10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                       to

Commission File Number 000-19119

Cephalon, Inc.(Exact Name of Registrant as Specified in Its Charter)

Delaware	23-2484489
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
41 Moores Road
P.O. Box 4011
Frazer, Pennsylvania	19355
(Address of Principal Executive Offices)	(Zip Code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   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 April 30, 2010
Common Stock, par value $.01	75,191,556 Shares

TABLE OF CONTENTS

Cautionary Note Regarding Forward-Looking Statements		ii
PART I — FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Statements of Operations — Three months ended March 31, 2010 and 2009	1
	Consolidated Balance Sheets — March 31, 2010 and December 31, 2009	2
	Consolidated Statement of Changes in Equity — Three months ended March 31, 2010 and 2009	3
	Consolidated Statements of Cash Flows — Three months ended March 31, 2010 and 2009	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	32
Item 4.	Controls and Procedures	32
PART II — OTHER INFORMATION		32
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 5.	Other Information	45
Item 6.	Exhibits	46
SIGNATURES		47

i

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical facts or statements of current condition, this report and the documents into which this report is and will be incorporated contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements contained in this report or incorporated herein by reference constitute our expectations or forecasts of future events as of the date this report was filed with the Securities and Exchange Commission and are not statements of historical fact. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as “anticipate,” “will,” “estimate,” “expect,” “project,” “intend,” “should,” “plan,” “believe,” “hope,” and other words and terms of similar meaning in connection with any discussion of, among other things, future operating or financial performance, strategic initiatives and business strategies, regulatory or competitive environments, our intellectual property and product development. In particular, these forward-looking statements include, among others, statements about:

·our dependence on sales of PROVIGIL® (modafinil) Tablets [C-IV] and NUVIGIL® (armodafinil) Tablets [C-IV] in the United States and the market prospects and future marketing efforts for PROVIGIL, NUVIGIL, 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 TREANDA, NUVIGIL and/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 our corporate integrity agreement) with the U.S. Attorney’s Office (“USAO”), the U.S. 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 Attorneys General of Connecticut and Massachusetts and the various states;

·our ongoing litigation matters, including litigation stemming from the settlement of the PROVIGIL patent litigation, the FENTORA patent infringement lawsuits we have filed against Watson Laboratories, Inc. (“Watson”) and Barr Laboratories, Inc. (“Barr”), the AMRIX patent infringement lawsuits we have filed against Barr, Mylan Pharmaceuticals, Inc. (“Mylan”), Impax Laboratories, Inc. (“Impax”) and Anchen Pharmaceuticals, Inc. (“Anchen”), and the NUVIGIL patent infringement lawsuits we have filed against Actavis Pharma Manufacturing Pvt Ltd. (“Actavis”), Lupin Limited (“Lupin”), Mylan, Sandoz, Inc. (“Sandoz”), Teva Pharmaceuticals USA, Inc. (“Teva”) and Watson;

·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, acquisition activity 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 TREANDA, FENTORA and NUVIGIL, and to launch such products or indications successfully;

ii

·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;

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

·a finding that our patents are invalid or unenforceable or that generic versions of our marketed products do not infringe our patents or the “at risk” launch of generic versions of our products;

·the loss of key management or scientific personnel;

·the activities of our competitors in the industry;

·regulatory, legal or other setbacks or delays with respect to the settlement agreements with the USAO, the DOJ, the OIG and other federal entities, the state settlement agreements and corporate integrity agreement related thereto, the settlement agreements with the Offices of the Attorneys General of Connecticut and Massachusetts, our settlements of the PROVIGIL patent litigation and the ongoing litigation related to such settlements, the FENTORA patent infringement lawsuit we have filed against Watson, the AMRIX patent infringement lawsuits we have filed against Barr, Mylan, Impax and Anchen, and the NUVIGIL patent infringement lawsuits we have filed against Actavis, Lupin, Mylan, Sandoz, Teva and Watson;

·our ability to integrate successfully technologies, products and businesses we acquire and realize the expected benefits from those acquisitions, including our recent acquisitions of Mepha AG and Ception Therapeutics, Inc.;

·unanticipated conversion of our convertible notes by our note holders;

·market conditions generally or in the biopharmaceutical industry that make raising capital or consummating acquisitions difficult, expensive or both;

·the effect of volatility of currency exchange rates; and

·enactment of new government laws, regulations, court decisions, regulatory interpretations or other initiatives that are adverse to us or our interests.

We do not intend to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We discuss in more detail the risks that we anticipate in Part II, Item 1A of this Quarterly Report on Form 10-Q. This discussion is permitted by the Private Securities Litigation Reform Act of 1995.

iii

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three months ended March 31,
	2010			2009
REVENUES:
Net Sales	$	576,681		$	514,366
Other revenues	19,904			5,602
	596,585			519,968
COSTS AND EXPENSES:
Cost of sales	105,043			97,770
Research and development	105,377			103,024
Selling, general and administrative	204,641			200,590
Restructuring charges	744			1,637
Acquired in-process research and development	—			30,750
	415,805			433,771
INCOME FROM OPERATIONS	180,780			86,197
OTHER INCOME (EXPENSE):
Interest income	1,930			704
Interest expense	(26,791		)	(16,604		)
Other income (expense), net	(7,271		)	6,539
	(32,132		)	(9,361		)
INCOME BEFORE INCOME TAXES	148,648			76,836
INCOME TAX EXPENSE	48,311			33,054
NET INCOME	100,337			43,782
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST	10,228			14,801
NET INCOME ATTRIBUTABLE TO CEPHALON, INC.	$	110,565		$	58,583
BASIC INCOME PER COMMON SHARE ATTRIBUTABLE TO CEPHALON, INC.	$	1.47		$	0.85
DILUTED INCOME PER COMMON SHARE ATTRIBUTABLE TO CEPHALON, INC.	$	1.35		$	0.75
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING	74,990			68,792
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING— ASSUMING DILUTION	81,811			77,993

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

1

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	March 31,			December 31,
	2010 *			2009 *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,874,453		$	1,647,635
Receivables, net	349,271			376,076
Inventory, net	236,649			240,576
Deferred tax assets, net	232,900			243,246
Other current assets	65,920			58,423
Total current assets	2,759,193			2,565,956
INVESTMENTS	12,427			12,427
PROPERTY AND EQUIPMENT, net	432,212			451,879
GOODWILL	583,307			590,284
INTANGIBLE ASSETS, net	945,924			981,857
DEBT ISSUANCE COSTS	17,695			18,862
OTHER ASSETS	35,516			36,830
	$	4,786,274		$	4,658,095
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt, net	$	827,594		$	818,925
Accounts payable	99,191			88,829
Accrued expenses	451,720			430,209
Total current liabilities	1,378,505			1,337,963
LONG-TERM DEBT	369,805			363,696
DEFERRED TAX LIABILITIES, net	148,240			159,328
OTHER LIABILITIES	110,354			111,728
Total liabilities	2,006,904			1,972,715
COMMITMENTS AND CONTINGENCIES
REDEEMABLE EQUITY	196,562			207,307
EQUITY:
Cephalon 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, 78,270,902 and 78,002,764 shares issued, and 75,184,556 and 74,916,920 shares outstanding	783			780
Additional paid-in capital	2,567,453			2,534,070
Treasury stock, at cost, 3,086,346 and 3,085,844 shares	(208,460		)	(208,427		)
Accumulated deficit	(68,094		)	(178,659		)
Accumulated other comprehensive income	85,135			114,194
Total Cephalon stockholders’ equity	2,376,817			2,261,958
Noncontrolling interest	205,991			216,115
Total equity	2,582,808			2,478,073
	$	4,786,274		$	4,658,095

*Amounts include assets and liabilities of our variable interest entities (VIEs). Our interests and obligations with respect to our VIEs’ assets and liabilities are limited to those accorded to us in our agreements with our VIEs. See Note 2 to these consolidated financial statements for amounts.

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

2

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands, except share data)

(Unaudited)

	Cephalon Stockholders’ Equity															Total
				Additional									Accumulated Other			Stockholders’ Equity
	Common Stock			Paid-in		Treasury Stock				Accumulated			Comprehensive			Attributable to			Noncontrolling
	Shares	Amount		Capital		Shares	Amount			Deficit			Income			Cephalon, Inc.			Interest			Total
BALANCE, JANUARY 1, 2009	71,707,041	$	717	$	2,095,324	2,970,399	$	(201,705	)	$	(521,286	)	$	43,630		$	1,416,680		$	—		$	1,416,680
Net income										58,583						$	58,583		$	(14,801	)	$	43,782
Foreign currency translation gains													(6,164		)	(6.164		)	—			(6,164		)
Net prior service costs on retirement-related plans													(21		)	(21		)	—			(21		)
Unrealized investment gains													2,165			2,165			—			2,165
Comprehensive income																54,563			(14,801		)	39,762
Issuance of common stock upon conversion of convertible notes	54	—		—												—						—
Stock options exercised	94,035	1		4,539												4,540						4,540
Tax benefit from equity compensation				351												351						351
Stock-based compensation expense	1,250	—		11,560												11,560						11,560
Treasury stock acquired						377	(29		)							(29		)				(29		)
Change in redeemable equity associated with convertible notes				9,999												9,999						9,999
Purchase of share in noncontrolling interest																—			306,500			306,500
Other																—			416			416
BALANCE, MARCH 31, 2009	71,802,380	$	718	$	2,121,773	2,970,776	$	(201,734	)	$	(462,703	)	$	39,610		$	1,497,664		$	292,115		$	1,789,779

	Cephalon Stockholders’ Equity															Total
				Additional									Accumulated Other			Stockholders’ Equity
	Common Stock			Paid-in		Treasury Stock				Accumulated			Comprehensive			Attributable to			Noncontrolling
	Shares	Amount		Capital		Shares	Amount			Deficit			Income			Cephalon, Inc.			Interest			Total
BALANCE, JANUARY 1, 2010	78,002,764	$	780	$	2,534,070	3,085,844	$	(208,427	)	$	(178,659	)	$	114,194		$	2,261,958		$	216,115		$	2,478,073
Net income										110,565						$	110,565		$	(10,228	)	$	100,337
Foreign currency translation gains													(29,034		)	(29,034		)	—			(29,034		)
Net prior service costs on retirement-related plans													(25		)	(25		)	—			(25		)
Unrealized investment gains													—			—			—			—
Comprehensive income																81,506			(10,228		)	71,278
Stock options exercised	266,888	3		13,801												13,804						13,804
Tax benefit from equity compensation				7												7						7
Stock-based compensation expense	1,250	—		8,830												8,830						8,830
Treasury stock acquired						502	(33		)							(33		)				(33		)
Change in redeemable equity associated with convertible notes				10,745												10,745						10,745
Other																			104			104
BALANCE, MARCH 31, 2010	78,270,902	$	783	$	2,567,453	3,086,346	$	(208,460	)	$	(68,094	)	$	85,135		$	2,376,817		$	205,991		$	2,582,808

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

3

CEPHALON INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three months ended
	March 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	100,337		$	43,782
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax benefit	(1,045		)	(9,036		)
Depreciation and amortization	48,353			41,952
Stock-based compensation expense	8,830			11,560
Amortization of debt discount and debt issuance costs	18,144			10,558
Loss (gain) on foreign exchange contracts	6,169			(13,084		)
Other	239			109
Changes in operating assets and liabilities:
Receivables	20,308			55,668
Inventory	(2,383		)	(7,697		)
Other assets	(348		)	9,683
Accounts payable, accrued expenses and deferred revenues	39,449			27,458
Other liabilities	(4,498		)	1,756
Net cash provided by operating activities	233,555			172,709
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(9,613		)	(14,958		)
Cash balance from consolidation of variable interest entity	—			52,563
Investment in Ception	—			(75,000		)
Purchases of investments	—			(9,082		)
(Cash Settlements of) proceeds from foreign exchange contract	(6,155		)	7,732
Purchases of available-for-sale investments	—			(41,390		)
Net cash used for investing activities	(15,768		)	(80,135		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock options	13,804			4,540
Windfall tax benefits from stock-based compensation	23			351
Acquisition of treasury stock	(33		)	(29		)
Payments on and retirements of long-term debt	(2,577		)	(3,283		)
Net cash provided by financing activities	11,217			1,579
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(2,186		)	(4,036		)
NET INCREASE IN CASH AND CASH EQUIVALENTS	226,818			90,117
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	1,647,635			524,459
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,874,453		$	614,576

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

4

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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 U.S. GAAP 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 U.S. Securities and Exchange Commission (the “SEC”), which includes audited financial statements as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009. 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

Effective January 1, 2010, we adopted the revised accounting guidance for consolidation of variable interest entities (“VIE”), which replaces the previous quantitative based risk and rewards calculation for determining the primary beneficiary of a VIE with an approach focused on identifying which enterprise has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses or (2) the right to receive benefits.  The new guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.  The new guidance has not changed our assessment of which entities are included in our consolidated financial statements. We adopted the additional disclosure requirements of this new standard effective with this Form 10-Q.

In October 2009, the FASB issued revised accounting guidance for multiple-deliverable arrangements.  The amendment requires that arrangement considerations be allocated at the inception of the arrangement to all deliverables using the relative selling price method and provides for expanded disclosures related to such arrangements.  It is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are currently evaluating the impact of adoption on our consolidated financial statements.

                In March 2010, the FASB issued revised accounting guidance for milestone revenue recognition. The new guidance recognizes the milestone method as an acceptable revenue recognition method for substantive milestones in research or development transactions. It is effective on a prospective basis to milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010.  We are currently evaluating the impact of adoption on our consolidated financial statements.

2.   ACQUISITIONS AND TRANSACTIONS

Ception Therapeutics, Inc.

In January 2009, we entered into an option agreement (the “Ception Option Agreement”) with Ception Therapeutics, Inc. (“Ception”).  Under the terms of the Ception Option Agreement, we had the irrevocable option (the “Ception Option”) to purchase all of the outstanding capital stock on a fully diluted basis of Ception within a specified period of time.  As consideration for the Ception Option, we paid $50.0 million to Ception and paid Ception stockholders an aggregate of $50.0 million.  In February 2010, we exercised the Ception Option based on our evaluation of the results of a Phase II clinical trial of Ception’s lead compound, CINQUIL™ (reslizumab) for the treatment of eosinophilic asthma.

We have determined that, because of our rights under the Ception Option Agreement, effective on January 13, 2009, Ception is a variable interest entity for which we are the primary beneficiary.  As a result, as of January 13, 2009 we have included the financial condition and results of operations of Ception in our consolidated financial statements.  However, we did not have an equity interest in Ception as of March 31, 2010 and, therefore, we allocated the Ception losses to noncontrolling interest in the consolidated statement of operations.

5

After completing certain closing conditions, including U.S. antitrust approval, in April 2010, we acquired privately-held Ception Therapeutics, Inc. for $250.0 million.  We also advanced $25.0 million in financing to Ception prior to the acquisition, for which the Ception stockholders were not required to (and therefore did not) repay at the closing of the acquisition. Ception stockholders also could receive (i) additional payments related to clinical and regulatory milestones and (ii) royalties related to net sales of products developed from Ception’s program to discover small molecule, orally-active, anti-TNF (tumor necrosis factor) receptor agents.   We expect to begin a Phase III clinical trial for the treatment of eosinophilic asthma by the end of 2010.

As a result of exercising our option to purchase Ception in April 2010, we expect to recognize a reduction of approximately $200 million in Cephalon stockholders’ equity for the second quarter of 2010 which reflects the difference between the fair value of the consideration paid and the amount by which the noncontrolling interest will be adjusted to reflect the change in our ownership in Ception. The purchase price includes the estimated fair value of future milestone payments. The contingent consideration payments will be recorded as a liability and remeasured each quarter through earnings.

The following summarizes the carrying amounts and classification of Ception’s assets and liabilities included in our consolidated balance sheet as of December 31, 2009 and March 31, 2010:

	December 31,2009		March 31,2010
Cash and cash equivalents	$	52,500	$	56,000
Other current assets	193		275
Property and equipment, net	348		294
Goodwill	121,918		121,918
Intangible assets	199,400		199,400
Other assets	10		10
Current portion of long-term debt, net	3,763		2,105
Accounts payable	4,064		1,450
Accrued expenses	5,526		9,150
Deferred tax liabilities	61,911		60,868
Noncontrolling interest	188,105		179,323

Although Ception is included in our consolidated financial statements, our interest in Ception’s assets is limited to that accorded to us in the agreements with Ception as described above.  For example, Ception’s cash and cash equivalents balance includes $50.0 million of Ception Option Agreement proceeds; Ception retained the right to distribute those cash proceeds to its current stockholders. In April 2010, Ception distributed the $50.0 million cash to its stockholders immediately prior to the closing of the acquisition.  Ception’s creditors have no recourse to the general credit of Cephalon.

BioAssets Development Corporation

Effective November 2009, we signed an agreement with BioAssets Development Corporation (“BDC”) that sets forth our option to acquire BDC.  Under the terms of the option agreement, we paid BDC an upfront payment of $30.0 million. If we exercise the option, we have agreed to pay a total of $12.5 million plus the value of BDC’s net working capital less the amount of any outstanding debt.  BDC stockholders could also receive additional future payments related to regulatory and sales milestones.  We may exercise our option at any time from the closing date of the option agreement until the date that is 60 days after receipt of one-month patient response data from BDC’s Phase II study of etanercept for the treatment of sciatica. Data are anticipated to be available in the second half of 2010.

We have determined that, because of our rights under the BDC option agreement, effective on November 18, 2009, BDC is a variable interest entity for which we are the primary beneficiary.  As a result, as of November 18, 2009 we have included the financial condition and results of operations of BDC in our consolidated financial statements.  However, we do not have an equity interest in BDC and, therefore, we have allocated the BDC losses to noncontrolling interest in the consolidated statement of operations.   If the BDC option expires unexercised, we will deconsolidate BDC and recognize a loss of $30.0 million, equal to our investment in BDC.  BDC did not have a material impact on our revenues or earnings attributable to our Cephalon shareholders for the period ended March 31, 2010 or on a pro forma basis for the periods ended March 31, 2010 and 2009.  BDC is included in our U. S. operating segment.

6

The following summarizes the carrying amounts and classification of BDC’s assets and liabilities included in our consolidated balance sheet as of December 31, 2009 and March 31, 2010:

	December 31, 2009		March 31,2010
Cash and cash equivalents	$	9,854	$	6,707
Accounts receivable	69		3
Other current assets	27		19
Property and equipment, net	18		12
Goodwill	20,391		20,391
Intangible assets	48,000		48,000
Accounts payable	362		56
Accrued expenses	1,817		377
Deferred tax liabilities	18,171		18,032
Noncontrolling interest	28,009		26,668

Although BDC is included in our consolidated financial statements, our interest in BDC’s assets is limited to that accorded to us in the agreements with BDC as described above.  BDC’s creditors have no recourse to the general credit of Cephalon.

3.   RESTRUCTURING

2009 restructuring

In October 2009, we began to restructure our discovery research organization to focus on our pipeline opportunities, primarily in oncology, inflammatory diseases and pain, with an emphasis on our biologic opportunities, wind down our internal research efforts in CNS and reduce our overall cost structure.  As part of this restructuring, we have recently announced worldwide restructuring efforts. Beginning in 2009 and continuing in 2010, we expect to eliminate approximately 82 jobs worldwide through a combination of voluntary resignations and terminations.  As of March 31, 2010, 69 positions have been eliminated.  The total estimated pre-tax costs of these restructuring efforts are $9.7 million.  Total estimated charges and spending related to worldwide restructuring efforts recognized in the consolidated statement of operations and included primarily in the United States segment are as follows:

	Three months endedMarch 31,
	2010
Restructuring reserves as of January 1	$	7,862
Severance Costs	32
Payments	(6,673		)
Restructuring reserves as of March 31	$	1,221

CIMA 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 performed in Salt Lake City. The phased transition of manufacturing activities and the closure of the Eden Prairie facility are expected to be completed in 2011.  The consolidation of drug delivery research and development activities at Brooklyn Park was completed in 2008.  The plan is intended to increase efficiencies in manufacturing and research and development activities, reduce our cost structure and enhance competitiveness.

As a result of this plan, we will incur certain costs associated with exit or disposal activities.  As part of the plan, we estimate that approximately 90 jobs will be eliminated in total, with approximately 175 net jobs eliminated at CIMA and approximately 85 net jobs added in Salt Lake City.

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

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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 being recognized between 2008 and 2011 and are included in the United States segment.  Through March 31, 2010, we have incurred a total of $14.2 million related to the restructuring plan.  In addition to the costs described above, we have recognized pre-tax, non-cash accelerated depreciation of plant and equipment at the Eden Prairie facility, which we expect to total approximately $18 million to $20 million.  Through March 31, 2010, we have incurred a total of $15.4 million in accelerated depreciation charges.

	Three months ended March 31,
	2010			2009
Restructuring reserves as of January 1	$	7,083		$	3,733
Severance costs	527			1,066
Manufacturing and personnel transfer costs	217			571
Payments	(473		)	(774		)
Restructuring reserves as of March 31	$	7,354		$	4,596

4.  ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE

For the three months ended March 31, 2009, we incurred expense of $30.0 million in exchange for the exclusive, worldwide license rights to LUPUZORTM, acquired from ImmuPharma plc (“ImmuPharma”).  We also paid SymBio $0.8 million in exchange for the license rights to bendamustine hydrochloride in China and Hong Kong.

5.  OTHER INCOME (EXPENSE)

Other income (expense), net consisted of the following:

	Three months ended March 31,
	2010			2009
Gains (losses) on foreign exchange derivative instruments	$	(6,169	)	$	5,352
Arana dividend income	—			1,567
Foreign exchange gains (losses)	(1,102		)	(380		)
Other income (expense), net	$	(7,271	)	$	6,539

In February 2010, Cephalon entered into a foreign exchange forward contract related to the Mepha AG transaction.  This contract protects against fluctuations between the Swiss Franc and the U.S. Dollar. For the period ended March 31, 2010, we recognized a loss of $6.2 million from the decrease in fair value of these foreign exchange contracts. For more information on our acquisition of Mepha, please see Note 17.

In March 2009, Cephalon entered into a foreign exchange forward contract and a foreign exchange option contract related to our Arana transaction.  Together, these contracts protected against fluctuations between the Australian Dollar and the U.S. Dollar.  For the period ended March 31, 2009, we recognized a gain of $5.4 million from the increase in fair value of these foreign exchange contracts.

6.  ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income, all of which apply to Cephalon, Inc., consisted of the following:

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	March 31, 2010		December 31, 2009
Foreign currency translation gains	$	83,125	$	112,159
Prior service gains and losses on retirement-related plans	2,010		2,035
Accumulated other comprehensive income	$	85,135	$	114,194

7.  FAIR VALUE DISCLOSURES

Our non-current investments are recorded on a cost basis.  The carrying values of cash, cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses approximate the respective fair values.  Except for our convertible notes, our debt instruments do not have readily ascertainable market values; however, the carrying values approximate the respective fair values. As of March 31, 2010, the fair value and carrying value of our convertible debt, based on quoted market prices was:

	Fair Value		Carrying Value		Face Value
2.0% convertible senior subordinated notes due June 1, 2015	$	1,233,198	$	626,082	$	820,000
2.5% convertible senior subordinated notes due May 1, 2014	579,375		368,474		500,000
Zero Coupon convertible subordinated notes first putable June 2010	240,095		197,346		199,549

In February 2010, Cephalon entered into a foreign exchange forward contract related to the Mepha AG transaction.  The fair value of this forward contract as of March 31 2010 was immaterial.

8.  INVENTORY, NET

Inventory, net consisted of the following:

	March 31, 2010		December 31, 2009
Raw materials	$	29,024	$	27,105
Work-in-process	142,527		144,145
Finished goods	65,098		69,326
Total inventory, net	$	236,649	$	240,576

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 coupled the launch of NUVIGIL in 2009, we assessed the potential impact of these items on certain of our existing agreements to purchase modafinil and recorded a reserve in 2008 for purchase commitments for modafinil raw materials not expected to be utilized as a charge to cost of sales.  As of March 31, 2010, our aggregate future purchase commitments remaining total $15.3 million and our reserve balance for excess purchase commitments is $9.0 million.

9. GOODWILL

Goodwill consisted of the following:

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	United States		Europe			Total
December 31, 2009	$	486,619	$	103,665		$	590,284
Foreign currency translation adjustment	—		(6,977		)	(6,977		)
March 31, 2010	$	486,619	$	96,688		$	583,307

10.  INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

		March 31, 2010						December 31, 2009
	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	$	54,450	$	44,550	$	99,000	$	52,800	$	46,200
DURASOLV technology	14 years	70,000		27,395		42,605		70,000		26,174		43,826
ACTIQ marketing rights	10 – 12 years	83,454		62,961		20,493		83,454		61,091		22,363
GABITRIL product rights	9 – 15 years	107,046		70,819		36,227		107,206		69,126		38,080
TRISENOX product rights	8 – 13 years	112,068		42,174		69,894		112,455		40,172		72,283
AMRIX product rights	18 years	99,303		23,300		76,003		99,303		22,027		77,276
MYOCET trademark	20 years	158,622		33,710		124,912		170,059		34,013		136,046
CINQUIL product rights	Indefinite	199,400		—		199,400		199,400		—		199,400
TNF inhibitor product rights	Indefinite	143,666		—		143,666		141,806		—		141,806
Cephalon Australia royalty agreements*	1 year	22,643		15,095		7,548		22,203		10,361		11,842
VOGALENE/VOGALIB trademark	10 years	53,324		1,270		52,054		53,324		—		53,324
Other product rights	5 – 20 years	316,333		187,761		128,572		326,907		187,496		139,411
		$	1,464,859	$	518,935	$	945,924	$	1,485,117	$	503,260	$	981,857

* As of February 10, 2010, the name of Arana Therapeutics Pty. Ltd. was changed to Cephalon Australia Pty. Ltd.

Intangible assets are amortized over their estimated useful economic life using the straight line method. Amortization expense was $25.8 million and $21.2 million for the three months ended March 31, 2010 and 2009, respectively.

11.  LONG-TERM DEBT

Long-term debt consisted of the following:

	March 31, 2010			December 31, 2009
2.0% convertible senior subordinated notes due June 1, 2015	$	820,000		$	820,000
Debt discount on 2.0% convertible senior subordinated notes due June 1, 2015	(193,918		)	(201,536		)
2.5% convertible senior subordinated notes due May 1,2014	500,000			500,000
Debt discount on 2.5% convertible senior subordinated notes due May 1, 2014	(131,526		)	(137,907		)
Zero Coupon convertible subordinated notes first putable June 2010	199,990			199,968
Debt discount on Zero Coupon convertible subordinated notes first putable June 2010	(2,644		)	(5,771		)
Capital lease obligations	2,828			3,065
Ception Therapeutics, Inc. obligations	2,105			3,763
Other	564			1,039
Total debt	1,197,399			1,182,621
Less current portion	(827,594		)	(818,925		)
Total long-term debt	$	369,805		$	363,696

Convertible Notes

The liability component of our convertible notes will be classified as current liabilities and presented in current portion of long-term debt and the equity component of our convertible debt will be considered a redeemable security and presented as redeemable equity on our consolidated balance sheet if our debt is considered current at the balance sheet date.

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At March 31, 2010, our stock price was $67.78 and, therefore, the 2.0% Notes are considered to be current liabilities based on conversion price and are presented in current portion of long-term debt on our consolidated balance sheet.  At March 31, 2010 and December 31, 2009, the 2010 Zero Coupon Notes are presented in current portion of long-term debt based on maturity date.  At December 31, 2009, our stock price was $62.42, and, therefore, the 2.0% Notes are considered to be current liabilities based on conversion price and are presented in 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 customary 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 debt did occur, we believe that we have the ability to fund the payment of principal amounts due through a combination of utilizing our existing cash on hand, accessing our credit facility, raising money in the capital markets or selling our note hedge instruments for cash.

12.  LEGAL PROCEEDINGS AND OTHER MATTERS

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. (“Carlsbad”) based upon the Paragraph IV ANDA related to modafinil that Carlsbad filed with the FDA.

In late 2005 and early 2006, we entered into settlement agreements with each of Teva, Mylan, Ranbaxy and Barr; in August 2006, we entered into a settlement agreement with Carlsbad and its development partner, Watson Pharmaceuticals, Inc., which we understand has the right to commercialize the Carlsbad product if approved by the FDA. As part of these separate settlements, we agreed to grant to each of these parties a non-exclusive royalty-bearing license to market and sell a generic version of PROVIGIL in the United States, effective in April 2012, subject to applicable regulatory considerations. Under the agreements, the licenses could become effective prior to April 2012 only if a generic version of PROVIGIL is sold in the United States prior to this date. Various factors could lead to the sale of a generic version of PROVIGIL in the United States at any time prior to April 2012, including if (i) we lose patent protection for PROVIGIL due to an adverse judicial decision in a patent infringement lawsuit; (ii) all parties with first-to file ANDAs relinquish their right to the 180-day period of marketing exclusivity, which could allow a subsequent ANDA filer, if approved by the FDA, to launch a generic version of PROVIGIL in the United States at-risk; (iii) we breach or the applicable counterparty breaches a PROVIGIL settlement agreement; or (iv) the FTC prevails in its lawsuit against us in the U.S. District Court for the Eastern District of Pennsylvania described below.

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, Mylan, 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 minimum amounts of modafinil through 2012, with aggregate remaining purchase commitments totaling $15.3 million as of March 31, 2010. See Note 8 for additional details.

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

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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 (the “EDPA”), 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. 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.

Numerous private antitrust complaints have been filed in the EDPA, 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 was filed by an indirect purchaser of PROVIGIL in September 2007. The plaintiffs in all of these actions are seeking monetary damages and/or equitable relief. In addition, in December 2009, we entered a tolling agreement with the Attorneys General of Arkansas, California, Florida, New York and Pennsylvania to suspend the running of the statute of limitations to any claims or causes of action relating to our PROVIGIL settlements pending the resolution of the FTC litigation described above.

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 EDPA, 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 May 2009, Apotex also filed a declaratory judgment complaint in the EDPA that our U.S. Patent No. 7,297,346 (the “‘346 Patent”) is invalid, unenforceable and/or not infringed by its proposed generic. The ‘346 Patent covers pharmaceutical compositions of modafinil and expires in May 2024. 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 in April 2009 we filed a patent infringement lawsuit against Apotex in Canada. We believe that the private antitrust complaints described in the preceding paragraph and the Apotex antitrust and declaratory judgment complaints 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 August 2009, the private antitrust class (e.g. the direct and indirect purchasers), Apotex and the FTC filed amended complaints and, subsequently, we filed motions to dismiss each amended complaint. The private antitrust class, Apotex and the FTC have filed responses to our motions to dismiss. In March 2010, the EDPA denied our motions to dismiss each amended complaint. The EDPA has scheduled a trial for the Apotex matter to begin in March 2011.

In November 2005 and March 2006, we received notice that Caraco Pharmaceutical Laboratories, Ltd. (“Caraco”) 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 in the United States against either Caraco or Apotex, although Apotex has filed suit against us, as described above. In early August 2008, we received notice that Hikma Pharmaceuticals plc (“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.

In the first quarter 2010, we understand that generic versions of modafinil have been launched in Portugal, Sweden and Denmark.  We are currently investigating these launches and intend to vigorously enforce our intellectual property rights.

The EU Commission is conducting a pharmaceutical sector inquiry of over 100 companies regarding, among other matters, settlements by branded pharmaceutical companies (such as Cephalon) with generic pharmaceutical companies. We are cooperating with the EU Commission’s inquiry and have provided questionnaire responses regarding our business and documents related to our PROVIGIL settlement with Teva’s UK affiliate in 2005.

NUVIGIL Patent Litigation

In December 2009, January 2010 and February 2010, we filed patent infringement lawsuits against six companies—Teva, Actavis, Mylan, Watson, Sandoz and Lupin—based upon the abbreviated new drug applications (“ANDA”) filed by

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each of these firms with the FDA seeking approval to market a generic form of armodafinil. The lawsuits claimed infringement of our ‘570 Patent, ‘346 Patent and ‘516 Patent. Cephalon has a three-year period of marketing exclusivity for NUVIGIL that extends until June 15, 2010. In addition, including the six-month pediatric extension, the ‘516 Patent, the ‘346 Patent, and the ‘570 Patent expire on April 6, 2015, May 29, 2024, and June 18, 2024, respectively.

Under the provisions of the Hatch-Waxman Act, the filing of the Teva, Actavis, Mylan, Watson, Sandoz, and Lupin lawsuits stays any FDA approval of the applicable ANDA until the earlier of entry 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.  Assuming no earlier district court judgment, the earliest the 30-month stay will expire is in May 2012.

AMRIX Patent Litigation

In October 2008, Cephalon and Eurand, Inc. (“Eurand”), 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 version of the 15 mg and 30 mg strengths of AMRIX. In November 2008, we received a similar certification letter from Impax Laboratories, Inc. Mylan and Impax each allege that the U.S. Patent Number 7,387,793 (the “Eurand Patent”), entitled “Modified Release Dosage Forms of Skeletal Muscle Relaxants,” issued to Eurand will not be infringed by the manufacture, use or sale of the product described in the applicable ANDA and reserves the right to challenge the validity and/or enforceability of the Eurand Patent. Barr alleges that the Eurand Patent is invalid, unenforceable and/or will not be infringed by its manufacture, use or sale of the product described in its ANDA. The Eurand Patent does not expire until February 26, 2025. In late November 2008, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Mylan (and its parent) and Barr (and its parent) for infringement of the Eurand Patent. In January 2009, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Impax for infringement of the Eurand Patent.  Trial for the Mylan, Barr and Impax matters is scheduled for September 2010.

In late May 2009, Cephalon and Eurand received a Paragraph IV certification letter relating to an ANDA submitted to the FDA by Anchen Pharmaceuticals, Inc. (“Anchen”) requesting approval to market and sell a generic version of the 15 mg and 30 mg strengths of AMRIX. Anchen alleges that the Eurand Patent is invalid, unenforceable and/or will not be infringed by its manufacture, use or sale of the product described in its ANDA. In July 2009, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Anchen for infringement of the Eurand Patent.

Under the provisions of the Hatch-Waxman Act, the filing of the Mylan, Barr, Impax and Anchen lawsuits stays any FDA approval of the applicable ANDA until the earlier of entry 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.   Assuming no earlier district court judgment, the earliest the 30-month stay will expire is in April 2011.

FENTORA Patent Litigation

In April 2008, June 2008 and January 2010, we received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Watson Laboratories, Inc., Barr and Sandoz, 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, July 2008 and January 2010, we and our wholly-owned subsidiary, CIMA, filed lawsuits in U.S. District Court in Delaware against Watson, Barr and Sandoz for infringement of these patents.  Trial for the Watson matter is scheduled for May 2010.

In November 2009, we entered into a binding agreement-in-principle (the “Barr Agreement”) with Barr to settle its pending patent infringement lawsuit related to FENTORA. The Barr Agreement does not affect the status of our separate FENTORA patent litigation with Watson pending in the U.S. District Court in Delaware. In connection with the Barr Agreement, we will grant Barr a non-exclusive, royalty-free right to market and sell a generic version of FENTORA in the United States. Barr’s license will become effective in October 2018. If another generic version of FENTORA enters the U.S. market prior to October 2018, Barr may enter the U.S. market on the same date, subject to the expiration of any applicable regulatory exclusivities of any first filer with respect to FENTORA and subject, in certain circumstances, to the payment of royalties to us. Upon execution of the definitive written agreement giving effect to the terms of the Barr Agreement (the “Definitive Agreement”), the parties will file dismissals with prejudice with the United States District Court for the District

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of Delaware, which will conclude the pending FENTORA patent litigation with Barr. We have filed the Barr Agreement (and, once executed, will file the Definitive Agreement) with both the FTC and the Antitrust Division of the DOJ as required by the Medicare Prescription Drug, Improvement and Modernization Act of 2003. There can be no assurance that the FTC and/or the DOJ will not raise objections to, or request modifications to, the Barr Agreement and the Definitive Agreement; that any such modifications will be acceptable to the parties; or that the Barr Agreement and the Definitive Agreement will continue to be effective on the terms currently proposed or at all.

Under the provisions of the Hatch-Waxman Act, the filing of the Watson, Barr and Sandoz lawsuits stays any FDA approval of the applicable ANDA until the earlier of entry 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.  Assuming no earlier district court judgment, the earliest the 30-month stay will expire is in October 2010.

While we intend to vigorously defend the NUVIGIL, AMRIX and FENTORA intellectual property rights, 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.

U.S. Attorney’s Office and Related Matters

In September 2008, we entered into a settlement agreement (the “Settlement Agreement”) with the DOJ, the USAO, the OIG, TRICARE Management Activity, the U.S. Office of Personnel Management (collectively, the “United States Government”) and the relators identified in the Settlement Agreement 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 paid a total of $375 million (the “Payment”) plus interest of $11.3 million. Pursuant to the Settlement Agreement, the United States Government and the relators released us from all Claims and the United States Government 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). All of the payments described above were made in the fourth quarter of 2008.

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.

In September 2008, we 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 paid a total of $6.15 million to Connecticut and (ii) Connecticut released us from any claim relating to the promotional practices that were the subject of Connecticut’s investigation. 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 paid a total of $0.7 million to 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 in the EDPA on behalf of entities that claim to have reimbursed for prescriptions of 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 2008, the plaintiffs filed a consolidated and amended complaint that also alleges violations of RICO and conspiracy to violate RICO. The RICO allegations were dismissed with prejudice in May 2009. In February 2009, we were served with an additional putative class action complaint filed on behalf of two health and welfare trust funds that claim to have reimbursed for prescriptions of GABITRIL and PROVIGIL for uses outside the products

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approved labels. The complaint alleges violations of RICO and the common law of unjust enrichment and seeks an unspecified amount of money in actual, punitive and/or treble damages, with interest. We believe the allegations in the complaints are without merit, and we intend to vigorously defend ourselves in these matters and in any similar actions that may be filed in the future. 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.

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. In August 2009, our Motion for Judgment on the Pleadings was granted. The plaintiffs have appealed this ruling. We believe the plaintiff’s allegations in this matter are without merit and we intend to vigorously defend ourselves in this matter. 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.

DURASOLV

In the third quarter of 2007, the U.S. Patent and Trademark Office (“PTO”) notified us that, in response to re-examination petitions filed by a third party, the Examiner rejected the claims in the two U.S. patents for our DURASOLV ODT technology. We disagree with the Examiner’s position, and we filed notices of appeal to the Board of Patent Appeals of the PTO’s decisions in the fourth quarter of 2007 regarding one patent and in the second quarter of 2008 regarding the second patent. In September 2009, the Board affirmed the Examiner’s position with respect to one of the DURASOLV patents. We have requested reconsideration from the Board and are awaiting the Board’s response.  We have the right to appeal from the Board and, as of the filing date of this report, we are awaiting a hearing and a determination with respect to our appeal regarding the other patent. These efforts will be both expensive and time consuming and, ultimately, due to the nature of patent appeals, there can be no assurance that these efforts will be successful. The invalidity of the DURASOLV patents could reduce our ability to enter into new contracts with regard to 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.

Other Commitments

We have committed to make potential future “milestone” payments to third parties as part of our in-licensing and development programs primarily in the area of research and development agreements.  Payments generally become due and payable only upon the achievement of certain developmental, regulatory and/or commercial milestones.  Because the achievement of these milestones is neither probable or reasonably estimable, we have not recorded a liability on our balance sheet for any such contingencies.  As of March 31, 2010, the potential milestone and other contingency payments due under current contractual agreements are $1.7 billion.

13.  STOCK-BASED COMPENSATION

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

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	Three months ended March 31,
	2010		2009
Stock option expense	$	4,470	$	6,230
G Restricted stock unit expense	4,360		5,330
Total stock-based compensation*	$	8,830	$	11,560
Total stock-based compensation expense after-tax	$	5,801	$	7,514

*For the three months ended March 31, 2010 and 2009, 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.

Stock based compensation expense decreased for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 due to a higher level of forfeitures in the three months ended March 31, 2010.

14.    INCOME TAXES

For the three months ended March 31, 2010, we recognized $48.3 million of income tax expense on income before income taxes of $148.6 million, resulting in an overall effective tax rate of 32.5 percent.

The Internal Revenue Service (“IRS”) currently is examining Cephalon, Inc.’s 2006 and 2007 U.S. federal income tax returns.  Zeneus Pharma S.a.r.L. is under examination by the French Tax Authorities for 2003 and 2004, while Cephalon France SAS is also under examination by the French Tax Authorities for 2007 and 2008.  Cephalon Gmbh, in Germany, is under examination for 2004 to 2006.  Our filings in the United Kingdom remain open to examination for 2007 to 2009.  In other significant foreign jurisdictions, the tax years that remains open for potential examination range from 2001 to 2009.  We do not believe at this time that the results of these examinations will have a material impact on the financial statements.

In the regular course of business, various state and local tax authorities also conduct examinations of our state and local income tax returns.  Depending on the state, state income tax returns are generally subject to examination for a period of three to five years after filing.  The state impact of any federal changes that may result from the 2006 and 2007 IRS examination and the agreed to federal changes from the 2003 to 2005 IRS examination, settled in 2008, remain subject to examination by various states for a period of up to one year after formal notification to the states. We currently have several state income tax returns in the process of examination.

In 2010, we received $16.0 million in federal tax refunds of previously paid federal taxes.  This refund was due to the carryback of unused federal tax credits from the tax year ending December 31, 2008. In 2009, we received $67.3 million in federal tax refunds of previously paid federal taxes. This refund was principally due to the tax benefit relating to the termination of our collaboration with Alkermes and the settlement with the USAO.

15.    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.

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, 2.5% Notes and the 2010 Zero Coupon Notes. However, we are required 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 be anti-dilutive.  The impact of the warrants is computed using the treasury stock method.

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

	Three months ended
	March 31,
	2010		2009
Average market price per share of Cephalon stock	$	67.43	$	72.24
Shares included in diluted EPS calculation:
2.0% Notes	5,398		6,208
Zero Coupon Notes	572		769
Warrants related to 2.0% Notes	—		1,178
Warrants related to 2010 Zero Coupon Notes	—		8
Other	1		1
Total	5,971		8,164

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

	Three months ended March 31,
	2010		2009
Basic income per common share computation:
Numerator:
Net income used for basic income per common share	$	110,565	$	58,583
Denominator:
Weighted average shares used for basic income per common share	74,990		68,792
Basic income per common share	$	1.47	$	0.85

	Three months ended March 31,
	2010		2009
Diluted income per common share computation:
Numerator:
Net income used for basic income per common share	$	110,565	$	58,583
Denominator:
Weighted average shares used for basic income per common share	74,990		68,792
Effect of dilutive securities:
Convertible subordinated notes and warrants	5,971		8,164
Employee stock options and restricted stock units	850		1,037
Weighted average shares used for diluted income per common share	81,811		77,993
Diluted income per common share	$	1.35	$	0.75

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

	Three months ended
	March 31,
	2010	2009
Weighted average shares excluded:
Convertible subordinated notes and warrants	28,337	23,232
Employee stock options and restricted stock units	4,804	3,008
	33,141	26,240

16.  SEGMENT AND SUBSIDIARY INFORMATION

Revenues for the three months ended March 31:

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	2010								2009
	United States			Europe		Total			United States			Europe			Total
Net Sales:
PROVIGIL*	$	244,601		$	17,850	$	262,451		$	238,429		$	14,933		$	253,362
NUVIGIL	34,922			—		34,922			—			—			—
GABITRIL	8,299			1,462		9,761			14,749			1,505			16,254
CNS	287,822			19,312		307,134			253,178			16,438			269,616
ACTIQ	14,940			18,491		33,431			21,412			16,752			38,164
Generic OTFC	12,779			—		12,779			24,112			—			24,112
FENTORA**	38,480			3,729		42,209			33,290			423			33,713
AMRIX	25,135			—		25,135			26,237			—			26,237
Pain	91,334			22,220		113,554			105,051			17,175			122,226
TREANDA	81,257			—		81,257			50,197			—			50,197
Other Oncology	4,555			24,198		28,753			5,326			21,032			26,358
Oncology	85,812			24,198		110,010			55,523			21,032			76,555
Other	9,460			36,523		45,983			11,155			34,814			45,969
Total Net Sales	474,428			102,253		576,681			424,907			89,459			514,366
Other Revenues	15,784			4,120		19,904			5,623			(21		)	5,602
Total External Revenues	490,212			106,373		596,585			430,530			89,438			519,968
Inter-Segment Revenues	8,919			—		8,919			5,705			172			5,877
Elimination of Inter-Segment Revenues	(8,919		)	—		(8,919		)	(5,705		)	(172		)	(5,877		)
Total Revenues	$	490,212		$	106,373	$	596,585		$	430,530		$	89,438		$	519,968

* Marketed under the name MODIODAL® (modafinil) in France and under the name VIGIL® (modafinil) in Germany.

** Marketed under the name EFFENTORA® (fentanyl buccal tablet) in Europe.

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

	2010		2009
United States	$	141,842	$	113,965
Europe	6,806		(37,129		)
Total	$	148,648	$	76,836

Total assets:

	March 31, 2010		December 31, 2009
United States	$	4,038,223	$	3,896,131
Europe	748,051		761,964
Total	$	4,786,274	$	4,658,095

17.  SUBSEQUENT EVENTS

Mepha AG

In April 2010, we acquired all of the issued share capital of Mepha AG (“Mepha”), a privately-held, Swiss-based pharmaceutical company, for a final purchase price of CHF 622.5 million plus contractual purchase price adjustments of CHF 26.4 million for a total of CHF 648.9 million (or approximately US$606 million) in cash, funded from our available cash on hand.   Founded in 1949, Mepha markets branded and non-branded generics as well as specialty products in more than 50 countries. Mepha has operational subsidiaries in Portugal and the Baltics. Through partnerships, Mepha markets its products in other European countries, in the Middle East, Africa, South and Central America as well as in Asia. Mepha has approximately 700 full-time employees, 500 of them in Switzerland, and approximately 300 contractors.

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As of the date of this filing, we are still gathering information to allocate the purchase price to the assets acquired and liabilities assumed.

Ception Therapeutics, Inc.

In April 2010, we acquired privately-held Ception Therapeutics, Inc. for $250.0 million.  For more information on Ception, please see Note 2.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2009.

EXECUTIVE SUMMARY

Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and commercialization of innovative products in four core therapeutic areas: central nervous system (“CNS”), pain, oncology and inflammatory disease. In addition to conducting an active research and development program, we market seven proprietary products in the United States and numerous products in various countries throughout Europe and the world.  Consistent with our core therapeutic areas, we have aligned our approximately 770-person U.S. field sales and sales management teams by area.  We have a sales and marketing organization numbering approximately 320 persons that supports our presence in nearly 50 countries in Europe, the Middle East and Africa and have a strong presence in the five key European pharmaceutical markets: France, Germany, Italy, Spain and the United Kingdom, and affiliates in Benelux and Poland.

In April 2010, we acquired all of the issued share capital of Mepha AG (“Mepha”), a privately-held, Swiss-based pharmaceutical company, for a final purchase price of CHF 622.5 million plus contractual purchase price adjustments of CHF 26.4 million for a total of CHF 648.9 million (or approximately US$606 million) in cash, funded from our available cash on hand.  Founded in 1949, Mepha markets branded and non-branded generics as well as specialty products in more than 50 countries. Mepha develops and manufactures its products in Aesch/Basel, Switzerland with a focus on Swiss-quality standards. Mepha’s research and development focuses on the development of improved and innovative generics providing additional benefits for patients. Mepha is also active in malaria research, offering innovative life-saving therapies for adults and children.  Mepha is the leading company on the Swiss generic market, with more than 120 products in over 500 packaging forms. Mepha has operational subsidiaries in Portugal and the Baltics. Through partnerships, Mepha markets its products in other European countries, in the Middle East, Africa, South and Central America as well as in Asia. Mepha has approximately 700 full-time employees, 500 of them in Switzerland, and approximately 300 contractors.

In April 2010, we acquired privately-held Ception Therapeutics, Inc. for $250.0 million.  We also advanced $25.0 million in financing to Ception prior to the acquisition, for which the Ception stockholders were not required to (and therefore did not) repay at the closing of the acquisition. Ception stockholders also could receive (i) additional payments related to clinical and regulatory milestones and (ii) royalties related to net sales of products developed from Ception’s program to discover small molecule, orally-active, anti-TNF (tumor necrosis factor) receptor agents.  A Phase II clinical trial of Ception’s lead compound, CINQUIL™ (reslizumab), in 106 patients demonstrated improved asthma control in adult patients with moderate to severe asthma and eosinophilic airway inflammation, as measured by the primary study endpoint, a change in Asthma-Control -Questionnaire or ACQ score (p=0.054). In addition, an analysis of the FEV1, a measure of lung function, showed a statistically significant improvement with CINQUIL compared to placebo (p= 0.002).  We expect to begin a Phase III clinical trial for the treatment of eosinophilic asthma by the end of 2010.

We also have recently completed other transactions designed to build a portfolio of potential products targeted to treat inflammatory diseases.  In 2009, we (i) acquired Arana Therapeutics Limited, an Australian company, whose lead human framework domain antibody construct compound, CEP-37247, is in Phase II development for patients with certain inflammatory diseases; (ii) acquired an exclusive, worldwide license to the ImmuPharma investigational compound, LUPUZOR™, which is in Phase IIb development for the treatment of systemic lupus erythematosus; and (iii) purchased an option to acquire privately-held BioAssets Development Corporation, which has an intellectual property estate around use of TNF inhibitors for sciatic pain in

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patients with intervertebral disk herniation, as well as other spinal disorders, which intellectual property we expect to utilize to develop CEP-37247 as a possible treatment of sciatica.

Our most significant products are our wakefulness products, PROVIGIL® (modafinil) Tablets [C-IV] and NUVIGIL® (armodafinil) Tablets [C-IV].  PROVIGIL comprised 46% of our total consolidated net sales for the three months ended March 31, 2010, of which 93% was in the U.S. market.  NUVIGIL comprised 6% of our total consolidated net sales for the three months ended March 31, 2010, all of which were in the U.S. market. In June 2007, we secured final U.S. Food and Drug Administration (the “FDA”) approval of the NUVIGIL indication for the treatment of excessive sleepiness associated with narcolepsy, obstructive sleep apnea/hypopnea syndrome (“OSA/HS”) and shift work sleep disorder (“SWSD”). We launched NUVIGIL on June 1, 2009.  In March 2009, we announced positive results from a Phase II clinical trial of NUVIGIL as adjunctive therapy for treating major depressive disorder in adults with bipolar I disorder and our plan to advance to Phase III trials for this indication.  In April 2009, we announced positive results from a Phase III clinical trial of NUVIGIL as a treatment for excessive sleepiness associated with jet lag disorder and filed a supplemental new drug application (an “sNDA”) for this indication with the FDA in June 2009.  Together with the FDA, we designed a special protocol assessment (“SPA”) intended to evaluate the experience of a typical eastbound airline traveler.  We believe the results of the Phase III clinical trial met the requirements of the SPA.  In March 2010, we received a complete response letter from the FDA that raised questions regarding the robustness of the Patient Global Impression of Severity (PGI-S) data, one of the two primary endpoints set forth in the SPA for this clinical trial. We have scheduled a meeting with the FDA in May 2010 to discuss the complete response letter.  In May 2009, we announced positive results from a Phase IV study of NUVIGIL in obstructive sleep apnea and co-morbid major depressive disorder requiring ongoing antidepressant therapy.

On a combined basis, 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 15% of our total consolidated net sales for the three months ended March 31, 2010, of which 75% was in the U.S. market.   In October 2006, we launched FENTORA in the United States.  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 launched the product in certain European countries in January 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 an sNDA to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid tolerant patients with chronic pain conditions.  In early April 2009, we submitted a Risk Evaluation and Mitigation Strategy (the “REMS Program”) with respect to FENTORA. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA regarding the FENTORA REMS Program by the middle of 2010.  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.  In September 2009, our obligation to supply Barr with generic OTFC ended pursuant to the terms of a license and supply agreement we entered into with Barr in July 2004.  We understand that in October 2009 the FDA approved ANDAs by Barr and by Covidien to market and sell generic OTFC and that Covidien launched its generic OTFC in the United States in March 2010.  We submitted our REMS Program for ACTIQ and generic OTFC in early April 2009.  We expect to receive a response from the FDA by the middle of 2010.

In March 2008, the FDA granted approval for TREANDA® (bendamustine hydrochloride) for the treatment of patients with chronic lymphocytic leukemia (“CLL”) and, in April 2008, the product was launched.  In October 2008, we received FDA approval of TREANDA 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.  TREANDA comprised 14% of our total consolidated net sales for the three months ended March 31, 2010, all of which were in the U.S. market.  While not a currently approved indication by the FDA, TREANDA was recently listed in the 2010 NCCN clinical practice guidelines as a front-line treatment for NHL.  We believe the guidelines listing was the result of an independent Phase III clinical study conducted by the German Study Group for Indolent Lymphomas (“StiL Group”) in Giessen, Germany.  The StiL Group’s study results announced in December 2009 indicated better tolerability and more than a 20-month improvement in median progression free survival in patients treated with TREANDA in combination with rituximab versus cyclophosphamide, doxorubicin, vincristine, and prednisolone (commonly known as CHOP) in combination with rituximab for the first-line treatment of patients with advanced follicular, indolent, and mantle cell lymphomas, each of which is not currently an FDA-approved indication. We are working with the StiL Group to determine if its study results can be filed with the FDA to support an sNDA for TREANDA for the treatment of front-line NHL.  Separately, we have begun enrolling patients in our own Phase III study of TREANDA for the treatment of front-line NHL.

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In August 2007, we acquired exclusive North American rights to AMRIX® (cyclobenzaprine hydrochloride extended-release capsules) from E. Claiborne Robins Company, Inc., a privately-held company d/b/a ECR Pharmaceuticals (“ECR”).  Two dosage strengths of AMRIX (15 mg and 30 mg) were approved in February 2007 by the FDA for short-term use as an adjunct to rest and physical therapy for relief of muscle spasm associated with acute, painful musculoskeletal conditions.  We made the product available in the United States in October 2007 and commenced a full U.S. launch in November 2007.  In June 2008, the U.S. Patent and Trademark Office (the “PTO”) issued a pharmaceutical formulation patent for AMRIX, which expires in February 2025.  In July 2009, the PTO issued a notice of allowance for an additional pharmaceutical formulation patent application for AMRIX.  In October 2009, after further review, the PTO rejected that patent application.  We have appealed that decision.

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 particular, as a biopharmaceutical company, our future success is highly dependent on obtaining and maintaining patent protection or regulatory exclusivity for our products and technology. In that regard, we are currently engaged in lawsuits with respect to generic company challenges to the validity and/or enforceability of our patents covering AMRIX, FENTORA and NUVIGIL. Trials for the Watson FENTORA ANDA matter and the Mylan, Barr and Impax AMRIX ANDA matters are scheduled for May 2010 and September 2010, respectively. In the first quarter of 2010, we understand that generic versions of modafinil have been launched in Portugal, Sweden and Denmark.  We intend to vigorously defend and enforce 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.   For more information regarding these matters, please see Note 12 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

While we seek to increase profitability and cash flow from operations, we will need to continue to achieve growth of product sales and other revenues sufficient for us to attain these objectives. The rate of our future growth will depend, in part, upon our ability to obtain and maintain adequate intellectual property protection for our currently marketed products, and to successfully develop or acquire and commercialize new product candidates.

RESULTS OF OPERATIONS

(In thousands)

Three months ended March 31, 2010 compared to three months ended March 31, 2009:

	Three months ended
	March 31,
	2010						2009							% Increase (Decrease)
	United States		Europe		Total		United States		Europe			Total		United States		Europe		Total
Net Sales:
PROVIGIL*	$	244,601	$	17,850	$	262,451	$	238,429	$	14,933		$	253,362	3	%	20	%	4	%
NUVIGIL	34,922		—		34,922		—		—			—		—		—		—
GABITRIL	8,299		1,462		9,761		14,749		1,505			16,254		(44	)	(3	)	(40	)
CNS	287,822		19,312		307,134		253,178		16,438			269,616		14		17		14
ACTIQ	14,940		18,491		33,431		21,412		16,752			38,164		(30	)	10		(12	)
Generic OTFC	12,779		—		12,779		24,112		—			24,112		(47	)	—		(47	)
FENTORA**	38,480		3,729		42,209		33,290		423			33,713		16		782		25
AMRIX	25,135		—		25,135		26,237		—			26,237		(4	)	—		(4	)
Pain	91,334		22,220		113,554		105,051		17,175			122,226		(13	)	29		(7	)
TREANDA	81,257		—		81,257		50,197		—			50,197		62		—		62
Other Oncology	4,555		24,198		28,753		5,326		21,032			26,358		(14	)	15		9
Oncology	85,812		24,198		110,010		55,523		21,032			76,555		55		15		44
Other	9,460		36,523		45,983		11,155		34,814			45,969		(15	)	5		—
Total Net Sales	474,428		102,253		576,681		424,907		89,459			514,366		12		14		12
Other Revenues	15,784		4,120		19,904		5,623		(21		)	5,602		181		—		255
Total Revenues	$	490,212	$	106,373	$	596,585	$	430,530	$	89,438		$	519,968	14	%	19	%	15	%

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* Marketed under the name MODIODAL® (modafinil) in France and under the name VIGIL® (modafinil) in Germany.

** Marketed under the name EFFENTORA® (fentanyl buccal tablet) in Europe.

Net Sales—In the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which accounted for 77% of our total consolidated gross sales for the three months ended March 31, 2010.  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. Various factors can impact the decisions made by wholesalers and retailers regarding the levels of inventory they hold, including, among other factors, their assessment of anticipated demand for products, timing of sales made by them, their review of historical product usage trends, and their purchasing patterns.

As of March 31, 2010, 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.  Based on a retail inventory survey in June 2009, we believe that our generic OTFC inventory held at wholesalers and retailers is approximately three months. We do not expect that potential future fluctuations in inventory levels of generic OTFC held by retailers will have a significant impact on our financial position and results of operations.

For the three months ended March 31, 2010, in addition to the factors addressed below, net sales were also impacted by changes in the product sales allowances deducted from gross sales as described further below and by changes in the relative levels of the number of units of inventory held at wholesalers and retailers. Increases in foreign exchange rates versus the U.S. dollar caused a 5% increase in European net sales as compared to the three months ended March 31, 2009.  The other key factors that contributed to the increase in net sales, period to period, are summarized by product as follows:

·In CNS, net sales increased 14 percent.  Net sales of NUVIGIL, launched in June 2009, contributed to a 17% increase in CNS net sales in the U.S.  PROVIGIL net sales in the U.S. increased 3% due to price increases in 2009, offset by a decline in unit sales due to the introduction of NUVIGIL and the transition of our marketing support from PROVIGIL to NUVIGIL.  For the three months ended March 31, 2010, NUVIGIL represented 26% of the combined NUVIGIL/PROVIGIL prescriptions. European net sales of PROVIGIL increased 20% due to increased unit sales and the favorable effect of exchange rates. Net sales of GABITRIL, a non-promoted product, decreased 44% in the U.S and 3% in Europe. In the U.S., the decrease in prescriptions was partially offset by a 10% price increase in November 2009.

·In Pain, net sales decreased 7 percent. Net sales of our pain products have been negatively impacted by an overall decline in the rapid onset opioid market.  Net sales of FENTORA increased 25%, due to the introduction of FENTORA in Europe and U.S. price increases during 2009, partially offset by decreased unit sales in the U.S.  Net sales of ACTIQ in the U.S. decreased by 30% due to loss of market share to generic competition, partially offset by price increases in November 2009.  Net sales of our own generic OTFC and shipments of our generic OTFC to Barr decreased 47 percent.  In September 2009, our obligation to supply Barr with generic OTFC ended pursuant to the terms of a license and supply agreement we entered into with Barr in July 2004.  Net sales of ACTIQ in Europe increased 10% due to an increase in unit sales and the favorable effect of exchange rates.  Net sales of AMRIX decreased 4% due to decreases in unit sales and increases in reserves (primarily coupons), offset by a 5% price increase in November 2009.

·In Oncology, net sales increased 44 percent. This increase was attributable to the growth of TREANDA, which launched in April 2008.  Net sales of our European oncology products increased 15%, due primarily to increases in unit sales of MYOCET. Throughout 2010, we expect Oncology net sales to exceed prior year amounts due to the increased acceptance of TREANDA, resulting in increased sales levels.

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·Other net sales maintained their prior year levels primarily due to increases in unit sales of SPASFON, offset by decreases to our revenues earned from our collaborative arrangements with pharmaceutical or biotech companies to develop and produce orally disintegrating tablets.

Other Revenues—The increase of 255% from period to period is primarily due to license royalties earned by Cephalon Australia, the majority of which will expire by the end of the second quarter of 2010, and revenues earned from VOGALENE/VOGALIB, which we purchased from UCB Pharma France in December 2009.

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

	Three months ended
	March 31,
	2010			2009			Change			% Change
Gross sales	$	657,050		$	583,159		$	73,891		13	%
Product sales allowances:
Prompt payment discounts	11,154			9,761			1,393			14
Wholesaler discounts	3,826			3,939			(113		)	(3	)
Returns	11,673			13,214			(1,541		)	(12	)
Coupons	7,659			3,198			4,461			139
Medicaid discounts	13,590			11,646			1,944			17
Managed care and governmental contracts	32,467			27,035			5,432			20
	80,369			68,793			11,576
Net sales	$	576,681		$	514,366		62,315			12	%
Product sales allowances as a percentage of gross sales	12.2		%	11.8		%

Prompt payment discounts increased for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 due to the increase in net sales. Wholesaler discounts decreased as a result of the utilization of credits issued by our wholesalers in the first quarter of 2010, following price increases in November 2009. Returns decreased as a result of decreased returns experience related to ACTIQ, OTFC, and FENTORA, offset by increases in returns experience for PROVIGIL. Coupons increased period over period as a result of the NUVIGIL coupon program, which launched in the second quarter of 2009, and an increase in AMRIX coupon activity, partially offset by the termination of the PROVIGIL coupon program in the second quarter of 2009.

Medicaid discounts increased for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 due to the $2.2 million effect from the recently-enacted U.S. health care reform law, which increased reimbursement rates from 15.1 to 23.1 percent. Managed care and governmental contracts increased for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 due to increases in Federal Chargeback from PROVIGIL price increases and increases in sales of TREANDA, offset by a decrease in our DOD Tricare expense. In the future, we expect product sales allowances as a percentage of gross sales to trend upward due to the impact of price increases on Medicaid discounts and potential increases related to Medicaid, managed care and governmental contracts sales.

	Three months ended
	March 31,
	2010		2009		Change		% Change
Costs and expenses:
Cost of sales	$	105,043	$	97,770	7,273		7	%
Research and development	105,377		103,024		2,353		2
Selling, general and administrative	204,641		200,590		4,051		2
Restructuring charges	744		1,637		(893	)	(55	)
Acquired in-process research and development	—		30,750		(30,750	)	(100	)
	$	415,805	$	433,771	(17,966	)	(4	)%

Cost of Sales—The cost of sales was 18.2% of net sales for the three months ended March 31, 2010 and 19.0% of net sales for the three months ended March 31, 2009.  Cost of sales increased 7% due to the launch of NUVIGIL in the second quarter of 2009 and increases in TREANDA sales, offset by a decrease in PROVIGIL costs as we fully satisfied royalty contractual commitments to TEVA during July 2009.  For the three months ended March 31, 2010 and 2009, we recognized $25.8 million and $21.2 million of amortization expense included in cost of sales, respectively. Amortization expense increased

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primarily due to the amortization of intangible assets recognized in connection with the acquisition of Arana and VOGALENE/VOGALIB, for which there was no equivalent amortization expense in the first quarter of 2009.  We recorded accelerated depreciation charges of $5.2 million and $4.5 million in the first quarter of 2010 and 2009, respectively.

Research and Development Expenses—Research and development (“R&D”) expenses increased $2.4 million, or 2%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This increase is primarily attributable to R&D activities of $5.4 million at Cephalon Australia. For the three months ended March 31, 2010 and 2009, we recognized $6.2 million and $6.3 million of depreciation expense included in research and development expenses, respectively.

Selling, General and Administrative Expenses—Selling, general and administrative expenses increased $4.1 million, or 2% for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009, primarily due to increases in marketing expenses for NUVIGIL, offset by lower selling expenses for both PROVIGIL and AMRIX. For the three months ended March 31, 2010 and 2009, we recognized $6.6 million and $5.8 million of depreciation expense included in selling, general and administrative expenses, respectively.

Acquired in-process research and development—For the three months ended March 31, 2009, we incurred expense of $30.0 million in exchange for the exclusive, worldwide license rights to LUPUZOR, acquired from ImmuPharma plc.  We also paid SymBio Pharmaceuticals Limited (“SymBio”) $0.8 million in exchange for the exclusive sublicense to bendamustine hydrochloride in China and Hong Kong.

Restructuring charges—For the three months ended March 31, 2010 and 2009, we recorded $0.7 million and $1.6 million, respectively, related to our restructuring plan to consolidate certain manufacturing and research and development activities primarily 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.  For additional information, see Note 3 of the Consolidated Financial Statements included in Part I, Item 1 of this Report.

	Three months ended
	March 31,
	2010			2009			Change		% Change
Other income (expense):
Interest income	$	1,930		$	704		1,226		174	%
Interest expense	(26,791		)	(16,604		)	(10,187	)	61
Other income, net	(7,271		)	6,539			(13,810	)	(211	)
	$	(32,132	)	$	(9,361	)	(22,771	)	243	%

Other Income (Expense)—Other expense increased $22.8 million, or 243%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The increase was attributable to the following factors:

·a $1.2 million increase in interest income due to higher average investment balances;

·a $10.2 million increase in interest expense primarily due to interest and debt discount amortization on our 2.5% convertible notes issued in May 2009; and

·a $13.8 million decrease in other income, net, primarily due to a loss of $6.2 million from the decrease in fair value of foreign exchange contracts used to protect against currency fluctuations related to our acquisition of Mepha, along with $1.1 million unfavorable variance in foreign exchange gains and losses.  In 2009, we recognized income of $5.4 million from the increase in fair value of foreign exchange contracts used to protect against currency fluctuations related to our acquisition of Arana and $1.6 million from Arana dividends.  For additional information, see Note 5 of the Consolidated Financial Statements included in Part I, Item 1 of this Report.

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	Three months ended
	March 31,
	2010		2009		Change		% Change
Income tax expense	$	48,311	$	33,054	$	15,257	46	%

Income Taxes— For the three months ended March 31, 2010, we recognized $48.3 million of income tax expense on income before income taxes of $148.6 million, resulting in an overall effective tax rate of 32.5 percent. This compared to income tax expense for the three months ended March 31, 2009 of $33.0 million on income before income taxes of $76.8 million, resulting in an effective tax rate of 43.0 percent, as we did not recognize tax benefits for losses attributable to non-controlling interest of $14.8 million.

	Three months ended
	March 31,
	2010		2009		Change			% Change
Net loss attributable to noncontrolling interest	$	10,228	$	14,801	$	(4,573	)	(31	)%

Noncontrolling Interest- For the three months ended March 31, 2010, we recorded a loss attributable to noncontrolling interest of $10.2 million, related to our investments in BDC and Ception.  For additional information, see Note 2 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. For the three months ended March 31, 2009, we recorded a loss attributable to noncontrolling interest of $14.8 million, related to our investments in Ception and Acusphere.  Acusphere was deconsolidated in the second quarter of 2009.

LIQUIDITY AND CAPITAL RESOURCES

(In thousands)

	As of
	March 31, 2010			December 31, 2009
Financial assets:
Cash and cash equivalents and investments	$	1,874,453		$	1,647,635
Total financial assets (current)	$	1,874,453		$	1,647,635
Debt and redeemable equity:
Current portion of long-term debt- convertible notes	$	1,019,990		$	1,019,968
Current portion of long-term debt discount- convertible notes	(196,562		)	(207,307		)
Current portion of long-term debt- other debt	4,166			6,264
Long-term debt- convertible notes	500,000			500,000
Long-term debt discount- convertible notes	(131,526		)	(137,907		)
Long-term debt- other debt	1,331			1,603
Redeemable equity	196,562			207,307
Total debt and redeemable equity	$	1,393,961		$	1,389,928
Select measures of liquidity and capital resources:
Working capital surplus	$	1,380,688		$	1,227,993
Cash/cash equivalents/investments as a percent of total assets	39		%	35		%

	Three months ended March 31,
	2010			2009
Change in cash and cash equivalents
Net cash provided by operating activities	$	233,555		$	172,709
Net cash used for investing activities	(15,768		)	(80,135		)
Net cash provided by financing activities	11,217			1,579
Effect of exchange rate changes on cash and cash equivalents	(2,186		)	(4,036		)
Net increase in cash and cash equivalents	$	226,818		$	90,117

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Our working capital surplus is calculated as current assets less current liabilities. Our convertible subordinated notes contain conversion terms that will impact whether these notes are classified as current or long-term liabilities and consequently affect our working capital position.

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.

Net income was $100.3 million in 2010 compared to $43.8 million in 2009 primarily due to increased sales of our products.  Also included within cash used for operating activities in the first quarter of 2009 are payments recorded as in-process research and development including a payment of $30.0 million in exchange for the exclusive, worldwide license rights to LUPUZOR, acquired from Immupharma, and a payment of $0.8 million in exchange for the license rights to bedamustine hydrochloride in China and Hong Kong.

The change in receivables was lower in 2010 than 2009 primarily due to federal tax refunds for previously paid federal taxes of $16.0 million in the first quarter of 2010, compared to $67.3 million in the first quarter of 2009.

The increase in accounts payable, accrued expenses and deferred revenues was higher in 2010 than in 2009 primarily due to increases in accrued taxes.

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.

Net cash used for investing activities was $15.8 million in 2010 as compared to $80.1 million in 2009. The decrease between periods is primarily attributable to the following activity during 2009:

·$75.0 million paid as consideration for an option to purchase Ception;

·$41.4 million paid in conjunction with our equity stake in Arana as part of our takeover offer;

·an equity investment in 2009 of $9.1 million in SymBio;

·the initial variable interest entity consolidation of Ception’s cash and cash equivalent balances of $52.6 million in 2009.

Net Cash Provided by Financing Activities

Financing activities for the periods presented above primarily relate to proceeds from stock option exercises and payments on long-term debt. Proceeds received from the exercise of stock options will vary from period to period primarily due to the number of options exercised and fluctuations in the market value of our stock relative to the exercise price of such options.

Noncontrolling Interest

Although our VIE’s are included in our consolidated financial statements, our interest in our VIE’s assets are limited to those accorded to us in the agreements with our VIE’s as described in Note 2 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.  For example, Ception’s cash and cash equivalents balance includes $50.0 million of Ception Option Agreement proceeds; Ception has retained the right to distribute those cash proceeds to its current stockholders. In April 2010, we acquired Ception and Ception distributed the $50.0 million cash to its shareholders immediately prior to the closing of the acquisition.  The creditors of our VIE’s have no recourse to the general credit of Cephalon.

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Outlook

We expect to use our cash, cash equivalents, credit facility and investments for working capital and general corporate purposes, the acquisition of businesses, products, product rights, technologies, property, plant and equipment, 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. We expect that net sales of our currently marketed products should allow us to continue to generate positive operating cash flow in 2010. At this time, however, we cannot accurately predict the effect of certain developments on our anticipated rate of sales growth in 2010 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 product candidates and new indications for existing products.

Based on our current level of operations, projected sales of our existing products and estimated sales from our product candidates, if approved, combined with other revenues and interest income, we also believe that we will be able to service our existing debt and meet our capital expenditure and working capital requirements in the near term. We do not expect any material changes in our capital expenditure spending during 2010. 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.

Subsequent to March 31, 2010, we acquired Mepha AG for $606 million and Ception for $250.0 million and we may be required to repay up to $200 million to the holders of our 2010 Zero Coupon Notes (as defined below) if such holders elect to convert their notes in June 2010.

As part of our business strategy, we plan to consider and, as appropriate, make acquisitions of other businesses, products, product rights or technologies. Our cash reserves and other liquid assets may be inadequate to consummate such acquisitions and it may be necessary for us to issue stock or raise substantial additional funds 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 or closure costs.

U.S. Health Care Reform

We expect that the recently-enacted U.S. health care reform law will have certain negative effects and currently non-estimable positive effects upon our business.  In particular, we expect that the increase of the Medicaid rebate to 23.1% will have an estimated negative $7-11 million impact in 2010 and, assuming no material changes in our product mix, a similar impact in subsequent years.  We also expect that we will be negatively affected by other provisions of the health reform law to be implemented in 2011, including:

·To expand Medicare Part D coverage, pharmaceutical companies will provide a 50% discount (increasing to 75% by 2020) for all Part D branded pharmaceutical products for Medicare beneficiaries in the coverage gap (commonly referred to as the “Doughnut Hole”); and

·Branded pharmaceutical companies will pay an annual fee based on all prior year product sales to U.S. government programs (such as TriCare, Medicaid, and Medicare Part D).

Based on our current understanding of these provisions and on expected product mix, we expect the Medicare Part D coverage provision to total between $5-10 million and the annual fee to total between $6-9 million in 2011. The U.S. government is currently drafting rules and regulations regarding these and many other of the law’s provisions, which, once finalized, will provide further guidance regarding the full extent of the effects of the U.S. health reform law on our business.  We also anticipate that one of the positive effects of this law is that more patients will become insured, providing, from the patient’s standpoint, greater and more cost-effective access to our products.  The benefits of this law upon our business are currently not estimable.

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Marketed Products and Product Candidates

Sales growth of our wakefulness products depends, in part, on the continued effectiveness of the various settlement agreements we entered into in late 2005 and early 2006, as well as our maintenance of protection in the United States and abroad of the modafinil particle-size patent through its expiration beginning in 2014 and our NUVIGIL polymorph patent through its expiration beginning in 2023. See Note 12 of the Consolidated Financial Statements included in Part I, Item 1of this Quarterly Report on Form 10-Q. During 2009, we experienced a 12% decline in prescriptions of PROVIGIL. Growth of our wakefulness product sales in the future may depend in part on our ability to build upon the June 2009 launch of NUVIGIL in the U.S. and on the strength of the patents covering the product, particularly in light of the ANDAs filed by Actavis, Lupin, Mylan, Sandoz, Teva and Watson.

Our future growth depends in large 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 Barr, Mylan, Impax and Anchen, and a positive outcome of the September 2010 trial related to the Barr, Mylan and Impax ANDAs.

Our future growth also depends, in part, on our ability to successfully market FENTORA within its current indication and to secure FDA approval of a new broader label indication for the product outside of breakthrough cancer pain. In November 2007, we submitted an sNDA to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid tolerant patients with chronic pain conditions. In early April 2009, we submitted a Risk Evaluation and Mitigation Strategy (the “REMS Program”) with respect to FENTORA. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA regarding the FENTORA REMS Program by the middle of 2010. For more information regarding our FENTORA REMS Program, please see “Executive Summary” of this Part I, Item 2 above.  Growth of FENTORA sales will also depend in part on the strength of the patents covering the product, particularly in light of the ANDAs filed by Watson, Barr and Sandoz, and a positive outcome of the May 2010 trial related to the Watson ANDA.

Clinical Studies

Over the past few years, we have incurred significant expenditures related to conducting clinical studies to develop new pharmaceutical products and to explore the utility of our existing products in treating disorders beyond those currently approved in their respective labels. In 2010, 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: clinical studies evaluating TREANDA as a treatment for front-line NHL; clinical studies evaluating LUPUZOR for the treatment of systemic lupus erythematosus; clinical studies evaluating CINQUIL for the treatment of eosonophilic asthma; clinical programs for certain pipeline compounds with respect to certain oncology and inflammatory diseases; and clinical programs with NUVIGIL focused on adjunctive treatment to atypical anti-psychotics in schizophrenia patients, adjunctive treatment for bi-polar depression and excessive sleepiness associated with traumatic brain injury.

Manufacturing, Selling and Marketing Efforts

In 2010, we expect to continue to incur significant expenditures associated with manufacturing, selling and marketing our products. We expect to continue in 2010 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 phased transfer to be completed in 2011.

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 coupled with the launch of NUVIGIL on June 1, 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 future purchase commitments totaling $15.3 million as of March 31, 2010. Based on our current assessment, we have recorded a reserve of $9.0 million for purchase commitments for modafinil raw materials not expected to be utilized. We have also initiated a search for a potential acquiror of our manufacturing facility in Mitry-Mory, France where we produce modafinil. As of March 31, 2010, we had $12.3 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.

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Indebtedness

We have significant indebtedness outstanding, consisting principally of indebtedness on convertible subordinated notes. The following table summarizes the principal terms of our most significant convertible subordinated notes outstanding as of March 31, 2010:

Security	Outstanding		Conversion Price			Redemption Rights and Obligations
	(in millions)
2.5% Convertible Senior Subordinated Notes due May 2014 (the “2.5% Notes”)	$	500.0	$	69.00	*	Generally not redeemable by the holder prior to November 2013.
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 price as per the terms of the notes; subject to adjustment (equivalent to a conversion rate of approximately 14.4928 shares per $1,000 principal amount of 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 any of the following conditions is satisfied: (1) during any calendar quarter commencing after September 30, 2009, the closing sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price per share ($89.70 based on the initial conversion price) of the notes in effect on that last trading day; (2) during the 10 consecutive trading-day period that follows any five consecutive trading-day period in which the trading price for the notes for each such trading day was less than 98% of the closing sale price of our common stock on such date multiplied by the then current conversion rate; or (3) if we make certain significant distributions to holders of our common stock, we enter into specified corporate transactions or our common stock is not listed on a U.S. national securities exchange.

**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 13 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, 2009.

As of March 31, 2010, our closing stock price was $67.78, and therefore the 2.0% Notes and 2010 Zero Coupon Notes were convertible as of March 31, 2010. Under the terms of the indentures governing the notes, we are obligated to repay in cash the aggregate principal balance of any such notes presented for conversion. As of the filing date of this Quarterly Report on Form 10-Q, we do not have available cash, cash equivalents and investments sufficient to repay all of the convertible notes, if presented. In addition, 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 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.

As of March 31, 2010, our 2.0% Notes and our 2010 Zero Coupon Notes have been classified as current liabilities on our consolidated balance sheet as of March 31, 2010.  We believe that the share price of our common stock would have to significantly increase over the market price as of the filing date of this report before the fair value of the convertible notes would be less than the value of the common stock shares underlying the notes and, as such, we believe it is highly unlikely that holders of the 2.0% Notes or the 2010 Zero Coupon Notes will present significant amounts of such notes for conversion under the current terms. In the unlikely event that a significant conversion did occur, we believe that we have the ability to raise sufficient cash to repay the principal amounts due through a combination of utilizing our existing cash on hand, 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 March 31, 2010 are $16.4 million, payable semi-annually on June 1 and December 1. The annual interest payments on our 2.5% Notes as of March 31, 2010 are $12.5 million, payable semi-annually on May 1 and November 1. In the future, we may agree to exchanges of the notes for shares of

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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 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, 2.5% 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, $100.00 and $72.08, respectively. However, from an accounting principles generally accepted in the United States of America perspective, since the impact of the convertible note hedge agreements is always anti-dilutive 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)
$	55.00	2,650	—	2,650	(2,650	)	—
$	65.00	5,406	—	5,406	(5,406	)	—
$	75.00	8,077	1,796	9,873	(8,077	)	1,796
$	85.00	10,460	4,065	14,525	(10,460	)	4,065
$	95.00	12,341	5,857	18,198	(12,341	)	5,857
$	105.00	13,864	7,653	21,517	(13,864	)	7,653

(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.

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 customary borrowing conditions and 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.

Acquisition Strategy

As part of our business strategy, we plan to consider and, as appropriate, make acquisitions of other businesses, products, product rights or technologies. Our cash reserves and other liquid assets may be inadequate to consummate such acquisitions and it may be necessary for us to issue stock or raise substantial additional funds to complete future transactions. In addition, as a result of our acquisition efforts, we are likely to experience significant charges to earnings for merger and related expenses (whether or not our efforts are successful) that may include transaction costs, closure costs or acquired in-process research and development charges.

Other

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

·cost of product sales;

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·achievement and timing of research and development milestones;

·collaboration revenues;

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

·marketing and other expenses;

·manufacturing or supply disruptions;

·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 U.S. GAAP. 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 7 of our Annual Report on Form 10-K for the year ended December 31, 2009 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, 2009: prompt payment discounts, wholesaler discounts, returns, coupons, Medicaid discounts, Medicare Part D discounts and managed care and governmental contracts. Calculating each of these items involves significant estimates and judgments and requires us to use information from external sources.In certain of the product sales allowance categories, we have calculated the impact of changes in our estimates, which we believe represent reasonably likely changes to these estimates based on historical data adjusted for certain unusual items such as changes in government contract rules.

The following table summarizes activity in each of the above categories for the three months ended March 31, 2010:

(In thousands)	Prompt Payment Discounts			Wholesaler Discounts			Returns*			Coupons			Medicaid Discounts			Managed Care & Governmental Contracts			Total
Balance at January 1, 2010	$	(4,489	)	$	(57	)	$	(66,034	)	$	(14,272	)	$	(21,554	)	$	(56,462	)	$	(162,868	)
Provision:
Current period	(11,154		)	(3,827		)	(10,564		)	(8,522		)	(13,991		)	(32,522		)	(80,580		)
Prior periods	—			1			(1,109		)	863			401			55			211
Total	(11,154		)	(3,826		)	(11,673		)	(7,659		)	(13,590		)	(32,467		)	(80,369		)
Actual:
Current period	6,821			—			—			942			—			13,680			21,443
Prior periods	4,489			55			4,553			11,629			10,193			20,697			51,616
Total	11,310			55			4,553			12,571			10,193			34,377			73,059
Balance at March 31, 2010	$	(4,333	)	$	(3,828	)	$	(73,154	)	$	(9,360	)	$	(24,951	)	$	(54,552	)	$	(170,178	)

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

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to foreign currency exchange risk related to our operations in European and Australian subsidiaries that have transactions, assets, and liabilities denominated in foreign currencies that are translated into U.S. dollars for consolidated financial reporting purposes. For the three months ended March 31, 2010 an average 10% weakening of the U.S. dollar relative to the currencies in which our non-U.S. subsidiaries operate would have resulted in an increase of $11.5 million in reported total revenues and a corresponding increase in reported expenses. As a result of our acquisition of Mepha in April 2010, our level of foreign operations will be more significant and our exposure to foreign currency exchange risk will increase.

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.

In February 2010 Cephalon entered into a foreign exchange forward contract related to our Mepha transaction.  This contract protects against fluctuations between the Swiss Franc and the U.S. Dollar. For the period ended March 31, 2010, we recognized a loss of $6.2 million from the decrease in fair value of these foreign exchange contracts.

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 12 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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 five products, and our future success will depend on the aggregate growth of NUVIGIL and PROVIGIL, the continued acceptance of FENTORA, and the growth of AMRIX and TREANDA.

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For the quarter ended March 31, 2010, approximately 46%, 14%, 7%, 6% and 4% of our total consolidated net sales were derived from sales of PROVIGIL, TREANDA, FENTORA, NUVIGIL and AMRIX, respectively. With respect to PROVIGIL, we cannot be certain that it will continue to be accepted in its market. With respect to NUVIGIL, we cannot be sure that our sales and marketing efforts will be successful or that it will be accepted in the market.  It is possible that CNS net sales could decrease in the future as a result of the decline in PROVIGIL marketing efforts associated with the launch of NUVIGIL. NUVIGIL is currently selling at a price below that of PROVIGIL.  As a result, it is possible that CNS net sales could decline if we are unable to achieve sufficient prescription growth for PROVIGIL and NUVIGIL in the aggregate.  With respect AMRIX and TREANDA, we cannot be certain that they will continue to be accepted in their markets or that we will be able to achieve projected levels of sales growth.

To counter the impact from existing and potential generic competition for ACTIQ, we need FENTORA to continue to be accepted in the market.  We expect to initiate a REMS Program for FENTORA to mitigate serious risks associated with the use of FENTORA.  We submitted our REMS Program to the FDA in early April 2009.  Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA by the middle of 2010.  It is possible that the REMS Program could have a negative impact on sales of FENTORA.

For consolidated net sales to grow over the next several years, we will need our three newest branded products in the United States, NUVIGIL, 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 and FENTORA:

·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 the benefits they convey and to other competing drugs or treatments, including the impact of the availability of generic versions of our products on the market acceptance of those products;

·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 or expanded indications 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 (including product candidates for which we have an option-to-acquire) or of expanded indications of our existing products such as TREANDA, FENTORA and NUVIGIL.

While not a currently approved indication by the FDA, TREANDA was recently listed in the 2010 NCCN clinical practice guidelines as a front-line treatment for NHL.  We believe the guidelines listing was the result of an independent Phase III clinical study conducted by the German Study Group for Indolent Lymphomas (“StiL Group”) in Giessen, Germany.  The StiL Group’s study results announced in December 2009 indicated better tolerability and more than a 20-month improvement in median progression free survival in patients treated with TREANDA in combination with rituximab versus cyclophosphamide, doxorubicin, vincristine, and prednisolone (commonly known as CHOP) in combination with rituximab for the first-line treatment of patients with advanced follicular, indolent, and mantle cell lymphomas, each of which is not currently an FDA-approved indication. We are working with the StiL Group to determine if its study results can be filed with the FDA to support an sNDA for TREANDA for the treatment of front-line NHL.  Separately, we have begun enrolling patients in our own Phase III study of TREANDA for the treatment of front-line NHL.

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In May 2008, an FDA Advisory Committee voted not to recommend approval of the FENTORA sNDA.  In September 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 December 2008, we also received a supplement request letter from the FDA requesting that we submit a Risk Evaluation and Mitigation Strategy (the “REMS Program”) with respect to FENTORA. We submitted our REMS Program to the FDA in early April 2009. To address the FDA’s requests in its September 2008 and December 2008 letters, we plan to implement SECURE Access™, a first-of-its-kind initiative designed to minimize the potential risk of overdose from an opioid through appropriate patient selection, as part of our REMS Program.  In July 2009, we exchanged correspondence with the FDA regarding elements of our REMS Program for FENTORA and have been engaged in ongoing discussions with the agency. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA by the middle of 2010.  We believe that, by working with the FDA, we can design and implement a REMS Program to meet the FDA’s requests and possibly to provide a potential avenue for approval of the sNDA.  While we plan to initiate the REMS Program upon receipt of approval from the FDA, we may be unsuccessful, ultimately, in designing and implementing a REMS Program acceptable to the FDA.

In March 2009, we announced positive results from a Phase II clinical trial of NUVIGIL as adjunctive therapy for treating major depressive disorder in adults with bipolar I disorder and our plan to advance to Phase III trials for this indication. In April 2009, we announced positive results from a Phase III clinical trial of NUVIGIL as a treatment for excessive sleepiness associated with jet lag disorder and filed an sNDA for this indication with the FDA in June 2009. In April 2009, we announced positive results from a Phase III clinical trial of NUVIGIL as a treatment for excessive sleepiness associated with jet lag disorder and filed a supplemental new drug application (an “sNDA”) for this indication with the FDA in June 2009.  Together with the FDA, we designed a special protocol assessment (“SPA”) intended to evaluate the experience of a typical eastbound airline traveler.  We believe the results of the Phase III clinical trial met the requirements of the SPA.  In March 2010, we received a complete response letter from the FDA that raised questions regarding the robustness of the Patient Global Impression of Severity (PGI-S) data, one of the two primary endpoints set forth in the SPA for this clinical trial. We have scheduled a meeting with the FDA in May 2010 to discuss the complete response letter.  In May 2009, we announced positive results from a Phase IV study of NUVIGIL in obstructive sleep apnea and comorbid major depressive disorder requiring ongoing antidepressant therapy.

There can be no assurance that our applications to market for these new indications or for product candidates will be submitted or reviewed in a timely manner or that the FDA will approve the new indications or product candidates on the basis of the data contained in the applications.  Even if approval is granted to market a new indication or a product candidate, there can be no assurance that we will be able to successfully commercialize the product in the marketplace or achieve a profitable level of sales.

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

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

Competition from generic manufacturers is a particularly significant risk to our business.  Upon the expiration of, or successful challenge to, our patents covering a product, generic competitors may introduce a generic version of that product at a lower price.  Some generic manufacturers have also demonstrated a willingness to launch generic versions of branded products before the final resolution of related patent litigation (known as an “at-risk launch”).  A launch of a generic version of one of our products could have a material adverse effect on our business and we could suffer a significant loss of sales and market share in a short period of time.

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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.

We are currently engaged in lawsuits with respect to generic company challenges to the validity and/or enforceability of our patents covering AMRIX, FENTORA and NUVIGIL. While we intend to vigorously defend the validity, and prevent infringement, of our patents, 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. 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.   For more information regarding legal proceedings and others, please see Note 12 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

In late 2005 and early 2006, we entered into PROVIGIL patent settlement agreements with certain generic pharmaceutical companies. 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. Various factors could lead to the sale of a generic version of PROVIGIL in the United States at any time prior to April 2012, including if (i) we lose patent protection for PROVIGIL due to an adverse judicial decision in a patent infringement lawsuit; (ii) all parties with first-to file ANDAs relinquish their right to the 180-day period of marketing exclusivity, which could allow a subsequent ANDA filer, if approved by the FDA, to launch a generic version of PROVIGIL in the United States at-risk; (iii) we breach or the applicable counterparty breaches a PROVIGIL settlement agreement; or (iv) the FTC prevails in its lawsuit against us in the U.S. District Court for the Eastern District of Pennsylvania described below. 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 challenging the validity of the settlements and related agreements.  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.  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.  For more information regarding our PROVIGIL settlements and related litigation, please see Note 12 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

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

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·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.

In September 2008, as part of our settlement with the U.S. government regarding their investigation of our promotional practices with respect to ACTIQ, GABITRIL and PROVIGIL, we entered into a five-year Corporate Integrity Agreement (the “CIA”) with the Office of Inspector General of the Department of Health and Human Services.  The CIA provides criteria for establishing and maintaining compliance with federal laws governing the marketing and promotion of our products.  We are also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed.  For more information regarding our settlement with the U.S. government and the CIA, please see Note 12 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Although we have resolved the previously outstanding federal and state government investigations into our sales and promotional practices, there can be no assurance that there will not be regulatory or other actions brought 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 us 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. 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, EFFENTORA, 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

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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 and EFFENTORA or the fentanyl citrate that is the active ingredient in ACTIQ and generic OTFC.

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.

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.

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 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. As described above, we are also in process of developing REMS Programs for certain of our products to mitigate serious risks associated with the use of certain of our products.  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, EFFENTORA, ACTIQ, generic OTFC, NUVIGIL and PROVIGIL, which contain controlled substances.

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In April 2009, we received approval from the FDA for our sNDA to update the prescribing information for TREANDA.  We finalized and implemented the updated prescribing information for TREANDA in May 2009.   We identified two postmarketing cases of Stevens Johnson Syndrome (“SJS”)/toxic epidermal necrolysis (“TEN”) in patients treated concomitantly with TREANDA and allopurinol; one of these cases was fatal. Allopurinol is known to cause SJS/TEN. In the non-fatal case, the patient also received other drugs that can cause SJS.  TREANDA’s prescribing information has been updated to include these serious skin reactions.  These updates communicate safety warnings when TREANDA is used in combination with allopurinol.  Although the relationship between TREANDA and SJS/TEN cannot be determined, there may be an increased risk of severe skin toxicity when TREANDA and allopurinol are administered concomitantly.  This update is similar to the labeling that currently exists with certain other agents used to treat indolent non-Hodgkin’s lymphoma and/or chronic lymphocytic leukemia, such as RITUXAN® (rituximab), REVLIMID® (lenalidomide) and cyclophosphamide, all of which also reference SJS/TEN in their current respective prescribing information.

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 held by our wholly-owned Bermuda-based insurance captive 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. Product liability coverage maintained by our captive is reserved for, based on Cephalon’s historical claims as well as historical claims within the industry. Reserves held by the captive are fully funded. 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 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

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·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.  As of March 31, 2010, our 2.0% Notes are convertible because the closing price of our common stock on that date was higher than the restricted conversion prices of these notes and our 2010 Zero Coupon Notes are convertible based on maturity date.  As a result, our 2.0% Notes and our 2010 Zero Coupon Notes have been classified as current liabilities on our consolidated balance sheet as of March 31, 2010.  Under the terms of the indentures governing the notes, we are obligated to repay in cash the aggregate principal balance of any such notes presented for conversion. As of the filing date of this report, we do not have available cash, cash equivalents and investments sufficient to repay all of the convertible notes, if presented. In addition, 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, manufacturing 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.

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In each of these areas, our partners may not support fully our research and commercial interests because our program may compete for time, attention and resources with the internal programs of our corporate collaborators. As such, our program may not move forward as effectively, or advance as rapidly, as it might if we had retained complete control of all research, development, regulatory and commercialization decisions. We also rely on some of these collaborators and other third parties for the production of compounds and the manufacture and supply of pharmaceutical products. Additionally, we may find it necessary from time to time to seek new or additional partners to assist us in commercializing our products, though we ultimately might not be successful in establishing any such new or additional relationships.

The efforts of government entities and third party payers to contain or reduce the costs of health care may adversely affect our sales and limit the commercial success of our products.

In certain foreign markets, pricing or profitability of pharmaceutical products is subject to various forms of direct and indirect governmental control, including the control over the amount of reimbursements provided to the patient who is prescribed specific pharmaceutical products. For example, we are aware of governmental efforts in France to limit or eliminate reimbursement for some of our products, particularly FONZYLANE, 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. For example, the U.S. health care reform law will have certain estimable negative effects and possible, non-estimable effects on our business.  Certain members of Congress have introduced legislation to restrict or significantly limit branded pharmaceutical companies’ ability to enter into patent litigation settlement agreements with generic companies. Congress is also considering legislation to provide for FDA approval of generic versions of branded biologic products.  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 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.  ONSOLIS® is approved for this indication.  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.  In October 2009, we understand that the FDA approved ANDAs by Barr and Covidien to market and sell generic OTFC and that Covidien launched its generic OTFC in the United States in March 2010. With respect to TREANDA, we face competition from LEUKERAN®, CAMPATH® and the combination therapy of fludarabine, cyclophosphamide and rituximab.  With respect to TRISENOX, the pharmaceutical market for the treatment of patients with

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relapsed or refractory APL is served by a number of available therapeutics, such as VESANOID® by Roche in combination with chemotherapy.

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

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

We plan to consider and, as appropriate, make acquisitions of technologies, products and businesses, which may subject us to a number of risks and/or result in us experiencing significant charges to earnings that may adversely affect our stock price, operating results and financial condition.

As part of our efforts to acquire businesses or to enter into other significant transactions, we conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, we might not realize the intended advantages of the acquisition. If we fail to realize the expected benefits from acquisitions we have consummated or may consummate in the future, whether as a result of unidentified risks, integration difficulties, regulatory setbacks or other events, our business, results of operations and financial condition could be adversely affected. In connection with an acquisition, we must estimate the value of the transaction by making certain assumptions about, among other things, likelihood of regulatory approval for unapproved products and the market potential for marketed products and/or product candidates. Ultimately, our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of a transaction.  As part of our efforts to hedge risks associated with the uncertainty of acquisitions generally and pharmaceutical development specifically, we have structured certain transactions as options-to-acquire.  Pursuant to this structure, we typically make an upfront payment to secure the option, set forth the appropriate “trigger” for the option in an option agreement and, should we exercise the option, make a subsequent payment to finalize the product or company acquisition.  Our option transaction with BDC is an example of this option structure.  While we believe that this structure helps us to manage risk appropriately, it is possible that we will not “trigger” an option-to-acquire, and therefore receive nothing of tangible value in return for our upfront payment to secure the option-to-acquire.

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.

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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 the development of new indications for our existing products and seeking regulatory approval in the United States and abroad. In all of these areas, we have relatively limited resources and compete against larger, multinational pharmaceutical companies. Moreover, even if we undertake these activities in an effective and efficient manner, regulatory approval for the sale of new pharmaceutical products remains highly uncertain because the majority of compounds discovered do not enter clinical studies and the majority of therapeutic candidates fail to show the human safety and efficacy necessary for regulatory approval and successful commercialization.

In the pharmaceutical business, the research and development process generally takes 12 years or longer, from discovery to commercial product launch. During each stage of this process, there is a substantial risk of failure. Preclinical testing and clinical trials must demonstrate that a product candidate is safe and efficacious. The results from preclinical testing and early clinical trials may not be predictive of results obtained in subsequent clinical trials, and these clinical trials may not demonstrate the safety and efficacy necessary to obtain regulatory approval for any product candidates. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. For ethical reasons, certain clinical trials are conducted with patients having the most advanced stages of disease and who have failed treatment with alternative therapies. During the course of treatment, these patients often die or suffer other adverse medical effects for reasons that may not be related to the pharmaceutical agent being tested. Such events can have a negative impact on the statistical analysis of clinical trial results.

The completion of clinical trials of our product candidates may be delayed by many factors, including the rate of enrollment of patients. Neither we nor our collaborators can control the rate at which patients present themselves for enrollment, and the rate of patient enrollment may not be consistent with our expectations or sufficient to enable clinical trials of our product candidates to be completed in a timely manner or at all. In addition, we may not be permitted by regulatory authorities to undertake additional clinical trials for one or more of our product candidates. Even if such trials are conducted, our product candidates may not prove to be safe and efficacious or receive regulatory approvals. Any significant delays in, or termination of, clinical trials of our product candidates could impact our ability to generate product sales from these product candidates in the future.

The price of our common stock has been and may continue to be highly volatile, which may make it difficult for stockholders to sell our common stock when desired or at attractive prices.

The market price of our common stock is highly volatile, and we expect it to continue to be volatile for the foreseeable future. For example, from January 1, 2009 through April 30, 2010 our common stock traded at a high price of $81.35 and a low price of $52.55. 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.

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In order for management to evaluate our internal controls, we must regularly review and document our internal control processes and procedures and test such controls. Ultimately, we or our independent auditors could conclude that our internal control over financial reporting may not be effective if, among others things:

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

·we fail to remediate assessed deficiencies.

We have implemented a number of information technology systems, including SAP®, to assist us to meet our internal controls for financial reporting.   While we believe our systems are effective for that purpose, we cannot be certain that they will continue to be effective in the future or adaptable for future needs.  Due to the number of controls to be examined, the complexity of our processes, the subjectivity involved in determining the effectiveness of controls, and, more generally, the laws and regulations to which we are subject as a global company, we cannot be certain that, in the future, all of our controls will continue to be considered effective by management or, if considered effective by our management, that our auditors will agree with such assessment.

If, in the future, we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal control over financial reporting, we could be subject to regulatory sanctions or lose investor confidence in the accuracy and completeness of our financial reports, either of which could have an adverse effect on the market price for our securities.

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

Historically, a portion of our revenues and expenses has been earned and incurred, respectively, in currencies other than the U.S. dollar. For the quarter ended March 31, 2010, 19.3% of our revenues were denominated in currencies other than the U.S. dollar.  With our acquisition of Mepha AG, we expect the percentage of revenues denominated in foreign currencies to increase, thereby increasing our exposure to foreign currency exchange risk.  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 77% of our total consolidated gross sales for the three months ended March 31, 2010. 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 12 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.

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Unfavorable general economic conditions could adversely affect our business.

Our business, financial condition and results of operations may be affected by various general economic factors and conditions.  Periods of economic slowdown or recession in any of the countries in which we operate could lead to a decline in the use of our products and therefore could have an adverse effect on our business.  In addition, if we are unable to access the capital markets due to general economic conditions, we may not have the cash available or be able to obtain funding to permit us to meet our business requirements and objectives, thus adversely affecting our business and the market price for our securities.

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 foreign, federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes, and we may be required to incur significant costs to comply with related existing and future environmental laws and regulations.

While we believe that our safety procedures for handling and disposing of these materials comply with foreign, federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of an accident, we could be held liable for any resulting damages, which could include fines and remedial costs. These damages could require payment by us of significant amounts over a number of years, which could adversely affect our results of operations and financial condition.

Anti-takeover provisions may delay or prevent changes in control of our management or deter a third party from acquiring us, limiting our stockholders’ ability to profit from such a transaction.

Our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock, $0.01 par value, of which 1,000,000 have been reserved for issuance in connection with our stockholder rights plan, and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders. Our stockholder rights plan could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.

We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 could have the effect of delaying or preventing a change of control of Cephalon. Section 203, the rights plan, and certain provisions of our certificate of incorporation, our bylaws and Delaware corporate law, may have the effect of deterring hostile takeovers, or delaying or preventing changes in control of our management, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices.

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

Issuer Purchases of Equity Securities

Period	Total Number of Shares of Common Stock Purchased(1)	Average Price Paid Per Share(2)		Total Number of Shares of Common Stock Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares of Common Stock that May Yet Be Purchased Under the Plans or Programs
January 1-31, 2010	—	$	—	—	$	—
February 1-28, 2010	502	64.80		—	—
March 1-31, 2010	—	—		—	—
Total	502	$	64.80	—	$	—

(1)	Consists entirely of shares repurchased from employees. Such repurchases are not part of a publicly announced plan or program.
(2)	Price paid per share is a weighted average based on the closing price of our common stock on the various vesting dates.

ITEM 5.  OTHER INFORMATION

Computation of Ratios of Earnings to Fixed Charges

	Year Ended												Three months ended
	December 31,												March 31,
	2005			2006		2007			2008		2009		2010
Determination of earnings:
Income (loss) before income taxes	$	(264,506	)	$	192,166	$	(123,276	)	$	134,070	$	289,407	$	148,648
Add:
Amortization of interest capitalized in current or prior periods	—			52		98			250		265		66
Fixed charges	81,007			97,054		79,993			84,762		99,453		29,018
Total earnings	$	(183,499	)	$	289,272	$	(43,185	)	$	219,082	$	389,125	$	177,732
Fixed charges:
Interest expense and amortization of debt discount and premium on all indebtedness	75,257			87,805		70,866			75,233		90,336		26,791
Appropriate portion of rentals	5,750			9,249		9,127			9,529		9,117		2,227
Fixed charges	81,007			97,054		79,993			84,762		99,453		29,018
Capitalized interest	1,044			1,766		768			77		—		—
Total fixed charges	$	82,051		$	98,820	$	80,761		$	84,839	$	99,453	$	29,018
Ratio of earnings to fixed charges(1)	—			2.93		—			2.58		3.91		6.12
Deficiency of earnings to fixed charges	265,550			—		123,946			—		—

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

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ITEM 6.  EXHIBITS

Exhibit No.	Description
2.1^	Share Purchase Agreement dated January 31, 2010 between Cephalon, Inc. and Mepha Holdings AG, filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on April 14, 2010.
2.2	Accession Agreement dated April 8, 2010 among the Company, Cephalon Luxembourg and Mepha Holding AG, filed as Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on April 14, 2010.
2.3*^	Agreement and Plan of Merger dated as of March 10, 2010 among Cephalon, Inc., Capture Acquisition Corp., Ception Therapeutics, Inc. and the Stockholders’ Representatives named therein
10.1	Fifth Amendment dated March 22, 2010 to the 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 March 24, 2010.
10.2*	Third Amendment dated as of January 26, 2010 to the Option Agreement dated as of January 13, 2009 by and between Cephalon, Inc. and Ception Therapeutics, Inc.
10.3†	Consulting Agreement dated as of February 5, 2010 by and between Cephalon, Inc. and Robert P. Roche, Jr., filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 11, 2010.
10.4†	Cephalon, Inc. 2010 Management Incentive Compensation Plan, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 2, 2010.
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 Wilco Groenhuysen, 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 Wilco Groenhuysen, Executive Vice President and Chief Financial Officer of the Company, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed herewith.

†Compensation plans and arrangements for executive officers and others.

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

^Pursuant to Item 601 of Regulation S-K, certain schedules have been omitted from this Exhibit.  The Company will furnish a copy of any omitted schedule to the Securities and Exchange Commission upon request.  Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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SIGNATURES

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

	CEPHALON, INC.
	(Registrant)
May 5, 2010	By	/s/ FRANK BALDINO, JR.
		Frank Baldino, Jr., Ph.D.
		Chairman and Chief Executive Officer
		(Principal executive officer)
	By	/s/ WILCO GROENHUYSEN
		Wilco Groenhuysen
		Executive Vice President and Chief Financial Officer
		(Principal financial and accounting officer)

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EX-2.3

EXHIBIT 2.3

CONFIDENTIAL

INFORMATION

REDACTED

AGREEMENT AND PLAN OF MERGER

Dated as of March 10, 2010

among

CEPHALON, INC.,

CAPTURE ACQUISITION CORP.,

CEPTION THERAPEUTICS, INC.

and

the Stockholders’ Representatives named herein

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

TABLE OF CONTENTS

		Page
ARTICLE I
DEFINITIONS AND INTERPRETATIONS
1.1.	Definitions	2
1.2.	Interpretation	16
ARTICLE II
THE MERGER
2.1.	Surviving Corporation	17
2.2.	Effects of the Merger	17
2.3.	Certificate of Incorporation, By-laws, Directors and Officers	17
ARTICLE III
EFFECT ON CAPITAL STOCK
3.1.	Conversion Terms	17
3.2.	Dissenting Shares	27
3.3.	Payment of Closing Date Merger Consideration	28
3.4.	Contingent Consideration Payments	29
3.5.	Lost Certificates and Agreements	33
3.6.	Unclaimed Funds	34
3.7.	Withholding Rights	34
3.8.	Escrow Fund	35
3.9.	Further Assurances	35
ARTICLE IV
CLOSING
4.1.	Closing Date	35
4.2.	Filing Certificate of Merger and Effectiveness	35
4.3.	Parent’s Additional Deliveries	36
4.4.	Merger Sub’s Deliveries	36
4.5.	The Company’s Deliveries	37
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
5.1.	Organization and Capitalization of the Company	38
5.2.	Subsidiaries and Investments	40
5.3.	Authority of the Company	41
5.4.	Financial Statements	42
5.5.	Operations Since Balance Sheet Date	42
5.6.	No Undisclosed Liabilities	44

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

i

TABLE OF CONTENTS

		Page
5.7.	Taxes	45
5.8.	Availability of Assets	46
5.9.	Governmental Permits; Regulatory Matters	46
5.10.	Real Property	48
5.11.	Personal Property	49
5.12.	Intellectual Property	49
5.13.	Inventories	55
5.14.	Title to Property	55
5.15.	Employees and Related Agreements; ERISA	55
5.16.	Employee Relations	57
5.17.	Contracts	58
5.18.	Status of Contracts	59
5.19.	No Violation or Litigation	59
5.20.	Environmental Matters	60
5.21.	Insurance	62
5.22.	Suppliers	62
5.23.	Takeover Laws	62
5.24.	Approval by Stockholders	62
5.25.	Foreign Corrupt Practices Act; Etc.	63
5.26.	No Finder	63
5.27.	Disclosure	63
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
6.1.	Organization and Capital Structure	64
6.2.	Authority	64
6.3.	No Finder	65
6.4.	Financial Wherewithal	65
ARTICLE VII
ACTION PRIOR TO THE EFFECTIVE TIME
7.1.	Investigation by Parent; Information Rights	65
7.2.	Preserve Accuracy of Representations and Warranties; Notification of Certain Matters	66
7.3.	Consents of Third Parties; Governmental Approvals	67
7.4.	Conduct of Business by the Company and the Subsidiaries	68
7.5.	Acquisition Proposals	71
7.6.	Takeover Laws	72
7.7.	Company Options and Company Warrants	72
7.8.	F&F C-2 Share Rights	73
7.9.	Notice to Stockholders; Meeting of Stockholders	73
7.10.	Third Party Debt	73
7.11.	Termination of Stockholders’ Agreement	74

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

ii

TABLE OF CONTENTS

		Page
ARTICLE VIII
OTHER AGREEMENTS
8.1.	Directors and Officers	74
8.2.	Royalty Payments Pursuant to Fulcrum Plan of Merger Agreement	75
ARTICLE IX
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PARENT AND MERGER SUB
9.1.	No Misrepresentation or Breach of Covenants and Warranties	76
9.2.	No Changes or Destruction of Property	76
9.3.	No Restraint or Litigation	76
9.4.	Necessary Governmental Approvals	76
9.5.	Necessary Consents	76
9.6.	Stockholders’ Approval; Dissenters’ Rights	77
9.7.	Actions Relating to Company Options and Company Warrants	77
9.8.	Actions Relating to F&F C-2 Share Rights	77
9.9.	Termination of Stockholders’ Agreement	77
ARTICLE X
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY
10.1.	No Breach or Misrepresentation of Warranties and Covenants	77
10.2.	No Restraint or Litigation	78
10.3.	Necessary Governmental Approvals	78
ARTICLE XI
INDEMNIFICATION
11.1.	Escrow Fund	78
11.2.	Indemnification from the Escrow Fund	78
11.3.	Termination of Escrow Fund	80
11.4.	Notice and Determination of Claims	81
11.5.	Third Person Claims	82
11.6.	Adjustment to Closing Date Merger Consideration	84
11.7.	No Punitive or Consequential Damages	84
11.8.	Insurance Proceeds and Tax Benefits	84
ARTICLE XII
TERMINATION
12.1.	Termination Rights	84
12.2.	Notice of Termination	85
12.3.	Effect of Termination	85

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

iii

TABLE OF CONTENTS

		Page
ARTICLE XIII
STOCKHOLDERS’ REPRESENTATIVES
13.1.	Appointment of the Stockholders’ Representatives	85
13.2.	Actions of the Stockholders’ Representatives	86
13.3.	Removal and Replacement of the Stockholders’ Representatives	87
13.4.	Liability of the Stockholders’ Representatives	88
13.5.	Access to Records	89
ARTICLE XIV
GENERAL PROVISIONS
14.1.	Survival of Obligations	90
14.2.	No Public Announcement	90
14.3.	Notices	90
14.4.	Successors and Assigns	92
14.5.	Entire Agreement; Amendments	92
14.6.	Partial Invalidity	92
14.7.	Waivers	92
14.8.	Expenses	93
14.9.	Execution in Counterparts	93
14.10.	Governing Law	93
14.11.	Submission to Jurisdiction	93
14.12.	Waiver of Jury Trial	93

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

iv

EXHIBITS

A	Written Consent
B	Form of Escrow Agreement
C	Form of Series A Warrant Election
D	Form of Opinion of Sidley Austin LLP
E	Form of Opinion of Duane Morris LLP

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

v

AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER (this “Agreement”), dated as of March 10, 2010 among Cephalon, Inc., a Delaware corporation (“Parent”), Capture Acquisition Corp., a Delaware corporation (“Merger Sub”), Ception Therapeutics, Inc., a Delaware corporation (the “Company”) (Merger Sub and the Company being hereinafter sometimes referred to as the “Constituent Corporations”), and the Stockholders’ Representatives named herein.

WHEREAS, Merger Sub is a Delaware corporation having an authorized capital stock of 1,000 shares of common stock, par value $0.01 per share (“Merger Sub Common Stock”), all of which are issued and outstanding and owned of record and beneficially by Parent;

WHEREAS, the Company is a Delaware corporation having an authorized capital stock consisting of (i) 600,000,000 shares of Voting Common Stock, par value $0.001 per share (the “Voting Common Stock”), of which 23,323,212 shares are issued and outstanding, (ii) 6,000,000 shares of Non-Voting Common Stock, par value $0.001 per share (the “Non-Voting Common Stock”), of which 4,889,464 shares are issued and outstanding, and (iii) 164,145,000 shares of Preferred Stock, par value $0.001 per share, of which (A) 23,000,000 shares are designated Series A Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”), of which 21,138,150 shares are issued and outstanding, (B) 3,500,000 shares are designated Series B Junior Preferred Stock, par value $0.001 per share (the “Series B Junior Preferred Stock”), of which 3,444,802 shares are issued and outstanding, (C) 13,250,000 shares are designated Series C-1 Preferred Stock, par value $0.001 per share (the “Series C-1 Preferred Stock”), of which 13,146,503 shares are issued and outstanding, (D) 114,775,000 shares are designated Series C-2 Preferred Stock, par value $0.001 per share (the “Series C-2 Preferred Stock”), of which 113,625,255 shares are issued and outstanding, and (E) 9,620,000 shares are designated Series C-3 Preferred Stock, par value $0.001 per share (the “Series C-3 Preferred Stock”), of which 9,620,000 shares are issued and outstanding;

WHEREAS, the Company also has outstanding certain Company Options, Company Warrants and F&F C-2 Share Rights (in each case as defined below);

WHEREAS, (a) the respective Boards of Directors of Parent (or a duly authorized committee thereof), Merger Sub and the Company have approved the merger of Merger Sub with and into the Company (the “Merger”) pursuant to the terms and conditions of this Agreement, (b) Parent has approved the Merger and adopted this Agreement as the sole stockholder of Merger Sub, (c) the board of directors of the Company has declared this Agreement to be advisable and has directed that this Agreement be submitted to its stockholders for adoption and (d) the holders of (i) at least 77% of the issued and outstanding shares of Series C-1 Preferred Stock and Series C-2 Preferred Stock, voting together as a single class on an as-if converted to Company Common Stock basis, and (ii) at least a majority of the outstanding shares of Company Capital Stock, voting together as a single class on an as-if converted to Company Common Stock basis, have executed a written consent, a copy of which is attached hereto as Exhibit A (the “Written Consent”), pursuant to which such stockholders have approved the Merger and adopted this Agreement; and

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

1

WHEREAS, Parent, Merger Sub and the Company desire to make certain representations, warranties and agreements in connection with the Merger.

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties to this Agreement agree as follows:

ARTICLE I
DEFINITIONS AND INTERPRETATIONS

1.1.          Definitions.  In this Agreement, the following terms have the meanings specified or referred to in this Section 1.1 and shall be equally applicable to both the singular and plural forms.

“Accrued Dividends” means the aggregate amount of accrued and unpaid dividends on the shares of Company Preferred Stock in question.

“Acquisition Proposal” has the meaning specified in Section 7.5(a).

“Accounting Firm” has the meaning specified in Section 3.4(b)(ii).

“Administrative Expense Account” has the meaning specified in Section 13.4(d).

“Affiliate” means, with respect to any Person, any other Person which, at the time of determination, directly or indirectly through one or more intermediaries Controls, is Controlled by or is under common Control with such Person.  “Control” means, as to any Person, the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.  The terms “Controlled by,” “under common Control with” and “Controlling” shall have correlative meanings.

“Agreement” means this Agreement and Plan of Merger.

“Alternate Series A Preferred Warrant Payment” has the meaning specified in Section 3.1(e)(ii)(B).

“Antitrust Division” means the Antitrust Division of the United States Department of Justice.

“Assumed Per Common Share Closing Consideration” means, with respect to any Company Option, the amount equal to (a) (i) the Closing Date Merger Consideration, plus (ii) the Exercise Amount (including, for purposes of this definition, only the aggregate proceeds that would be received by the Company upon exercise of such Company Option in full), minus (iii) the sum of the Series C-1 Liquidation Preference, the Series C-2 Liquidation Preference, the Series C-3 Liquidation Preference, the Series B Liquidation Preference, the Series A Liquidation Preference, the aggregate Series A Preferred Warrant Payment, the Rights Preference and the Escrow Amount, divided by (b) the number of Fully Diluted Shares (including, for purposes of

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

2

this definition, only the aggregate number of shares of Company Common Stock issuable upon the exercise of such Company Option in full in the total number of Fully Diluted Shares).

“Balance Sheet” means the unaudited consolidated balance sheet of the Company and the Subsidiaries as of January 31, 2010 included in Schedule 5.4.

“Balance Sheet Date” means January 31, 2010.

“Bring-Down Certificate” has the meaning specified in the Option Agreement.

“CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601 et seq.

“Certificate of Incorporation” means the Restated Certificate of Incorporation of the Company, as amended as of the date of this Agreement.

“Claim Notice” has the meaning specified in Section 11.4(a).

“Closing” means the closing of the Merger of Merger Sub with and into the Company in accordance with Article IV.

“Closing Date” has the meaning specified in Section 4.1.

“Closing Date Merger Consideration” means the amount equal to (i) $250,000,000 (two-hundred fifty million dollars), plus (ii) the Remaining Option Consideration and Rights Proceeds Amount, if any, plus (iii) if Res 5-0010 Asthma Study Completion occurs on or prior to the Closing Date, the Res 5-0010 Asthma Payment of $50,000,000 (fifty million dollars), minus (iv) the Withheld Indemnity Amount, if any, and minus (v) the aggregate amount of Third Party Debt outstanding as of the Closing Date.  Notwithstanding the foregoing or anything else herein to the contrary, the parties acknowledge and agree that the Res 5-0010 Asthma Study has been concluded prior to the date hereof without the achievement of the primary endpoint for the Res 5-0010 Asthma Study specified in the definition of “Res 5-0010 Asthma Study Completion”, and, accordingly, the Res 5-0010 Asthma Study Completion has not occurred as of the date hereof and cannot occur on, prior to or subsequent to the Closing Date.

“Code” means the Internal Revenue Code of 1986.

“Common Stock Warrant” means a warrant to acquire shares of Company Common Stock.

“Company” has the meaning specified in the first paragraph of this Agreement.

“Company Agreements” has the meaning specified in Section 5.18.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

3

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

“Company Capital Stock” means all of the issued and outstanding shares of Company Common Stock and Company Preferred Stock.

“Company Common Stock” means the Voting Common Stock and the Non-Voting Common Stock.

“Company Group” means any “affiliated group” (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) that files or has filed a consolidated federal income Tax Return and that, at any time on or before the Effective Time, includes or has included the Company or any predecessor of the Company, or any other group of corporations which, at any time on or before the Effective Time, files or has filed a Tax Return on a combined, consolidated or unitary basis with the Company or any predecessor of the Company (or another such predecessor).

“Company IP” has the meaning specified in Section 5.12(b).

“Company Option” means an option to acquire shares of Company Common Stock.

“Company Preferred Stock” means the Series A Preferred Stock, the Series B Junior Preferred Stock, the Series C-1 Preferred Stock, the Series C-2 Preferred Stock and the Series C-3 Preferred Stock.

“Company Property” means any real or personal property, plant, building, facility, structure, underground storage tank, equipment or unit, or other asset owned, leased or operated by the Company or a Subsidiary.

“Company Warrants” means the Series C-2 Preferred Warrants, Series A Preferred Warrants and Common Stock Warrants.

“Confidentiality Agreement” means the Confidentiality Agreement dated as of October 8, 2008 between the Company and Parent.

“Constituent Corporations” has the meaning specified in the first paragraph of this Agreement.

“Contaminant” means any waste, pollutant, hazardous or toxic substance or waste, petroleum, petroleum-based substance or waste, special waste, or any constituent of any such substance or waste.

“Contingent Consideration Payments” has the meaning specified in Section 3.4(b)(i).

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

4

“Contingent Consideration Payment Date” means each date on which a Contingent Consideration Payment is made to the Paying Agent pursuant to Section 3.4.

“Contingent Consideration Distribution Fee” means, with respect to any Contingent Consideration Payment, the fees and expenses charged or to be charged by the Paying Agent to hold and distribute such Contingent Consideration Payment in accordance with the terms hereof and of the Paying Agency Agreement.

“Copyrights” has the meaning specified in Section 5.12(a).

“Court Order” means any judgment, order, award or decree of any United States federal, state or local, or any supra-national or non-U.S., court or tribunal and any award in any arbitration proceeding.

“Credit Agreement” means the Subordinated Credit Agreement, dated as of January 13, 2009, between Parent and the Company.

“Development Milestone” has the meaning specified in Section 3.4(a)(i).

“Development Milestone Payments” has the meaning specified in Section 3.4(a)(i).

“DGCL” means the General Corporation Law of the State of Delaware.

“Disclosure Materials” has the meaning specified in Section 5.24(d).

“Dissenting Shares” has the meaning specified in Section 3.2(a).

“Dissenting Stockholder” has the meaning specified in Section 3.2(a).

“Effective Time” has the meaning specified in Section 4.2.

“Encumbrance” means any lien (statutory or other), claim, charge, security interest, mortgage, deed of trust, pledge, hypothecation, assignment, conditional sale or other title retention agreement, preference, priority or other security agreement or preferential arrangement of any kind, and any easement, encroachment, covenant, restriction, right of way, defect in title or other encumbrance of any kind.

“Environmental Encumbrance” means an Encumbrance in favor of any Governmental Body for (i) any liability under any Environmental Law or (ii) damages arising from, or costs incurred by such Governmental Body in response to, a Release or threatened Release of a Contaminant into the environment.

“Environmental Law” means all Requirements of Laws relating to or addressing the environment, health or safety, including CERCLA, OSHA and RCRA and any state equivalent thereof.

“ERISA” means the Employee Retirement Income Security Act of 1974.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

5

“ERISA Affiliate” has the meaning specified in Section 5.15(g).

“ERISA Benefit Plans” has the meaning specified in Section 5.15(a).

“Escrow Agent” means Wells Fargo Bank, National Association.

“Escrow Agreement” has the meaning specified in Section 3.8.

“Escrow Amount” has the meaning specified in Section 3.8.

“Escrow Fund” has the meaning specified in Section 3.8.

“Essex” has the meaning specified in Section 13.3(b).

“Excluded Third Party IP Fees” means [**]

“Exercise Amount” means the maximum amount of consideration that would be received by the Company in respect of the cash exercise of all Company Options (other than Out-of-the-Money Company Options with respect to which the holder thereof shall not have paid the Out-of-the-Money Per Share Cash Exercise Amount), Common Stock Warrants, Series A Preferred Warrants, Series C-2 Preferred Warrants and F&F C-2 Share Rights, if such securities were exercised for cash, converted or exchanged immediately prior to the Effective Time, treating all such securities as fully vested and exercisable for purposes of this definition.

“Existing Royalties” has the meaning specified in the Option Agreement.

“Expenses” means any and all reasonable out-of-pocket expenses incurred in connection with investigating, defending or asserting any claim, action, suit or proceeding incident to any matter indemnified against pursuant to Article XI (including court filing fees, court costs, arbitration fees or costs, witness fees, and reasonable fees and disbursements of legal counsel, investigators, expert witnesses, consultants, accountants and other professionals).

“Expiration Date” has the meaning specified in the Option Agreement.

“F&F C-2 Share Rights” means the rights to purchase shares of Series C-2 Preferred Stock pursuant to the Series C-2 Preferred Stock Purchase Agreement.

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

“Final Net TNF Sales Report” has the meaning specified in Section 3.4(b)(ii).

“FTC” means the United States Federal Trade Commission.

“Fulcrum Plan of Merger Agreement” means the Agreement and Plan of Merger, dated as of December 5, 2005, by and among the Company, CF Pharmaceuticals Holding Corp., Fulcrum Pharmaceuticals, Inc., Fulcrum Acquisition Corp., Ception Acquisition Corp. and each of the

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

6

Ception Holders and Ception Consultants (each as defined therein) party thereto, as amended on January 19, 2007 and December 12, 2007.

“Fulcrum Plan of Merger Amendment” means the Amendment to Agreement and Plan of Merger, dated as of January 19, 2007, by and among the Company, Fulcrum Pharmaceuticals, Inc., CT Research, Inc. and each of the Ception Holders and Ception Consultants (each as defined therein) party thereto.

“Fully Diluted Shares” means the sum of, without duplication, (a) the aggregate number of shares of Company Common Stock outstanding immediately prior to the Effective Time (which will include any shares of Company Common Stock issued immediately prior to the Effective Time pursuant to (i) an automatic conversion of shares of Series A Preferred Stock as a result of the Series A Conversion Trigger Condition being met, (ii) an automatic conversion of shares of Series B Junior Preferred Stock as a result of the Series B Conversion Trigger Condition being met, (iii) an exercise of any Company Option, whether pursuant to Section 3.1(f) or otherwise, or (iv) the conversion of shares of Series A Preferred Stock and Series B Preferred Stock for which valid conversion elections have been made, contingent upon the occurrence of the Effective Time), (b) the aggregate number of shares of Company Common Stock into which the shares of (i) Series C-2 Preferred Stock outstanding immediately prior to the Effective Time are (or would be) then convertible, (ii) Series C-1 Preferred Stock outstanding immediately prior to the Effective Time are (or would be) then convertible and (iii) Series C-2 Preferred Stock issuable upon exercise of all Series C-2 Preferred Warrants outstanding immediately prior to the Effective Time are (or would be) then convertible, (c) the aggregate number of shares of Company Common Stock into which shares of Series C-3 Preferred Stock issued and outstanding immediately prior to the Effective Time would then be convertible, (d) the aggregate number of shares of Company Common Stock into which shares of Series C-2 Preferred Stock issuable upon exercise of all F&F C-2 Share Rights outstanding immediately prior to the Effective Time would then be convertible, (e) the aggregate number of shares of Company Common Stock issuable upon exercise of all Common Stock Warrants outstanding immediately prior to the Effective Time, (f) the aggregate number of shares of Company Common Stock into which shares of Series A Preferred Stock issuable upon conversion of Series A Preferred Warrants that are subject to valid Series A Warrant Elections are (or would be) then convertible and (g) the aggregate number of shares of Company Common Stock issuable upon exercise of all Company Options (other than Out-of-the-Money Company Options with respect to which the holder thereof shall not have paid the Out-of-the-Money Per Share Cash Exercise Amount) outstanding immediately prior to the Effective Time.

“Governmental Body” means any United States federal, state or local, or any supra-national or non-U.S., government, political subdivision, governmental, regulatory or administrative authority, instrumentality, agency body or commission, self-regulatory organization, court, tribunal or judicial or arbitral body.

“Governmental Permits” has the meaning specified in Section 5.9(a).

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

7

“Identified IP” means has the meaning specified in the Option Agreement.

“Indebtedness” of any Person means (i) all indebtedness for borrowed money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of property other than trade accounts (including commissions payable to sales representatives) arising in the ordinary course of business, (iii) all reimbursement obligations with respect to surety bonds, letters of credit (to the extent not collateralized with cash or cash equivalents), bankers’ acceptances and similar instruments (in each case, whether or not matured), (iv) all obligations evidenced by notes, including promissory notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (v) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person, (vi) all indebtedness referred to in clauses (i) through (v) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Encumbrance upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness and (vii) all agreements, undertakings or arrangements by which any Person guarantees, endorses or becomes or is contingently liable for any of the foregoing of another Person, or guarantees the payment of dividends or other distributions upon the equity securities or interest of any other Person.

“Indemnified Person” has the meaning specified in Section 8.1(a).

“Intellectual Property” has the meaning specified in Section 5.12(a).

“IRS” means the Internal Revenue Service.

“IRS Guidance” has the meaning specified in Section 3.1(f)(v).

“Knowledge of the Company” means the actual knowledge after reasonable investigation of Stephen Tullman, Dr. Tim Henkel, Doug Gessl and Kamil Ali-Jackson; provided, that, with respect to any representation or warranty of the Company relating to an Oral Anti-TNF Product, no reasonable investigation shall be required.  “Know” and “Known” shall have correlative meanings.

“Leased Real Property” has the meaning specified in Section 5.10(b).

“Losses” means any and all losses, costs, obligations, liabilities, settlement payments, awards, judgments, fines, penalties, Taxes, damages, deficiencies or other charges.

“Marks” has the meaning specified in Section 5.12(a).

“Material Adverse Effect” means any change or effect that is materially adverse to the assets, liabilities (absolute or contingent), business, condition (financial or otherwise), results of operations or prospects of the Company and the Subsidiaries, taken as a whole; provided, however, that, without limiting the generality of what shall not constitute a “Material Adverse

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

8

Effect,” to the extent any such change or effect results from changes affecting the United States economy or financial or securities markets as a whole or changes that are the result of factors generally affecting the industry in which the Company and the Subsidiaries conduct their business, to the extent such changes do not disproportionately impact the Company and its Subsidiaries, taken as a whole, relative to other companies in the industry in which the Company and its Subsidiaries conduct their business, it shall not be taken into account in determining whether there has been a “Material Adverse Effect.”

“Merger” has the meaning specified in the recitals to this Agreement.

“Merger Sub” has the meaning specified in the recitals to this Agreement.

“Merger Sub Common Stock” has the meaning specified in the recitals to this Agreement.

“Net Reslizumab Sales” has the meaning specified in the Option Agreement.

“Net TNF Sales” means, [**]:

“Net TNF Sales Payments” has the meaning specified in Section 3.4(b)(i).

“New Common Share” means a share of Company Common Stock issued by the Company after the Expiration Date upon (a) the exercise of a Company Option or a Common Stock Warrant, in each case that was outstanding on the Expiration Date, (b) the automatic conversion of a New Series A Preferred Share as a result of the Series A Conversion Trigger Condition being met or (c) the conversion of a New Series A Preferred Share as a result of a conversion election made by the holder of such New Series A Preferred Share, contingent upon the occurrence of the Effective Time.

“New Series A Preferred Share” mean a share of Series A Preferred Stock issued by the Company after the Expiration Date upon the exercise of a Series A Preferred Warrant that was outstanding on the Expiration Date.

“New Series C-2 Preferred Share” means a share of Series C-2 Preferred Stock issued by the Company after the Expiration Date upon the exercise of an F&F C-2 Share Right or a Series C-2 Preferred Warrant, in each case that was outstanding on the Expiration Date.

“NOLs” means the regular Tax net operating loss carryovers and carrybacks of the Company and each of the Subsidiaries (and, if applicable, the alternative minimum tax net operating loss carryovers and carrybacks of the Company and each of the Subsidiaries); provided, however, that any carrybacks are limited to net operating losses that arise in periods ending on or before the Closing Date.

“Non-ERISA Commitments” has the meaning specified in Section 5.15(b).

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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“Non-Voting Common Stock” means the Non-Voting Common Stock of the Company, par value $0.001 per share.

“Nondisclosure Agreements” has the meaning specified in Section 5.12(g)(iv).

“Objection” has the meaning specified in Section 11.4(b).

“Operating Plan” has the meaning specified in the Option Agreement.

“Option Agreement” means the Option Agreement, dated as of January 13, 2009, between Parent and the Company.

“Option Agreement Execution Date” means January 13, 2009.

“Oral Anti-TNF Product” means [**].

“OSHA” means the Occupational Safety and Health Act, 29 U.S.C. §§ 651 et seq.

“Out-of-the-Money Company Option” means any Company Option that has a cash exercise price per share of Company Common Stock subject to such Company Option that is equal to or greater than the sum of (i) the Assumed Per Common Share Closing Consideration plus (ii) the Per Share Rights Amount.

“Out-of-the-Money Per Share Cash Exercise Amount” has the meaning specified in Section 3.1(f)(iii).

“Parent” has the meaning specified in the first paragraph of this Agreement.

“Parent Ancillary Agreements” means all agreements, instruments and documents being or to be executed and delivered by Parent or Merger Sub under this Agreement or in connection herewith.

“Parent Group Member” means (i) Parent and its Affiliates, (ii) the directors, officers and employees of each of Parent and its Affiliates and (iii) the respective successors and assigns of each of the foregoing including, after the Effective Time, the Surviving Corporation.

“Patents” has the meaning specified in Section 5.12(a).

“Paying Agent” means Wells Fargo Bank, National Association, including any successor to such Person that is mutually agreed upon by Parent and at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left).

“Paying Agency Agreement” has the meaning specified in Section 3.3(a).

“Pending Indemnity Amount” has the meaning specified in the Option Agreement.

“Pension Plans” has the meaning specified in Section 5.15(a).

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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“Per Common Share Closing Consideration” means the amount equal to (a) (i) the Closing Date Merger Consideration, plus (ii) the Exercise Amount, minus (iii) the sum of the Series C-1 Liquidation Preference, the Series C-2 Liquidation Preference, the Series C-3 Liquidation Preference, the Series B Liquidation Preference, the Series A Liquidation Preference, the aggregate Series A Preferred Warrant Payment and the Rights Preference, divided by (b) the number of Fully Diluted Shares.

“Per Common Share Contingent Consideration” means the amount of any Contingent Consideration Payment payable pursuant to Section 3.4 divided by the number of Fully Diluted Shares.

“Per Share Rights Amount” means the amount equal to $50,000,000, divided by the number of shares of Company Common Stock, on an as-if converted to Company Common Stock basis, outstanding on the Expiration Date and subject to Stockholders Option Agreements in effect on the Expiration Date (ignoring any shares of Company Capital Stock issuable upon the exercise of Company Options, Company Warrants or F&F C-2 Share Rights outstanding on the Expiration Date).

“Per Share Series A Liquidation Preference” means, with respect to each share of Series A Preferred Stock outstanding immediately prior to the Effective Time which is not converted into Company Common Stock as a result of (x) the Series A Conversion Trigger Condition being met or (y) the delivery of a valid conversion notice that is contingent upon the occurrence of the Effective Time, an amount equal to (a) $0.94 plus (b) any Accrued Dividends on such share from January 19, 2007 (or such later date as such share of Series A Preferred Stock was issued) until the Effective Time.

“Per Share Series B Liquidation Preference” means, with respect to each share of Series B Junior Preferred Stock outstanding immediately prior to the Effective Time which is not converted into Company Common Stock as a result of (a) the Series B Conversion Trigger Condition being met or (b) the delivery of a valid conversion notice that is contingent upon the occurrence of the Effective Time, an amount equal to $0.94.

“Per Share Series C-1 Liquidation Preference” means, with respect to each share of Series C-1 Preferred Stock outstanding immediately prior to the Effective Time, an amount equal to (a) $0.56 plus (b) any Accrued Dividends on such share from the date of issuance of such share until the Effective Time.

“Per Share Series C-2 Liquidation Preference” means, with respect to each share of Series C-2 Preferred Stock outstanding immediately prior to the Effective Time, an amount equal to (a) $0.622732 plus (b) any Accrued Dividends on such share from the date of issuance of such share until the Effective Time.

“Per Share Series C-3 Liquidation Preference” means, with respect to each share of Series C-3 Preferred Stock outstanding immediately prior to the Effective Time, an amount equal

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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to (a) $0.622732 plus (b) any Accrued Dividends on such share from the date of issuance of such share until the Effective Time.

“Permitted Encumbrances” means (i) liens for Taxes and other governmental charges and assessments which are not yet due and payable, (ii) liens of landlords and liens of carriers, warehousemen, mechanics and materialmen and other similar liens imposed by law arising in the ordinary course of business for sums not yet due and payable and (iii) other liens or imperfections on property which do not adversely affect title to, detract from the value of, or impair the existing use of, the property affected by such lien or imperfection.

“Person” means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or Governmental Body.

“Preliminary Net TNF Sales Report” has the meaning specified in Section 3.4(b)(ii).

“RCRA” means the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901 et seq.

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

“Remaining Option Consideration and Rights Proceeds Amount” means $49.3 million (forty-nine million three-hundred thousand dollars), together with any interest (i) on such amount and (ii) on the sum of $1.5 million (one million five hundred thousand dollars), in each case from the date hereof until the Effective Time, plus any Rights Proceeds the Company may receive between the date hereof and the Effective Time.

“Remedial Action” means actions required to (i) clean up, remove, treat or in any other way address Contaminants in the indoor or outdoor environment, (ii) prevent the Release or threatened Release or minimize the further Release of Contaminants or (iii) investigate and determine if a remedial response is needed and to design such a response and post-remedial investigation, monitoring, operation and maintenance and care.

“Requirements of Laws” means any United States federal, state and local, and any non-U.S., laws, statutes, regulations, rules, codes or ordinances enacted, adopted, issued or promulgated by any Governmental Body (including those pertaining to electrical, building, zoning, environmental and occupational safety and health requirements) or common law.

“Res 5-0010 Asthma Study” means the Company’s clinical trial for Reslizumab in no less than 104 enrolled patients with asthma.

“Res 5-0010 Asthma Payment” has the meaning specified in Section 3.4(a)(i)(C).

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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“Res 5-0010 Asthma Study Completion” means achievement of the primary endpoint for the Res-5-0010 Asthma Study specified in the protocol accepted by the FDA.  For purposes of the Res-5-0010 Asthma Study, “achievement of the primary endpoint” means that the two-sided p-value of the primary endpoint is less than or equal to 0.05 and the active arm is the better arm.  Notwithstanding the foregoing or anything else herein to the contrary, the parties acknowledge and agree that the Res 5-0010 Asthma Study has been concluded prior to the date hereof without the achievement of the foregoing primary endpoint, and, accordingly, the Res 5-0010 Asthma Study Completion has not occurred as of the date hereof and cannot occur on, prior to or subsequent to the Closing Date.

“Reslizumab” means [**].

“Rights Preference” means the amount equal to the Per Share Rights Amount multiplied by 28,510,170.

“Rights Proceeds” means the proceeds received by the Company from the exercise of Company Options, Company Warrants and F&F C-2 Share Rights after the Option Agreement Execution Date.

“Securities” means, collectively, shares of the Company Common Stock (including New Common Shares) and Company Preferred Stock (including New Series C-2 Preferred Shares and New Series A Preferred Shares), Company Options, Company Warrants and F&F C-2 Share Rights.

“Series A Conversion Trigger Condition” means that the product obtained by multiplying (a) the Per Common Share Closing Consideration (calculated as if all of the shares of Series A Preferred Stock issued and outstanding immediately prior to the Effective Time are converted into Company Common Stock) by (b) the number of shares of Series A Preferred Stock outstanding immediately prior to such conversion, exceeds 200% of the aggregate Original Series A Issue Price (as such term is defined in, and adjusted pursuant to the terms of, the Certificate of Incorporation) of all shares of Series A Preferred Stock issued and outstanding immediately prior to the Effective Time.

“Series A Liquidation Preference” means (a) if the Series A Conversion Trigger Condition is not met, an amount equal to the Per Share Series A Liquidation Preference multiplied by the aggregate number of shares of Series A Preferred Stock outstanding immediately prior to the Effective Time (excluding for such purposes any shares of Series A Preferred Stock for which valid conversion elections have been made, contingent upon the occurrence of the Effective Time) and (b) if the Series A Conversion Trigger Condition is met, $0.00.

“Series A Preferred Stock” has the meaning specified in the recitals to this Agreement.

“Series A Preferred Warrant” means a warrant to acquire shares of Series A Preferred Stock.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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“Series A Preferred Warrant Payment” has the meaning specified in Section 3.1(e)(ii)(A).

“Series A Warrant Election” means an election by a holder of a Series A Preferred Warrant to exercise its Series A Preferred Warrant and, immediately following such exercise, convert the shares of Series A Preferred Stock issued upon such exercise into shares of Company Common Stock, which Series A Warrant Election shall be made by such holder no later than two (2) business days prior to the Closing Date by delivering to the Company an executed election notice in the form attached hereto as Exhibit C and will result in such holder receiving, in lieu of the Series A Warrant Payment, the Alternate Series A Preferred Warrant Payment.

“Series B Conversion Trigger Condition” means that the product obtained by multiplying (a) the Per Common Share Closing Consideration (calculated as if all of the shares of Series B Junior Preferred Stock issued and outstanding immediately prior to the Effective Time are converted into Company Common Stock) by (b) the number of shares of Series B Junior Preferred Stock outstanding immediately prior to such conversion, exceeds 100% of the aggregate Original Series B Issue Price (as such term is defined in, and adjusted pursuant to the terms of, the Certificate of Incorporation) of all shares of Series B Junior Preferred Stock issued and outstanding immediately prior to the Effective Time.

“Series B Junior Preferred Stock” has the meaning specified in the recitals to this Agreement.

“Series B Liquidation Preference” means (a) if the Series B Conversion Trigger Condition is not met, an amount equal to the Per Share Series B Liquidation Preference multiplied by the aggregate number of shares of Series B Junior Preferred Stock outstanding immediately prior to the Effective Time (excluding for such purposes any shares of Series B Junior Preferred Stock for which valid conversion elections have been made, contingent upon the occurrence of the Effective Time) and (b) if the Series B Conversion Trigger Condition is met, $0.00.

“Series C-1 Liquidation Preference” means the amount equal to the Per Share Series C-1 Liquidation Preference multiplied by the aggregate number of shares of Series C-1 Preferred Stock outstanding immediately prior to the Effective Time.

“Series C-1 Preferred Stock” has the meaning specified in the recitals to this Agreement.

“Series C-2 Liquidation Preference” means the amount equal to the Per Share Series C-2 Liquidation Preference multiplied by the aggregate number of shares of Series C-2 Preferred Stock outstanding immediately prior to the Effective Time.

“Series C-2 Preferred Stock” has the meaning specified in the recitals to this Agreement.

“Series C-2 Preferred Stock Purchase Agreement” means the Series C-2 Preferred Stock Purchase Agreement, dated as of January 19, 2007, among the Company and the purchasers party thereto, as amended by Amendment No. 1, dated as of May 30, 2007.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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“Series C-2 Preferred Warrant” means any warrant to acquire shares of Series C-2 Preferred Stock outstanding immediately prior to the Effective Time.

“Series C-3 Liquidation Preference” means the amount equal to the Per Share Series C-3 Liquidation Preference multiplied by the aggregate number of shares of Series C-3 Preferred Stock outstanding immediately prior to the Effective Time.

“Series C-3 Preferred Stock” has the meaning specified in the recitals to this Agreement.

“Stock Agreements” has the meaning specified in Section 3.3(b).

“Stock Certificates” has the meaning specified in Section 3.3(b).

“Stock Plan” means the Company’s Equity Incentive Plan, as amended.

“Stockholder Ownership Percentage” means, with respect to each Stockholder, the percentage set forth opposite such Stockholder’s name on Schedule 3.1(g) attached hereto, as such Schedule is updated by the Company at the Closing pursuant to Section 3.1(g).

“Stockholders” means the holders of the Securities.

“Stockholders Option Agreements” has the meaning specified in the Option Agreement.

“Stockholders’ Meeting” has the meaning specified in Section 7.9(d).

“Stockholders’ Agreement” means the Amended and Restated Stockholders’ Agreement, dated as of January 19, 2007, by and among the Company and the stockholders of the Company party thereto.

“Stockholders’ Representative” has the meaning specified in Section 13.1.

“Subsidiary” has the meaning specified in Section 5.2(a).

“Surviving Corporation” has the meaning specified in Section 2.1.

“Surviving Corporation Common Stock” has the meaning specified in Section 3.1(a).

“Tax” means:  (i) any federal, state or local, or foreign, net income, gross income, gross receipts, windfall profit, severance, property, production, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, value-added, transfer, stamp, or environmental (including taxes under Code Section 59A) tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, addition to tax or additional amount imposed by any Governmental Body; and (ii)  any liability for the payment of amounts with respect to payments of a type described in clause (i) as a result of being a member of an affiliated, consolidated, combined or unitary group, or as a result of any obligation under any Tax Sharing Arrangement or Tax indemnity agreement.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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

“Tax Sharing Arrangement” means any agreement or arrangement for the allocation or payment of Tax liabilities or payment for Tax benefits with respect to a consolidated, combined or unitary Tax Return which Tax Return includes or included the Company or any Subsidiary.

“Third Party Debt” means all Indebtedness of the Company and the Subsidiaries, other than Indebtedness owed to Parent or any Affiliate of Parent.

“Third Person Claim” has the meaning specified in Section 11.5.

“Third Point” has the meaning specified in Section 13.3(b).

“Trade Secrets” has the meaning specified in Section 5.12(a).

“Transmittal Letter” has the meaning specified in Section 3.3(b).

“Undisputed Net TNF Sales Payment” has the meaning specified in Section 3.4(b)(ii).

“Voting Common Stock” has the meaning specified in the recitals to this Agreement.

“WARN” has the meaning specified in Section 5.15(c).

“Welfare Plans” has the meaning specified in Section 5.15(a).

“Withheld Indemnity Amount” means the sum of (a) the aggregate amount of all Losses and Expenses relating to claims for indemnification made by Optionee Group Members (as defined in the Option Agreement) pursuant to Article VI of the Option Agreement which have been finally determined to be owed to the Optionee Group Members pursuant to Section 6.3(b) of the Option Agreement but which have not been paid by the Company as of the Closing Date plus (b) the Pending Indemnity Amount; provided, that in no event shall the Withheld Indemnity Amount exceed $50,000,000.  For the avoidance of doubt, the Pending Indemnity Amount is included within the Withheld Indemnity Amount and does not constitute an additional amount.

“Written Consent” has the meaning specified in the recitals to this Agreement.

1.2.          Interpretation.  For purposes of this Agreement, (i) the words “include,” “includes” and “including” shall be deemed to be followed by the words “without limitation,” (ii) the word “or” is not exclusive and (iii) the words “herein”, “hereof”, “hereby”, “hereto” and “hereunder” refer to this Agreement as a whole.  Unless the context otherwise requires, references herein:  (i) to Articles, Sections, Exhibits and Schedules mean the Articles and Sections of, and the Exhibits and Schedules attached to, this Agreement; (ii) to an agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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and by this Agreement; and (iii) to a statute means such statute as amended from time to time and includes any regulations promulgated thereunder.  All references herein to the Company or any Subsidiary shall include the predecessors and successors of such Person.  The Schedules and Exhibits referred to herein shall be construed with and as an integral part of this Agreement to the same extent as if they were set forth verbatim herein.  Titles to Articles and headings of Sections are inserted for convenience of reference only and shall not be deemed a part of or to affect the meaning or interpretation of this Agreement.  This Agreement, the Company Ancillary Agreements and the Parent Ancillary Agreements shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting an instrument or causing any instrument to be drafted.

ARTICLE II

THE MERGER

2.1.          Surviving Corporation.  Upon the terms and subject to the conditions contained herein, and in accordance with the provisions of this Agreement and the DGCL, Merger Sub shall be merged with and into the Company at the Effective Time.  Following the Merger, the separate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation (the “Surviving Corporation”) and shall succeed to all and assume all the rights and obligations of Merger Sub and the Company in accordance with the DGCL.

2.2.          Effects of the Merger.  The Merger shall have the effects set forth in the DGCL.

2.3.          Certificate of Incorporation, By-laws, Directors and Officers.  At the Effective Time, the Certificate of Incorporation of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation, except that the name of the corporation set forth therein shall be changed to the name of the Company.  As so amended, such Certificate of Incorporation shall be the Certificate of Incorporation of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law.  At the Effective Time, the by-laws of the Company, as in effect immediately prior to the Effective Time, shall be amended and restated as of the Effective Time to conform to the by-laws of Merger Sub immediately prior to the Effective Time.  The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation until their resignation or removal or until their respective successors are duly elected and qualified.  The officers of Merger Sub immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation until their resignation or removal or until their respective successors are duly elected and qualified.

ARTICLE III
EFFECT ON CAPITAL STOCK

3.1.          Conversion Terms.  Subject to Section 3.2, as of the Effective Time, by virtue of the Merger and without any action on the part of the Company, the holders of Securities, Parent or Merger Sub:

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(a)           Merger Sub Common Stock.  Each share of Merger Sub Common Stock issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock, par value $0.01 per share, of the Surviving Corporation (“Surviving Corporation Common Stock”).  From and after the Effective Time, each outstanding certificate representing shares of Merger Sub Common Stock shall be deemed for all purposes to evidence ownership of, and to represent the number of shares of, Surviving Corporation Common Stock into which such shares of Merger Sub Common Stock shall have been converted.

(b)           Treasury Stock and Company Capital Stock Owned by Parent or Merger Sub.  All shares of Company Capital Stock that are held in the treasury of the Company immediately prior to the Effective Time and any Company Capital Stock owned by Parent or Merger Sub immediately prior to the Effective Time shall be cancelled and retired and no cash or other consideration shall be paid or delivered in exchange therefor and the Merger will effect no conversion thereof.

(c)           Company Capital Stock.  Except as otherwise provided in Section 3.1(b), and subject to the provisions of Sections 3.4, 3.7 and 3.8 and Article XI, each share of Company Capital Stock issued and outstanding immediately prior to the Effective Time (other than any Dissenting Shares) will be converted as set forth in this Section 3.1(c).

(i)            Series C-3 Preferred Stock.  Each share of Series C-3 Preferred Stock issued and outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be converted into the right to receive, without interest, (A) the Per Share Series C-3 Liquidation Preference, (B) the Per Common Share Closing Consideration multiplied by the number of shares of Company Common Stock into which each share of Series C-3 Preferred Stock is convertible immediately prior to the Effective Time and (C) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4 multiplied by the number of shares of Company Common Stock into which each share of Series C-3 Preferred Stock is convertible immediately prior to the Effective Time, in each case payable in cash to the holder thereof, subject to applicable Tax withholding.  From and after the Effective Time, all such shares of Series C-3 Preferred Stock will no longer be outstanding and will be automatically cancelled and retired and will cease to exist, and each Stock Certificate formerly representing each such share will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the consideration with respect to such share set forth in this Section 3.1(c)(i).

(ii)           Series C-2 Preferred Stock.  Each share of Series C-2 Preferred Stock, other than any New Series C-2 Preferred Shares, issued and outstanding immediately prior to the Effective Time (which, for the avoidance of doubt, does not include the F&F C-2 Share Rights) will, effective as of the Effective Time, be converted into the right to receive, without interest, (A) the Per Share Series C-2 Liquidation Preference, (B) the Per Common Share Closing Consideration multiplied by the number of shares of Company Common Stock into which each share of Series C-2 Preferred Stock is convertible

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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immediately prior to the Effective Time and (C) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4 multiplied by the number of shares of Company Common Stock into which each share of Series C-2 Preferred Stock is convertible immediately prior to the Effective Time, in each case payable in cash to the holder thereof, subject to applicable Tax withholding.  From and after the Effective Time, all such shares of Series C-2 Preferred Stock will no longer be outstanding and will be automatically cancelled and retired and will cease to exist, and each Stock Certificate formerly representing each such share will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the consideration with respect to such share set forth in this Section 3.1(c)(ii).

(iii)          Series C-1 Preferred Stock.  Each share of Series C-1 Preferred Stock issued and outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be converted into the right to receive, without interest, (A) the Per Share Series C-1 Liquidation Preference, (B) the Per Common Share Closing Consideration multiplied by the number of shares of Company Common Stock into which each share of Series C-1 Preferred Stock is convertible immediately prior to the Effective Time and (C) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4 multiplied by the number of shares of Company Common Stock into which each share of Series C-1 Preferred Stock is convertible immediately prior to the Effective Time, in each case payable in cash to the holder thereof, subject to applicable Tax withholding.  From and after the Effective Time, all such shares of Series C-1 Preferred Stock will no longer be outstanding and will be automatically cancelled and retired and will cease to exist, and each Stock Certificate formerly representing each such share will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the consideration with respect to such share set forth in this Section 3.1(c)(iii).

(iv)          Series B Junior Preferred Stock.  Each share of Series B Junior Preferred Stock (other than any shares of Series B Junior Preferred Stock for which valid conversion elections have been made, contingent upon the occurrence of the Effective Time) issued and outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be converted into the right to receive, without interest, the Per Share Series B Liquidation Preference, payable in cash to the holder thereof, subject to applicable Tax withholding; provided, however, that if the Series B Conversion Trigger Condition is met, or if a valid conversion election shall have been made contingent upon the Effective Time, each share of Series B Junior Preferred Stock issued and outstanding immediately prior to the Effective Time will, effective immediately prior to the Effective Time, be converted into the number of shares of Company Common Stock into which each share of Series B Junior Preferred Stock is convertible immediately prior to the Effective Time, and each such share of Company Common Stock will be subject to all of the provisions of this Agreement relating to the Company Common Stock, including Section 3.1(c)(vi).  From and after the Effective Time, all such shares of Series B Junior Preferred Stock will no longer be outstanding and will be automatically cancelled and retired and will cease to exist, and each Stock Certificate formerly representing each such

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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share will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the applicable consideration with respect to such share set forth in this Section 3.1(c)(iv).

(v)           Series A Preferred Stock.  Each share of Series A Preferred Stock, other than any New Series A Preferred Shares and other than any shares of Series A Preferred Stock for which valid conversion elections have been made, contingent upon the occurrence of the Effective Time, issued and outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be converted into the right to receive, without interest, the Per Share Series A Liquidation Preference, payable in cash to the holder thereof, subject to applicable Tax withholding; provided, however, that if the Series A Conversion Trigger Condition is met, or if a valid conversion election shall have been made contingent upon the Effective Time, each share of Series A Preferred Stock, other than any New Series A Preferred Shares, issued and outstanding immediately prior to the Effective Time will, effective immediately prior to the Effective Time, be converted into the number of shares of Company Common Stock into which each share of Series A Preferred Stock is convertible immediately prior to the Effective Time, and each such share of Company Common Stock will be subject to all of the provisions of this Agreement relating to the Company Common Stock, including Section 3.1(c)(vi).  From and after the Effective Time, all such shares of Series A Preferred Stock will no longer be outstanding and will be automatically cancelled and retired and will cease to exist, and each Stock Certificate formerly representing each such share will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the applicable consideration with respect to such share set forth in this Section 3.1(c)(v).

(vi)          Company Common Stock.  Each share of Company Common Stock, other than New Common Shares, issued and outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be converted into the right to receive, without interest, the Per Common Share Closing Consideration and any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4, in each case payable in cash to the holder thereof, subject to applicable Tax withholding.  From and after the Effective Time, all such shares of Company Common Stock will no longer be outstanding and will, effective as of the Effective Time, be automatically cancelled and retired and will cease to exist, and each Stock Certificate formerly representing each such share will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the consideration with respect to such share set forth in this Section 3.1(c)(vi).

(vii)         [Reserved.]

(viii)        New Series C-2 Preferred Shares.  Each New Series C-2 Preferred Share issued and outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be converted into the right to receive, without interest, (A) the Per Share Rights Amount multiplied by the number of shares of Company Common Stock into

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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which each New Series C-2 Preferred Share is convertible immediately prior to the Effective Time, (B) the Per Share Series C-2 Liquidation Preference, (C) the Per Common Share Closing Consideration multiplied by the number of shares of Company Common Stock into which each New Series C-2 Preferred Share is convertible immediately prior to the Effective Time and (D) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4 multiplied by the number of shares of Company Common Stock into which each New Series C-2 Preferred Share is convertible immediately prior to the Effective Time, in each case payable in cash to the holder thereof, subject to applicable Tax withholding.  From and after the Effective Time, all such New Series C-2 Preferred Shares will no longer be outstanding and will be automatically cancelled and retired and will cease to exist, and each Stock Certificate formerly representing each such share will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the consideration with respect to such share set forth in this Section 3.1(c)(viii).

(ix)           New Series A Preferred Shares.  Each New Series A Preferred Share (other than any New Series A Preferred Shares for which valid conversion elections have been made, contingent upon the occurrence of the Effective Time) issued and outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be converted into the right to receive, without interest, (A) the Per Share Rights Amount multiplied by the number of shares of Company Common Stock into which each New Series A Preferred Share is convertible immediately prior to the Effective Time and (B) the Per Share Series A Liquidation Preference, payable in cash to the holder thereof, subject to applicable Tax withholding; provided, however, that if the Series A Conversion Trigger Condition is met, each New Series A Preferred Share issued and outstanding immediately prior to the Effective Time will, effective immediately prior to the Effective Time, be converted into the number of shares of Company Common Stock into which each share of Series A Preferred Stock is convertible immediately prior to the Effective Time, and each such share of Company Common Stock will be considered a New Common Share and be subject to all of the provisions of this Agreement relating to New Common Shares, including Section 3.1(c)(x).  From and after the Effective Time, all such New Series A Preferred Shares will no longer be outstanding and will be automatically cancelled and retired and will cease to exist, and each Stock Certificate formerly representing each such share will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the applicable consideration with respect to such share set forth in this Section 3.1(c)(ix).

(x)            New Common Shares.  Each New Common Share issued and outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be converted into the right to receive, without interest, (A) the Per Share Rights Amount, (B) the Per Common Share Closing Consideration and (C) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4, in each case payable in cash to the holder thereof, subject to applicable Tax withholding.  From and after the Effective Time, all such New Common Shares will no longer be outstanding and will, effective as of the Effective Time, be automatically cancelled and retired and will

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

21

cease to exist, and each Stock Certificate formerly representing each such share will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the consideration with respect to such share set forth in this Section 3.1(c)(x).

(d)           F&F C-2 Share Rights.  Subject to the provisions of Sections 3.4, 3.7 and 3.8 and Article XI, each F&F C-2 Share Right outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be converted into the right to receive, without interest, (i) the Per Share Rights Amount multiplied by the number of shares of Company Common Stock into which each share of Series C-2 Preferred Stock is convertible immediately prior to the Effective Time, (ii) an amount equal to the Per Common Share Closing Consideration multiplied by the number of shares of Company Common Stock into which each share of Series C-2 Preferred Stock is convertible immediately prior to the Effective Time and (iii) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4 multiplied by the number of shares of Company Common Stock into which each share of Series C-2 Preferred Stock is convertible immediately prior to the Effective Time, in each case payable to the holder thereof, subject to applicable Tax withholding.  From and after the Effective Time, all such F&F C-2 Share Rights will no longer be outstanding and will, effective as of the Effective Time, be automatically cancelled and will cease to exist, and each Stock Agreement formerly representing each such F&F C-2 Share Right will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the consideration with respect to such F&F C-2 Share Right set forth in this Section 3.1(d)

(e)           Company Warrants.  Subject to the provisions of Sections 3.4, 3.7 and 3.8 and Article XI, each unexpired Company Warrant outstanding immediately prior to the Effective Time will be converted as set forth in this Section 3.1(e).

(i)            Series C-2 Preferred Warrants.  The Company will take all necessary and appropriate action so that each Series C-2 Preferred Warrant outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be terminated and converted into the right to receive, without interest, subject to the terms and conditions of this Agreement, for each share of Series C-2 Preferred Stock subject thereto, an amount equal to (A) the Per Share Rights Amount multiplied by the number of shares of Company Common Stock into which each share of Series C-2 Preferred Stock is convertible immediately prior to the Effective Time, (B) the Per Common Share Closing Consideration multiplied by the number of shares of Company Common Stock into which each share of Series C-2 Preferred Stock is convertible immediately prior to the Effective Time and (C) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4 multiplied by the number of shares of Company Common Stock into which each share of Series C-2 Preferred Stock is convertible immediately prior to the Effective Time, in each case payable to the holder thereof, subject to applicable Tax withholding.  From and after the Effective Time, all Series C-2 Preferred Warrants will no longer be outstanding and will be automatically cancelled and will cease to exist, and each such warrant will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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consideration with respect to such warrant set forth in this Section 3.1(e)(i).  Within two (2) business days after the execution and delivery of this Agreement, the Company will deliver to each holder of a Series C-2 Preferred Warrant any notice contemplated by the Series C-2 Preferred Warrants regarding the Merger and the other transactions contemplated by this Agreement.

(ii)           Series A Preferred Warrants.  The Company will take all necessary and appropriate action so that:

(A)          each Series A Preferred Warrant outstanding immediately prior to the Effective Time and not subject to a valid Series A Warrant Election will, effective as of the Effective Time, be terminated and converted into the right to receive, without interest, for each share of Series A Preferred Stock subject thereto, (1) the Per Share Rights Amount multiplied by the number of shares of Company Common Stock into which each share of Series A Preferred Stock is convertible immediately prior to the Effective Time and (2) an amount equal to $0.317268 (being the difference between $0.94 and $0.622732, which is the exercise price per share of the Series A Preferred Warrants) (the “Series A Preferred Warrant Payment”), payable in cash to the holder thereof, subject to applicable Tax withholding; provided, however, that if the Series A Conversion Trigger Condition is met, each Series A Preferred Warrant not subject to a valid Series A Warrant Election will, effective as of the Effective Time, be terminated and converted into the right to receive, without interest, for each share of Series A Preferred Stock subject thereto, (I) the Per Share Rights Amount, (II) an amount equal to the Alternate Series A Preferred Warrant Payment (as defined below) and (III) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4, in each case payable in cash to the holder thereof, subject to applicable Tax withholding; and

(B)           each Series A Preferred Warrant outstanding immediately prior to the Effective Time and subject to a valid Series A Warrant Election will, effective as of the Effective Time, be terminated and converted into the right to receive, without interest, for each share of Series A Preferred Stock subject thereto, (1) the Per Share Rights Amount multiplied by the number of shares of Company Common Stock into which each share of Series A Preferred Stock is convertible immediately prior to the Effective Time, (2) an amount equal to the excess, if any, of the Per Common Share Closing Consideration over $0.622732 (the “Alternate Series A Preferred Warrant Payment”) and (3) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4 multiplied by the number of shares of Company Common Stock into which each share of Series A Preferred Stock is convertible immediately prior to the Effective Time, in each case payable in cash to the holder thereof, subject to applicable Tax withholding.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(C)           From and after the Effective Time, all Series A Preferred Warrants will no longer be outstanding and will be automatically cancelled and will cease to exist, and each such warrant will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the applicable consideration with respect to such warrant set forth in this Section 3.1(e)(ii).  Within two (2) business days after the execution and delivery of this Agreement, the Company will deliver to each holder of a Series A Preferred Warrant any notice contemplated by the Series A Preferred Warrants regarding the Merger and the other transactions contemplated by this Agreement.

(iii)          Common Stock Warrants.  The Company will take all necessary and appropriate action so that each Common Stock Warrant outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be terminated and converted into the right to receive, without interest, for each share of Voting Common Stock subject thereto, (A) the Per Share Rights Amount, (B) an amount equal to the excess, if any, of the Per Common Share Closing Consideration over the exercise price per share of such Common Stock Warrant immediately prior to the Effective Time and (C) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4, in each case payable in cash to the holder thereof, subject to applicable Tax withholding.  From and after the Effective Time, all Common Stock Warrants will no longer be outstanding and will be automatically cancelled and will cease to exist, and each such warrant will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the consideration with respect to such warrant set forth in this Section 3.1(e)(iii).  Within two (2) business days after the execution and delivery of this Agreement, the Company will deliver to each holder of a Common Stock Warrant any notice contemplated by the Common Stock Warrants regarding the Merger and the other transactions contemplated hereby.

(f)            Company Options.  Prior to the Effective Time, each holder of an unexpired Company Option shall be provided with the opportunity to exercise such Company Option.  Subject to the provisions of Sections 3.4, 3.7 and 3.8 and Article XI, each unexpired Company Option outstanding immediately prior to the Effective Time will be converted or cancelled as set forth in this Section 3.1(f).

(i)            Company Options (Other than Out-of-the-Money Company Options) Outstanding on the Expiration Date.  Each unexpired, unexercised Company Option (other than Out-of-the-Money Company Options) outstanding on the Expiration Date that remains outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be terminated and converted into the right to receive, without interest, for each share of Company Common Stock subject thereto, (A) the Per Share Rights Amount, (B) an amount equal to the excess of the Per Common Share Closing Consideration over the exercise price per share of such Company Option immediately prior to the Effective Time and (C) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4, in each case payable in cash to the holder thereof, subject to applicable Tax withholding.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(ii)           Company Options (Other than Out-of-the-Money Company Options) Not Outstanding on the Expiration Date.  Each unexpired, unexercised Company Option  (other than Out-of-the-Money Company Options) not outstanding on the Expiration Date that is outstanding immediately prior to the Effective Time will, effective as of the Effective Time, be terminated and converted into the right to receive, without interest, for each share of Company Common Stock subject thereto, (A) an amount equal to the excess of the Per Common Share Closing Consideration over the exercise price per share of such Company Option immediately prior to the Effective Time and (B) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4, in each case payable in cash to the holder thereof, subject to applicable Tax withholding

(iii)          Out-of-the-Money Company Options.  The Company will take all necessary and appropriate action so that each unexpired Out-of-the-Money Company Option outstanding as of the Effective Time, will, effective as of the Effective Time, be cancelled, without any consideration being payable in respect thereof, and have no further force or effect; provided, however, that, prior to the Effective Time, the holder of an Out-of-the-Money Company Option outstanding on the Expiration Date that remains outstanding immediately prior to the Effective Time may elect to (A) pay the Company, with respect to each share of Company Common Stock subject to such Company Option, an amount in cash (the “Out-of-the-Money Per Share Cash Exercise Amount”) equal to (1) the per share exercise price of such Company Option minus (2) an amount equal to the sum of the Per Common Share Closing Consideration and the Per Share Rights Amount plus (3) the portion of the Escrow Amount attributable to such share pursuant to this Article III and (B) deliver to the Company a written agreement or other instrument, duly executed by such holder and in form and substance reasonably satisfactory to each of the Company and Parent, evidencing the foregoing and acknowledging the treatment of such holder’s Out-of-the-Money Company Options pursuant to this Section 3.1(f)(iii), whereupon such holder will thereafter be entitled to receive, for each share of Company Common Stock subject to such Company Option, (I) upon the release of the Escrow Fund to the Stockholders in accordance with the Escrow Agreement, the portion of the Escrow Fund attributable to such share and (II) any Per Common Share Contingent Consideration payable from time to time pursuant to Section 3.4, in each case payable in cash to the holder thereof, subject to applicable Tax withholding.

(iv)          From and after the Effective Time, all Company Options will no longer be outstanding and will be automatically cancelled and will cease to exist, and each such option will cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the applicable consideration (if any) with respect to such option set forth in this Section 3.1(f).  Within two (2) business days after the execution and delivery of this Agreement, the Company will deliver to each holder of a Company Option any notice contemplated by the Company Options regarding the Merger and the other transactions contemplated by this Agreement.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(v)           For purposes of Code section 409A, each payment of any Per Common Share Contingent Consideration under this Agreement shall be treated as a separate payment, and any right to a series of payments in respect of any Per Common Share Contingent Consideration under this Agreement shall be treated as a right to receive a series of separate payments.  It is further expressly intended that any right to any Per Common Share Contingent Consideration shall be subject to a substantial risk of forfeiture, as described in Treas. Reg. §§ 1.409A-1(d) and 1.409A-3(i)(5)(iv)(A).  Notwithstanding the foregoing, it is intended that this Section 3.1(f) be drafted and administered in compliance with Code section 409A including any future amendments to Code section 409A, and any other Internal Revenue Service or other governmental rulings or interpretations (“IRS Guidance”) issued pursuant to Code section 409A so as not to subject the holder of a Company Option to payment of interest or any additional tax under Code section 409A.  In addition, to the extent that any IRS Guidance issued under Code section 409A would result in the holder of a Company Option being subject to the payment of interest or any additional tax under Code section 409A, the parties agree, to the extent reasonably possible, to amend this Section 3.1(f) in order to avoid the imposition of any such interest or additional tax under Code section 409A, which amendment shall have the minimum economic effect necessary and be reasonably determined in good faith by the parties to the Agreement and shall not, in any event, affect the consideration received or to be received by the other holders of Securities under this Agreement.

(g)           Schedule 3.1(g) sets forth the following information with respect to each Stockholder:

(i)            the Company Common Stock (separately identifying any New Common Shares held by each such Stockholder), Company Preferred Stock (separately identifying (A) any New Series C-2 Preferred Shares and New Series A Preferred Shares held by each such Stockholder and (B) any Series A Preferred Stock, New Series A Preferred Shares and Series B Junior Preferred Stock for which valid conversion elections have been made by each such Stockholder, contingent upon the occurrence of the Effective Time), Company Options (separately identifying any Company Options outstanding on the Expiration Date held by each such Stockholder), Company Warrants (separately identifying any Series A Preferred Warrants for which valid Series A Warrant Elections have been made) and F&F C-2 Share Rights held by each such Stockholder;

(ii)           the original issuance date with respect to each share of Company Capital Stock, each Company Option and each Company Warrant held by such Person, together with the vesting schedule and exercise price of each Company Option and Company Warrant held by such Stockholder; and

(iii)          such Stockholder’s Stockholder Ownership Percentage.

Schedule 3.1(g) will be supplemented at Closing to set forth the portion of the Closing Date Merger Consideration to be paid to each Stockholder.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(h)           Total Consideration; Accuracy of Payments.  Notwithstanding anything in this Agreement to the contrary, in no event shall the aggregate merger consideration (including the Escrow Amount and any consideration payable to holders of Company Options, Company Warrants or F&F C-2 Share Rights but excluding, for the avoidance of doubt, the Contingent Consideration Payments) payable by Parent, Merger Sub or the Surviving Corporation to the Stockholders in connection with the Merger exceed the Closing Date Merger Consideration minus the Remaining Option Consideration and Rights Proceeds Amount, if any, and minus any amount designated by the Stockholders’ Representatives to be placed in the Administrative Expense Account.  In the event that the Closing Date Merger Consideration is inadequate to pay in full all amounts to be paid to the Stockholders pursuant to the Certificate of Incorporation, the Closing Date Merger Consideration shall be divided among the Stockholders in accordance with the relative preferences set forth in the Certificate of Incorporation as in effect immediately prior to the Effective Time.  In calculating the consideration payable under this Article III, Parent shall be entitled to rely on the representations and warranties contained in this Agreement with respect to the capital stock of the Company.  If such representations and warranties are not correct, then (i) Parent shall have the right to adjust the amount payable in respect of each Security accordingly and (ii) any Stockholder that has received an amount of consideration in excess of what such Stockholder would be entitled to receive under the adjustment referred to in clause (i) shall return such excess amount to the Paying Agent by wire transfer of immediately available funds within two (2) business days of the date of written notice from Parent to such Stockholder to such effect.

3.2.          Dissenting Shares.

(a)           To the extent permitted under the DGCL, each Stockholder that has executed the Written Consent has approved the Merger and adopted this Agreement for purposes of Section 251 of the DGCL and has waived any and all rights that such Stockholder might otherwise have to dissent and to demand appraisal for such Stockholder’s shares of Company Capital Stock with respect to the Merger in accordance with the DGCL.  Notwithstanding anything in this Agreement to the contrary, but subject to the foregoing sentence, each outstanding share of Company Capital Stock as of the Effective Time as to which a written demand for appraisal is properly delivered to the Company in accordance with Section 262 of the DGCL, shall not be converted into or represent a right to receive the consideration with respect to such share (including any portion of the Contingent Consideration Payments, if any) specified in Section 3.1(c) unless and until the holder of such share shall have failed to perfect or shall have effectively withdrawn or lost such holder’s appraisal rights for such holder’s shares of Company Capital Stock under the DGCL, at which time such holder’s shares of Company Capital Stock shall be converted into the right to receive the consideration with respect to such share (including any portion of the Contingent Consideration, if any) specified in Section 3.1(c).  All such shares of Company Capital Stock as to which such a demand for appraisal is so delivered and not withdrawn, except any such shares of Company Capital Stock the holder of which shall have effectively withdrawn or lost such holder’s appraisal rights under such Section 262 of the DGCL, are herein called “Dissenting Shares.”  The Company shall give Parent prompt notice upon receipt by the Company of any such written demand for appraisal (any holder duly making such demand being hereinafter called a “Dissenting Stockholder”).  The Company agrees that prior to

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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the Effective Time it will not, except with the prior written consent of Parent, voluntarily make any payment with respect to, or settle or offer to settle with, any such Dissenting Stockholder.  Each Dissenting Stockholder who becomes entitled, pursuant to the provisions of Section 262 of the DGCL, to payment for his, her or its shares of Company Capital Stock shall receive payment therefor from the Surviving Corporation (but only after the amount thereof shall have been agreed upon or finally determined pursuant to the terms of this Agreement and the DGCL) and, upon receipt of such payment, such shares of Company Capital Stock shall be cancelled.

(b)           If any Dissenting Stockholder shall fail to perfect or shall effectively withdraw or lose appraisal rights with respect to such Dissenting Stockholder’s Dissenting Shares under Section 262 of the DGCL, the Dissenting Shares of such Dissenting Stockholder shall be converted into only the right to receive the consideration with respect to such shares specified in Section 3.1(c).  As soon as practicable after the surrender to the Paying Agent of one or more certificates for such shares of Company Capital Stock for cancellation and upon delivery of a properly completed and executed Transmittal Letter, such Dissenting Stockholder so failing to perfect or otherwise withdrawing or losing appraisal rights will be entitled to receive the consideration with respect to such shares specified in Section 3.1(c), in accordance with the procedures, and subject to the conditions, set forth in this Article III.

3.3.          Payment of Closing Date Merger Consideration.

(a)           Immediately prior to the Effective Time:  (i) Parent shall make available, by transferring to the Paying Agent via wire transfer of immediately available funds, cash in an amount equal to the Closing Date Merger Consideration minus (A) the Escrow Amount, minus (B) the Remaining Option Consideration and Rights Proceeds Amount, if any, minus (C) any amount designated by the Stockholders’ Representatives to be placed in the Administrative Expense Account and minus (D) the aggregate amount that would otherwise be payable by Parent pursuant to Section 3.1(c) with respect to Dissenting Shares if the Dissenting Stockholders had not exercised rights of appraisal; and (ii) the Company shall make available, by transferring to the Paying Agent via wire transfer of immediately available funds, cash in an amount equal to the Remaining Option Consideration and Rights Proceeds Amount, if any.  The Paying Agent shall hold such funds and deliver them in accordance with the terms hereof and the terms of a Paying Agency Agreement to be entered into by and among the Paying Agent, Parent and the Stockholders’ Representatives (including any such agreement entered into by and among Parent, the Stockholders’ Representatives and any successor Paying Agent, the “Paying Agency Agreement”).  All fees and expenses of the Paying Agent relating to the payment of the Closing Date Merger Consideration shall be paid one-half by Parent and one-half from the Escrow Fund.  Any amount designated by the Stockholders’ Representatives to be deposited into the Administrative Expense Account shall be promptly transferred to such account by Parent via wire transfer of immediately available funds.

(b)           Subject to receipt by the Paying Agent and Parent of sufficient information from the Company to satisfy such obligations, the Paying Agent shall promptly mail or cause to be mailed to each record holder (other than the Company) of a certificate or certificates which, immediately prior to the Effective Time, represented outstanding shares of Company Capital

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Stock except for shares to be cancelled pursuant to Section 3.1(b) (the “Stock Certificates”), and to each holder of an agreement evidencing any Company Options (including the relevant grant notices), Company Warrants or F&F C-2 Share Rights (collectively, the “Stock Agreements”), a form letter of transmittal (the “Transmittal Letter”) specifying that delivery shall be effected, and risk of loss and title to the Stock Certificates and Stock Agreements shall pass, only upon proper delivery of the Stock Certificates and Stock Agreements to the Paying Agent, and instructions for use in effecting the surrender of the Stock Certificates and the Stock Agreements in exchange for payment therefor.

(c)           After the Effective Time, each holder of a Stock Certificate, and each holder of a Stock Agreement, in each case outstanding immediately prior to the Effective Time, may surrender such Stock Certificate or Stock Agreement to the Paying Agent and, subject to the provisions of this Section 3.3, the Paying Agent shall promptly deliver or cause to be delivered to such holder a check in an amount equal to the portion of the Closing Date Merger Consideration exchangeable therefor pursuant to Section 3.1, minus an amount equal to such holder’s Stockholder Ownership Percentage of the Escrow Amount; provided that, with respect to a Stockholder that (i) has delivered such Stockholder’s Stock Certificate(s) and/or Stock Agreement(s), together with a duly executed Transmittal Letter, to the Paying Agent at least three (3) business days prior to the Closing Date and (ii) is, individually or together with its Affiliates, entitled to receive in excess of $50,000 as of the Effective Time as set forth in Schedule 3.1(g), Parent shall use commercially reasonable efforts to cause the Paying Agent to pay the applicable consideration in respect of such Stockholder’s Stock Certificate(s) and/or Stock Agreement(s) to such Stockholder on the Closing Date via wire transfer of immediately available funds to the bank account specified by such Stockholder in the Transmittal Letter so delivered.  Except as provided in the Escrow Agreement with respect to the Escrow Fund, in no event shall the holder of any such surrendered Stock Certificates or Stock Agreements be entitled to receive interest on any of the funds to be received in the Merger.  If any such check is to be sent to a Person other than the Person in whose name the Stock Certificates or Stock Agreements are registered, among other things, it shall be a condition of the making of such payment that the Person requesting such payment shall pay to the Paying Agent the transfer Taxes required by reason of the delivery of such payment to a Person other than the registered holder of the Stock Certificates or Stock Agreements surrendered, or shall establish to the reasonable satisfaction of Parent that such Tax has been paid or is not applicable.

(d)           Until so surrendered, each outstanding Stock Certificate and each outstanding Stock Agreement, in each case immediately prior to the Effective Time, shall not be transferable on the books of the Surviving Corporation or Parent after the Effective Time, but shall be deemed for all purposes to evidence only the right to receive the consideration exchangeable therefor pursuant to Section 3.1.

3.4.          Contingent Consideration Payments.

(a)           Development Milestone Payments.  (i)  In addition to the Closing Date Merger Consideration (less the Remaining Option Consideration and Rights Proceeds Amount, if any) and any Net TNF Sales Payments (as defined below), upon the attainment of the development

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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milestones set forth below (each, a “Development Milestone”), Parent shall, or shall cause the Surviving Corporation to, [**] after the occurrence of each Development Milestone, deliver to the Paying Agent (for further payment to the holders of Stock Certificates and Stock Agreements outstanding immediately prior to the Effective Time), via wire transfer of immediately available funds, the respective amounts set forth below minus, in each case, the applicable Contingent Consideration Distribution Fee associated therewith and any amount designated by the Stockholders’ Representatives to be placed in the Administrative Expense Account (each, a “Development Milestone Payment” and collectively, the “Development Milestone Payments”):

(A)          Upon FDA approval of Reslizumab for the treatment of eosinophilic esophagitis, a cash payment of [**];

(B)           Upon marketing authorization of Reslizumab for the treatment of eosinophilic esophagitis being granted by the European Commission in accordance with Regulation (EC) No. 726/2004, a cash payment of [**];

(C)           If Res 5-0010 Asthma Study Completion has not occurred on or prior to the Closing Date, then upon the occurrence of the Res 5-0010 Asthma Study Completion, a cash payment of $50,000,000 (fifty million dollars) (the “Res 5-0010 Asthma Payment”);

(D)          Upon FDA approval of Reslizumab for any asthma indication, a cash payment of [**];

(E)           Upon marketing authorization of Reslizumab for the treatment of any asthma indication being granted by the European Commission in accordance with Regulation (EC) No. 726/2004, a cash payment of [**]; and

(F)           Upon FDA approval of an Oral Anti-TNF Product, a cash payment of [**].

(ii)           Concurrently with delivery of a Development Milestone Payment to the Paying Agent, Parent shall, or shall cause the Surviving Corporation to, deliver to the Paying Agent, via wire transfer of immediately available funds, the Contingent Consideration Distribution Fee associated with such Development Milestone Payment.  Such Contingent Consideration Distribution Fee shall be retained by the Paying Agent and not be paid to the holders of Stock Certificates and Stock Agreements.

(iii)          From and after the Closing, Parent hereby agrees to use, or to cause its Affiliates to use, commercially reasonable efforts to develop and commercialize (or cause the development and commercialization of) Reslizumab so as to achieve the Developmental Milestones set forth in clauses (A) through (E) above.  For purposes of this Section 3.4 only, the phrase “commercially reasonable efforts” means [**].

(iv)          The Stockholders shall only be entitled to receive a single payment for each Development Milestone.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(b)           Net TNF Sales Payments.  (i)  In addition to the Closing Date Merger Consideration (less the Remaining Option Consideration and Rights Proceeds Amount, if any) and any Development Milestone Payments, on a quarterly basis, beginning with the fiscal quarter in which the first sale of an Oral Anti-TNF Product occurs, Parent shall, or shall cause the Surviving Corporation to, deliver to the Paying Agent (for further payment to the holders of Stock Certificates and Stock Agreements outstanding immediately prior to the Effective Time), via wire transfer of immediately available funds, an amount equal to [**] Net TNF Sales for such fiscal quarter minus, in each case, the applicable Contingent Consideration Distribution Fee associated therewith and any amount designated by the Stockholders’ Representatives to be placed in the Administrative Expense Account (each, a “Net TNF Sales Payment” and collectively, the “Net TNF Sales Payments” and, together with the Development Milestone Payments, the “Contingent Consideration Payments”).

(ii)           Parent will provide to the Stockholders’ Representatives, within [**]after the end of each fiscal quarter, commencing at the end of the fiscal quarter in which the Development Milestone described in Section 3.4(a)(i)(F) is achieved, a report setting forth in reasonable detail a calculation of the Net TNF Sales for such fiscal quarter (each, a “Preliminary Net TNF Sales Report”).  If at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) do not object to the Preliminary Net TNF Sales Report [**] of receipt thereof, or upon such earlier time as at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) shall provide written notice that they concur with the Preliminary Net TNF Sales Report, such report shall become final and binding as the “Final Net TNF Sales Report” for such fiscal quarter and shall be used to calculate the Net TNF Sales Payment to be paid with respect to such fiscal quarter.  If at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) deliver notice to Parent objecting to the Preliminary Net TNF Sales Report within [**]period, (A) Parent shall, within [**] after the date on which such notice is delivered to Parent, deliver to the Paying Agent the portion (the “Undisputed Net TNF Sales Payment”) of the Net TNF Sales Payment represented by the Net TNF Sales to which at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) do not object and (B) Parent and the Stockholders’ Representatives shall use their reasonable efforts to resolve by written agreement any differences as to the Preliminary Net TNF Sales Report and, if Parent and at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) resolve such differences, the Preliminary Net TNF Sales Report, as adjusted by such written agreement, shall become final and binding as the Final Net TNF Sales Report.  If Parent and at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) are not able to resolve all of their differences within the [**] period next following such [**] period, the Preliminary Net TNF Sales Report shall be submitted to a neutral accounting firm acceptable to both Parent and at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) and such firm (the “Accounting Firm”) shall be directed by Parent and the Stockholders’ Representatives to (Y) resolve the unresolved objections (based on

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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a review by the Accounting Firm of the calculation of Net TNF Sales in accordance with the terms hereof, the mathematical accuracy of the calculation contained in the Preliminary Net TNF Sales Report and such financial and sales information as shall be reasonably required by the Accounting Firm to confirm the accuracy of the Net TNF Sales) and (Z) make its final and binding resolution within [**]of its selection.  The determination of the Accounting Firm shall be final, binding and conclusive on Parent and the Stockholders’ Representatives and the Preliminary Sales Milestone Report, as adjusted by the determination of the Accounting Firm, shall be the Final Net TNF Sales Report.  The fees and disbursements of the Accounting Firm shall be paid by the Stockholders’ Representatives unless the Net TNF Sales in the Final Net TNF Sales Report are equal to or greater than [**], in which case the fees and disbursements of the Accounting Firm shall be paid by Parent.

(iii)          Following determination of each Final Net TNF Sales Report, the remaining portion of any Net TNF Sales Payment associated therewith shall be delivered to the Paying Agent concurrently with the delivery of the next Net TNF Sales Payment.

(iv)          Concurrently with delivery of a Net TNF Sales Payment to the Paying Agent, Parent shall, or shall cause the Surviving Corporation to, deliver to the Paying Agent via wire transfer of immediately available funds, the Contingent Consideration Distribution Fee associated with such Net TNF Sales Payment.  Such Contingent Consideration Distribution Fee shall be retained by the Paying Agent and not be paid to the holders of Stock Certificates and Stock Agreements.

(c)           Subject to Section 3.4(a)(iii), (i) from and after the Effective Time, the control of the Surviving Corporation, its subsidiaries and its and their business shall rest with Parent and its Affiliates and the Stockholders and the Stockholders’ Representatives shall have no right to object to the manner in which the business of the Surviving Corporation and its subsidiaries is conducted after the Effective Time and (ii) Parent shall have complete discretion with respect to all decisions related to the business of the Surviving Corporation and its subsidiaries, including decisions relating to the research, development, manufacture, marketing, pricing and distribution of Reslizumab or an Oral Anti-TNF Product, and shall have no obligation to conduct clinical trials related to, or otherwise pursue regulatory approvals of, any indication for Reslizumab or an Oral Anti-TNF Product or otherwise take any action to protect, attain or maximize any payment to be received by the holders of Stock Certificates and Stock Agreements pursuant to this Section 3.4.  Parent shall have no obligation to follow any business plan of the Company or be legally bound by any such plan and shall have no obligation to consult with the Stockholders or the Stockholders’ Representatives with respect to the business of the Surviving Corporation and its subsidiaries.

(d)           Promptly following each Contingent Consideration Payment Date, the Paying Agent shall deliver or cause to be delivered to each holder of a Stock Certificate or Stock Agreement that has previously surrendered such Stock Certificate or Stock Agreement to the Paying Agent in accordance with Section 3.3(c) a check in an amount equal to such Stockholder’s Stockholder Ownership Percentage of the Contingent Consideration Payment

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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made on such Contingent Consideration Payment Date.  If any such check is to be sent to a Person other than the Person in whose name the Stock Certificates or Stock Agreements was registered as of the Effective Time, among other things, it shall be a condition of the making of such payment that the Person requesting such payment shall pay to the Paying Agent the transfer Taxes required by reason of the delivery of such payment to a Person other than the registered holder of the Stock Certificates or Stock Agreements surrendered, or shall establish to the reasonable satisfaction of Parent that such Tax has been paid or is not applicable.  Any amount designated by the Stockholders’ Representatives to be deposited into the Administrative Expense Account shall be promptly transferred to such account by Parent via wire transfer of immediately available funds.

(e)           The right of any Person to receive any portion of any Contingent Consideration Payment shall not be assignable or transferable except, subject to compliance with applicable securities laws and, if reasonably requested by Parent, delivery to Parent and the Surviving Corporation of an opinion of counsel reasonably satisfactory to Parent as to compliance with such securities laws, (i) by operation of law, will or intestate succession, (ii) if such Person is an individual, to (A) trusts all of the beneficiaries of which are such individual and/or such individual’s spouse, descendants and siblings and descendants of such individual’s siblings or (B) family limited partnerships or family limited liability companies all of the equity interests of which are and in the future shall be owned by such individual and/or such individual’s spouse, descendants and siblings and descendant’s of such individual’s siblings or (iii) if such Person is an entity, to (A) an Affiliate of such Person or (B) to a non-Affiliate of such Person in connection with the sale of all or substantially all of the portfolio assets of such Person.  The Company hereby, and the Stockholders by virtue of their approval of the Merger and pursuant to the terms of the Letter of Transmittal shall, acknowledge and agree that:  (1) the right to receive the Contingent Consideration Payments, if any, is an integral part of the consideration for the transactions contemplated hereby; (2) the Contingent Consideration Payments do not represent any ownership or equity interest in the Company, Merger Sub, the Surviving Corporation or Parent and do not entitle any Person to voting rights or rights to dividend payments; and (3) the Contingent Consideration Payments are solely represented by this Agreement and are not represented by any certificate, instrument or other delivery.

3.5.          Lost Certificates and Agreements.  If any Stock Certificate or Stock Agreement shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the record holder thereof claiming such Stock Certificate or Stock Agreement to be lost, stolen or destroyed, the Paying Agent shall, subject to Sections 3.7 and 3.8, pay to such Person the amount of cash payable to the holder of such lost, stolen or destroyed Stock Certificate or Stock Agreement determined in accordance with Section 3.1.  When authorizing such payment in exchange for any lost, stolen or destroyed Stock Certificate or Stock Agreement, the Person to whom the cash is to be paid shall, as a condition precedent to the payment thereof, give the Surviving Corporation a bond reasonably satisfactory to the Surviving Corporation in such sum as it may direct, or otherwise indemnify the Surviving Corporation in a manner reasonably satisfactory to the Surviving Corporation, against any claim that may be made against Parent, Merger Sub or the Surviving Corporation with respect to the Stock Certificates or Stock Agreements alleged to have been lost, stolen or destroyed.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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3.6.          Unclaimed Funds.

(a)           Twelve (12) months following the Effective Time, Parent shall be entitled to require the Paying Agent to deliver to Parent any funds (other than funds held with respect to the Escrow Amount) that were delivered to the Paying Agent pursuant to Section 3.3(a) which have not been disbursed to holders of Stock Certificates or Stock Agreements, and thereafter such holders shall be entitled only to look to Parent and the Surviving Corporation (subject to abandoned property, escheat or other similar laws) for the cash payable upon due surrender of their Stock Certificates or Stock Agreements (and Parent and the Surviving Corporation shall, subject to such laws, be required to make such cash payments).

(b)           Twelve (12) months following the termination of the Escrow Fund, Parent shall be entitled to require the Paying Agent to deliver to Parent any funds remaining in the Escrow Fund which have not been disbursed to holders of Stock Certificates or Stock Agreements, and thereafter such holders shall be entitled only to look to Parent and the Surviving Corporation (subject to abandoned property, escheat or other similar laws) for the cash payable upon due surrender of their Stock Certificates or Stock Agreements (and Parent and the Surviving Corporation shall, subject to such laws, be required to make such cash payments).

(c)           Twelve (12) months following each Contingent Consideration Payment Date, Parent shall be entitled to require the Paying Agent to deliver to Parent any funds (other than funds held with respect to the Escrow Amount, if any) that were delivered to the Paying Agent on such Contingent Consideration Payment Date which have not been disbursed to holders of Stock Certificates or Stock Agreements, and thereafter such holders shall be entitled only to look to Parent and the Surviving Corporation (subject to abandoned property, escheat or other similar laws) for the cash payable upon due surrender of their Stock Certificates or Stock Agreements (and Parent and the Surviving Corporation shall, subject to such laws, be required to make such cash payments).

(d)           None of Parent, Merger Sub, the Surviving Corporation, the Company or the Paying Agent shall be liable to any Person in respect of any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

3.7.          Withholding Rights.  Parent shall be entitled to deduct and withhold from the consideration, if any, otherwise payable pursuant to this Agreement to any Stockholder (including the Escrow Amount and any consideration payable to holders of Company Options, Company Warrants or F&F C-2 Share Rights), or to any designee of such Stockholder, such amounts as are required to be deducted and withheld with respect to the making of such payments under the Code, or any provision of state, local or foreign Tax law.  To the extent practicable, Parent shall instruct the Paying Agent with respect to Tax matters relating to employee Tax withholding prior to the Effective Time.  At least five (5) days before the Closing Date, the Company shall provide to Parent all information reasonably requested by Parent which is reasonably necessary to permit Parent to determine the amounts, if any, required to be withheld with respect to employee Tax withholding.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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3.8.          Escrow Fund.  Notwithstanding anything else to the contrary in this Agreement, immediately prior to the Effective Time, $25,000,000 (twenty-five million dollars) of the aggregate amount payable under this Article III to the holders of Stock Certificates (not representing Dissenting Shares) and Stock Agreements (collectively, the “Escrow Amount”) shall be deposited with the Escrow Agent and shall not be paid to such holders upon the surrender of such Stock Certificates and Stock Agreements to the Paying Agent.  The Escrow Amount shall constitute the escrow fund (the “Escrow Fund”) to be held and released in accordance with the provisions of Article XI and the Escrow Agreement in substantially the form attached hereto as Exhibit B to be entered into at the Closing among Parent, the Stockholders’ Representatives and the Escrow Agent (the “Escrow Agreement”).  The Escrow Amount shall be allocated among and withheld from payment to the Stockholders in accordance with their respective Stockholder Ownership Percentages.  The Escrow Fund shall be governed by the terms set forth herein and in the Escrow Agreement.  All funds or other property received by the Escrow Agent in respect of the Escrow Fund (including any interest or other earnings thereon) shall be retained by it as part of the Escrow Fund.  For the avoidance of doubt, as used herein, the terms “Escrow Amount” and “Escrow Fund” shall exclude the Pending Indemnity Amount.

3.9.          Further Assurances.  If, at any time after the Effective Time, the Surviving Corporation or Parent shall consider or be advised that any deeds, bills of sale, assignments or assurances or any other acts or things are necessary, desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation its right, title and interest in, to or under any of the rights, privileges, powers, franchises, properties or assets of either of the Constituent Corporations or (b) otherwise to carry out the purposes of this Agreement, the Surviving Corporation, and its proper officers and directors or their designees, shall be authorized to execute and deliver, in the name and on behalf of either Constituent Corporation, all such deeds, bills of sale, assignments and assurances and to do, in the name and on behalf of either Constituent Corporation, all such other acts and things as may be necessary, desirable or proper to vest, perfect or confirm the Surviving Corporation’s right, title and interest in, to and under any of the rights, privileges, powers, franchises, properties or assets of such Constituent Corporation and otherwise to carry out the purposes of this Agreement.

ARTICLE IV
CLOSING

4.1.          Closing Date.  The Closing of the Merger shall take place at 9:00 a.m., local time, on a date to be specified by Parent and the Company, which shall be no later than the third business day after satisfaction or waiver of the conditions set forth in Articles IX and X, at the offices of Sidley Austin LLP, One South Dearborn Street, Chicago, Illinois, or on such other date or at such other place as shall be agreed to in writing by Parent and the Company.  The date on which the Closing is actually held is hereinafter sometimes referred to as the “Closing Date.”

4.2.          Filing Certificate of Merger and Effectiveness.  Subject to fulfillment or waiver of the conditions to the respective obligations of each of the parties set forth in Article IX or Article X, as the case may be, at the Closing the parties shall cause the Merger to be consummated by filing a Certificate of Merger, executed in accordance with the DGCL, with the Secretary of

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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State of the State of Delaware.  The Merger shall become effective upon such filing or, if the Certificate of Merger so specifies, at a later date and time not more than 30 days after filing of the Certificate of Merger.  The date and time on such date of effectiveness of the Merger is herein called the “Effective Time.”

4.3.          Parent’s Additional Deliveries.  Subject to the fulfillment or waiver of the conditions set forth in Article IX, (i) immediately prior to the Effective Time, Parent shall make the transfer and deposit required by Sections 3.3 and 3.8, respectively, and (ii) at the Closing Parent shall deliver to the Company, the Escrow Agent or the Paying Agent, as applicable, all of the following:

(a)           a copy of Parent’s Restated Certificate of Incorporation certified as of a recent date by the Secretary of State of the State of Delaware;

(b)           a certificate of good standing of Parent issued as of a recent date by the Secretary of State of the State of Delaware;

(c)           a certificate of the secretary or an assistant secretary of Parent, dated the Closing Date, as to:  (i) no amendments to the Restated Certificate of Incorporation of Parent since a specified date; (ii) the by-laws of Parent; (iii) the resolutions of the Board of Directors of Parent (or a duly authorized committee thereof) authorizing the execution, delivery and performance of this Agreement and the Parent Ancillary Agreements and the transactions contemplated hereby and thereby; and (iv) the incumbency and signatures of the officers of Parent executing this Agreement and any Parent Ancillary Agreement;

(d)           the certificate contemplated by Section 10.1, duly executed by the President or any Vice President of Parent;

(e)           the Escrow Agreement, duly executed by Parent;

(f)            the Paying Agency Agreement, duly executed by Parent;

(g)           an opinion of Sidley Austin LLP addressed to the Company in the form attached hereto as Exhibit D; and

(h)           such other documents and certificates as the Company may reasonably request.

4.4.          Merger Sub’s Deliveries.  Subject to the fulfillment or waiver of the conditions set forth in Article IX, at the Closing Merger Sub shall deliver to the Company all of the following:

(a)           a copy of Merger Sub’s Certificate of Incorporation certified as of a recent date by the Secretary of State of the State of Delaware;

(b)           a certificate of good standing of Merger Sub issued as of a recent date by the Secretary of State of the State of Delaware;

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(c)           a certificate of the secretary or an assistant secretary of Merger Sub, dated the Closing Date, as to:  (i) no amendments to the Certificate of Incorporation of Merger Sub since a specified date; (ii) the by-laws of Merger Sub; (iii) the resolutions of the Board of Directors of Merger Sub authorizing the execution, delivery and performance of this Agreement and the Parent Ancillary Agreements and the transactions contemplated hereby and thereby; and (iv) the incumbency and signatures of the officers of Merger Sub executing this Agreement and any Parent Ancillary Agreement; and

(d)           the certificate contemplated by Section 10.1, duly executed by the President or any Vice President of Parent.

4.5.          The Company’s Deliveries.  Subject to the fulfillment or waiver of the conditions set forth in Article X, at the Closing the Company shall deliver to Parent, the Escrow Agent or the Paying Agent, as applicable, all of the following:

(a)           a copy of the Certificate of Incorporation certified as of a recent date by the Secretary of State of the State of Delaware;

(b)           a certificate of good standing of the Company issued as of a recent date by the Secretary of State of the State of Delaware;

(c)           a certificate of the secretary or an assistant secretary of the Company, dated the Closing Date, as to:  (i) no amendments to the Certificate of Incorporation since a specified date; (ii) the by-laws of the Company; (iii) the resolutions of the Board of Directors and stockholders of the Company authorizing the execution, delivery and performance of this Agreement and the Company Ancillary Agreements and the transactions contemplated hereby and thereby; and (iv) the incumbency and signatures of the officers of the Company executing this Agreement and any Company Ancillary Agreement being executed and delivered on the date hereof;

(d)           all consents, waivers or approvals obtained by the Company with respect to the consummation of the transactions contemplated by this Agreement and the Company Ancillary Agreements (a list of such consents, waivers and approvals, as agreed to by the Company and Parent, being set forth in Schedule 4.5(d));

(e)           written payoff letters from the applicable lenders with respect to (i) payment in full satisfaction and discharge of all of the Third Party Debt, (ii) the release of all Encumbrances relating to or securing the Third Party Debt and (iii) related UCC-3 termination statements;

(f)            an opinion of Duane Morris LLP, dated the Closing Date, addressed to Parent and Merger Sub and in the form attached hereto as Exhibit E;

(g)           resignations of each of the officers (in their capacities as such) and directors of the Company and the Subsidiaries, effective as of the Effective Time;

(h)           the certificates contemplated by Sections 9.1, 9.2 and 9.6, duly executed by the Chief Executive Officer of the Company;

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(i)            documentation in form and substance reasonably satisfactory to Parent terminating the Stockholders’ Agreement effective as of the Effective Time;

(j)            copies of the written acknowledgments of the holders of Company Warrants to be delivered pursuant to Section 7.7;

(k)           copies of the written acknowledgments of the holders of F&F C-2 Share Rights to be delivered pursuant to Section 7.8;

(l)            copies of all conversion or exercise notices received by the Company on or prior to the Closing Date with respect to any Securities;

(m)          the Escrow Agreement, duly executed by the Stockholders’ Representatives;

(n)           the Paying Agency Agreement, duly executed by the Stockholders’ Representatives;

(o)           a written instruction, duly executed by at least two of the three Stockholders’ Representatives, as to the amount, if any, to be placed in the Administrative Expense Account (together with wire transfer instructions relating thereto); and

(p)           such other documents and certificates as Parent may reasonably request.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

As an inducement to Parent and Merger Sub to enter into this Agreement and to consummate the transactions contemplated hereby, the Company represents and warrants to Parent and Merger Sub and agrees as follows:

5.1.          Organization and Capitalization of the Company.

(a)           The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware.  The Company is duly qualified to transact business as a foreign corporation and is in good standing in each of the jurisdictions listed in Schedule 5.1(a), which jurisdictions are the only ones in which the ownership or leasing of the Company’s assets or the conduct of the Company’s business requires such qualification, except where the failure to be so qualified or in good standing would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. No other jurisdiction has made a written demand, request or has otherwise indicated in writing that the Company is required so to qualify on account of the ownership or leasing of its assets or the conduct of its business.  The Company has full corporate power and authority to own or lease and to operate and use its assets and to carry on its business as now conducted.

(b)           Except as set forth in Schedule 5.1(b), true and complete copies of (i) the Certificate of Incorporation and all amendments thereto, (ii) the Company’s by-laws, as amended

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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to date, and (iii) the minute books of the Company have been delivered or made available to Parent.  The Company is not in default under, or in violation of, any provision of the Certificate of Incorporation or its by-laws.  Such minute books contain true and complete records of all meetings or other actions taken by the board of directors and stockholders of the Company.

(c)           The authorized capital stock of Company consists of (i) 600,000,000 shares of Voting Common Stock, of which 23,323,212 shares are issued and outstanding, (ii) 6,000,000 shares of Non-Voting Common Stock, of which 4,889,464 shares are issued and outstanding, and (iii) 164,145,000 shares of Preferred Stock, of which (A) 23,000,000 shares are designated Series A Preferred Stock, of which 21,138,150 shares are issued and outstanding, (B) 3,500,000 shares are designated Series B Junior Preferred Stock, of which 3,444,802 shares are issued and outstanding, (C) 13,250,000 shares are designated Series C-1 Preferred Stock, of which 13,146,503 shares are issued and outstanding, (D) 114,775,000 shares are designated Series C-2 Preferred Stock, of which 113,625,255 shares are issued and outstanding, and (E) 9,620,000 shares are designated Series C-3 Preferred Stock, of which 9,620,000 shares are issued and outstanding.  The Company does not hold any treasury shares.  All of the issued and outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable and have been offered, issued, sold and delivered by the Company in compliance with all applicable federal and state securities laws.  No shares of Series C-3 Preferred Stock were issued after February 20, 2009.  None of the issued and outstanding shares of Company Common Stock or Company Preferred Stock has been issued in violation of, or is subject to, any preemptive rights, rights of first offer, rights of first refusal or subscription rights, except as set forth in Schedule 5.1(c).

(d)           All of the Company Common Stock, Company Preferred Stock, Company Options, Company Warrants and F&F C-2 Share Rights are held of record by the holders and in the amounts identified in Schedule 5.1(d).  Schedule 5.1(d) also sets forth:  (i) the number of shares of Company Common Stock into which each share of Company Preferred Stock is convertible; (ii) the exercise price per share of each Company Option and each Company Warrant; (iii) the date of grant of each Company Option and each Company Warrant and the expiration date thereof; (iv) the number of shares of Company Common Stock or Company Preferred Stock issuable upon the exercise of each Company Option or Company Warrant; and (v) the number of shares of Company Common Stock or Company Preferred Stock issuable as a result of outstanding F&F C-2 Share Rights.  True and complete copies of the stock record books and agreements evidencing Company Warrants, Company Options and F&F C-2 Share Rights have been delivered or made available to Parent.  Each Company Warrant and Company Option was duly issued and is valid and in full force and effect.

(e)           Schedule 5.1(e) sets forth (i) the unpaid Accrued Dividends (whether or not declared) with respect to each holder of shares of Company Preferred Stock and (ii) the per diem accrual rate of dividends with respect to each share of Company Preferred Stock pursuant to the terms of the Certificate of Incorporation.  There are no declared and unpaid dividends or other distributions with respect to any shares of Company Common Stock or Company Preferred Stock.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(f)            Except (i) for the Company Options and Company Warrants, (ii) the F&F C-2 Share Rights, (iii) the Option Agreement, (iv) as set forth in the Certificate of Incorporation and (v) as set forth in Schedule 5.1(f), there are no agreements, arrangements, options, warrants, calls, rights or commitments of any character relating to the issuance, sale, purchase or redemption of any shares of capital stock or other equity interest of the Company, whether on conversion of other securities or otherwise.  Except for this Agreement and as set forth in Schedule 5.1(f), the Company is not a party to any, and to the Knowledge of the Company there exists no, stockholder agreement, voting trust agreement or any other similar contract, agreement, arrangement, commitment, plan or understanding restricting or otherwise relating to the voting, dividend, ownership or transfer rights of any shares of capital stock of the Company.  Except as set forth in Schedule 5.1(f), the Company is not under any obligation to register under the Securities Act of 1933 any shares of its capital stock or any other securities of the Company, whether currently outstanding or that may subsequently be issued.

(g)           There are no bonds, debentures, notes or other instruments evidencing Indebtedness of the Company or any of the Subsidiaries issued or outstanding (i) having the right to vote on any matters on which stockholders may vote (or which is convertible into, or exchangeable for, securities having such right) or (ii) the value of which is in any way based upon or derived from capital or voting stock of Company or any of the Subsidiaries.

5.2.          Subsidiaries and Investments.

(a)           Schedule 5.2 sets forth a list of each corporation, partnership, limited liability company, joint venture or other entity (i) in which the Company, directly or indirectly, owns of record or beneficially 50% or more of the outstanding voting securities or of which it is a general partner (each such corporation, partnership, limited liability company, joint venture or other entity being referred to herein as a “Subsidiary”), (ii) in which the Company, directly or indirectly, owns of record or beneficially any outstanding voting securities or other equity interests or (iii) which is Controlled by the Company.

(b)           Schedule 5.2 sets forth the authorized capital stock of each Subsidiary and indicates the number of issued and outstanding shares of capital stock, the number of issued shares of capital stock held as treasury shares and the number of shares of capital stock unissued and not reserved for any purpose of each Subsidiary.  Except as set forth in Schedule 5.2 and except for this Agreement, there are no agreements, arrangements, options, warrants, calls, rights or commitments of any character relating to the issuance, sale, purchase or redemption of any shares of capital stock of any of the Subsidiaries.  All of the outstanding shares of capital stock of each of the Subsidiaries are validly issued, fully paid and nonassessable.  All of the outstanding shares of capital stock of each of the Subsidiaries are owned by the Company of record and beneficially free from all Encumbrances, except as set forth in Schedule 5.2.

(c)           Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is duly qualified to transact business as a foreign corporation and is in good standing under the laws of each jurisdiction listed under its name in Schedule 5.2, which jurisdictions are the only ones in which the

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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ownership or leasing of such Subsidiary’s assets or the conduct of such Subsidiary’s business requires such qualification, except where the failure to be so qualified or in good standing would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.  No other jurisdiction has made a written demand, request or has otherwise indicated in writing that such Subsidiary is required so to qualify.  Each Subsidiary has full corporate power and authority to own or lease and to operate and use its properties and assets and to carry on its business as now conducted.

(d)           True and complete copies of (i) the certificate of incorporation and all amendments thereto, (ii) the by-laws, as amended to date, and (iii) the minute books of each Subsidiary have been delivered or made available to Parent.  No Subsidiary is in default under, or in violation of, any provision of its certificate of incorporation or by-laws.  Such minute books contain true and complete records of all meetings or other actions taken by the board of directors and stockholders of each Subsidiary.

5.3.          Authority of the Company.

(a)           The Company has full corporate power and authority to execute, deliver and perform this Agreement and all of the Company Ancillary Agreements.  The execution, delivery and performance of this Agreement and the Company Ancillary Agreements by the Company have been duly authorized and approved by the Company’s board of directors and, to the extent required by the Certificate of Incorporation or any agreement to which the Company is a party, by the requisite number of the Company’s stockholders and do not require any further authorization or consent of the Company or its stockholders.  This Agreement has been duly authorized, executed and delivered by the Company and is the legal, valid and binding obligation of the Company enforceable in accordance with its terms, and each of the Company Ancillary Agreements has been duly authorized by the Company and upon execution and delivery by the Company will be a legal, valid and binding obligation of the Company enforceable in accordance with its terms, in each case except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law).

(b)           Except as set forth in Schedule 5.3, neither the execution and delivery of this Agreement or any of the Company Ancillary Agreements nor the consummation of any of the transactions contemplated hereby or thereby nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof, in each case by the Company, will:

(i)            conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any Encumbrance upon any of the properties or assets of the Company or any Subsidiary, under (A) the certificate of incorporation or by-laws, or similar organizational documents, of the Company or any Subsidiary, (B) any Company Agreement, (C) any other material mortgage, franchise, permit or other authorization, right, restriction or

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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obligation to which the Company or any Subsidiary is a party or any of the assets or properties of the Company or any Subsidiary is subject or by which the Company or any Subsidiary is bound, (D) any Court Order to which the Company or any Subsidiary is a party or any of the properties or assets of the Company or any Subsidiary is subject or by which the Company or any Subsidiary is bound, or (E) any material Requirements of Laws affecting the Company, any Subsidiary or any of their respective properties, assets or business; or

(ii)           require the approval, consent, authorization or act of, or the making by the Company of any declaration, filing or registration with, any Person, except for the filing of the Certificate of Merger as contemplated by Section 4.2 with the Secretary of State of the State of Delaware and as provided under the HSR Act.

5.4.          Financial Statements.  Schedule 5.4 contains (i) the audited consolidated balance sheets of the Company and the Subsidiaries as of December 31, 2008 and 2007 and the related statements of income and cash flows for each of the years then ended, together with the appropriate notes to such financial statements, (ii) the unaudited consolidated balance sheet of the Company and the Subsidiaries as of December 31, 2009 and the related statements of income and cash flows for the year then ended, together with the appropriate notes to such financial statements, and (iii) the unaudited consolidated balance sheet of the Company and the Subsidiaries as of January 31, 2010 and the related statements of income and cash flows for the one month then ended.  Except as set forth therein or in the notes thereto and subject, in the case of the financial statements referred to in clause (iii) above, to normal year end adjustments and the absence of notes, such balance sheets and statements of income and cash flow have been prepared in conformity with U.S. generally accepted accounting principles consistently applied, and such balance sheets and related statements of income and cash flows present fairly in all material respects the consolidated financial position and results of operations and cash flows of the Company and the Subsidiaries as of their respective dates and for the respective periods covered thereby.  Except as set forth in Schedule 5.4, the financial statements referred to in clause (iii) above include all adjustments, which consist only of normal accruals made in the ordinary course of business, necessary for such fair presentation in all material respects, other than normal year-end audit adjustments and footnotes.

5.5.          Operations Since Balance Sheet Date.

(a)           Except as set forth in Schedule 5.5(a), since the Balance Sheet Date, there has been no Material Adverse Effect, and no fact or condition exists or, to the Knowledge of the Company, is threatened which would reasonably be expected to cause a Material Adverse Effect.

(b)           Except as set forth in Schedule 5.5(b), since the Balance Sheet Date, the Company and the Subsidiaries have conducted their business only in the ordinary course of business.  Without limiting the generality of the foregoing, since the Balance Sheet Date, except as set forth in Schedule 5.3(b), neither the Company nor any Subsidiary has:

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(i)            issued, delivered or agreed (conditionally or unconditionally) to issue or deliver, or granted any option, warrant or other right to purchase, any of its capital stock or other equity interest or any security convertible into its capital stock or other equity interest;

(ii)           issued, delivered or agreed (conditionally or unconditionally) to issue or deliver any of its bonds, notes or other debt securities, or borrowed or agreed to borrow any funds;

(iii)          paid any obligation or liability (absolute or contingent) other than current liabilities reflected on the Balance Sheet and current liabilities incurred since the Balance Sheet Date in the ordinary course of business;

(iv)          declared, set aside or made, or agreed to declare, set aside or make, any payment of dividends or distributions to its stockholders or purchased or redeemed, or agreed to purchase or redeem, any of its capital stock or other equity interest, it being understood that pursuant to the terms of the Certificate of Incorporation, dividends accrue whether or not declared (but have not been paid) on the outstanding Series A Preferred Stock, Series C-1 Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred Stock;

(v)           except in the ordinary course of business, made any amendment or termination of any Company Agreement;

(vi)          except as set forth in the Operating Plan, undertaken or committed to undertake capital expenditures exceeding $200,000 or acquired any real property;

(vii)         sold, leased (as lessor), transferred or otherwise disposed of, or mortgaged or pledged, or imposed or suffered to be imposed any Encumbrance (other than a Permitted Encumbrance) on, any of the assets reflected on the Balance Sheet or any assets acquired by it after the Balance Sheet Date, other than (A) inventory and minor amounts of personal property sold or otherwise disposed of for fair value in the ordinary course of business and other than Permitted Encumbrances and (B) sales or other dispositions not in the ordinary course of business so long as such sales or dispositions were contemplated by the Operating Plan or did not exceed $100,000 (individually or in the aggregate);

(viii)        canceled any debts owed to or claims held by it (including the settlement of any claims or litigation) or waived any other rights held by it other than in the ordinary course of business;

(ix)           created, incurred or assumed, or agreed to create, incur or assume, any Indebtedness (except pursuant to the Credit Agreement) or entered into, as lessee, any capital lease (as defined in Statement of Financial Accounting Standards No. 13);

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(x)            accelerated or delayed collection of notes or accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of business;

(xi)           delayed or accelerated payment of any account payable beyond or in advance of its due date or the date when such account payable would have been paid in the ordinary course of business;

(xii)          written off any notes or accounts receivable or portions thereof as uncollectible except for write-offs in the ordinary course of business or as required by U.S. generally accepted accounting principles consistently applied;

(xiii)         allowed the levels of raw materials, supplies, work-in-process, finished goods, goods on consignment or other materials included in its inventory to vary in any material respect from the levels maintained in the ordinary course of business;

(xiv)        instituted any increase in any compensation payable to any director, officer, consultant or employee or in any profit-sharing, bonus, incentive, deferred compensation, insurance, pension, retirement, medical, hospital, disability, welfare or other benefits made available to its directors, officers, consultants or employees, except (A) regularly scheduled salary increases for employees, (B) annual bonuses paid to employees consistent with past compensation practices and (C) the adoption of any ERISA Benefit Plans or Non-ERISA Commitments set forth in Schedules 5.15(a) and 5.15(b), respectively;

(xv)         paid any amount or incurred any liability to or in respect of, or sold any properties or assets to, or entered into any transaction, agreement or arrangement with any corporation or business in which any officer or director of the Company or any Subsidiary has any direct or indirect ownership interest;

(xvi)        entered into any collective bargaining agreements or employment agreements;

(xvii)       made any change in the accounting principles and practices used by it from those applied in the preparation of the Balance Sheet and the related statements of income and cash flow for the period then ended; or

(xviii)      prepared or filed any Tax Return inconsistent with past practice or, on any such Tax Return, taken any position, made any election, or adopted any method that is inconsistent with the positions taken, elections made or methods used in preparing or filing similar Tax Returns in prior periods, except where necessitated as a result of a change in circumstances of the Company from a prior period.

5.6.          No Undisclosed Liabilities.  Except as set forth in Schedule 5.6, neither the Company nor any Subsidiary is subject to any material liability (including Known unasserted claims), whether absolute, contingent, accrued or otherwise, which is not shown or which is in

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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excess of amounts shown or reserved for in the Balance Sheet, other than liabilities of the same nature as those set forth in the Balance Sheet and reasonably incurred in the ordinary course of business after the Balance Sheet Date.

5.7.Taxes.

(a)Except as set forth on Schedule 5.7(a):  (i) each of the Company, each Subsidiary and each Company Group has filed all Tax Returns required to be filed; (ii) all such Tax Returns are complete and accurate in all material respects and disclose all Taxes required to be paid by the Company, each Subsidiary and each Company Group for the periods covered thereby and all Taxes shown to be due on such Tax Returns have been timely paid; (iii) none of the Company, any Subsidiary or any Company Group is currently the beneficiary of any extension of time within which to file any Tax Return; (iv) all Taxes (whether or not shown on any Tax Return) owed by the Company, any Subsidiary or any Company Group have been timely paid; (v) none of the Company, any Subsidiary or any member of any Company Group has waived or been requested to waive any statute of limitations in respect of Taxes; (vi) there is no action, suit, investigation, audit, claim or assessment pending or proposed or threatened in writing with respect to Taxes of the Company, any Subsidiary or any Company Group and, to the Knowledge of the Company, no reasonable basis exists therefor; (vii) all deficiencies asserted or assessments made as a result of any examination of the Tax Returns referred to in clause (i) have been paid in full; (viii) there are no Tax Sharing Arrangements (other than those solely among the Company and the Subsidiaries); (ix) there are no liens for Taxes upon the assets of the Company or any Subsidiary except liens relating to current Taxes not yet due; (x) all Taxes which the Company, any Subsidiary or any Company Group are required by law to withhold or to collect for payment have been duly withheld and collected, and have been paid or accrued, reserved against and entered on the books of the Company; (xi) there are no Tax rulings, requests for rulings, or closing agreements relating to the Company, any Subsidiary or any Company Group; (xii) no written claim has ever been made by a Governmental Body in a jurisdiction where the Company or any Subsidiary has never paid Taxes or filed Tax Returns asserting that the Company or any Subsidiary is or may be subject to Taxes assessed by such jurisdiction; (xiii) neither the Company nor any Subsidiary has been a member of any Company Group other than each Company Group of which it is a member as of the date hereof and neither the Company nor any Subsidiary has had any direct or indirect ownership in any corporation, partnership, joint venture, or other entity other than the Subsidiaries; and (xiv) neither the Company nor any Subsidiary has any liability for Taxes of any Person (other than the Company or any Subsidiary) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise.

(b)No transaction contemplated by this Agreement or the Company Ancillary Agreements is subject to withholding under Section 1445 of the Code.

(c)As a result of the transactions contemplated by this Agreement and the Company Ancillary Agreements, none of the Company, any Subsidiary or Parent will be obligated to make a payment to an individual that would be a “parachute payment” to a “disqualified individual” as

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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those terms are defined in Section 280G of the Code, without regard to whether such payment is reasonable compensation for personal services performed or to be performed in the future.

(d)The aggregate Taxes payable by the Company and each Subsidiary (including Taxes payable by any Company Group) with respect to any taxable period will not exceed the aggregate Taxes that would have been payable by them with respect to such period had no Option Consideration (as defined in the Option Agreement) been paid (for the avoidance of doubt, Tax liability shall be determined after taking into account NOLs with respect to taxable periods ending on or before the Closing Date being properly carried forward or back); provided, however, that any such excess with respect to a taxable period beginning after the date hereof shall not be taken into account to the extent such excess would not have occurred but for the NOLs carried over or back to such period being less than the NOLs that properly could have been carried over or back to such taxable period had no Option Consideration been paid; provided, further, that any such excess shall be computed by assuming that the net operating losses with respect to taxable periods ending on or before the Closing Date for which Parent files the Tax Returns of the Company are carried back to taxable periods ending on or before the Closing Date to the extent they may properly be so carried back.

5.8.Availability of Assets.

(a)Except as set forth in Schedule 5.8 and except for the Identified IP, the assets and properties owned, leased or licensed by the Company and the Subsidiaries constitute all the assets and properties used in or necessary for the operation of their business (including all books, records, computers and computer programs and data processing systems) as presently conducted in all material respects, are, in the case of tangible assets, in good and serviceable condition (subject to normal wear and tear) and are suitable for the uses for which intended.

(b)Schedule 5.8 sets forth a description of all material services provided to the Company or a Subsidiary by any stockholder of the Company (or any Affiliate of a stockholder of the Company) utilizing either (i) assets not owned by the Company or a Subsidiary or (ii) employees not listed in Schedule 5.15(f), and the manner in which the costs of providing such services have been charged to the Company or such Subsidiary.

5.9.Governmental Permits; Regulatory Matters.

(a)The Company and the Subsidiaries own, hold or possess all material licenses, franchises, permits, privileges, immunities, approvals and other authorizations from Governmental Bodies which are necessary to entitle them to own or lease, operate and use their assets and to carry on and conduct their business substantially as currently conducted (collectively, the “Governmental Permits”).  Schedule 5.9 sets forth a list and brief description of each Governmental Permit.  Complete and correct copies of all of the Governmental Permits have heretofore been delivered or made available to Parent.

(b)Except as set forth in Schedule 5.9:  (i) the Company and the Subsidiaries have fulfilled and performed in all material respects their respective obligations under each of the

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Governmental Permits, and no event has occurred or condition or state of facts exists which constitutes or, after notice or lapse of time or both, would constitute a breach or default under any such Governmental Permit or which permits or, after notice or lapse of time or both, would permit revocation or termination of any such Governmental Permit, or which might adversely affect in any material respect the rights of the Company and the Subsidiaries under any such Governmental Permit; (ii) no notice of cancellation, of default or of any dispute concerning any Governmental Permit, or of any event, condition or state of facts described in the preceding clause, has been received by, or is Known to, the Company; and (iii) each of the Governmental Permits is valid, subsisting and in full force and effect and, except to the extent that any such Governmental Permit were to expire prior to the consummation of the Merger, will continue in full force and effect after the date hereof and after Effective Time, in each case without (x) the occurrence of any breach, default or forfeiture of rights thereunder or (y) the consent, approval, or act of, or the making of any filing with, any Governmental Body.

(c)Complete and correct copies of each submission of the Company or any of its Subsidiaries to the FDA or any analogous foreign Governmental Body with respect to Reslizumab, and all amendments and supplements thereto, including all related pre-clinical and clinical data, have heretofore been delivered or made available to Parent by the Company.  Complete and correct copies of all written correspondence (including minutes of meetings and telephone calls) received by the Company or any of its Subsidiaries from the FDA or any analogous foreign Governmental Body with respect to Reslizumab and the responses thereto have heretofore been delivered or made available to Parent by the Company.  Complete and correct copies of all clinical trial agreements and other clinical trial documentation have been delivered or made available to Parent by the Company.

(d)To the extent applicable, the Company and the Subsidiaries have been and are in substantial compliance with 21 U.S.C. Section 355, 42 U.S.C. Section 262 and applicable FDA implementing regulations, including 21 C.F.R. Parts 312, 314, 600 and 601, and similar Requirements of Laws and all terms and conditions of the applicable new drug application and investigational new drug exemption submission under Section 505(i) of the Federal Food, Drug, and Cosmetic Act.  The Company and the Subsidiaries have been and are in substantial compliance with the clinical trial reporting and disclosure requirements of 42 U.S.C. Section 282(j) or any similar Requirements of Law.  The Company, the Subsidiaries and their respective officers, employees and agents have included in the applications for Reslizumab, where required, the certification described in 21 U.S.C. Section 335a(k)(1) or any similar Requirements of Law, and such certification and such list was in each case true and accurate when made and remained true and accurate in all material respects thereafter.  In addition, the Company and the Subsidiaries are in compliance in all material respects with all applicable registration and listing requirements set forth in 21 U.S.C. Section 360 and 21 C.F.R. Part 207 and all similar Requirements of Laws with respect to Reslizumab.

(e)Each article of Reslizumab manufactured and/or distributed by the Company and the Subsidiaries is not adulterated within the meaning of 21 U.S.C. Section 351 (or similar Requirement of Law) or misbranded within the meaning of 21 U.S.C. Section 352 (or similar

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Requirement of Law), and is not in violation of 21 U.S.C. Section 355 (or similar Requirement of Law).

(f)None of the Company, any Subsidiary or any of their respective officers, employees or agents has made an untrue statement of a material fact or fraudulent statement to the FDA or other Governmental Body, failed to disclose a material fact required to be disclosed to the FDA or any other Governmental Body, or committed an act, made a statement, or failed to make a statement that, at the time such disclosure was made, could reasonably be expected to provide a basis for the FDA or any other Governmental Body to invoke its policy respecting “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities” set forth in 56 Fed. Reg. 46191 (September 10, 1991) or any similar policy and, to the Knowledge of the Company, none of the Company, any Subsidiary or any of their respective officers, employees or agents is the subject, officially or otherwise, of any pending or threatened investigation by any Governmental Body under such policy or under the Federal Anti-Kickback Statute or the Civil False Claims Act or any regulations promulgated thereunder.  None of the Company, any Subsidiary or any of their respective officers, employees or agents has been convicted of any crime or engaged in any conduct with respect to Reslizumab for which debarment is mandated by 21 U.S.C. Section 335a(a) or any similar Requirement of Law or authorized by 21 U.S.C. Section 335a(b) or any similar Requirement of Law.

(g)To the Knowledge of the Company, all pre-clinical and clinical investigations conducted or sponsored by it with respect to Reslizumab have been and are being conducted in compliance with 21 C.F.R. Parts 50, 54, 56, 58 and 312 and all other applicable Requirements of Laws, including those with respect to good laboratory practices, investigational new drug requirements, good clinical practice requirements (including informed consent and institutional review boards designed to ensure the protection of the rights and welfare of human subjects), and federal and state laws restricting the use and disclosure of individually identifiable health information.

5.10.Real Property.

(a)Neither the Company nor any Subsidiary (i) owns or has ever owned any real property or (ii) holds any option to acquire any real property.

(b)Schedule 5.10 sets forth a list and brief description of each lease or similar agreement (showing the parties thereto, annual rental, expiration date, renewal and purchase options, if any, and the location of the real property covered by such lease or other agreement) under which the Company or any Subsidiary is lessee of, or holds or operates, any real property owned by any third Person (collectively, the “Leased Real Property”).  Except as set forth in Schedule 5.10, the Company or a Subsidiary has the right to quiet enjoyment of all the Leased Real Property for the full term of the lease or similar agreement (and any renewal option related thereto) relating thereto, and the leasehold or other interest of the Company or a Subsidiary in the Leased Real Property is not subject or subordinate to any Encumbrance except for Permitted Encumbrances.  Except as set forth in Schedule 5.10, and except for Permitted Encumbrances, there are no agreements or other documents to which the Company or any Subsidiary is a party

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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governing or affecting the occupancy or tenancy of any of the Leased Real Property by the Company and the Subsidiaries.

(c)To the Knowledge of the Company, neither the whole nor any part of the Leased Real Property is subject to any pending suit for condemnation or other taking by any Governmental Body, and, to the Knowledge of the Company, no such condemnation or other taking is threatened or contemplated.

5.11.Personal Property.

(a)Schedule 5.11(a)contains a list of all machinery, equipment, vehicles, furniture and other tangible personal property owned by the Company or a Subsidiary having an original cost of $100,000 or more.

(b)Schedule 5.11(b)contains a list and description of each lease or other agreement or right, whether written or oral, under which the Company or a Subsidiary is lessee of, or holds or operates, any machinery, equipment, vehicle or other tangible personal property owned by a third Person, except for any such lease, agreement or right that is terminable by the Company or such Subsidiary without penalty or payment on notice of 60 days or less, or which involves the payment by the Company or such Subsidiary of rentals of less than $100,000 per year.

5.12.Intellectual Property.

(a)The term “Intellectual Property” means and includes:  (i) inventions, whether or not patentable, whether or not reduced to practice, and whether or not yet made the subject of a pending patent application or applications; United States and foreign patents, multinational statutory invention registrations, patent registrations and patent applications (including all divisions, continuations, continuations-in-part, substitutions, patents of addition), reissues, reexaminations, extensions and all rights therein provided by the United States, foreign countries and international treaties or conventions; and all improvements to the inventions disclosed in each such registration, patent or patent application; and assign patents (collectively, “Patents”); (ii) trademarks, service marks, trade dress, logos, trade names and corporate names, whether or not registered, including all common law rights, and registrations and applications for registrations thereof, including without limitation, all marks registered in the United States Patent and Trademark Office, the trademark offices of the states and territories of the United States, and the trademark offices of other nations throughout the world, and all rights therein provided by the United States, foreign countries and international treaties or conventions (collectively, “Marks”); (iii) copyrights (registered or otherwise) in both published and non published works and registrations and applications for registration thereof, works of authorship, and all rights therein provided by the United States, foreign countries and international treatise or conventions (collectively, “Copyrights”); (iv) computer software, including, without limitation, software code (in any form including course code and executable or object code), subroutines, databases (including biological sequence databases), data collections, user interfaces, URLs, internet domain names, web sites, operating systems and specifications, documentation and other materials related thereto; (v) trade secrets and confidential, technical and business information

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(including inventions whether patentable or unpatentable and whether or not reduced to practice) (collectively, “Trade Secrets”); (vi) whether or not confidential, technology (including know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial marketing and business data, pricing and cost information; (vii) copies and tangible embodiments of all the foregoing, in whatever form or medium; (viii) all rights to obtain and rights to apply for patents, and to register trademarks and copyrights; and (ix) all rights to defend and enforce any of the foregoing.

(b)The term “Company IP” means all Intellectual Property owned by or licensed by the Company and/or one or more of the Subsidiaries (whether exclusively, non-exclusively, jointly with another party or otherwise).

(c)Schedule 5.12(c) accurately identifies each proprietary product or service that has been developed by the Company or a Subsidiary within the last 36 months and any product or service that is currently under development by the Company or a Subsidiary or that is currently manufactured and sold by the Company or a Subsidiary.  All products made, used or sold under the Patents have been or will be, to the extent feasible, marked with the proper patent notice.

(d)Schedule 5.12(d) accurately identifies (i) all Patents and Marks in which the Company or a Subsidiary has or purports to have an ownership interest of any nature (whether exclusively, non-exclusively, jointly with another Person, or otherwise), (ii) where applicable, the jurisdiction in which such Patent or Mark has been registered or filed and the applicable registration or serial number and (iii) any other Person that has an ownership interest in such Patent or Mark and the nature of such ownership interest.

(e)Schedule 5.12(e) accurately identifies (i) all Intellectual Property licensed to the Company or a Subsidiary, (ii) the corresponding contract or contracts pursuant to which such Intellectual Property is licensed to the Company or a Subsidiary, (iii) whether the license or licenses granted to the Company and the Subsidiaries are exclusive or non-exclusive and (iv) any royalties paid or received by the Company and the Subsidiaries.  Schedule 5.12(e) accurately identifies all research and development licenses and material transfer agreements to which the Company or a Subsidiary is a party and that is currently in effect or under which the Company, a Subsidiary or a third party has continuing obligations.  Neither the Company nor any Subsidiary is in breach of, or has not complied in all material respects with all terms of, any license or other agreement relating to Company IP.  Neither the Company nor any Subsidiary has received any notice of any such breach or failure to comply.  No Patents are sublicensed to the Company or a Subsidiary by a third party.  Neither the Company nor any Subsidiary has entered into any agreement or understanding pursuant to which it is obligated to pay a royalty to a third party other than as disclosed in Schedule 5.12(e).

(f)(i)  Schedule 5.12(f)(i) accurately identifies each contract pursuant to which any Person has been granted by the Company or a Subsidiary any license under, or otherwise has received or acquired any right (whether or not currently exercisable) or interest in, any Company IP.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(ii)Except as set forth in Schedule 5.12(f)(ii), except to the extent that the Company IP is subject to the patent, technology and know-how rights, “field of use” and geographic limitations contained in the Company Agreements, neither the Company nor any Subsidiary is bound by, and no Company IP is subject to, any contract containing any covenant or other provision that in any way limits or restricts the ability of the Company or a Subsidiary to use, exploit, assert or enforce any Company IP anywhere in the world.

(g)The Company and the Subsidiaries exclusively or non-exclusively, as the case may be, own all right, title and interest to and under the Company IP (other than Intellectual Property licensed to the Company or a Subsidiary, as identified in Schedule 5.12(e)), free and clear of any Encumbrances.  Without limiting the generality of the foregoing:

(i)All documents and instruments necessary to perfect the rights of the Company or a Subsidiary in the Company IP have been validly executed, delivered and filed in a timely manner with the appropriate Governmental Body.  The Company, the Subsidiaries and their respective licensors, as appropriate, are identified in the records of the U.S. Patent and Trademark Office and corresponding foreign Governmental Bodies as the holders of record of patents and patent applications within Company IP and no other Person has any right, title or interest in such patents and patent applications except as identified in Schedule 5.12(d).

(ii)Each individual who is or was an employee or contractor of the Company or a Subsidiary and who is or was involved in the creation or development of any Company IP has signed a valid, enforceable agreement containing an assignment of Intellectual Property to the Company or such Subsidiary and confidentiality provisions protecting the Company IP.  Except as set forth in Schedule 5.12(g)(ii), no current or former stockholder, officer, director or employee of the Company or a Subsidiary has any claim, right (whether or not currently exercisable) or interest to or in any Company IP.  To the Knowledge of the Company, no employee of the Company or a Subsidiary is (A) bound by or otherwise subject to any contract restricting him or her from performing his or her duties for the Company or such Subsidiary or (B) in breach of any contract with any former employer or other Person concerning Intellectual Property or confidentiality.

(iii)Except as set forth in Schedule 5.12(g)(iii), no funding, facilities or personnel of any Governmental Body were used, directly or indirectly, to develop or create, in whole or in part, any Company IP.

(iv)The Company and the Subsidiaries have taken reasonable steps in accordance with normal industry practice to maintain the confidentiality of and otherwise protect and enforce their rights in all proprietary information that the Company and the Subsidiaries hold, or purport to hold, as a Trade Secret.  Without limiting the generality of the foregoing, the proprietary information of the Company and the Subsidiaries is not part of the public knowledge.  To the Knowledge of the Company, such proprietary information has not been used or divulged for the benefit of any Person other than the Company and the Subsidiaries.  Any receipt or use by, or disclosure to or from, a third

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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party has been pursuant to the terms of a binding written confidentiality agreement between the Company or a subsidiary and such third party (collectively, the “Nondisclosure Agreements”).  The Company and the Subsidiaries are in compliance with the provisions of the Nondisclosure Agreements.  to the Knowledge of the Company, all other parties to the Nondisclosure Agreements are in compliance with the provisions thereof.

(v)Except as set forth in Schedule 5.12(g)(v), to the Knowledge of the Company, the Company and the Subsidiaries have good title to and an absolute right (but not necessarily exclusive) to use the Trade Secrets.  To the Knowledge of the Company, the Trade Secrets are not part of the public knowledge or literature and, to the Knowledge of the Company, have not been used, divulged or appropriated either for the benefit of any Person or to the detriment of the Company and the Subsidiaries.  To the Knowledge of the Company, no Trade Secret is subject to any adverse claim or has been challenged or threatened in any way or infringes any intellectual property right or any other Person.

(h)To the Knowledge of the Company, the Company IP is valid, subsisting and enforceable (in the case of patent applications, would be enforceable if issued as patents).  Without limiting the generality of the foregoing:

(i)For each item of Company IP that is filed by the Company and registered or issued under the authority of any Governmental Body whose duty is to register or issue patents, trademarks, copyrights or other forms of intellectual property protection, all applicable registration fees, maintenance fees, renewal fees, annuity fees and taxes which are due in connection with such Company IP have been paid and all other documents in connection with such Company IP have been filed in the relevant patent, trademark, copyright offices or other Governmental Body in the United States or applicable foreign jurisdictions, as the case may be, for the purpose of maintaining such Company IP.

(ii)To the Knowledge of the Company, no interference, opposition, reissue, reexamination or other proceeding or challenge is pending or threatened in which the scope, validity, or enforceability of any Company IP is being or has been contested or challenged in any court of competent jurisdiction, the U.S. Patent and Trademark Office or any other Governmental Body.  To the Knowledge of the Company, there is no reasonable basis for a claim that any claim of an issued patent within Company IP is invalid or unenforceable, or a claim of a pending patent application within Company IP would be invalid or unenforceable as a patent claim.

(iii)The patent and patent applications within Company IP disclose and claim patentable subject matter under the U.S patent laws encompassing the Company’s and the Subsidiaries’ existing products and products under development.  The Company and the Subsidiaries are (with respect to Company IP licensed by the Company or a Subsidiary, to the extent the Company or a Subsidiary is obligated or has the right to do so (and is exercising such prosecution rights) pursuant to any agreement relating to Company IP) diligently prosecuting claims in the pending patent applications within Company IP

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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claiming existing products and products currently under development.  To the Knowledge of the Company, each other party to any such agreement relating to Company IP that is obligated to prosecute claims is diligently prosecuting such claims.  To the Knowledge of the Company, each of these pending patent applications was properly filed and is being diligently prosecuted.  To the Knowledge of the Company, and except for the Identified IP, there are no issued patents or pending applications that could issue as patents that would dominate or interfere with any pending application claiming any of the Company’s or the Subsidiaries’ existing products.

(i)To the Knowledge of the Company, no Person has infringed, misappropriated or otherwise violated, and no Person is currently infringing, misappropriating, or otherwise violating, any Company IP.  Schedule 5.12(i) accurately identifies each letter or other written, electronic or other communication or correspondence that has been sent or otherwise delivered in the last 24 months by or to the Company or a Subsidiary or any representative of the Company regarding any actual, alleged, or suspected infringement or misappropriation of any Company IP, and provides a brief description of the current status of the matter referred to in such letter, communication, or correspondence.

(j)To the Knowledge of the Company, neither the Company nor any Subsidiary has infringed (whether direct, contributory or induced), misappropriated or otherwise violated any Intellectual Property right of any other Person.  Without limiting the generality of the foregoing:

(i)Except as set forth on Schedule 5.12(j)(i) and except with respect to the Identified IP, to the Knowledge of the Company, no product or service that (A) has been, or is being, developed, (B) is the subject of an investigational new drug or human clinical trial or (C) is being currently, or is contemplated to be, sold by the Company or a Subsidiary, infringes, misappropriates or otherwise violates the Intellectual Property rights of any other Person and, to the Knowledge of the Company, no process or know-how used or currently contemplated to be used by the Company and the Subsidiaries infringes, misappropriates or otherwise violates the Intellectual Property rights of any other Person.

(ii)Except as set forth in Schedule 5.12(j)(ii): no infringement, misappropriation, or similar claim, suit, action, proceeding or investigation is pending or, to the Knowledge of the Company, threatened against the Company, a Subsidiary or against any other Person who may be entitled to be indemnified, defended, held harmless or reimbursed by the Company with respect to such claim, suit, action, proceeding or investigation; and neither the Company nor any Subsidiary has received any notice or other written or, to the Knowledge of the Company, oral communication relating to any actual, alleged or suspected infringement, misappropriation or violation of any Intellectual Property rights of another Person.

(iii)Except as described in Schedule 5.12(j)(iii), neither the Company nor any Subsidiary is bound by any contract to indemnify, defend, hold harmless or reimburse any other Person with respect to any intellectual property infringement, misappropriation,

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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or similar claim.  Neither the Company nor any Subsidiary has assumed, or agreed to discharge or otherwise take responsibility for, any existing or potential liability of another Person for infringement, misappropriation or violation of any Intellectual Property right.

(k)To the Knowledge of the Company, no claim, suit, action, proceeding or investigation involving any Intellectual Property licensed to the Company is pending or has been threatened.

(l)Schedule 5.12(l) contains a complete and accurate list and summary description of all Marks.

(i)Except as set forth in Schedule 5.12(l), all Marks have been registered with the U.S. Patent and Trademark Office, are currently in compliance with all formal legal requirements (including the timely post-registration filing of affidavits of use and incontestability and renewal applications), are valid and enforceable.

(ii)No Mark has been or is now involved in any opposition, invalidation or cancellation claim, suit, action, proceeding or investigation and, to the Knowledge of the Company, no such action is threatened with respect to any of the Marks.

(iii)To the Knowledge of the Company, there is no potentially interfering trademark or trademark application of any other Person.

(iv)Except as set forth in Schedule 5.12(l), no Mark is infringed or has been challenged or threatened in any way and, to the Knowledge of the Company, none of the Marks used by the Company or any Subsidiary infringes or is alleged to infringe any trade name, trademark or service mark of any other Person.

(v)All products and materials containing a Mark bear the proper federal registration notice where permitted by Requirements of Laws.

(m)The Company and the Subsidiaries do not have an ownership interest in any registered Copyrights.

(n)Neither the execution, delivery, or performance of this Agreement or the Company Ancillary Agreements nor the consummation of any of the transactions contemplated by this Agreement or the Company Ancillary Agreements will, with or without notice or lapse of time, result in, or give any other Person the right or option to cause or declare, (i) a loss of, or encumbrance on, any Company IP, (ii) a breach by the Company or a Subsidiary of any license agreement listed or required to be listed in Schedule 5.12(f), (iii) the release, disclosure or delivery of any Company IP by or to any escrow agent or other Person or (iv) the grant, assignment, or transfer to any other Person of any license or other right or interest under, to, or in any of the Company IP.

(o)[**].

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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5.13.Inventories.  The Company has no inventories (as that term is used for purposes of U.S. generally accepted accounting principles).

5.14.Title to Property.  The Company or a Subsidiary has good and marketable title to all of the assets reflected on the Balance Sheet as being owned by the Company or a Subsidiary, free and clear of all Encumbrances, except for Permitted Encumbrances and except as set forth in Schedule 5.14.

5.15.Employees and Related Agreements; ERISA.  (a)  Set forth in Schedule 5.15(a) is a true and complete list of each “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA) maintained by the Company, a Subsidiary or an ERISA Affiliate (defined in paragraph (f) below), or with respect to which the Company, a Subsidiary or an ERISA Affiliate is or will be required to make any payment, or which provides or will provide benefits to present or prior employees of the Company, a Subsidiary or an ERISA Affiliate due to such employment (the “Pension Plans”).  Set forth in Schedule 5.15(a) is a true and complete list of each “employee welfare benefit plan” (as such term is defined in Section 3(1) of ERISA) maintained by the Company or a Subsidiary, or with respect to which the Company or a Subsidiary is or will be required to make any payment, or which provides or will provide benefits to present or prior employees of the Company or a Subsidiary due to such employment (the “Welfare Plans”) (the Pension Plans and Welfare Plans being the “ERISA Benefit Plans”).  None of the Company, any Subsidiary or any ERISA Affiliate has ever maintained, contributed to or has any potential liability with respect to any “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA) that is or has ever been subject to Section 302 of ERISA (including any defined benefit plan within the meaning of Section 3(35) of ERISA and any multiemployer plan within the meaning of 3(37) of ERISA).

(b)Other than those listed in Schedule 5.15(a), set forth in Schedule 5.15(b) is a true and complete list of each of the following to which the Company or a Subsidiary is a party or with respect to which it is or will be required to make any payment (the “Non-ERISA Commitments”):

(i)each retirement, savings, profit sharing, deferred compensation, severance, stock ownership, stock purchase, stock option, performance, bonus, incentive, vacation or holiday pay, hospitalization or other medical, disability, life or other insurance, or other welfare, benefit or fringe benefit plan, policy, trust, understanding or arrangement of any kind, whether written or oral; and

(ii)each agreement, understanding or arrangement, whether written or oral, with or for the benefit of any present or prior officer, director, employee agent or consultant (including each employment, compensation, deferred compensation, severance or consulting agreement or arrangement, confidentiality agreement, covenant not to compete and any agreement or arrangement associated with a change in ownership or control of the Company or a Subsidiary, but excluding employment agreements terminable by the Company or such Subsidiary without premium or penalty on notice of 30 days or less under which the only monetary obligation of the Company or such

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Subsidiary is to make current wage or salary payments and provide current fringe benefits).

The Company has delivered or made available to Parent correct and complete copies of (i) all written Non-ERISA Commitments and (ii) all insurance and annuity policies and contracts and other documents relevant to any Non-ERISA Commitment.  Schedule 5.15(b) contains a complete and accurate description of all material oral Non-ERISA Commitments as of the date of this Agreement.  Except as disclosed in Schedule 5.15(a) or Schedule 5.15(b), none of the ERISA Benefit Plans or the Non-ERISA Commitments is subject to the law of any jurisdiction outside of the United States.

(c)The Company has delivered or made available to Parent with respect to each ERISA Benefit Plan correct and complete copies, where applicable, of (i) all plan documents and amendments thereto, trust agreements and amendments thereto and insurance and annuity contracts and policies, (ii) the current summary plan description, (iii) the Annual Reports (Form 5500 series) and accompanying schedules, as filed, for all completed plan years for which such reports have been filed, (iv) the financial statements for all completed plan years for which such statements have been prepared, (v) the actuarial reports for all completed plan years for which such reports exist, (vi) the most recent determination letter issued by the IRS and (vii) all correspondence with the IRS, Department of Labor and Pension Benefit Guaranty Corporation concerning any controversy since the inception of the Company or any Subsidiary.  Each report described in clause (v) of the preceding sentence accurately describes the funded status of the plan to which it relates, and subsequent to the date of such report there has been no adverse change in the funding status or financial condition of such plan.  Each ERISA Benefit Plan listed in Schedule 5.15(a) which is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS that such ERISA Benefit Plan is so qualified under the Code, and no circumstance exists which might cause such ERISA Benefit Plan to cease being so qualified.  There is no pending or, to the Knowledge of the Company, threatened action, suit or claim in respect of any of the ERISA Benefit Plans or the assets of such ERISA Benefit Plans other than routine claims for benefits in the ordinary course of business.  Except as set forth in Schedule 5.15(c), each of the ERISA Benefit Plans (i) has been administered in accordance with its terms in all material respects and (ii) complies in form, and has been administered in accordance, in all material respects, with the requirements of ERISA and, where applicable, the Code, and there has been no notice issued by any governmental authority questioning or challenging such compliance.  Except as set forth in Schedule 5.15(c), the Company, each Subsidiary and each ERISA Affiliate has complied, in all material respects, with the health care continuation requirements of Part 6 of Title I of ERISA.  Except as set forth in Schedule 5.15(c), neither the Company nor any Subsidiary has any obligation under any ERISA Benefit Plans or otherwise to provide health or other welfare benefits to any prior employees or any other Person, except as required by Part 6 of Title I of ERISA.  Except as disclosed in Schedule 5.15(c), (1) the consummation of the transaction contemplated by this Agreement and the Merger Agreement (either alone or in connection with another event) will not result in an increase in the amount of compensation or benefits or accelerate the vesting or timing of payment of any compensation or benefits payable to or in respect of any participant, (2) no amounts will become payable for which Parent will bear any liability and (3) no payment will be required pursuant to any ERISA

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Benefit Plan which is not deductible under Section 162(m) of the Code.  The Company and the Subsidiaries are in compliance with the requirements of the Workers Adjustment and Retraining Notification Act (“WARN”) and have no material liabilities pursuant to WARN, except for such failures to comply that would not individually or in the aggregate have a Material Adverse Effect.

(d)The Company and the Subsidiaries have no liability of any kind whatsoever, whether direct, indirect, contingent or otherwise, (i) on account of any material violation of the health care requirements of Part 6 of Title I of ERISA or Section 4980B of the Code, (ii) under Section 502(i) or Section 502(l) of ERISA or Section 4975 of the Code, (iii) under Section 302 of ERISA or Section 412 of the Code or (iv) under Title IV of ERISA.

(e)Except as set forth in Schedule 5.15(e), all ERISA Benefit Plans and Non-ERISA Commitments subject to Section 409A of the Code are in compliance with the currently applicable requirements of Section 409A and the regulations, rulings and notices thereunder.

(f)Schedule 5.15(f)contains:  (i) a list of all employees or commission salespersons of the Company and the Subsidiaries; (ii) the current annual compensation of, and a description of the fringe benefits (other than those generally available to employees of the Company and the Subsidiaries) provided by the Company and the Subsidiaries to, any such employees or commission salespersons; (iii) a list of all present or former employees or commission salespersons of the Company and the Subsidiaries paid in excess of $100,000 in calendar year 2009 who have terminated or given notice of their intention to terminate their relationship with the Company and the Subsidiaries; and (iv) a list of any increase, effective after December 31, 2009, in the rate of compensation of any employees or commission salespersons if such increase exceeds 5% of the previous annual salary of such employee or commission salesperson.

(g)For purposes of this Agreement, “ERISA Affiliate” means:  (i) any corporation which at any time on or before the date hereof is or was a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company; (ii) any partnership, trade or business (whether or not incorporated) which at any time on or before the date hereof is or was under common control (within meaning of Section 414(c) of the Code) with the Company; and (iii) any entity which at any time on or before the date hereof is or was a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as either the Company, any corporation described in clause (i) of this paragraph or any partnership, trade or business described in clause (ii) of this paragraph.

5.16.Employee Relations.  Except as set forth in Schedule 5.16, the Company and the Subsidiaries have complied in all material respects with all applicable Requirements of Laws relating to prices, wages, hours, discrimination in employment and collective bargaining and to the operation of their business and are not liable for any arrears of wages or any Taxes or penalties for failure to comply with any of the foregoing.  The Company believes that its relations with its employees are satisfactory.  Neither the Company nor any Subsidiary is a party to, and is not, to the Knowledge of the Company, or threatened with, any dispute or controversy with a union or with respect to unionization or collective bargaining involving its employees.  No

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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union organizing or election activities involving any employees of the Company and the Subsidiaries have occurred since January 1, 2009 or, to the Knowledge of the Company, are threatened as of the date hereof.

5.17.Contracts.  Except as set forth in Schedule 5.17 or any other Schedule hereto, neither the Company nor any Subsidiary is a party to or bound by:

(i)any contract for the purchase or sale of real property;

(ii)any contract for the purchase of services, materials, supplies or equipment which involved the payment of more than $150,000 in 2009, which the Company reasonably anticipates will involve the payment of more than $150,000 in 2010 or which the Company reasonably anticipates will involve the payment of more than $150,000 in any year after December 31, 2010;

(iii)any contract for the sale of goods or services which involved the payment of more than $150,000 in 2009, which the Company reasonably anticipates will involve the payment of more than $150,000 in 2010 or which the Company reasonably anticipates will involve the payment of more than $150,000 in any year after December 31, 2010;

(iv)any contract for the purchase, licensing or development of software, other than “shrink wrap” or “click wrap” software licenses obtained in the ordinary course of business;

(v)any consignment, distributor, dealer, manufacturers representative, sales agency, advertising representative or advertising or public relations contract which involved the payment of more than $50,000 in 2009, which the Company reasonably anticipates will involve the payment of more than $50,000 in 2010 or which the Company reasonably anticipates will involve the payment of more than $50,000 in any year after December 31, 2010;

(vi)any agreement, instrument or note which provides for, or relates to, the incurrence by the Company or a Subsidiary of Indebtedness (including any derivative financial instrument, hedge or swap entered into for the purpose of managing the interest rate and/or foreign exchange risk associated with its financing);

(vii)any guarantee of the obligations of customers, suppliers, officers, directors, employees, Affiliates or others;

(viii)any contract which limits or restricts where the Company or a Subsidiary may conduct their business or the type or line of business in which the Company or any Subsidiary may engage;

(ix)any contract under which the Company or a Subsidiary has advanced or loaned, or agreed to advance or loan, any other Person amounts that in the aggregate

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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exceed $25,000, excluding advances to employees for reasonable travel or other business expenses incurred in the ordinary course of business;

(x)any partnership, joint venture or other similar arrangement or agreement involving a sharing of profits or losses;

(xi)any contract not made in the ordinary course which involved the payment of more than $150,000 in 2009, which the Company reasonably anticipates will involve the payment of more than $150,000 in 2010 or which the Company reasonably anticipates will involve the payment of more than $150,000 in any year after December 31, 2010; or

(xii)any other contract, agreement, commitment, understanding or instrument which is material to the Company and the Subsidiaries, taken as a whole, or their business.

5.18.Status of Contracts.  Except as set forth in Schedule 5.18 or in any other Schedule hereto, each of the leases, contracts and other agreements listed in Schedules 5.10(b), 5.11(b), 5.12(e), 5.12(f), 5.12(j), 5.15(b) and 5.17 (collectively, the “Company Agreements”) constitutes a valid and binding obligation of the Company or Subsidiary party thereto and, to the Knowledge of the Company, each other party thereto, and is in full force and effect and (except as set forth in Schedule 5.3 and except for those Company Agreements which by their terms will expire prior to the Closing Date or are otherwise terminated prior to the Closing Date in accordance with the provisions thereof) will continue in full force and effect after the date hereof and after the Effective Time, in each case without breaching the terms thereof or resulting in the forfeiture or impairment of any rights thereunder and without the consent, approval or act of, or the making of any filing with, any other party.  The Company or a Subsidiary has fulfilled and performed in all material respects its obligations under each of the Company Agreements, and neither the Company nor any Subsidiary is in, or, to the Knowledge of the Company, alleged to be in, breach or default under, nor is there or, to the Knowledge of the Company, is there alleged to be any basis for termination of, any of the Company Agreements and, to the Knowledge of the Company, no other party to any of the Company Agreements has breached or defaulted thereunder, and no event has occurred and no condition or state of facts exists which, with the passage of time or the giving of notice or both, would constitute such a default or breach by the Company, any Subsidiary or, to the Knowledge of the Company, any such other party.  Except as set forth in Schedule 5.18, neither the Company nor any Subsidiary is currently renegotiating any of the Company Agreements or paying liquidated damages in lieu of performance thereunder.  Complete and correct copies of each of the Company Agreements, including all amendments, exhibits and schedules thereto, have heretofore been delivered or made available to Parent.

5.19.No Violation or Litigation.  Except as set forth in Schedule 5.19:

(i)the assets and properties of the Company and the Subsidiaries and their uses comply in all material respects with all applicable Requirements of Laws and Court

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Orders (which Court Orders are listed in Schedule 5.19) to which the Company or a Subsidiary is subject or a party;

(ii)the Company and the Subsidiaries have complied in all material respects with all Requirements of Laws and Court Orders which are applicable to the assets, properties and business of the Company and the Subsidiaries;

(iii)there are no lawsuits, claims, suits, proceedings or investigations pending or, to the Knowledge of the Company, threatened against the Company, a Subsidiary or their assets, properties, business or employees (in their capacities as such) nor, to the Knowledge of the Company, is there any basis for any of the same, and there are no lawsuits, claims or proceedings pending in which the Company or a Subsidiary is the plaintiff or claimant; and

(iv)there is no action, suit or proceeding pending or, to the Knowledge of the Company, threatened which questions the legality or propriety of the transactions contemplated by this Agreement.

5.20.Environmental Matters.    Except as set forth in Schedule 5.20:

(i)the past and present operations of the Company and the Subsidiaries have complied and are in compliance in all material respects with all applicable Environmental Laws;

(ii)the Company and the Subsidiaries have obtained all environmental, health and safety Governmental Permits necessary for the operation of their business in all material respects, and all such Governmental Permits are in good standing and the Company and the Subsidiaries are in compliance in all material respects with all terms and conditions of such Governmental Permits;

(iii)none of the Company, any Subsidiary or any of the present Company Property or operations, or the past Company Property or operations, is, to the Knowledge of the Company, subject to any on-going investigation by, order from or agreement with any Person (including any prior owner or operator of Company Property) respecting (A) any Environmental Law, (B) any Remedial Action or (C) any claim of Losses and Expenses arising from the Release or threatened Release of a Contaminant into the environment;

(iv)neither the Company nor any Subsidiary is subject to any judicial or administrative proceeding, order, judgment, decree or settlement alleging or addressing a violation of or liability by the Company or any Subsidiary under any Environmental Law;

(v)neither the Company nor any Subsidiary has:

(A)reported a Release of a hazardous substance pursuant to Section 113(a) of CERCLA, or any state equivalent;

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(B)filed a notice pursuant to Section 113(c) of CERCLA;

(C)filed notice pursuant to Section 3010 of RCRA indicating the generation of any hazardous waste, as that term is defined under 40 C.F.R. Part 261 or any state equivalent; or

(D)filed any notice under any applicable Environmental Law reporting a substantial violation of any applicable Environmental Law;

(vi)to the Knowledge of the Company, there is not now, nor has there ever been, on or in any Company Property:

(A)any treatment, recycling, storage or disposal of any hazardous waste, as that term is defined under 40 C.F.R. Part 261 or any state equivalent, that requires or required a Governmental Permit pursuant to Section 3005 of RCRA; or

(B)any underground storage tank or surface impoundment or landfill or waste pile;

(vii)to the Knowledge of the Company, there is not now on or in any Company Property any polychlorinated biphenyls used in pigments, hydraulic oils, electrical transformers or other equipment;

(viii)neither the Company nor any Subsidiary has received any written notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release of a Contaminant;

(ix)no Company Property has been listed or, to the Knowledge of the Company, proposed for listing on the National Priorities List pursuant to CERCLA, on the Comprehensive Environmental Response, Compensation and Liability Information System List or any state list of sites requiring Remedial Action;

(x)the Company has not sent or arranged for the transport of any Contaminant to any site listed on the National Priorities List pursuant to CERCLA or that otherwise could give rise to liability on the part of the Company for Remedial Action, Losses or Expenses;

(xi)no Environmental Encumbrance has attached to any Company Property; and

(xii)to the Knowledge of the Company, any asbestos-containing material which is on or part of any Company Property is in good repair according to the current standards and practices governing such material, and, to the Knowledge of the Company, its presence or condition does not violate any currently applicable Environmental Law.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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5.21.Insurance.  The Company and the Subsidiaries maintain, own or hold valid policies of workers’ compensation and of insurance with respect to their assets, properties and business of the kinds and in the amounts not less than is customarily maintained by companies of a similar stage of development engaged in the same or similar business and similarly situated, including insurance against loss, damage, fire, theft and public liability.  Schedule 5.21 sets forth a list and brief description (including nature of coverage, limits, deductibles, premiums and the loss experience for the most recent three years with respect to each type of coverage) of all such policies of insurance maintained, owned or held by the Company and the Subsidiaries.  The Company and the Subsidiaries have complied with each of such insurance policies and have not failed to give any notice of, or present, any material claim thereunder in a due and timely manner.  The Company has delivered or made available to Parent correct and complete copies of the most recent inspection reports, if any, received from insurance underwriters as to the condition of the Company’s and the Subsidiaries’ assets.

5.22.Suppliers.  Schedule 5.22 sets forth a list of the top 15 suppliers of the Company and the Subsidiaries.  Except as set forth in Schedule 5.22, there exists no actual or, to the Knowledge of the Company, threatened termination, cancellation or limitation of, or any modification or change in, the business relationship of the Company and the Subsidiaries with any supplier or group of suppliers listed in Schedule 5.22, and, to the Knowledge of the Company, there exists no condition or state of facts or circumstances involving suppliers which the Company can now reasonably foresee would materially adversely affect its business or prevent the conduct of its business after the consummation of the transactions contemplated by this Agreement in essentially the same manner in which it has heretofore been conducted or is presently proposed to be conducted.

5.23.Takeover Laws.  The Company has taken all action required to be taken by it in order to exempt this Agreement and the Merger from, and this Agreement and the Merger are exempt from, the requirements of any “fair price,” “moratorium,” “control share acquisition” statute or other similar anti-takeover statute or regulation enacted under any Requirements of Laws, or any takeover provision in the Certificate of Incorporation or the Company’s by-laws.

5.24.Approval by Stockholders.  (a) On the basis of the Certificate of Incorporation, the DGCL and the Stockholders’ Agreement, the sole required approval of the stockholders of the Company of this Agreement and the transactions contemplated hereby is the approval, by vote or written consent, of the holders of (i) at least 77% of the issued and outstanding shares of Series C-1 Preferred Stock and Series C-2 Preferred Stock, voting together as a single class on an as-if converted to Company Common Stock basis, pursuant to Sections 3.2(b) and 3.2(r) of the Stockholders’ Agreement, (ii) if waiver of the 20 business day notice set forth in ARTICLE FOURTH, (C), Section 4(n) of the Certificate of Incorporation is required prior to effecting the Merger, at least 77% of the issued and outstanding shares of Series C-2 Preferred Stock, voting as a single class on an as-if converted to Common Stock basis, pursuant to such section and (iii) a majority of the outstanding shares of Company Capital Stock, voting together as a single class on an as-if converted to Company Common Stock basis.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(b)Pursuant to the Written Consent, this Agreement and the Merger have been duly authorized and approved by the stockholders of the Company in accordance with the Certificate of Incorporation and the DGCL.

(c)No stockholders of the Company have exercised any applicable rights of appraisal under the DGCL with respect to the Merger or delivered notice to the Company of any intention to exercise such rights.

(d)The documents, materials and notices (collectively, the “Disclosure Materials”) prepared or to be prepared by the Company pursuant to the DGCL, the Certificate of Incorporation or otherwise in connection with obtaining the approval by the stockholders of the Company of this Agreement and the Merger and providing the required notices thereof or otherwise relating to the transactions contemplated by this Agreement comply or, when prepared by the Company and distributed to the stockholders of the Company, will comply with the DGCL and the Certificate of Incorporation and will not, at the time of distribution of the Disclosure Materials or at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading.

5.25.Foreign Corrupt Practices Act; Etc.  The Company, the Subsidiaries and, to the Knowledge of the Company, its and the Subsidiaries’ officers, directors, employees and agents are in compliance with and have not violated in any material respect the Foreign Corrupt Practices Act of 1977 or any similar Requirements of Laws of any foreign jurisdiction.  To the Knowledge of the Company, no governmental or political official in any country is or has been employed by, acted as a consultant to or held any beneficial ownership in the Company or any Subsidiary.  The Company, the Subsidiaries and, to the Knowledge of the Company, its and the Subsidiaries’ officers, directors, employees and agents are in compliance with and have not violated any U.S. anti-money laundering Requirements of Laws, the U.S. Bank Secrecy Act, the USA PATRIOT Act or the anti-money laundering Requirements of Laws of any foreign jurisdiction.

5.26.No Finder.  Except as set forth in Schedule 5.26, neither the Company nor any Person acting on its behalf has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement.

5.27.Disclosure.  This Agreement and the Schedules hereto (including the representations and warranties set forth herein and therein), when viewed collectively, do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances in which they were made.  To the Knowledge of the Company, there is no fact which the Company has not disclosed to Parent or its intellectual property counsel, McCarter & English, LLP, in writing that has had or would reasonably be expected to have a Material Adverse Effect.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

As an inducement to the Company to enter into this Agreement and to consummate the transactions contemplated hereby, Parent and Merger Sub jointly and severally represent and warrant to the Company and agree as follows:

6.1.Organization and Capital Structure.  Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and authority to own or lease and to operate and use its properties and assets and to carry on its business as now conducted.  Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware.  Merger Sub has not engaged in any business since it was incorporated which is not in connection with this Agreement.  All of the outstanding shares of capital stock of Merger Sub are validly issued, fully paid and nonassessable and owned of record and beneficially by Parent, free from all Encumbrances.

6.2.Authority.

(a)Parent has full corporate power and authority to execute, deliver and perform this Agreement and all of the Parent Ancillary Agreements to which it is or will be a party.  The execution, delivery and performance of this Agreement and the Parent Ancillary Agreements to which Parent is or will be a party by Parent have been duly authorized and approved by Parent’s board of directors (or a duly authorized committee thereof) and do not require any further authorization or consent of Parent or its stockholders.  This Agreement has been duly authorized, executed and delivered by Parent and is the legal, valid and binding agreement of Parent enforceable in accordance with its terms, and each of the Parent Ancillary Agreements to which Parent is or will be a party has been duly authorized by Parent and upon execution and delivery by Parent will be a legal, valid and binding obligation of Parent enforceable in accordance with its terms, in each case except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law).

(b)Merger Sub has full corporate power and authority to execute, deliver and perform this Agreement and all of the Parent Ancillary Agreements to which it is or will be a party.  The execution, delivery and performance of this Agreement and the Parent Ancillary Agreements to which Merger Sub is or will be a party by Merger Sub have been duly authorized and approved by Merger Sub’s board of directors and by Parent as the sole stockholder of Merger Sub and, except for the filing of the Certificate of Merger as contemplated by Section 4.2, no other corporate proceedings on the part of Merger Sub are necessary to authorize this Agreement and the transactions contemplated hereby.  This Agreement has been duly authorized, executed and delivered by Merger Sub and is the legal, valid and binding agreement of Merger Sub enforceable in accordance with its terms, and each of the Parent Ancillary Agreements to which Merger Sub is or will be a party has been duly authorized by Merger Sub and upon

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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execution and delivery by Merger Sub will be a legal, valid and binding obligation of Merger Sub enforceable in accordance with its terms, in each case except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law).

(c)Neither the execution and delivery of this Agreement or any of the Parent Ancillary Agreements or the consummation of any of the transactions contemplated hereby or thereby nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof, in each case by Parent or Merger Sub, will:

(i)conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under (A) the certificate of incorporation or by-laws of Parent or Merger Sub, (B) any material note, instrument, agreement, mortgage, lease, license, franchise, permit or other authorization, right, restriction or obligation to which Parent or Merger Sub is a party or any of their respective properties or assets is subject or by which Parent or Merger Sub is bound, (C) any Court Order to which Parent or Merger Sub is a party or any of Parent’s or Merger Sub’s respective properties or assets is subject or by which either Parent or Merger Sub is bound or (D) any material Requirements of Laws affecting Parent or Merger Sub or any of their respective assets or business; or

(ii)require the approval, consent, authorization or act of, or the making by Parent or Merger Sub of any declaration, filing or registration with, any Person, except for the filing of the Certificate of Merger as contemplated by Section 4.2 with the Secretary of State of the State of Delaware and as provided under the HSR Act.

6.3.No Finder.  None of Parent, Merger Sub or any Person acting on behalf of Parent or Merger Sub has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement.

6.4.Financial Wherewithal.  Parent has the financial wherewithal, in the form of cash on hand, to pay the Closing Date Merger Consideration, less the Remaining Option Consideration and Rights Proceeds Amount, if any.

ARTICLE VII

ACTION PRIOR TO THE EFFECTIVE TIME

The respective parties hereto covenant and agree to take the following actions between the date hereof and the Effective Time:

7.1.Investigation by Parent; Information Rights.

(a)The Company shall afford the officers, employees and authorized representatives of Parent (including independent public accountants and attorneys) reasonable access, upon three

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(3) business days’ notice, during normal business hours to the offices, properties, employees and business and financial records (including computer files, retrieval programs and similar documentation) of the Company and the Subsidiaries to the extent Parent shall deem necessary or desirable and shall furnish to Parent or its authorized representatives such additional information concerning the assets, properties, operations and businesses of the Company and the Subsidiaries as shall be reasonably requested, including all such information as shall be necessary to enable Parent or its representatives to verify the accuracy of the representations and warranties contained in this Agreement and to verify that the covenants of the Company contained in this Agreement are being and have been complied with.  Parent agrees that such investigation shall be conducted in such a manner as not to interfere unreasonably with the operations of the Company and the Subsidiaries.

(b)The Company shall continue to deliver to Parent each of the financial statements, reports, supporting documentation, budgets, certificates, correspondence, presentations and other documents and materials required to be delivered pursuant to Section 5.1(b) of the Option Agreement; provided, however, that the consolidated income statement, consolidated balance sheet and consolidated cash flow statement required to be delivered pursuant to Section 5.1(b)(i) of the Option Agreement need not, solely for the year ended December 31, 2009, be audited and certified by independent public accountants.

(c)Parent will hold any information obtained pursuant to this Section 7.1 in confidence in accordance with, and will otherwise be subject to, the provisions of the Confidentiality Agreement (it being understood that Parent shall be permitted to disclose such information to the extent required by applicable Requirements of Law or the rules of any applicable securities exchange).  No investigation made by Parent or its representatives hereunder shall affect the representations and warranties of the Company hereunder.

(d)Notwithstanding any disclosure requirements of the Company set forth in this Article VII, the Company shall not be obligated to disclose to Parent any proprietary information to the extent such disclosure would, or would be reasonably expected to, violate any contractual obligation of the Company or would cause the Company or a Subsidiary to waive the attorney-client privilege; provided, however, that the Company:  (i) shall be entitled to withhold only such information that may not be provided without causing such violation or waiver; (ii) shall provide to Parent all related information that may be provided without causing such violation or waiver (including, to the extent permitted, redacted versions of any such information); (iii) at the request of Parent, shall cooperate with Parent and use its commercially reasonable efforts to obtain the consent or waiver of any third party to the disclosure in full of all such information to Parent; and (iv) shall enter into such joint-defense agreements or other protective arrangements as may be reasonably requested by Parent in order that all such information may be provided to Parent without causing such violation or waiver.

7.2.Preserve Accuracy of Representations and Warranties; Notification of Certain Matters.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(a)Each party hereto shall (i) refrain from taking any action which would render any representation or warranty made by it in Article V or VI, as applicable, inaccurate in any material respect at any time prior to the Effective Time and (ii) use commercially reasonable efforts to cause each of the representations and warranties made by it in Article V or VI, as applicable, to be true and correct in all material respects at any time prior to the Effective Time.

(b)Each party hereto shall promptly notify the other of (i) any event or matter that would reasonably be expected to cause any of its representations or warranties to be untrue in any material respect at the Effective Time and (ii) any action, suit or proceeding that shall be instituted or threatened against such party to restrain, prohibit or otherwise challenge the legality of any transaction contemplated by this Agreement.

(c)The Company shall promptly notify Parent of (i) any change or event having, or that would reasonably be expected to have, a Material Adverse Effect, (ii) any lawsuit, claim, proceeding or investigation that is threatened in writing (or, if not threatened in writing, is otherwise material to the Company and the Subsidiaries), brought, asserted or commenced against the Company which would have been listed in Schedule 5.19 if such lawsuit, claim, proceeding or investigation had arisen prior to the date hereof and (iii) any material default under any Company Agreement or event which, with notice or lapse of time or both, would become such a default on or prior to the Effective Time and of which the Company has Knowledge.

7.3.Consents of Third Parties; Governmental Approvals.

(a)If the Company receives any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement, the Company shall immediately notify Parent in writing thereof and, at Parent’s request, the Company will act diligently and reasonably in attempting to obtain such consent, approval or waiver, in form and substance reasonably satisfactory to Parent; provided that neither the Company nor Parent shall have any obligation to offer or pay any consideration in order to obtain any such consents or approvals; and provided, further, that the Company shall not make any agreement or understanding adversely affecting its assets or its business as a condition for obtaining any such consents or waivers except with the prior written consent of Parent.  Parent shall act diligently and reasonably to cooperate with the Company in attempting to obtain the consents, approvals and waivers contemplated by this Section 7.3(a).

(b)The Company and Parent shall act diligently and reasonably, and shall cooperate with each other, in attempting to obtain any consents and approvals of any Governmental Body required to be obtained by them in order to consummate the transactions contemplated by this Agreement; provided that the Company shall not make any agreement or understanding adversely affecting its assets or its business as a condition for obtaining any such consents or approvals except with the prior written consent of Parent.

(c)As promptly as practicable after the date hereof and in no event more than three (3) business days after the date hereof, the Company and Parent shall file with the FTC and the Antitrust Division the notifications and other information required to be filed under the HSR Act

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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with respect to the transactions contemplated hereby.  Each party warrants that all such filings by it will be, as of the date filed, true and accurate and in accordance with the requirements of the HSR Act.  Each of the Company and Parent agrees to make available to the other such information as each of them may reasonably request relative to its business, assets and property as may be required of each of them to file any additional information requested by the FTC or the Antitrust Division under the HSR Act with respect to the notifications filed by the Company and Parent in connection with the transactions contemplated hereby.  Each of the Company and Parent agrees to provide to the other copies of all correspondence between it (or its advisors) and any such agency relating to this Agreement or any of the matters described in this Section 7.3(c); provided that such correspondence does not contain or reveal confidential information of the Company, Parent or their respective Affiliates.  The Company and Parent agree that all telephonic calls and meetings with such agencies regarding the transactions contemplated hereby or any of the matters described in this Section 7.3(c) shall include representatives of each of the Company and Parent.  The filing fees under the HSR Act shall be borne by Parent.

7.4.Conduct of Business by the Company and the Subsidiaries.

(a)The Company shall, and shall cause each of the Subsidiaries to, operate and carry on its business in the ordinary course and/or in a manner consistent with the Operating Plan and, to the extent consistent therewith, keep and maintain its assets and properties in good operating condition and use its commercially reasonable efforts consistent with good business practice to preserve intact its current business organization, keep available the services of its current officers and employees and preserve its relationships with material customers, suppliers, contractors, licensors, licensees and others having business dealings with it (except, in each case, with the prior written approval of Parent).  For purposes of this Section 7.4(a) only, the phrase “commercially reasonable efforts” means the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as the Company (without regard to the portion of the Option Consideration received by the Company or the Rights Proceeds), with due regard to the nature of efforts and cost required for the undertaking at stake.

(b)Without limiting the generality of Section 7.4(a), except as expressly contemplated by this Agreement, as set forth on Schedule 7.4 or with the express written approval of Parent, the Company shall not, and shall not permit any of the Subsidiaries to:

(i)(A) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise make any payments to any stockholder in its capacity as such, (B) split, combine or reclassify any of its capital stock or issue, sell or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock (other than any issuances of its securities (1) upon exercise of outstanding Company Options and Company Warrants, (2) pursuant to the F&F C-2 Share Rights, or (3) upon conversion of outstanding shares of Company Preferred Stock or (C) purchase, redeem or otherwise acquire any shares of its capital stock or other securities;

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(ii)issue, deliver, sell, pledge, dispose of or otherwise encumber any shares of its capital stock or other securities (including any rights, warrants or options to acquire any shares of its capital stock or other securities, other than any issuance of shares of Company Common Stock or Company Preferred Stock (A) upon the exercise of Company Options and Company Warrants, (B) pursuant to the F&F C-2 Share Rights, or (C) upon conversion of outstanding shares of Company Preferred Stock in accordance with the terms thereof as in effect on the date hereof;

(iii)amend its certificate of incorporation, by-laws or similar organizational documents;

(iv)acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of or equity in, or by any other manner, any business or any corporation, partnership, limited liability company, association or other business organization or division thereof;

(v)alter through merger, liquidation, reorganization, restructuring or in other fashion its corporate structure;

(vi)voluntarily dissolve or liquidate;

(vii)file a voluntary petition in bankruptcy or commence a voluntary legal procedure for reorganization, arrangement, adjustment, release or composition of Indebtedness in bankruptcy or other similar Requirements of Law now or hereafter in effect, consent to the entry of an order for relief in an involuntary case under any such Requirements of Law or apply for or consent to the appointment of a rescuer, liquidator, assignee, custodian or trustee (or similar office) of the Company or any Subsidiary;

(viii)enter into the active management of a business that is not primarily related to, or in furtherance of, being a pharmaceutical company focused on the research, development and commercialization of proprietary healthcare products;

(ix)except as set forth in the Operating Plan, make or incur any new capital expenditure in excess of $200,000 (individually or in the aggregate);

(x)(A) modify any of the agreements, understandings, obligations, commitments or other obligations set forth in any of the Schedules to this Agreement, except for such modifications that are consistent with the Operating Plan or do not modify any such agreements or other obligations in any material respect (subject to clause (2) below) or (B) create, incur or assume any Indebtedness (or enter into any agreement, understanding, obligation or commitment to do so); enter into, as lessee, any capital lease (as defined in Statement of Financial Accounting Standards No. 13); guarantee any such Indebtedness or obligation; issue or sell any debt securities, or guarantee any debt securities of others; or make any loans, advances or capital contributions to, or investments in, any other Person (other than reasonable advances for work-related expenses to employees and consultants in the ordinary course consistent

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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with Company policies) or obligation, in each case (1) of the type that would have been required to be listed in Schedule 5.17 if in existence on the date hereof (except as contemplated by the Operating Plan), (2) that would require the approval or consent of any other Person to the transactions contemplated by this Agreement or would otherwise prohibit, interfere with or delay the consummation of the Merger or (3) that would not be permitted to be repaid pursuant to its terms in connection with the consummation of the Merger without the payment of any prepayment penalty or fee;

(xi)enter into any contract for the purchase of real property or any option to extend a lease listed in Schedule 5.10(b);

(xii)sell, lease (as lessor), transfer or otherwise dispose of, or mortgage or pledge, or impose or suffer to be imposed any Encumbrance on, any of its assets, other than (A) inventory and minor amounts of personal property sold or otherwise disposed of for fair value in the ordinary course of business and other than Permitted Encumbrances and (B) sales or other dispositions not in the ordinary course of business so long as such sales or dispositions are contemplated by the Operating Plan or do not exceed $100,000 (individually or in the aggregate);

(xiii)cancel any debts owed to or claims held by it (including the settlement of any claims or litigation) other than in the ordinary course of business;

(xiv)pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction thereof in the ordinary course of business;

(xv)accelerate or delay collection of any notes or accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of business;

(xvi)delay or accelerate payment of any account payable or other liability beyond or in advance of its due date or the date when such liability would have been paid in the ordinary course of business, except that the Company may pay off, at any time, all outstanding Indebtedness under the Loan and Security Agreement, dated as of August 30, 2007, among Silicon Valley Bank, Oxford Finance Corporation, the other lenders party thereto, the Company, CT Research, Inc. and Fulcrum Pharmaceuticals, Inc.;

(xvii)make any change in the accounting policies applied in the preparation of the financial statements contained in Schedule 5.4, except as required by U.S. generally accepted accounting principles;

(xviii)enter into, adopt or amend any bonus, incentive, deferred compensation, insurance, medical, hospital, disability or severance plan, agreement or arrangement or enter into or amend any employee benefit plan or employment, consulting or management agreement, other than any such amendment to an employee benefit plan that is made to maintain the qualified status of such plan or its continued compliance with

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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applicable law and other than in the ordinary course of business; provided that no such plan, agreement or arrangement (or amendment thereto) shall provide for severance or similar payments except to the extent such severance or similar payments are consistent with pharmaceutical industry norms;

(xix)pay or commit to pay any bonus, except as set forth on Schedule 7.4(b)(xix);

(xx)make any change in the compensation of its employees, other than payments, commitments or changes made in accordance with the Company’s normal compensation practices;

(xxi)prepare or file any Tax Return inconsistent with past practice or, on any such Tax Return, take any position, make any election, or adopt any method that is inconsistent with positions taken, elections made or methods used in preparing or filing similar Tax Returns in prior periods; or

(xxii)enter into any other agreement or commitment to take any action prohibited by this Section 7.4.

(c)The Company shall, and shall cause the Subsidiaries to:  (i) use the proceeds of Loans (as defined in the Credit Agreement) only for funding expenses identified in, or which are otherwise consistent with, the Operating Plan; (ii) keep its and their existing policies of insurance, or comparable insurance, in full force and effect; (iii) to the extent the Company or a Subsidiary is obligated or has the right to do so (and is exercising such prosecution rights) pursuant to any agreement relating to Company IP, diligently prosecute, or enforce its rights to cause another party to such agreement relating to Company IP to diligently prosecute, claims in the pending patent applications within Company IP claiming existing products and products currently under development; and (iv) keep in force all registered Marks by paying any maintenance fees or taxes or responding to any actions.

7.5.Acquisition Proposals.

(a)The Company shall not, nor shall it authorize or cause any of its Affiliates or any officer, director, employee, investment banker, attorney or other adviser or representative of the Company or any of its Affiliates to, (i) solicit, initiate, or encourage the submission of, any Acquisition Proposal (as hereinafter defined), (ii) enter into any agreement with respect to, otherwise approve or recommend, or consummate, any Acquisition Proposal or (iii) participate in any discussions or negotiations regarding, or furnish to any Person any information for the purpose of facilitating the making of, or take any other action to facilitate any inquiries or the making of, any proposal that constitutes, or may reasonably be expected to lead to, any Acquisition Proposal.  Without limiting the foregoing, it is understood that any violation, of which the Company had Knowledge at the time such violation occurred, of the restrictions set forth in the immediately preceding sentence by any officer, director, employee, investment banker, attorney, employee or other adviser or representative of the Company or any of its

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Affiliates, whether or not such Person is purporting to act on behalf of the Company or any of its Affiliates or otherwise, shall be deemed to be a breach of this Section 7.5 by the Company.  The Company promptly shall advise Parent of any Acquisition Proposal and any inquiries with respect to any Acquisition Proposal, including keeping Parent promptly advised of the status and material terms (including a copy of any written proposal) and the identity of the Person making such inquiries or Acquisition Proposal.  For purposes of this Agreement, “Acquisition Proposal” means any proposal for a merger or other business combination involving the Company or any of its Affiliates or any proposal or offer to acquire in any manner, directly or indirectly, an equity interest in the Company or any of its Subsidiaries or a material portion of the assets of the Company; provided, however, that the issuance by the Company of its securities (a) upon exercise of outstanding Company Options or Company Warrants, (b) pursuant to the F&F C-2 Share Rights, or (c) upon conversion of outstanding shares of Preferred Stock shall not be considered an “Acquisition Proposal.”

(b)The Company’s board of directors shall not withdraw or modify in any manner, or publicly propose to withdraw or modify in any manner, the approval or recommendation by the Company’s board of directors of this Agreement or the Merger.

7.6.Takeover Laws.  If any “fair price,” “moratorium” or “control share acquisition” statute or other similar anti-takeover statute or regulation shall become applicable to the transactions contemplated by this Agreement, the Company and its Board of Directors shall use their best efforts to grant such approvals and take such actions as are necessary so that the transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated hereby and thereby and otherwise act to minimize the effects of any such statute or regulation on the transactions contemplated hereby and thereby.

7.7.Company Options and Company Warrants.

(a)Prior to the Effective Time, the board of directors of the Company (or, if appropriate, a duly authorized committee thereof) shall adopt appropriate resolutions and take all other actions necessary or appropriate, as deemed reasonably satisfactory to Parent, to cause each Company Option outstanding immediately prior to the Effective Time, whether or not currently vested or exercisable, (i) to be fully vested and exercisable immediately prior to the Effective Time and (ii) to be terminated at the Effective Time in exchange for the applicable consideration set forth in Section 3.1(f) with respect to such Company Option.

(b)Prior to the Effective Time, the Company shall take all actions necessary to provide that, as of the Effective Time, (i) each of the Stock Plans shall be terminated and (ii) any rights under any other option plan, program, agreement or arrangement relating to the issuance or grant of any other interest in respect of the capital stock of the Company shall be terminated.

(c)Prior to the Effective Time, the Company shall use commercially reasonable efforts to deliver to Parent a written statement signed by each holder of a Company Warrant outstanding acknowledging that such Company Warrant shall, by virtue of the Merger, no longer be exercisable into the right to receive shares of Company Common Stock or Company Preferred

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Stock, as the case may be, but shall after the Effective Time represent the right to receive the applicable consideration set forth in Section 3.1(e) with respect to such Company Warrant.

7.8.F&F C-2 Share Rights.  Prior to the Effective Time, the Company shall use commercially reasonable efforts to deliver to Parent a written statement signed by each holder of a F&F C-2 Share Right acknowledging that such holder’s F&F C-2 Share Right shall, by virtue of the Merger, no longer represent the right to receive shares of Series C-2 Preferred Stock (or Voting Common Stock), as applicable, but shall after the Effective Time represent the right to receive the applicable consideration set forth in Section 3.1(d) with respect to such F&F C-2 Share Right.

7.9.Notice to Stockholders; Meeting of Stockholders.  (a)  In accordance with and in satisfaction of the requirements of Section 262 of the DGCL, the Company covenants and agrees to cause a written notice to be delivered no later than four (4) business days following the date hereof to each stockholder of the Company who did not execute the Written Consent and to deliver any additional notice or other information to the stockholders of the Company as may be required by the DGCL.  The Company shall cause to be delivered to each holder of Company Preferred Stock all notices relating to this Agreement and the Merger required by the Certificate of Incorporation.

(b)The Company agrees to use its reasonable best efforts to cause all stockholders of the Company that have not previously executed the Written Consent to approve and adopt this Agreement and the Merger by executing and joining the Written Consent.  The Company shall provide the stockholders of the Company with such Disclosure Materials as shall be required by applicable Requirements of Law.

(c)The Company shall submit to Parent the form of any written notice and other Disclosure Materials to be transmitted to stockholders pursuant to paragraphs (a) and (b) above prior to delivery thereof to the stockholders and shall not transmit to its stockholders any such notice or Disclosure Material to which Parent reasonably objects.

(d)Upon the written request of Parent, the Company shall duly call, give notice of, convene and hold a meeting of its stockholders (the “Stockholders’ Meeting”) for the purpose of approving the Merger and adopting this Agreement and, in connection therewith, shall deliver to its stockholders all Disclosure Materials required by applicable Requirements of Law.  The Company shall, through its board of directors, recommend to the stockholders adoption of this Agreement at the Stockholders’ Meeting and shall solicit the approval and adoption of this Agreement by the requisite number of stockholders as required by the Certification of Incorporation, the DGCL and the Stockholders’ Agreement.

7.10.Third Party Debt.  Not less than two (2) business days prior to the Closing Date, the Company shall deliver to Parent a certificate, executed on behalf of the Company by its Chief Executive Officer, setting forth the aggregate amount of Third Party Debt estimated to be outstanding as of the Closing Date.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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7.11.Termination of Stockholders’ Agreement.  Prior to the Effective Time, the Company shall take all actions necessary to terminate the Stockholders’ Agreement effective as of the Effective Time in accordance with its terms and in a manner reasonably satisfactory in form and substance to Parent.

ARTICLE VIII

OTHER AGREEMENTS

8.1.Directors and Officers.

(a)After the Effective Time, to the fullest extent permitted by law, the Surviving Corporation shall, and Parent shall cause the Surviving Corporation to, indemnify and hold harmless, and provide advancement of expenses to, all current and former directors and officers of the Company and the Subsidiaries, and Dr. Tim Henkel, Dr. Patricia Cleveland and Dr. H. Jeffery Wilkins (each, an “Indemnified Person”), to the same extent such Indemnified Persons are indemnified or have the right to advancement of expenses as of the date of this Agreement by the Company or a Subsidiary pursuant to the Company’s or such Subsidiary’s, as applicable, certificate of incorporation or by-laws, in each case for acts or omissions by the Indemnified Persons occurring at or prior to the Effective Time (including for acts or omissions by the Indemnified Persons occurring in connection with the approval of this Agreement and the consummation of the transactions contemplated hereby); provided, however, that (i) as it relates to Dr. Henkel, Dr. Cleveland and Dr. Wilkins, the word “may” in the first sentence of paragraph (c) of ARTICLE FIFTH of the Certificate of Incorporation shall be deemed to read “shall” and (ii) the second sentence of paragraph (c) of ARTICLE FIFTH of the Certificate of Incorporation shall not be deemed to be in effect.  Without limiting the foregoing, Parent agrees that all rights to indemnification (including any obligations to advance funds for expenses) and exculpation from liabilities for acts or omissions occurring at or prior to the Effective Time now existing in favor of the Indemnified Persons as provided in the Company’s or a Subsidiary’s, as applicable, certificate of incorporation or by-laws will, effective as of the Effective Time, be assumed by the Surviving Corporation without further action on the part of any Person and will survive the Merger and the transactions contemplated hereby and will continue in full force and effect in accordance with their respective terms and such rights will not be amended or modified in any manner that would adversely affect the rights of the Indemnified Persons.  Notwithstanding the foregoing, neither Parent nor the Surviving Corporation shall be obligated to indemnify any Indemnified Person for (i) any acts that were not taken by such Indemnified Person in good faith and in a manner that such Indemnified Person reasonably believed to be in or not opposed to the best interests of the Company and the Subsidiaries or, with respect to any criminal action or proceeding, that such Indemnified Person had reasonable cause to believe was unlawful or (ii) for any settlement effected without its written consent (which consent shall not be unreasonably withheld, delayed or conditioned).  The Surviving Corporation shall, and Parent shall cause the Surviving Corporation to, comply with all written agreements regarding indemnification between the Company and any individuals who are current or former directors or officers of the Company with respect to actions taken or not taken by such persons in their capacities, which agreements (x) were set forth on Schedule 3.17 to the Option Agreement that was delivered to Parent on the Option Agreement Execution Date and specifically identified as director and officer

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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indemnification agreements and (y) are in effect immediately prior to the Effective Time and remain in effect after the Effective Time in accordance with their terms; provided, that neither Parent nor the Surviving Corporation shall cause such agreements to be terminated prior to their scheduled expiration date, except in accordance with their respective terms.

(b)In the event Parent or the Surviving Corporation or any of their respective successors or assigns (i) consolidates or merges into any other Person and is not the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, Parent shall cause proper provisions to be made so that the successors and permitted assigns of Parent or the Surviving Corporation, as the case may be, assume the obligations set forth in this Section 8.1.

(c)For six (6) years after the Effective Time, the Surviving Corporation shall cause to be maintained in effect the current policies of directors’ and officers’ liability insurance maintained by the Company (provided that the Surviving Corporation may substitute therefor policies with reputable and financially sound carriers of at least the same coverage and amounts containing terms and conditions that are substantially the same as the Company’s current policies, including deductibles and caps that are no less favorable to the directors and officers than those in effect as of the date hereof) covering acts or omissions occurring at or prior to the Effective Time with respect to those Indemnified Persons who are currently covered by the Company’s directors’ and officers’ liability insurance policy; provided, however, that in no event shall Parent or the Surviving Corporation be required to expend for such policies an average annual premium amount in excess of the annual premiums currently paid by the Company for such insurance, and if the annual premium shall exceed such amount, Parent shall, or shall cause the Surviving Corporation to, promptly notify the Stockholders’ Representatives thereof, and the Stockholders’ Representatives shall have the right to pay the excess amount so as to maintain the same insurance coverage (and the Stockholders’ Representatives are hereby authorized to pay such excess amounts, if they so choose, from the Administrative Expense Account).

(d)The obligations of Parent and the Surviving Corporation under this Section 8.1 shall not be terminated or modified after the Effective Time in such a manner as to adversely affect any Indemnified Person without the prior written consent of such Indemnified Person.  The provisions of this Section 8.1 are (i) intended to be for the benefit of, and will be enforceable by, each Indemnified Person, his or her heirs and his or her personal representatives and (ii) in addition to, and not in substitution for, any other rights to indemnification or contribution that any such Indemnified Person may have by contract or otherwise.

8.2.Royalty Payments Pursuant to Fulcrum Plan of Merger Agreement.  From and after the Effective Time, Parent shall, and shall cause the Surviving Corporation to, comply with, and give effect to, the royalty arrangements (including making payments when due) set forth in Section 2.2(c) of the Fulcrum Plan of Merger Agreement (as amended by the Fulcrum Plan of Merger Amendment).  The Ception Holders and Ception Consultants (as such terms are defined in the Fulcrum Plan of Merger Amendment) shall be third party beneficiaries of the provisions of this Section 8.2.

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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ARTICLE IX

CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PARENT AND MERGER SUB

The obligations of Parent and Merger Sub under this Agreement shall, at the option of Parent and Merger Sub, be subject to the satisfaction, on or prior to the Effective Time, of the following conditions:

9.1.No Misrepresentation or Breach of Covenants and Warranties.  There shall have been no material breach by the Company in the performance of any of its covenants and agreements herein; none of the representations and warranties of the Company contained herein that is qualified as to materiality shall be untrue or incorrect in any respect and at the Effective Time such representations and warranties shall be true and correct as though made at the Effective Time except for changes therein specifically permitted by this Agreement; none of the representations and warranties of the Company that is not qualified as to materiality shall be untrue or incorrect in any material respect and at the Effective Time such representations and warranties shall be true and correct in all material respects as though made at the Effective Time except for changes therein specifically permitted by this Agreement; and there shall have been delivered to Parent and Merger Sub a certificate or certificates to such effect, dated the Closing Date and signed on behalf of the Company by the Chief Executive Officer of the Company.

9.2.No Changes or Destruction of Property.  Between the date hereof and the Effective Time, there shall have been (a) no Material Adverse Effect and (b) no material adverse change with respect to legislation or regulation to which the Company and the Subsidiaries are subject (other than any such change that would not constitute a Material Adverse Effect because it generally affects (x) the U.S. economy or financial or securities markets as a whole or (y) the industry in which the Company and the Subsidiaries conduct their business, in each case only to the extent such change does not disproportionately impact the Company and its Subsidiaries); and there shall have been delivered to Parent and Merger Sub a certificate or certificates to such effect, dated the Closing Date and signed on behalf of the Company by the Chief Executive Officer of the Company.

9.3.No Restraint or Litigation.  No action, suit, investigation or proceeding shall have been instituted or threatened by any Governmental Body to restrain or prohibit or otherwise challenge the legality or validity of the transactions contemplated hereby.  No Court Order shall be in effect restraining or prohibiting such transactions.

9.4.Necessary Governmental Approvals.  The parties shall have received all approvals and actions of or by all Governmental Bodies which are necessary to consummate the transactions contemplated hereby, which are either specified in Schedule 5.3 or otherwise required to be obtained prior to the Closing by applicable Requirements of Laws or which are necessary to prevent a Material Adverse Effect.

9.5.Necessary Consents.  The Company shall have received consents, in form and substance reasonably satisfactory to Parent and Merger Sub, to the transactions contemplated hereby from the other parties to all contracts, leases, agreements and permits to which the

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Company or a Subsidiary is a party or by which the Company, a Subsidiary or any of their respective assets or properties is affected and which are specified in Schedule 9.5 or are otherwise necessary to prevent a Material Adverse Effect.

9.6.Stockholders’ Approval; Dissenters’ Rights.  (a)  This Agreement and the Merger shall have been duly approved and adopted by the requisite votes of the stockholders of the Company through either (i) the Written Consent, and in such case the Written Consent shall remain in full force and effect as of the Effective Time, or (ii) the Stockholders’ Meeting, and in such case the vote of the stockholders of the Company taken at the Stockholders’ Meeting shall remain in full force and effect as of the Effective Time, in either such case in accordance with the DGCL, the Certificate of Incorporation and the Stockholders’ Agreement.

(b)The time period during which holders of Company Capital Stock are entitled to deliver demands for appraisal of their Company Capital Stock to the Company pursuant to Section 262 of the DGCL shall have terminated and holders of more than five percent (5%) of the outstanding Company Common Stock (assuming the conversion of all of the shares of Company Preferred Stock) shall not have delivered to the Company a demand for appraisal of their Company Capital Stock pursuant to Section 262 of the DGCL.

(c)There shall have been delivered to Parent and Merger Sub a certificate confirming compliance with the foregoing requirements of this Section 9.6, dated the Closing Date and signed on behalf of the Company by the Chief Executive Officer of the Company.

9.7.Actions Relating to Company Options and Company Warrants.  The Company shall have taken all actions required by Section 7.7.

9.8.Actions Relating to F&F C-2 Share Rights.  The Company shall have taken all actions required by Section 7.8.

9.9.Termination of Stockholders’ Agreement.  The Stockholders’ Agreement shall have been duly terminated by the Company and the stockholders party thereto in accordance with its terms and in a manner reasonably satisfactory in form and substance to Parent.

ARTICLE X

CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY

The obligations of the Company under this Agreement shall, at the option of the Company, be subject to the satisfaction, on or prior to the Effective Time, of the following conditions:

10.1.No Breach or Misrepresentation of Warranties and Covenants.  There shall have been no material breach by Parent or Merger Sub in the performance of any of their respective covenants and agreements herein; none of the representations and warranties of Parent or Merger Sub contained herein that is qualified as to materiality shall be untrue or incorrect in any respect and at the Effective Time such representations and warranties shall be true and correct as though made at the Effective Time except for changes therein specifically permitted by this Agreement;

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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none of the representations and warranties of Parent or Merger Sub that is not qualified as to materiality shall be untrue or incorrect in any material respect and at the Effective Time such representations and warranties shall be true and correct in all material respects as though made at the Effective Time except for changes therein specifically permitted by this Agreement; and there shall have been delivered to the Company a certificate or certificates to such effect, dated the Closing Date and signed on behalf of Parent by the President or any Vice President of Parent and on behalf of Merger Sub by the President or any Vice President of Merger Sub.

10.2.No Restraint or Litigation.  No action, suit or proceeding shall have been instituted or threatened by any Governmental Body to restrain, prohibit or otherwise challenge the legality or validity of the transactions contemplated hereby.  No Court Order shall be in effect restraining or prohibiting such transactions.

10.3.Necessary Governmental Approvals.  The parties shall have received all approvals and actions of or by all Governmental Bodies which are necessary to consummate the transactions contemplated hereby, which are required to be obtained prior to the Closing by applicable Requirements of Laws.

ARTICLE XI

INDEMNIFICATION

11.1.Escrow Fund.  Immediately after the Effective Time, Parent shall transfer and deposit the Escrow Amount with the Escrow Agent.  Such deposit shall constitute the Escrow Fund and shall be governed by the terms set forth herein and in the Escrow Agreement.  The Escrow Fund shall be available to indemnify the Parent Group Members from any Loss or Expense indemnifiable under this Article XI.  All fees and expenses of the Escrow Agent shall be paid one-half by Parent and one-half from the Escrow Fund.

11.2.Indemnification from the Escrow Fund.

(a)From and after the Effective Time, each Parent Group Member shall be indemnified, held harmless and reimbursed from and against any and all Losses and Expenses incurred by such Parent Group Member in connection with or arising from:

(i)any breach of any warranty or the inaccuracy of any representation of the Company contained in this Agreement, in any certificate delivered by or on behalf of the Company pursuant hereto or in any Company Ancillary Agreement;

(ii)the Bring-Down Certificate being false or inaccurate in any respect (taking into account the provisions of Section 2.6(b)(i) of the Option Agreement), to the extent Parent has not made a claim and could not reasonably have made a claim for indemnification pursuant to Article VI of the Option Agreement with respect to such false or inaccurate Bring-Down Certificate as a result of the facts or circumstances giving rise to or relating to such falseness or inaccuracy not having been disclosed to Parent prior to the execution of this Agreement; provided, however, that (A) Parent shall not be indemnified both under this Section 11.2(a)(ii) and Section 11.2(a)(i) if the matters that

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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cause the Bring-Down Certificate to be false or inaccurate in any respect (taking into account the provisions of Section 2.6(b)(i) of the Option Agreement) also cause there to be a breach of any warranty or inaccuracy of any representation that entitles Parent to indemnification under Section 11.2(a)(i) (i.e., indemnification shall be without duplication) and (B) Parent’s indemnification under this Section 11.2(a)(ii) shall not exceed the lesser of (1) the Escrow Fund and (2) subject to Section 6.9 of the Option Agreement, the balance of any indemnification that would have been available to Parent had it been able to make an indemnification claim under Article VI of the Option Agreement on account of a breach of warranty or inaccuracy of a representation that was updated or otherwise brought down in the Bring-Down Certificate;

(iii)any breach by the Company of any of its covenants or agreements, or any failure of the Company to perform any of its obligations, in this Agreement or any Company Ancillary Agreement, in each case prior to the Effective Time;

(iv)without prejudice to Section 8.1, any action, claim, suit or proceeding instituted, on or after the Closing Date, by any other Person (including any Stockholder) against any Parent Group Member, the Company, any officer, director or Affiliate of the Company relating to any action, misrepresentation or omission (including any breach of fiduciary duty), occurring on or prior to the Closing Date, by the Company or any officer, director or employee of the Company relating to this Agreement, the Option Agreement and the transactions contemplated hereby and thereby;

(v)any failure by the Company to obtain any of the acknowledgments from holders of Company Warrants or F&F C-2 Share Rights contemplated by Sections 7.7(c) and 7.8, only to the extent that, with respect to any such holder, the Losses and Expenses (together with the aggregate amount, if any, received by such holder for such Securities in accordance with the terms of this Agreement) arising from such failure exceed the aggregate amount that such holder received or would have received for such Securities in accordance with the terms of this Agreement if such holder had made the acknowledgments contemplated by Section 7.7(c) or 7.8, as applicable; and

(vi)any reasonable fees, expenses, costs, liabilities or payments incurred by any Parent Group Member in connection with the exercise by any stockholder of the Company of any applicable rights of appraisal under the DGCL with respect to the Merger, only to the extent that the aggregate of such fees, expenses, costs, liabilities or payments incurred in respect of such stockholder’s exercise of such rights of appraisal exceed the aggregate amount that such stockholder would otherwise have received for its shares of Company Stock in accordance with the terms of this Agreement if such stockholder had not exercised such rights of appraisal;

provided, however, that the Parent Group Members shall not be entitled to indemnification under clause (i) of this Section 11.2(a) unless the aggregate amount of Losses and Expenses incurred by all Parent Group Members pursuant to clause (i) of this Section 11.2(a) exceeds $500,000, and once such amount has been exceeded, the Parent Group Members shall be entitled to be

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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indemnified out of the Escrow Fund with respect to all Losses and Expenses incurred by them without reduction.

(b)The indemnification provided for in Section 11.2(a) shall terminate 15 months after the Closing Date (and no claims shall be made by any Parent Group Member under Section 11.2(a) thereafter), except that the indemnification pursuant to Section 11.2(a) shall continue as to any Loss or Expense of which any Parent Group Member has given a Claim Notice in accordance with the requirements of Section 11.4 on or prior to the date that is 15 months after the Closing Date, as to which the indemnification pursuant to Section 11.2(a) shall continue until the liability of the Escrow Fund shall have been determined pursuant to this Article XI and all Parent Group Members shall have been reimbursed out of the Escrow Fund for the full amount of such Loss and Expense in accordance with this Article XI.

(c)The sole source of recovery for any claim under this Article XI shall be the Escrow Fund.  From and after the Effective Time, the sole and exclusive remedy of any Parent Group Member with respect to any and all claims (other than claims of, or causes of action arising from, fraud or other remedies that cannot be waived as a matter of law) for money damages or other monetary relief relating to or arising out of any breach of any warranty or covenant or the inaccuracy of any representation of the Company contained in this Agreement, in any certificate delivered by or on behalf of the Company pursuant hereto, in any Company Ancillary Agreement or in the Bring-Down Certificate shall be pursuant to the indemnification provisions set forth in this Article XI.

(d)Notwithstanding anything to the contrary in this Agreement, the parties acknowledge and agree that the Pending Indemnity Amount shall (i) be deposited with the Escrow Agent pursuant to Section 6.6 of the Option Agreement, (ii) be available solely to satisfy any Pending Indemnity Claims (as defined in the Escrow Agreement) and (iii) not be considered a part of the Escrow Fund or available to satisfy any claims by the Parent Group Members pursuant to Section 11.2(a).

(e)Notwithstanding anything to the contrary in this Agreement, other than the representations and warranties contained in Section 5.7(d) and the Losses and Expenses incurred by Parent Group Members in connection with or arising from any breach or inaccuracy of the representations and warranties contained in Section 5.7(d), the Company makes no representations or warranties, and there shall be no indemnification obligations under this Section 11.2, with respect to the amount, availability or sufficiency of any net operating losses (carryforward or otherwise), capital losses or credits of the Company for any taxable periods ending on or before the Closing Date that may be available to offset, reduce or eliminate income or Taxes of the Company or any Parent Group Member for taxable periods ending after the Closing Date.

11.3.Termination of Escrow Fund.  If on the 15-month anniversary of the Closing Date, no claims for indemnification by any Parent Group Member are pending or remain unpaid, the Escrow Fund shall terminate and any funds remaining in the Escrow Fund, after payment of any amounts therefrom due to the Escrow Agent in accordance with this Agreement and the

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Escrow Agreement, shall be allocated among and paid to, in each case in accordance with their respective Stockholder Ownership Percentages and in accordance with Article III, the holders of Stock Certificates and Stock Agreements outstanding immediately prior to the Effective Time who have complied with the requirements of Section 3.3.  Alternatively, if on the 15-month anniversary of the Closing Date any such claims for indemnification are pending or remain unpaid, the Escrow Fund shall not terminate and any funds remaining in the Escrow Fund shall not be distributed to the holders of Stock Certificates and Stock Agreements outstanding immediately prior to the Effective Time unless and until all such claims have been resolved and, if appropriate, paid in accordance with this Article XI; provided, however, in the event that on the 15-month anniversary of the Closing Date, there are claims for indemnification by any Parent Group Member pending or that remain unpaid, but the aggregate amount of all Losses and Expenses relating to such claims is less than the aggregate amount then on deposit in the Escrow Fund, the amount of any excess of the amount then on deposit in the Escrow Fund over the aggregate amount of all Losses and Expenses relating to such pending or unpaid claims shall be allocated among and paid to such holders who have complied with the requirements of Section 3.3, in each case in accordance with their respective Stockholder Ownership Percentages and in accordance with Article III; provided further that, upon final resolution of all claims for indemnification by Parent Group Members, the Escrow Fund shall terminate and any funds remaining in the Escrow Fund, after payment of any amounts therefrom due to the Escrow Agent in accordance with this Agreement and the Escrow Agreement, shall be allocated among and paid to such holders who have complied with the requirements of Section 3.3, in each case in accordance with their respective Stockholder Ownership Percentages and in accordance with Article III.

11.4.Notice and Determination of Claims.

(a)If any Parent Group Member wishes to make a claim of indemnification from the Escrow Fund, Parent shall so notify the Escrow Agent in writing (the “Claim Notice”) of the facts giving rise to such claim for indemnification hereunder.  Any Claim Notice shall (i) describe (in reasonable detail and in good faith to the extent then known) the Losses or Expenses in connection therewith and the method of computation of the amount of such claim and (ii) contain a reference to the provision of this Agreement or any other agreement, document or instrument executed hereunder or in connection herewith upon which such claim is based.  The Escrow Agent shall, on the 20th business day after receipt of a Claim Notice, pay or deliver to Parent, for its account or the account of each Parent Group Member named in the Claim Notice, the Escrow Fund or a portion thereof specified in the Claim Notice.  Payment shall be delivered as specified in the Claim Notice.

(b)Following the Escrow Agent’s receipt of any Claim Notice, a duplicate copy of such Claim Notice shall be delivered to the Stockholders’ Representatives in accordance with the Escrow Agreement.  Notwithstanding the provisions of Section 11.4(a), the Escrow Agent shall not make any payment of the Escrow Fund or any portion thereof with respect to a Claim Notice if during the 20 business days after the Escrow Agent’s receipt of such Claim Notice at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Representative left) shall have delivered to the Escrow Agent, with a copy to Parent, a written objection to the claim made in the Claim Notice (an “Objection”).

(c)Upon receipt of an Objection pursuant to this Agreement, the Escrow Agent shall (i) deliver to Parent, for its account or the account of each Parent Group Member named in the Claim Notice, cash out of the Escrow Fund, in an amount equal to that portion, if any, of the claim which is not disputed by at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) (with such undisputed amount, if any, being set forth in the Objection) and (ii) designate and segregate out of the Escrow Fund the amount subject to the claim which is disputed by at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left).  Thereafter, the Escrow Agent shall not dispose of that remaining portion of the Escrow Fund subject to the Claim Notice until the Escrow Agent shall have received from Parent or at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) a certified copy of a final judgment or decree of a court of competent jurisdiction with respect to the claim set forth in the Claim Notice, or the Escrow Agent shall have received a copy of a written agreement between Parent and at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) resolving such dispute and setting forth the amount, if any, of the claim which such Parent Group Member is entitled to receive.  The Escrow Agent will pay Parent, for its account or the account of each Parent Group Member named in the Claim Notice, out of the Escrow Fund the amount that the Parent Group Member is entitled to receive as set forth in such judgment or decree after the expiration of 10 days from the receipt of such judgment or decree or, in the event that the amount to which the Parent Group Member is entitled is established pursuant to an agreement between Parent and at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left), as soon as possible after the Escrow Agent’s receipt of such agreement.  Copies of any written agreement between at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) and Parent confirming that the Parent Group Member is entitled to a portion but not all of the amount claimed by Parent may be filed by Parent with the Escrow Agent, with the effect set forth in the preceding sentence as to the agreed amount, but no such agreement or filing thereof shall operate as a waiver of the Parent Group Member’s rights as to the disputed amount, including its right to recover the same, and any final judgment or decree of a court of competent jurisdiction that the Parent Group Member is entitled to receive the disputed amount may be filed with the Escrow Agent and shall, when filed with the Escrow Agent, be acted on as set forth above.  The judgment or decree of a court shall be deemed final when the time for appeal, if any, shall have expired and no appeal shall have been taken or when all appeals taken shall have been finally determined.  Subject to Sections 14.10, 14.11 and 14.12, if Parent and at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) do not resolve a dispute regarding a claim within 30 days after the delivery of an Objection, either party may submit the dispute to a court of competent jurisdiction for resolution.

11.5.Third Person Claims.  In the event that any Parent Group Member becomes aware of any pending or threatened action at law or suit in equity by or against a third Person (which,

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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for the avoidance of doubt, shall mean that a Parent Group Member must be a party to such claim) (each such action or suit being a “Third Person Claim”) which Parent reasonably believes will result in a demand against the Escrow Fund, (i) Parent shall promptly notify the Stockholders’ Representatives of such Third Person Claim, (ii) Parent shall have the right to conduct and control, through counsel of its choosing, the defense, compromise or settlement of any such Third Person Claim and (iii) the Stockholders’ Representatives shall cooperate in connection therewith and shall furnish such records, information and testimony and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested by Parent in connection therewith; provided, that:

(a)the Stockholders’ Representatives may participate, through counsel chosen by at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) and at their own expense, in the defense of any such Third Person Claim, and in any such case Parent shall (i) consult with the Stockholders’ Representatives, and furnish such records, information and testimony, as may be reasonably requested by the Stockholders’ Representatives in connection therewith, (ii) provide the Stockholders’ Representatives with a reasonable opportunity, subject to applicable filing deadlines, to comment on any material filing relating to such Third Person Claim prior to making such filing and (iii) permit the Stockholders’ Representatives and their counsel to attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested by the Stockholders’ Representatives in connection therewith (and shall provide reasonable advance notice of such matters to Stockholders’ Representatives so as to facilitate such right to attend);

(b)Parent shall not, without the prior written consent of at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) (which written consent shall not be unreasonably withheld), pay, compromise or settle any such Third Person Claim, except that no such consent shall be required if (i) following a written request from Parent, at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) shall fail, within 14 days after the making of such request, to acknowledge and agree in writing that, if such Third Person Claim shall be adversely determined, indemnification shall be provided to Parent Group Members with respect to such Third Person Claim from the Escrow Fund under this Article XI or (ii) such Third Person Claim to be settled involves a civil or criminal or other charge made by a Governmental Body; provided, that if at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) make such acknowledgment and agreement and are participating in the defense of a Third Person Claim described in clause (i) above pursuant to paragraph (a) above, Parent shall not assert any material defense or otherwise take any material legal position with respect to such Third Person Claim that at least two of the three Stockholders’ Representatives (or one, if there shall be only one Stockholders’ Representative left), after good faith consultation with their counsel, reasonably believe is reasonably likely to cause a material increase to the amount to be indemnified from the Escrow Fund with respect to such Third Person Claim pursuant to this Agreement; provided further, that in the exercise of their rights pursuant to the preceding proviso, the Stockholders’ Representatives shall not unreasonably delay the resolution of such Third Person Claim.  In the event that at least two of the three

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Stockolders’ Representatives (or one, if there shall be only one Stockholders’ Representative left) have consented to any such settlement, the Stockholders’ Representatives shall have no power or authority to object under Section 11.4 or any other provision of this Article XI to the amount paid in settlement of such Third Person Claim (provided, that the amount paid in settlement is equal to or less than the amount consented to by the Stockholders’ Representatives) of any claim by Parent, on its behalf or on behalf of any other Parent Group Member, against the Escrow Fund for indemnity with respect to such settlement.

Notwithstanding the foregoing, Parent shall have the right to pay, settle or compromise any such Third Person Claim described in clause (i) of paragraph (b) above without such consent, provided, that in such event Parent, on its behalf and on behalf of the other Parent Group Members, shall waive any right to indemnity therefor hereunder unless such consent is requested and is unreasonably withheld.

11.6.Adjustment to Closing Date Merger Consideration.  Any payment from the Escrow Fund under this Article XI shall be treated by the parties as an adjustment to the Closing Date Merger Consideration, unless otherwise required by applicable Tax Requirements of Laws.

11.7.No Punitive or Consequential Damages.  UNDER NO CIRCUMSTANCES SHALL THE ESCROW FUND HAVE ANY LIABILITY FOR, AND NO PARENT GROUP MEMBER SHALL HAVE THE RIGHT TO CLAIM OR RECOVER FROM THE ESCROW FUND, ANY PUNITIVE OR CONSEQUENTIAL DAMAGES, LOSSES OR EXPENSES OF ANY KIND OR NATURE WHATSOEVER, WHETHER FORESEEABLE OR UNFORESEEABLE, HOWSOEVER CAUSED OR ON ANY THEORY OF LIABILITY, EXCEPT, IN ALL SUCH CASES, THAT ANY PARENT GROUP MEMBER MAY RECOVER SUCH DAMAGES, LOSSES OR EXPENSES THAT SUCH PARENT GROUP MEMBER IS REQUIRED TO PAY TO ANY THIRD PERSON IN CONNECTION WITH A THIRD-PARTY CLAIM.

11.8.Insurance Proceeds and Tax Benefits.  The amount of any Loss or Expense suffered by a Parent Group Member under this Agreement shall be adjusted to reflect (a) any insurance proceeds actually received by the Parent Group Member on account of such Loss or Expense, net of any increases in premiums resulting therefrom, and (b) any realizable Tax benefits or savings resulting from the incurrence, accrual or payment of the Loss or Expense or any realizable Tax detriment or cost resulting from the incurrence, accrual or payment of the Loss or Expense.  The Parent Group Member shall promptly make a claim for any Loss or Expense suffered by it under any applicable insurance policies.

ARTICLE XII

TERMINATION

12.1.Termination Rights.  Anything contained in this Agreement to the contrary notwithstanding, this Agreement may be terminated at any time prior to the Effective Time:

(a)by the mutual written consent of Parent, Merger Sub and the Company;

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(b)by the Company if there has been a material breach by Parent or Merger Sub of any of their respective agreements, representations or warranties contained herein and such breach has not been cured within 14 days following receipt by Parent or Merger Sub of notice from the Company requesting that such breach be cured;

(c)by Parent if there has been a material breach by the Company of any of its agreements, representations or warranties contained herein and such breach has not been cured within 14 days following the Company’s receipt of notice from Parent requesting that such breach be cured;

(d)by either Parent or the Company if:

(i)the Effective Time shall not have occurred on or before July 10, 2010 (or such later date as may be mutually agreed to by all of the parties hereto); provided, however, that a party may not terminate this Agreement pursuant to this paragraph (i) if the failure of the Closing to occur on or before such date is attributable in whole or in part to a breach of the terms of this Agreement by such party; or

(ii)any court of competent jurisdiction or any other Governmental Body shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable.

12.2.Notice of Termination.  Any party desiring to terminate this Agreement pursuant to Section 12.1 shall give notice of such termination to each of the other parties to this Agreement.

12.3.Effect of Termination.  In the event that this Agreement shall be terminated pursuant to this Article XII, all further obligations of the parties under this Agreement (other than under Sections 14.2, 14.8 and 14.11) shall be terminated without further liability of any party to the other parties; provided, however, that nothing herein shall relieve any party from liability for its willful breach of this Agreement.

ARTICLE XIII

STOCKHOLDERS’ REPRESENTATIVES

13.1.Appointment of the Stockholders’ Representatives.  By virtue of the Written Consent and pursuant to the Transmittal Letters, each Stockholder (other than Dissenting Stockholders) irrevocably constitutes and appoints each of Jeff Himawan, Timothy Lash and Steve Tullman (and by their respective execution of this Agreement as the Stockholders’ Representatives, each of Messrs. Himawan, Lash and Tullman respectively hereby accepts his appointment) as its true, exclusive and lawful attorneys-in-fact and agents (each a “Stockholders’ Representative” and collectively the “Stockholders’ Representatives”) to act in the name, place and stead of such Stockholder in connection with the execution and performance of this Agreement and the Escrow Agreement and the transactions contemplated hereby and thereby, and to do or refrain from doing all such further acts and things, and to execute all such

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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documents, as the Stockholders’ Representatives shall deem necessary or appropriate in connection with the transactions contemplated by this Agreement and the Escrow Agreement, including the power:

(a)to act for the Stockholders with regard to matters pertaining to indemnification referred to in this Agreement, including:  the power to receive notices and communications; to authorize delivery to the Parent Group Members of the funds or other property from the Escrow Fund in satisfaction of claims by the Parent Group Members; to the extent applicable, assert any claim against Parent; and to negotiate, enter into settlements and compromises of, and comply with all orders of courts and awards of arbitrators with respect to, such claims;

(b)to execute and deliver all amendments, waivers, ancillary agreements, stock powers, certificates and documents that the Stockholders’ Representatives deem necessary or appropriate in connection with the consummation of the transactions contemplated by this Agreement and the Escrow Agreement;

(c)to participate in any process with respect to the determination of Net TNF Sales pursuant to Section 3.4(b), including paying the applicable portion of the fees of the Accounting Firm;

(d)to do or refrain from doing any further act or deed on behalf of the Stockholders that the Stockholders’ Representatives deem necessary or appropriate in their sole discretion relating to the subject matter of this Agreement and the Escrow Agreement as fully and completely as the Stockholders could do if personally present;

(e)to receive service of process on behalf of any Stockholder in connection with any claims under this Agreement or the Escrow Agreement;

(f)to pay, out of the Administrative Expense Account, the excess insurance premium amount contemplated by Section 8.1(c); and

(g)to deal with the Administrative Expense Account in accordance with Section 13.4, including adding thereto from the Closing Date Merger Consideration and the Contingent Consideration Payments in accordance with Section 13.4; provided, that at any time that the Stockholders’ Representatives determine to release any or all of the remaining amounts of the Administrative Expense Account back to the Stockholders, which decision shall be at the Stockholders’ Representatives’ discretion, such payments shall be made to the Stockholders in accordance with each Stockholder’s Stockholder Ownership Percentage; provided further that neither Parent nor the Surviving Corporation shall have any liability with respect to such release and distribution.

13.2.Actions of the Stockholders’ Representatives.  A decision, act, consent or instruction of any two (2) of the Stockholders’ Representatives, acting in such capacity pursuant to the terms of this Agreement (including Section 3.4) or the Escrow Agreement, shall constitute a decision of all Stockholders and shall be final, binding and conclusive upon each such Stockholder, and the Escrow Agent and each Parent Group Member may rely upon any written

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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decision, act, consent or instruction of at least two of the three Stockholders’ Representatives as being the decision, act, consent or instruction of all of the Stockholders’ Representatives and each and every such Stockholder.  The Escrow Agent and each Parent Group Member are hereby relieved from any liability to any Person for any acts done by them in accordance with the written instructions or agreement of at least two of the three Stockholders’ Representatives; provided that (i) if Steve Tullman is then a director, officer or employee of Parent or the Surviving Corporation and is also then a Stockholders’ Representative, then with respect to any decision, act, consent or instruction by the Stockholders’ Representatives in connection with any matter related to Section 3.4 or Article XI of this Agreement, such decision, act, consent or instruction shall require the written consent of both of the other two Stockholders’ Representatives, and (ii) if at any time there remains only one (1) Stockholders’ Representative, any decision, act, consent or instruction of such Stockholders’ Representative shall be deemed to be the decision, act, consent or instruction of each and every Stockholder.  The Stockholders’ Representatives may, at any time as they may determine in their sole discretion, solicit the written approval, consent or instructions of Stockholders who held at least a majority of the outstanding shares of Company Capital Stock (voting together as a single class on an as-if converted to Company Common Stock basis) immediately prior to the Effective Time (and the Stockholders’ Representatives are hereby relieved from any liability to any Stockholder for (i) any acts or omission done by them in accordance with such majority approval, consent or instructions, and (ii) refusing to take any act until they receive such majority approval, consent or instructions, regardless of the effect of any such act, omission or refusal to act); provided, however, that no such solicitation, nor the time period required to make such solicitation, or the failure to obtain any such written approval or consent, shall limit any rights that Parent may have hereunder or under the Escrow Agreement (including any such rights that arise from a failure to act by the Stockholders’ Representatives).

13.3.Removal and Replacement of the Stockholders’ Representatives.

(a)Subject to Section 13.3(b), and provided that there shall at all times be at least one (1) Stockholders’ Representative, any Stockholders’ Representative may be removed and replaced only upon delivery of written notice to the Surviving Corporation by the Stockholders holding at least a majority of outstanding shares of Company Capital Stock (voting together as a single class on an as-if converted to Company Common Stock basis) immediately prior to the Effective Time.

(b)Notwithstanding Section 13.3(a):  (i) Essex Woodlands Health Ventures, Inc. (“Essex”) shall be entitled to remove and replace Jeff Himawan, or any Person designated by Essex to replace Jeff Himawan, as a Stockholders’ Representative upon delivery of written notice to Parent, the Escrow Agent and the other Stockholders’ Representatives; and (ii) Third Point, LLC (“Third Point”) shall be entitled to remove and replace Timothy Lash, or any Person designated by Third Point to replace Timothy Lash, as a Stockholders’ Representative upon delivery of written notice to Parent, the Escrow Agent and the other Stockholders’ Representatives; provided that in no event shall either of Essex or Third Point be required to designate a substitute Person upon or after any removal by them of Messrs. Himawan or Lash, respectively, or any subsequent designee (and neither Essex nor Third Point, or any Affiliate of

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Essex or Third Point, will bear any liability of any kind or nature whatsoever as a consequence of a determination to remove any Stockholders’ Representative, or a determination not appoint a substitute Stockholders’ Representative); provided further, that if Essex or Third Point determines not to appoint a substitute Stockholders’ Representative, Stockholders holding at least a majority of outstanding shares of Company Capital Stock (voting together as a single class on an as-if converted to Company Common Stock basis) immediately prior to the Effective Time shall appoint such a substitute.

(c)If Steve Tullman is, for any reason, unable or unwilling to serve as a Stockholders’ Representative, then Dennis Langer shall serve as a Stockholders’ Representative in his stead, and if Dennis Langer is, for any reason, unable or unwilling to serve as a Stockholders’ Representative, then Yves Quintin shall serve as a Stockholders’ Representative, and in each case the Stockholders’ Representatives shall provide written notice of such fact to Parent and the Escrow Agent.

13.4.Liability of the Stockholders’ Representatives.

(a)The Stockholders’ Representatives shall act for the Stockholders on all of the matters set forth in this Agreement in the manner the Stockholders’ Representatives believe to be in the best interest of the Stockholders and consistent with the obligations under this Agreement, but none of the Stockholders’ Representatives shall be responsible to the Stockholders for any Losses or Expenses the Stockholders may suffer by the performance of the duties of the Stockholders’ Represenatives under this Agreement, other than Losses or Expenses arising from such Stockholders’ Representative’s willful misconduct.  Further, in no event shall a particular Stockholders’ Representative be responsible to the Stockholders for any Losses or Expenses arising out of any action or failure to act by the Stockholders’ Representatives as to which such Stockholders’ Representative dissented in a writing provided to the other Stockholders’ Representatives.

(b)Each Stockholder shall, severally and not jointly (directly and not from the Escrow Amount), hold harmless and reimburse each Stockholders’ Representative from and against such Stockholder’s ratable share (based on such Stockholder’s Stockholder Ownership Percentage) of any and all Losses and Expenses (including costs and expenses incurred by the Stockholders’ Representatives or any one of them to defend against any claim of liability with respect to any action taken or omitted by any Stockholders’ Representative) suffered or incurred by such Stockholders’ Representative arising out of or resulting from any action taken or omitted to be taken by such Stockholders’ Representative under this Agreement or the Escrow Agreement or in connection with the transactions contemplated hereby or thereby, other than such Losses or Expenses arising out of or resulting from such Stockholders’ Representative’s willful misconduct.  The Stockholders’ Representatives shall also be fully protected against the Stockholders in relying upon any written notice, demand, certificate, document, direction or instruction that the Stockholders’ Representatives in good faith believe to be genuine (including facsimiles or electronic transmissions thereof).

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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(c)The Stockholders’ Representatives may engage and consult with counsel and accountants of their own choosing with respect to any and all matters related to their duties under this Agreement, and will have full and complete authorization and protection for any action taken and suffered by them in good faith and in accordance with such opinion of counsel or written advice of such accountants.  The Stockholders’ Representatives shall be entitled to engage third Persons to perform any administrative or clerical services required to be performed by them under this Agreement and to compensate such Persons on a reasonable basis.

(d)In furtherance of the payment of such Losses and Expenses incurred by or on behalf of the Stockholders’ Representatives, the Stockholders’ Representatives are hereby authorized and directed to instruct the Paying Agent to place a portion of the Closing Date Merger Consideration in the principal amount of $1,000,000 (one million dollars) and a portion of each Contingent Consideration Payment in the principal amount of up to 0.25% (one-quarter of one percent) (as determined in the discretion of a majority of the Stockholders Representatives) of the applicable Contingent Consideration Payment but (if so requested in the discretion of a majority of the Stockholders’ Representatives) no less than the amount then necessary to replenish the Administrative Expense Account (as defined below) to $1,000,000 (one million dollars) or such higher amount as the Stockholders’ Representatives may deem necessary in the discretion of a majority of such representatives, into an account established by and in the name of the Stockholders’ Representatives (collectively, the “Administrative Expense Account”) and to reduce the Closing Date Merger Consideration and each Contingent Consideration Payment to be paid to the holders of Securities by such amount.  The Stockholders agree that, to the extent available, the Stockholders’ Representatives shall be entitled to draw against the Administrative Expense Account at any time and from time to time as and when (i) the Stockholders’ Representatives incur any Losses and Expenses indemnified by the Stockholders as set forth in this Article XIII, (ii) as and when any Losses and Expenses are otherwise due under this Agreement and (iii) necessary or appropriate to pay any costs and expenses reasonably incurred by the Stockholders’ Representatives in the performance of their duties in accordance with this Agreement.  The Stockholders’ Representatives shall be the administrators of the Administrative Expense Account and shall have sole and absolute authority over the Administrative Expense Account to pay all Losses and Expenses incurred in accordance with this Article XIII.

13.5.Access to Records.  Parent agrees that it shall, and shall cause the Surviving Corporation to, make available to the Stockholders’ Representatives, at their expense, such records and personnel as may be reasonably required by the Stockholders’ Representatives in order to permit the Stockholders’ Representatives to perform their obligations hereunder and pursue the rights of the Stockholders hereunder (and Parent agrees to preserve, and to cause the Surviving Corporation to preserve, all such records for a period of six (6) years from the Effective Time (or such longer period as may relate to the period for which a claim of indemnification may be made under this Agreement and with respect to which such records may reasonably be expected to relate)).  If Parent or Surviving Corporation wishes to destroy such records after that time, Parent or Surviving Corporation shall so notify the Stockholders’ Representatives in writing at least thirty (30) days prior to such destruction, and the Stockholders’ Representatives shall have the right, at the option and expense of the

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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Stockholders’ Representatives, to take possession of such records within ninety (90) days after the date of such notice.

ARTICLE XIV

GENERAL PROVISIONS

14.1.Survival of Obligations.  All representations, warranties, covenants and obligations contained in this Agreement shall survive the consummation of the transactions contemplated by this Agreement; provided, however, that, except as otherwise provided in Article XI, the representations and warranties contained in Articles V and VI shall terminate on the date that is 15 months after the Effective Time.  Except as otherwise provided herein, no claim shall be made for the breach of any representation or warranty contained in Article V or VI or under any certificate delivered with respect thereto under this Agreement after the date on which such representations and warranties terminate as set forth in this Section 14.1.

14.2.No Public Announcement.  No party hereto shall, without the prior written approval of all of the other parties, make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that any party shall be so obligated by Requirements of Law or the rules of any stock exchange, in which case the other parties shall be advised and the parties shall use their reasonable best efforts to cause a mutually agreeable release or announcement to be issued; provided, that the foregoing shall not preclude communications or disclosures necessary to implement the provisions of this Agreement or to comply with accounting and Securities and Exchange Commission disclosure obligations.

14.3.Notices.  All notices, consents and other communications hereunder shall be in writing and shall be deemed to have been duly given (a) when delivered by hand or by Federal Express or a similarly reputable overnight courier, (b) upon receipt, if sent by registered or certified mail, return receipt requested or (c) when successfully transmitted by facsimile (with a confirming copy of such communication to be sent as provided in clause (a) or (b) above), in each case to the party for whom intended, at the address or facsimile number for such party set forth below:

If to Parent or Merger Sub, to:
Cephalon, Inc.
41 Moores Road
Frazer, PA 19355
Attention:	General Counsel
Facsimile:	(610) 738-6258

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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with a copy to:
Sidley Austin LLP
One South Dearborn Street
Chicago, IL 60603
Attention:	Pran Jha
Facsimile:	(312) 853-7036
If to the Company (prior to the Effective Time), to:
Ception Therapeutics, Inc.
101 Lindenwood Drive
Suite 400
Malvern, PA 19355
Attention:	General Counsel
Facsimile:	(610) 640-2945
with a copy to:
Duane Morris LLP
30 South 17th Street
Philadelphia, PA 19103
Attention:	Yves Quintin
Facsimile:	(215) 979-1020
If to the Stockholders’ Representatives, to:
Jeff Himawan
c/o Essex Woodlands Healthcare Ventures
335 Bryant Street, 3rd Floor
Palo Alto, CA 94301
Facsimile:	(650) 327-9755
Timothy Lash
c/o Third Point LLC
390 Park Avenue
New York, NY 10022
Facsimile:	(212) 318-3814
Stephen Tullman
11 Kyle Drive
Chester Springs, PA 19425
Facsimile:	(610) 827-9729

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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or to such other address as such party may indicate by a notice delivered to the other party hereto in accordance with this Section 14.3.

14.4.Successors and Assigns.

(a)This Agreement may not be assigned by any party without the prior written consent of each of the other parties; provided, however, that Parent and Merger Sub shall be entitled to assign this Agreement to any Affiliate of Parent, provided that no such assignment shall relieve Parent or Merger Sub, as the case may be, of its obligations hereunder.

(b)This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns.  The successors and permitted assigns hereunder shall include, in the case of Parent and Merger Sub, any permitted assignee as well as the successors in interest to such permitted assignee (whether by merger, liquidation (including successive mergers or liquidations) or otherwise).  Except as set forth in Sections 8.1(d) and 8.2, nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon any Person other than the parties and successors and permitted assigns permitted by this Section 14.4 any right, remedy or claim under or by reason of this Agreement, as a third party beneficiary or otherwise.

14.5.Entire Agreement; Amendments.  This Agreement, the Exhibits and Schedules referred to herein and the documents delivered pursuant hereto and the Confidentiality Agreement contain the entire understanding of the parties hereto with regard to the subject matter contained herein or therein, and supersede all prior agreements, understandings or letters of intent between the parties hereto.  This Agreement shall not be amended, modified or supplemented except by a written instrument signed by an authorized representative of each of the parties hereto.

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

14.7.Waivers.  Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the party or parties entitled to the benefit thereof.  Any such waiver shall be validly and sufficiently authorized for the purposes of this Agreement if, as to any party, it is authorized in writing by an authorized representative of such party.  The failure of any party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of any party thereafter to enforce each and every such provision.  No

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach.

14.8.Expenses.  Each party hereto will pay all costs and expenses incident to its negotiation and preparation of this Agreement and to its performance and compliance with all agreements and conditions contained herein on its part to be performed or complied with, including the fees, expenses and disbursements of its counsel and accountants.

14.9.Execution in Counterparts.  This Agreement may be executed in multiple counterparts, each of which shall be considered an original instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have been signed by each of the parties hereto and delivered to the other party.  Delivery of an executed counterpart of a signature page to this Agreement shall be as effective as delivery of a manually executed counterpart of this Agreement.

14.10.Governing Law.  This Agreement shall be governed by and construed in accordance with the internal laws (excluding the conflicts of law provisions) of the State of Delaware.

14.11.Submission to Jurisdiction.  The Company, Parent, Merger Sub and the Stockholders’ Representatives hereby irrevocably submit in any suit, action or proceeding arising out of or related to this Agreement or any of the transactions contemplated hereby or thereby to the jurisdiction of the United States District Court for the District of Delaware and the jurisdiction of any court of the State of Delaware located in Wilmington, Delaware and waive any and all objections to jurisdiction that they may have under the laws of the State of Delaware or the United States.

14.12.Waiver of Jury Trial.  EACH OF PARENT, MERGER SUB, THE COMPANY AND THE STOCKHOLDERS’ REPRESENTATIVES HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, MERGER SUB OR THE COMPANY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.

[Remainder of page intentionally left blank; signature page follows.]

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the day and year first above written.

CEPHALON, INC.
By:	/s/J. Kevin Buchi
Name:	J. Kevin Buchi
Title:	Chief Operating Officer
CAPTURE ACQUISITION CORP.
By:	/s/ J. Kevin Buchi
Name:	J. Kevin Buchi
Title:	Vice President
CEPTION THERAPEUTICS, INC.
By:	/s/ Stephen A. Tullman
Name:	Stephen A. Tullman
Title:	President and CEO
STOCKHOLDERS’ REPRESENTATIVE:
	/s/ Jeff Himawan
Jeff Himawan
STOCKHOLDERS’ REPRESENTATIVE:
	/s/ Timothy Lash
Timothy Lash
STOCKHOLDERS’ REPRESENTATIVE:
	/s/ Stephen A. Tullman
Stephen A. Tullman

Signature Page to Merger Agreement

** Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

EX-10.2

Exhibit 10.2

THIRD AMENDMENT

To

OPTION AGREEMENT

DATED JANUARY 13, 2009

BETWEEN CEPHALON, INC.

AND

CEPTION THERAPEUTICS, INC.

This Third Amendment (hereinafter, “THIRD AMENDMENT”) is made effective as of January 26, 2010 (the “AMENDMENT EFFECTIVE DATE”) by and between Ception Therapeutics, Inc. (hereinafter referred to as “Ception”), a corporation incorporated in the state of Delaware, located at 101 Lindenwood Drive, Suite 400, Malvern, Pennsylvania 19355, and Cephalon, Inc. (hereinafter referred to as “Cephalon”), a corporation incorporated in the state of Delaware, located at 41 Moores Road, P.O. Box 4011, Frazer, Pennsylvania 19355.

RECITALS

Ception and Cephalon are parties to an Option Agreement dated January 13, 2009, as amended (hereinafter “AGREEMENT”), which sets forth the terms and conditions under which Ception has agreed to grant to Cephalon, for a period of time as set forth in such AGREEMENT, an exclusive option to acquire Ception pursuant to a merger.  The parties desire to amend the AGREEMENT as more fully described in this THIRD AMENDMENT.

NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereby agree as follows:

1.Unless otherwise defined in this THIRD AMENDMENT, all capitalized and/or italicized and/or bolded terms shall have the same meaning as set forth in the AGREEMENT.

2.The definition of “Option Termination Date” in Section 1.1 of the AGREEMENT is hereby deleted in its entirety and replaced with the following new definition:

“Option Termination Date” means the date that is (a) 15 business days after the later of (i) the receipt by Optionee of the final study report for the Res-5-0002 EE Study or (ii) the receipt by Optionee of the top-line data from the Res-5-0010 Asthma Study (which data shall be delivered to Optionee in a form substantially similar to the form in which the top-line data from the Res-5-0002 EE Study were delivered by the Company to Optionee in November 2009) or (b) such earlier date on which Optionee terminates this Agreement pursuant to Section 7.1(b).

3.Section 5.4(c) of the AGREEMENT is hereby deleted in its entirety and replaced with the following paragraph:

The Company shall, and shall cause the Subsidiaries to:  (i) conduct each of the Res-5-0002 EE Study and the Res 5-0010 Asthma Study in compliance in all material respects with all applicable Requirements of Laws and in accordance with the Operating Plan; (ii) use the

proceeds of Loans (as defined in the Credit Agreement) only for funding expenses identified in, or which are otherwise consistent with, the Operating Plan or related to the modification of the Res-5-0002 EE Study and/or the Res-5-0004 Open Label EE Study; (iii) keep its and their existing policies of insurance, or comparable insurance, in full force and effect; (iv) to the extent the Company or a Subsidiary is obligated or has the right to do so (and is exercising such prosecution rights) pursuant to any agreement relating to Company IP, diligently prosecute, or enforce its rights to cause another party to such agreement relating to Company IP to diligently prosecute claims in the pending patent applications within Company IP claiming existing products and products currently under development; and (v) keep in force all registered Marks by paying any maintenance fees or taxes or responding to any actions.  The Company shall deliver (1) the final study report relating to the Res-5-0002 EE Study within three (3) business days after such report becomes final and (2) the top-line data from the Res-5-0010 Asthma Study by the earlier of (A) seven (7) business days after such top-line data has been received by the Company from its third-party contractor and (B) one (1) business day after such top-line data has been approved for release to Optionee by the Company’s Board of Directors.

4.Ception represents and warrants to Cephalon that no approval of the stockholders of Ception is required under the Certificate of Incorporation, the DGCL or the Stockholders’ Agreement with respect to this THIRD AMENDMENT.

5.Cephalon expressly reserves its rights with respect to the AGREEMENT and hereby preserves, with respect thereto, any and all claims for indemnification, or other causes of action, relating to costs, damages, expenses, losses, liabilities or deficiencies that occurred (or were incurred) on or prior to the AMENDMENT EFFECTIVE DATE; provided that Cephalon shall not be entitled to assert any claims for indemnification, or other causes of action, relating to costs, damages, expenses, losses, liabilities or deficiencies based solely on the results (i.e. outcome, success, failure or, to the extent caused by events occurring outside the control of Ception, development progress) of the Res-5-0002 EE Study, the Res-5-0004 Open-Label EE Study and/or the Res-5-0010 Asthma Study; provided further that, subject to the foregoing proviso, nothing herein shall be deemed to affect, restrict or limit Cephalon’s rights, and Ception’s obligations, pursuant to Section 6.1 of the AGREEMENT.

6.Except as provided above, all other terms and conditions of the AGREEMENT shall remain in full force and effect.  From and after the AMENDMENT EFFECTIVE DATE, each reference in the Agreement to “this Agreement,” “herein,” “hereof,” “hereunder” or words of similar import, or to any provision of the AGREEMENT, shall be deemed to refer to the AGREEMENT or such provision as amended by the First Amendment effective as of August 4, 2009, the Second Amendment effective as of September 11, 2009 and/or this THIRD AMENDMENT unless the context otherwise requires, and references in the AGREEMENT to the “date hereof” or the “date of this Agreement” shall be deemed to refer to January 13, 2009.

* * * * * * *

2

IN WITNESS WHEREOF,the parties have executed this THIRD AMENDMENT by proper persons thereunto duly authorized.

CEPTION THERAPEUTICS, INC.		CEPHALON, INC.
Signature:	/s/ Stephen A. Tullman	Signature:	/s/ J. Kevin Buchi
Stephen A. Tullman		J. Kevin Buchi
President and Chief Executive Officer		Executive Vice President & CFO

3

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Frank Baldino, Jr., certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: May 5, 2010
	/s/ Frank Baldino, Jr.
	Frank Baldino, Jr., Ph.D.
	Chairman and Chief Executive Officer
	(Principal executive officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Wilco Groenhuysen certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: May 5, 2010
	/s/ Wilco Groenhuysen
	Wilco Groenhuysen
	Executive Vice President and Chief Financial Officer
	(Principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Report of Cephalon, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Frank Baldino, Jr., Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, based on my knowledge, that:

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

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

/s/ Frank Baldino, Jr.

Frank Baldino, Jr., Ph.D.

Chairman and Chief Executive Officer

May 5, 2010

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Report of Cephalon, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2010  as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Wilco Groenhuysen, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, based on my knowledge, that:

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

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

/s/Wilco Groenhuysen

Wilco Groenhuysen

Executive Vice President and Chief Financial Officer

May 5, 2010