Cephalon, Inc., the lenders named therein, JPMorgan Chase Bank, N.A., as administrative agent, Deutsche Bank Securities Inc. and Bank of America N.A., as co-syndication agents, Wachovia Bank, N.A. and Barclays Bank plc, as co-documentation agents, and J.P. Morgan Securities Inc., Deutsche Bank Securities Inc. and Banc of America Securities LLC, as joint bookrunners and joint lead arrangers, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 18, 2008.
10.2		Letter to Takeda Pharmaceuticals North America, Inc. dated August 29, 2008, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 3, 2008.
10.3		Settlement Agreement dated as of September 29, 2008 among Cephalon, Inc., the U.S. Department of Justice, the U.S. Attorney’s Office for the Eastern District of Pennsylvania, the Office of Inspector General of the Department of Health and Human Services, TRICARE Management Activity, the U.S. Office of Personnel Management and the relators identified therein, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 29, 2008.
10.4		Corporate Integrity Agreement dated as of September 29, 2008 between the Office of Inspector General of the Department of Health and Human Services and Cephalon, Inc., filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 29, 2008.
10.5		Form of State Settlement Agreement and Release dated as of September 29, 2008 between Cephalon, Inc. and each of the 50 States and the District of Columbia, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on September 29, 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.

	CEPHALON, INC.
	(Registrant)


November 5, 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)

*		Filed herewith.

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